Author: Nishant Sheth

As some of you may already know, on February 1^st Facebook decided to announce plans for an initial public offering. The IPO could value at up to $100 billion. This is a landmark figure for a company like Facebook, who is into social networking. Facebook is a very useful and integral tool in today’s world. It has a very broad user base all over the world. Facebook generated $3.7 billion in revenue just last year. The main question entering investor’s minds is, does this justify the possible $100 billion IPO? Facebook is not only an important tool for teenagers and college students but also one that is very important in today’s corporate world. Companies know that Facebook is a way for them to reach their target audience and promote their products. It has become essential for companies to utilize social media to remain competitive in their market. The one at the top of the list: Facebook. Some people worry about the IPO because Facebook only has 3,200 employees. Many of these employees would become millionaires after its IPO. This may curb employee motivation as they have already made it big. Also, all this new money will drive Facebook to add more products and services which will focus on profit making. Since Facebook relies on advertisements, more and more products and services means more information from users. This could raise privacy and trust issues. Another big issue brought up is antitrust regulation and technology competition. What do you think about Facebook’s IPO and analysts concerns?

Economist Article: http://www.economist.com/node/21546012

Is It All About The Benjamins?

Check out the following commentary by Economics Finance blog contributor Alex Knapp.

Article Link:
http://www.washingtonpost.com/wp-dyn/content/article/2010/12/17/AR2010121707069.html’

There has recently been a lot of uproar in regards to the massive bonuses received by men and women on Wall Street. Even though 2010 has seen up to 30% declines in those annual bonuses at some firms, people outside of the big brokerage houses, investment banks, and other financial institutions still feel that these conniving swindlers are being overpaid.

Based on a Washington Post article these worries could be soon alleviated. For the past 20 years, MBA students at the Wharton School have had to write a mid-term paper on how they were paid and managed at their last job. This year, the professors said that out of the over 800 papers submitted, there was a resounding shift in the sentiment of young workers toward big bonuses.

The students at Wharton seem to have a growing distrust of the bonus system and prefer meaningful feedback and supervision. This seems like a very nice thought, but these students would not be attending the highest touted business school in the world if they were just looking for meaningful feedback. They could have become veterinarians, pediatricians, or joined the Peace Corps; these professions provide meaningful feedback every day. Though it is a nice thought, and sounds great in an essay to your professor, I wonder why they didn’t say the same thing to their boss when he or she handed them a $200,000 check, as one student cited.

As a business student myself, surrounded by all of my business student friends, I question the sincerity of the Wharton students. Not to say that all business men and women are bloodsucking money mongers, but there are millions of other professions out there they could have chosen instead.

Since we are all business majors here at Bentley, what do you think of big bonuses, why did you get into the business world, and do you think there will be a change in the way big financial firms compensate employees?

PERSONAL DEBT

Check out the following commentary by Economics Finance blog contributor Jonas Grazulis.

Article Link:
http://www.studentdoc.com/refinance-student-loans.html

While we’re in school, we usually talk about finance and economics in theory, what is going on in the world, but rarely do we apply it to our own lives this early. Well, I urge you to start. I will be graduating this May with some school loans I will have to repay. For some of you this may be true as well, and for others this may be useful later on in life with personal loans or home mortgages. As we know, we are in a low interest rate environment based on historical data. Since I have some loans I pay interest on, I wondered whether I can take advantage of these rates in some way. We know that firms are taking advantage of these low rates to refinance some of their debt or to finance expansion, so should we! After looking into it, it turns out I can. After I graduate, I am able to refinance many, if not all, of my loans at lower rates since I will be consolidating my debt and taking advantage of the credit environment. When consolidating debt, make sure to do it in two steps if you have federal and private student loans. Student loans such as Stafford loans usually come with a lower interest rate already, so you want to consolidate these separately and hopefully get an even lower rate. Private loans from institutions such as Sallie Mae or CIT come at higher rates and could be 4-10% depending on the case. If your credit is good, you have been paying interest payments (if required) on time, and graduated - you are eligible to consolidate and refinance your loans. There is plenty of information of how to do this if you just “google” refinancing student loans.

This applies not only to your student loans, but technically any loans you may have in the future. Just as companies use debt to finance current operations, and expansions among other things, individuals are technically able to do the same. One should not overlook the opportunities in the market when the conditions are right to avoid throwing money out the window by paying higher than needed interest expenses.

I started here and there is plenty of information around elsewhere as well so don’t limit yourself if you will look into it.

HIGH FREQUENCY TRADING

Check out the following commentary by Economics Finance blog contributor Jonas Grazulis.

Article Link:
http://www.bloomberg.com/news/2010-11-09/high-frequency-firms-accelerate-lobbying-donations-to-head-off-u-s-rules.html

High-Frequency trading has been in the news quite a bit this year, and it was mostly put into focus by the Flash Crash of May 6^th. Whether or not the firms were rightfully accused is still an open debate between regulators, while a negative light was shed on this particular type of trading.

Now, if you are not familiar with high-frequency trading (HFT), let’s review. HFT falls under the category of algorithmic trading. This means, the trading decisions are generated automatically due to specified conditions. For example, a buy signal (a long trade) will be initiated on a Google stock after a large positive surprise upon a GDP data release. Rules may be as simple as that, and get much more complex. As a rule of thumb, traders and strategists prefer systems with very simple and few rules because such a system will be able to perform well for a longer period of time, while a very complex system may only be good during certain times in the market. This type of trading is generally not what you will find in a Bentley classroom or most schools for that matter. How far away is this from projecting cash flows of a company for the next few years and determining the intrinsic value of a company knowing that you will be in and out of a trade within minutes or hours?

So why have HFT firms been in the news recently? They’re getting scrutinized for trying to find some support in Washington to defend their industry from regulators and senseless laws that restrict our markets. The SEC has been looking to restrict HFT firms from certain practices and in some cases require them to operate when conditions are not in their favor. <- Now this is the part that doesn’t really make sense to me. A firm will choose not to operate and take on risk when the conditions in the market don’t seem favorable because they think they will lose money, but the SEC wants to require them to operate regardless. For some reason I started hearing echoes of capitalism, free market, and economic interest at hand once I read this article. While the benefits of HFT have been noted by many respected market participants, the SEC is looking to curtail this practice and establish regulations that will directly impact performance of these firms and move them out of the market.

I do have a bias view in this matter, but it shouldn’t stop you from reading this article and forming your own view. Comments, questions, and opinions regarding any algorithmic trading are more than welcome.

Contact: grazuli_jona@bentley.edu

The Bulls & Bears

The Bulls & Bears Press is the most widely distributed intercollegiate publication in the world. It is distributed to finance and investment clubs at over 70 universities including Harvard, Princeton, Yale, 4 universities in Singapore, 4 in Australia, and 3 in India.

Please check out the latest issue that includes stories highlighting “CFA, MBA, or CAIA”, “NetSpend IPO”, “Microfinance in India”, “Agricultural Commodities”, and “This Week in Barrons”.

To download this week’s issue please click the following link:
http://bullsbearspress.com/download-issues/volume-iv/83-volume-4-issue-6

THE GOLDEN ARCHES

Check out the following commentary by Economics Finance blog contributor Tyler Stoffers

Article Link:
http://www.bloomberg.com/news/2010-11-08/mcdonald-s-october-sales-rise-6-5-as-monopoly-lures-consumers.html

The world’s largest restaurant chain, McDonald’s corp., recently reported that sales for October were up 6.5% last month compared to a year earlier. This increase beat analysts’ estimates as they predicted global sales would have grown by 5.4%. Much of this success is due to the recent monopoly promotion and addition of new products such as coffee and fruit smoothies. These additionally menu items were put in place in order to attract customers to the fast-food restaurant sites at times other than regular meals. Additionally, sales responded in a very positive manner in regards to the Monopoly board game promotion. For those of you who are not familiar with this game, McDonalds gives customers game pieces with food purchases and if an individual collects all of the pieces of a particular color they receive a predetermined prize. This is a yearly promotion offered by McDonalds and during its execution; customers tend to favor eating at McDonalds as opposed to other fast-food chains. Through this annual promotion and new product line McDonalds has been able to position itself to beat forecasted sales. McDonald’s has a current trading price of $79, do you believe that this stock is overvalued, undervalued, or priced accordingly?

The Bulls & Bears

The Bulls & Bears Press is the most widely distributed intercollegiate publication in the world. It is distributed to finance and investment clubs at over 70 universities including Harvard, Princeton, Yale, 4 universities in Singapore, 4 in Australia, and 3 in India.

Please check out the latest issue that includes stories highlighting “Yield Curve Implications”, “Environmental Markets”, “GE & HP”, “Momentum Investing”, and “This Week in Barrons”.

To download this week’s issue please click the following link:
http://bullsbearspress.com/download-issues/volume-iv/82-volume-4-issue-5

Warren Buffet?

Check out the following commentary by Economics Finance blog contributor Jonas Grazulis.

Article Link:
http://go2managedfutures.com/wp-content/uploads/2010/10/Beatingwarren.pdf

A look at investment performance objectively:

If you are at all interested in investment management, chances are you heard of Warren Buffet and his strong performance record. Most investors envy his record and look at it as an example or even a goal for themselves. I say, we take a look at it objectively and see how it ranks with some other investment managers.

Let us quickly compare the performance of Berkshire Hathaway A Shares and some of the CTAs covered in the referenced article. Based on 1996-2010 data, Berkshire returned a little less than 10 percent on an annualized basis. Such performance is surely nothing to scoff at, seeing how over the time period an invested $100,000 would have turned into almost $400,000. But, I wouldn’t be writing this article to tell you how well Berkshire performed over the last 14 years. So, what if I tell you that over the same period, some of these CTAs would have ended up with portfolios worth more than 400, 600, even $700,000? Now, that is what caught my attention. Many of these managers had much larger annualized returns with even smaller drawdowns. So in fact, they are being less risky on a standard deviation basis than something like Berkshire or the S&P, yet producing larger returns. I have the utmost respect for Warren Buffet, his investment style and genius overall, but will I let him manage my money anytime soon? Probably not; simply because while he is very good at what he does, there may be people that are better. I welcome you to check out the article “Beating Warren Buffett: Can Your Investment Manager Beat Warren Buffett’s Berkshire Hathaway’s Stock Performance over the past 10 years?” by Daniels Trading and expand your horizon of investment opportunities.

I leave you with one of my favorite quotes from this short paper. “Morning Star calculates that the average annual return of 6,176 mutual funds was 3.72% for the ten year period covered and the annual return for the S&P 500 was -3.06% with a total return for the period of -26.91% for these same ten years. Yes, you read correctly: the average annual return over the past ten years for 6,176 mutual funds was a meager 3.72%.”

The Bulls & Bears

The Bulls & Bears Press is the most widely distributed intercollegiate publication in the world. It is distributed to finance and investment clubs at over 70 universities including Harvard, Princeton, Yale, 4 universities in Singapore, 4 in Australia, and 3 in India.

Please check out the latest issue that includes stories highlighting “LBO Resurgence”, “Structured Products”, “Mortgages”, “Capital Markets”, and “This Week in Barrons”.

To download this week’s issue please click the following link:
http://bullsbearspress.com/download-issues/volume-iv/81-volume-4-issue-4

The Bulls & Bears

The Bulls & Bears Press is the most widely distributed intercollegiate publication in the world. It is distributed to finance and investment clubs at over 70 universities including Harvard, Princeton, Yale, 4 universities in Singapore, 4 in Australia, and 3 in India.

Please check out the latest issue that includes stories highlighting “Early Russia”, “Developments in Europe”, “Value Investing”, “Credit Default Swaps”, and “This Week in Barrons”.

To download this week’s issue please click the following link:
http://bullsbearspress.com/download-issues/volume-iv/80-volume-4-issue-3