< The Finance Professionals' Post: February 2012

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19 posts from February 2012


A Q&A with the Compensation Expert Who Thinks Banking Pay Could Fall Another 50% in Five Years


What’s happening with investment banking compensation? Are lower pay and higher deferrals really inevitable? We asked Jon Terry, remuneration partner at PricewaterhouseCoopers.

Q: Over the next five years, how much would you expect investment banking compensation to fall by—on average?

A: Two big factors are likely to influence compensation levels: profitability and the share of profits distributed to employees. If banks continue to de-risk, profits will fall. If shareholders demand a higher share of profits, pay will fall exponentially.

Continue reading "A Q&A with the Compensation Expert Who Thinks Banking Pay Could Fall Another 50% in Five Years" »


The “Weight”iness of Level II Item Sets

CFA Exam Prep

My last post, "Item Sets Define the Level II Exam," showed how the item-set format shifts the candidate’s focus and emphasized two additional test taking skills—reading speed and reading comprehension. This is because item sets contain vignettes, or large blocks of information, from which six multiple choice questions are asked. There are 20 item sets on the exam (10 in the morning and 10 in the afternoon), for a total of 120 questions. Despite having half the number of questions than the Level I exam, time management is still critical but it now takes a new dimension. The item-set format requires that the candidate read quickly and accurately in order to be successful. The item-set format also changes how questions can be structured and so impacts how things can be asked.

Continue reading "The “Weight”iness of Level II Item Sets" »


Managing Your Online Identity


Have you ever wondered why you can’t seem to snag an interview with that elusive dream job? How do you come across on the Web? A recent survey found that most employers now use social media sites to vet candidates. Your online image may be keeping you from getting that invite. You want to catch people’s attention because you are the best person for the job, not because of that really rash comment or photo posted at the end of a bad night.

Fortunately, it is not 1999 when information was fragmented and search engines were proliferating. These days, there are less than a handful of major search engines that you need to monitor: Google, Yahoo, and Bing.

Continue reading "Managing Your Online Identity" »

NYSSA Announces June 2012 Scholarship Winners

The New York Society of Security Analysts (NYSSA) is pleased to announce the winners of the June 2012 CFA Exam Scholarship Program. NYSSA offers up to five scholarships in both the fall and spring to New York–area CFA candidates. Recipients are selected based on experience and/or interest in the investment profession, ethical standards, and commitment to NYSSA and CFA Institute. Scholarship winners receive discounted registration fees and Schweser study materials, and free NYSSA CFA weekly review.

Next spring, applications for December 2012 will be accepted. Applicants do not have to be a member of NYSSA, but are encouraged to join. Visit the scholarship page for more details.

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Setting the Standards for Investing in the Solutions to Climate Change

The news around climate change grows more ominous every day, with reports of rising sea levels, droughts, severe weather, and mounting scientific evidence that the Earth’s temperature could well rise between 2 and 7 degrees in the coming century due to rising levels of atmospheric carbon. The International Energy Agency estimates that US$1 trillion investment in climate change combating projects per year will be required over the next four decades to address these catastrophic risks to the planet and global economy.

It has become more and more obvious that the challenge of climate change must be met not merely through punitive, regulatory measures. Big tent solutions that focus on the opportunities in investing in a low carbon economy are expected to be far more effective. The Climate Bonds Initiative—a not-for-profit collaboration among investors, policymakers, academics, and environmental NGOs seeking to support the development of a transparent global market for bonds issued to raise funding for climate-change mitigation and adaptation—is one such ambitious, solutions-oriented project.

Last month we spoke to Nick Robins, Director of HSBC’s Climate Change Center for Excellence, about his participation as an advisor to the Initiative. This month Sean Kidney, Chair and Co-founder of the Initiative, talks about its standard setting activities and why they are critical for the development of the market.

Continue reading "Setting the Standards for Investing in the Solutions to Climate Change" »


Book Review: Startup Asia


China is now the second largest venture market. India is third. Vietnam is quickly expanding. Now more than ever, rather than starting an entrepreneurship in the West, the newest generation of entrepreneurs are looking to the East. Many of the same venture investors that formed the original Silicon Valley are repeating these successful enterprises in Asia. Startup Asia: Top Strategies for Cashing in on Asia's Innovation Boom tells the dramatic story of how business start-ups have developed and boomed in Asia.

Continue reading "Book Review: Startup Asia" »


Are You a Candidate for Private Wealth Management?

Interested in a career in the private wealth management space? It is an increasingly complex profession, and successful candidates will need to possess a wide range of skills - sale skills and a personable nature being of high importance on the list. Listen to our panel of experts from a NYSSA Career Chat™ on the state of private wealth management discuss the changes in private wealth management, and what makes an ideal candidate.

(Hint: Owing to the relationship between private wealth and investment banking, former investment bankers make good candidates for private wealth management.) 


What's Really Going on with US-Listed Chinese Stocks?

In this report, we analyze the technical position of every US-listed Chinese stock with a market cap above $5 billion. Of these, nine are based in mainland China, three in Taiwan and two in Hong Kong. By far the best looking chart is China Petroleum and Chemical while PetroChina shares are stuck at resistance. The worst stock, from a technical perspective is the telecom provider in Taiwan, Chunghwa Telecom.

From a value investing perspective, we believe that the best time to invest in a market sector is when sentiment is extremely biased against it. Presently, in our view, US-listed Chinese stocks appear to be one of the most reviled investment sectors, and not without some cause. A series of frauds uncovered by diligent short-sellers, and halfhearted support in reforming fraudulent practices by Chinese regulators have undermined confidence in Chinese stocks. The most widely cited index of US listed Chinese stocks, the USX China Index, is off 42% from its October 2007 high but has more than doubled from its November 2008 low.

We believe that Chinese stocks, having fallen out of favor, will gain newfound interest by investors. Later today, [Ed. Note: This paper is dated February 14, 2012.] Chinese Vice President Xi Jinping will be visiting the White House. Xi is expected to become the Premier or head of the government later this year and the media are expecting that this visit will lead to a “reset” of US-China relations. There are concerns about a slowdown in the Chinese economy as global commodities prices rise, real estate prices weaken and some manufacturing at the margin is returning to the US. But the Chinese economy is still largely tied to the financial health of its largest customer—the US consumer—who appears to regaining his health after a long illness. So despite the concerns, there is a bull case to be made for the Chinese economy as well.


We do not have a view as to whether Chinese stocks now represent a good fundamental value or how pervasive the fraud issues are. However, the key premise of technical analysis is that the charts represent “the wisdom of the crowds” or, in other words, the many market participants ranging from savvy short-sellers like Muddy Waters, large sell-side and buy-side firms globally, individual investors and corporate insiders collectively bring all their knowledge to bear in the setting of share prices, and those with the most conviction, and presumably best knowledge, have the most impact on price given the higher volumes they trade. So, stock prices tend to correctly reflect underlying fundamental value. So in this report we look at what the technicals are saying about US-listed Chinese stocks.

We begin with an overview of the major Chinese markets. Our focus is on mainland China, but it is impossible to analyze this market without considering the interrelated Hong Kong and Taiwan markets. The main stock exchange in China is the Shanghai Stock Exchange which trades two classes of stocks – A shares which are traded in Renimbi, and are limited to Chinese citizens and Qualified Foreign Institutional Investors, and B shares which are traded in dollars and available to global investors. The Shanghai Stock Exchange is 23% off its 52-week high and just 10% above its low having bottomed in January, so this may represent an interesting entry point for investors. In Hong Kong, the Hang Seng Index bottomed in September and has gained 29%. In Taiwan, the stock exchange is 19% off its high, having bottomed in December. The USX China Index of US-listed Chinese stocks also bottomed in October and is up 25% off its low. So investors are seeing something they like again in Chinese stocks. Overall, most stocks are at inflection points of breaking out to the upside. A positive catalyst such as a good visit by Xi or a Greek settlement could push these stocks significantly higher. But, in our view, it is definitely time to be looking east again.

–Barry M. Sine, CFA, CMT

This an exerpt from a white paper entitled, "What's Really Going on with US–Listed Chinese Stocks ?" by Barry Sine, CFA, CMT, Managing Director and Director of Research at Drexel-Hamilton. Click here to download the full report.

Checks & Balances: Three Epochs of Federal Budget Management

White House
Credit: Wikimedia Commons

“Today,” President Bill Clinton (1993–2001) said on January 6, 1999, “I am proud to announce that we can say the era of big deficits is over.”1 Clinton’s pronouncement was profoundly premature, a fact underscored by the debt ceiling impasse and Treasury bond downgrade of 2011. Unless the US economy improves faster than even the most optimistic economist now forecasts, huge federal deficits will be in America’s future for many years to come. That means the national debt, already at almost $15 trillion and 100% of GDP, will continue to grow, putting more downward pressure on the government’s bond rating and additional upward pressure on interest rates. Many Americans believe that more dangerously destabilizing political squabbles over taxes and social programs are forthcoming, with results that no one with a decent respect for the intricacies of politics and economics dares to predict.

Continue reading "Checks & Balances: Three Epochs of Federal Budget Management" »


Implications of New Accounting Standards

Accounting standards are modified on a regular basis and several changes will affect your analysis of financial statements in the coming months.  To put them into perspective, you might first ask yourself some other questions:

  • How does your organization approach such changes in accounting standards?
  • What does that say about your investment process?

Continue reading "Implications of New Accounting Standards" »


A Tale of Two Overhangs: The Nexus of Financial Sector and Sovereign Credit Risks


There has emerged in the Western economies a strong nexus between the credit risks of financial sectors and their sovereigns. We argue that this phenomenon can be understood in the context of two debt overhang problems: one affecting the financial sector due to its under-capitalization following the crisis of 2007–08; the second, affecting the non-financial sector, whose incentives are crowded out by high sovereign debt and anticipated future taxes. While the desire to resolve the financial sector overhang may make bailouts tempting, they raise the risk of exacerbating the overhang related to sovereign debt. Conversely, reduction of growth prospects due to sovereign debt overhang can make the financial sector riskier as it is highly exposed to sovereign debt both through direct holdings and indirectly through implicit government guarantees. We provide evidence on this important nexus, based on our ongoing research that exploits data on European bank and sovereign credit risks.

Continue reading "A Tale of Two Overhangs: The Nexus of Financial Sector and Sovereign Credit Risks" »


If the Bonus Season Made a Fashion Statement, Color it Gray


Let’s face it. The forecast for this year’s bonus season is down right gloomy. And judging by eFinancialCareers most recent survey on the subject, most financial professionals were not surprised.

Like we do every year around this time, eFinancialCareers took a look at the year-end payouts that begin in December and last on through February by surveying Wall Street professionals who are bonus-eligible and know the amount of their annual bonus.

Continue reading "If the Bonus Season Made a Fashion Statement, Color it Gray" »


Recent Research: Highlights from February 2012

"Measuring and Modeling Execution Cost and Risk"
The Journal of Portfolio Management (Winter 2012)
Robert Engle, Robert Ferstenberg, and Jeffrey Russell

Financial markets are considered to be liquid if a large quantity can be traded quickly and with minimal price impact. Although the idea of a liquid market involves both a cost as well as a time component, most measures of execution costs tend to focus on only a single number that reflects average costs and do not explicitly account for the temporal dimension of liquidity. In practice, trading takes time because larger orders are often broken up into smaller transactions or because of price limits. Recent work shows that the time taken to transact introduces a risk component in execution costs. In this setting, the decision can be viewed as a risk–reward trade-off faced by the investor who can solve for a mean-variance utility-maximizing trading strategy. Engle, Ferstenberg, and Russell introduce an econometric method to jointly model the expected cost and risk of the trade, thereby characterizing the mean-variance tradeoffs associated with different trading approaches, given market and order characteristics. They apply their methodology to a novel dataset and show that the risk component is a nontrivial part of the transaction decision.

Continue reading "Recent Research: Highlights from February 2012" »


Inside a Great Financial Services Cover Letter


You have a great resume, but if you ever want it read, you need an introduction that has impact, and that means a great cover letter that separates you from the rest of the pack.

With the financial services sector having experienced such a drastic reduction in force in recent years, the competition for jobs today is tougher than ever. There are literally thousands of qualified, experienced, motivated professionals applying for a relative handful of opportunities.

So what is it that will get the hiring manager to look at your resume? Many career experts suggest that you focus your attention and energy on creating a dynamic cover letter. A cover letter is a sales letter. It’s selling you.

Continue reading "Inside a Great Financial Services Cover Letter" »


Who's Got G.A.M.E.?


Finance professionals will have the rare opportunity to attend a Who’s Who of financial industry leaders next month. On March 29, 2012, a host of notable speakers will gather to discuss and debate key issues in investments at the second annual Global Asset Management Education (G.A.M.E.) II Forum. “This is the first academia-hosted event of this magnitude in New York City,” said Dr. David Sauer, managing director and program chair, citing top names in the field such as Guy Adami (of CNBC’s “Fast Money”) and Abby Cohen (president of the Global Markets Institute and senior investment strategist at Goldman Sachs)—to name a few.

Continue reading "Who's Got G.A.M.E.?" »


Letters to a Young Analyst

Those of us who have been in the investment business for a number of years are often asked for advice about what it takes to get a job and to get ahead in this very competitive field. Given the complexity of the industry and the degree to which it has changed over the decades, it is not surprising that my suggestions have evolved, but the principles that underlie them have not.

When I read a wonderful book by Ian Stewart, Letters to a Young Mathematician (Art of Mentoring), I was struck by how closely the themes of his advice in a completely different realm matched those of the advice that I give. So, I wrote a series of letters to a young analyst that dealt with those common themes. Each of the seven dispatches covered an important aspect of the new job that the recipient (named Tim) would be starting—and of the profession he had chosen.

Continue reading "Letters to a Young Analyst" »


What's Wrong with the Debt Debate

This former banker, and now sustainability investor and humble blogger, will not offer grand predictions for 2012. Forecasting in a world of rising uncertainty suggests a lack of understanding about uncertainty. Instead, inspired by my holiday reading, Debt: The First 5,000 Years, by anthropologist David Graeber, I will take up the debate about the debt, and offer an uncomfortable third view: jubilee (in some form) is inevitable.

Continue reading "What's Wrong with the Debt Debate" »


How Much Alpha Is in Preliminary Data?

Illuminating the Differences between Prelim and Final Filings

“In theory there is no difference between theory and practice. In practice there is.”
-Yogi Berra

Companies often report financials twice: first, through a preliminary press release and again in their official, i.e., final, SEC filings. In theory, there should be no difference between the numbers reported in a company’s preliminary financial filings and their final filings with the SEC. In practice, often significant difference can occur between the preliminary and final filings. In this month’s research report, we focus on these observed differences within the S&P Capital IQ Point-In-Time database in order to ascertain the nature and exploitability of these differences. We find that:

Continue reading "How Much Alpha Is in Preliminary Data?" »


How and Where Should You Invest in Emerging Markets?

As the new year failed to ring in a solution to the debt crisis that has transfixed the eurozone, investors are left wondering whether now is the time to place their bets on potentially risky growth opportunities or to keep their assets in safe havens. Beyond Europe’s sovereign credit issues, other factors such as massive debt overhang, the threat of double-dip recessions, and ongoing money printing by central banks in the developed world call into question the traditional definition of “safe.” In this environment, some money managers are asking whether investing in emerging economies may, in fact, be safer than committing assets to developed markets.

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