Why Take This Class?

Based on our experience, many students have a negative view of Finance at the beginning of the class. So why take this class? A recent study found that most retail investors “have a weak grasp of elementary financial concepts and lack critical knowledge of ways to avoid investment fraud.” Only 14 states currently have a required personal finance class. While we do not believe that this class will make you an informed investor by itself, many of the concepts are applicable to basic investment decisions and can serve as a foundation for your future financial literacy.

Sell In September?

"Sell in May and go away," an old stock market adage, advises investors to sell stocks in May and not reinvest until the fall, typically around Halloween. Since 1896, September has been the Dow Jones Industrial Average's worst month with an average loss of about 1 percent. And since 2000, September has seen an average loss of 2.12 percent. On the bright side, 5 of the last 7 Septembers have had positive returns.  Whether or not September 2012 has another negative return remains to be seen, but technical analysts should have already left the stock market.

EU Warned About Credit Problems

Moody's cut the European Union's creditworthiness from "stable" to "negative". In July, Moody's revised the outlook downward for Germany and the Netherlands. Moody's stated that it believed that member countries would likely back their sovereign debt rather than EU debt. The EU recently announced a bond buyback for the sovereign debt of Spain and Italy, two countries that have large deficits and borrowings, leading to very high sovereign debt interest rates.

Dividend Tax Expires, Stock Unaffected?

A recent opinion article in CFO argues that allowing the Bush dividend tax cut to expire will not affect stock prices. In other words, the author argues that tax rates on dividends do not affect stock prices for four reasons: 1) Dividends are critical to returns and smart investors do not turn their backs on dividends. 2) Dividend paying stocks remain in high demand, the widows and orphans argument. 3) Institutional investors will not be impacted, a rephrasing of the widows and orphans argument. 4) There is no evidence that companies adjust dividends based on shareholder taxation, an argument that DeAngelo, DeAngelo, and Skinner (2008) might disagree with (Figure 19.8).

The Bonds They Are A Changin'

Goldman Sachs recently pulled its Dylan bonds from the market. Goldman had originally expected to sell $300 million worth of the bonds, backed by the royalties received from songs written by Bob Dylan. The bonds were expected to be issued with a BBB- rating, but Goldman pulled the bonds to separate the cash flows into two classes, or "tranches". The senior tranche will carry a higher credit rating, while the subordinated, or junior, tranche will have a lower credit rating and bear more default risk than the senior tranche.

Samurai Bonds Issuance Rises

Samurai bond issuance is rising due to low Japanese interest rates and demand from Japanese investors. About $7.2 billion worth of Samurai bonds have been issued this year by Asia-Pacific borrowers. While this is down from the $8.2 billion issued over the same period the previous year, it is up 20 percent from 2010. Japanese investors are eager for the samurai bonds after the 2011 tsunami revealed the problems with too much domestic debt exposure, resulting in "reverse roadshows". Typically, a lender will have a roadshow to attract potential investors, but demand for samurai bonds is so high that borrowers are running reverse roadshows in which they search for potential lenders to offer samurai bonds.

Economists Learn Finance

One of the central tenets in Finance is the importance of market values and this is true when managing risks. When the recent financial crisis began in 2007, the models used by Federal Reserve economists were unable to explain the problems occurring in the economy. So, Finance came to the rescue. The Federal Reserve had always believed itself better informed than the market, but investors can provide important information about the risk a particular bank poses to the rest of the financial system. One of the new models being used by the Fed is the Marginal Expected Shortfall Approach, developed by professors at NYU's Stern School of Business.