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Could You Be Tricked Into A Trade By A Cute Name? Probably.

Thursday, November 19th, 2009

There are lots of risky and complicated investment vehicles available that can mislead investors with the power of cute-sounding acronyms…

  • A psychological phenomenon called “fluency” makes acronyms that sound like familiar words (like “ELKS,” “LYONS,” and “NINJAS”) more appealing than the complicated, clunky investment vehicles they stand for.
  • The same phenomenon extends to stock ticker symbols as well, with snappy and pronounceable symbols tending to outperform clunkier symbols in short-term gains.
  • Investors should be especially cautious when considering stocks or other investment vehicles represented by acronyms rather than their full names. Is it possible that the name is designed to deflect attention from potential risks?

Facts & Figures

  • In an experiment involving ordinary people judging the safety of various fake food additives, easily-pronounceable additives were perceived to be 29% safer than those with hard-to-pronounce names.
  • When Harley-Davidson changed its stock ticker symbol from HDI to HOG, the stock price rose by 5%.
  • Some choice acronyms and what they stand for: BIMBOs (Buy-In Management Buyouts); STRYPES (Structured Yield Product Exchangeable for Stock); SPARQS (Stock Participation Accreting Redemption Quarterly-Pay Securities); PRIDES (Preferred Redeemable Increased Dividend Equity Securities).

Goldman Takes One For The Team, Offers $500,000,000 Olive Branch

Thursday, November 19th, 2009

In an unusual display of corporate responsibility, Goldman Sachs admits its part in the financial crisis and tries to make nice with the small business community.

  • Goldman CEO Lloyd Blankfein made a statement acknowledging his company’s role in the global meltdown and offering an apology for its actions.
  • Attached to the apology is a $500 million donation to go toward supporting small businesses, which will be administered by rock star investor and Berkshire Hathaway CEO Warren Buffet.
  • The company has recently been the object of public outrage for issuing record executive bonuses after accepting bailout funds funded with taxpayer money (which it has since repaid).

Facts & Figures

  • Goldman’s compensation and bonuses this year already total $17 billion and could reach $23 billion by the end of the year.
  • The $500 million pledge represents approximately 2% of compensation funds set aside for 2009.
  • In the third quarter of 2009, Goldman Sachs earned more than $100 million on 36 different trading days.

Best Quote

“We participated in things that were clearly wrong and have reason to regret. We apologize.” – Lloyd Blankfein, CEO of Goldman Sachs

What happens to your money if your bank disappears?

Thursday, November 19th, 2009

Don’t worry, just because your bank has evaporated doesn’t mean your money will too – no screaming necessary. Every major bank in the country is insured by the Federal Deposit Insurance Corporation (FDIC); it’s the government organization in charge of protecting your deposits (up to a certain amount) and keeping the banking system running smoothly. But what happens when a bank outright fails?

Although rare, when a bank does fail the FDIC can step in one of two ways. The preferred method is where the FDIC will try to find a healthy bank to buy the failing bank’s assets, which would mean your funds are transferred over to the better bank. Without you doing anything, your money is automatically put in a safer place. On the other hand, if a buyer can’t be found, the FDIC will write you a check for your money.

How quickly and for how much? The FDIC insures your money up to $250,000 per account and typically sends checks out within a few days of the bank failing. Since the FDIC’s creation, no one has ever lost a single penny of insured funds – a pretty good record for a 76-year-old organization. Either with a new bank or in a hefty check, you can breathe easy knowing you’ll get your money back.

How can five percent unemployment possibly be a good thing?

Thursday, November 19th, 2009

For an individual, being unemployed when you desperately need a job is never a good thing. However, a little unemployment in an economy is not necessarily a bad thing. First of all, some people don’t want to work – at least not in jobs that get listed on tax returns like stay-at-home moms and dads. That’s called voluntary unemployment, but it really shouldn’t even be counted in unemployment statistics. There are also always going to be people who are between jobs – having just left one job and waiting to start another, but not in real danger of long-term unemployment or desperate to find work. Economists call that “frictional unemployment.” Even if everybody who wanted a job had one, there would still be some “frictional” unemployment as people transitioned between jobs.

In reality, however, it’s extremely rare that every single person who wants a job is employed. Unemployment moves up and down in a cycle along with the rest of the economy and, while increased unemployment in a minor economic downturn is not a good thing, it isn’t an economic death knell. Some people will also be involuntarily unemployed because of structural unemployment – unemployment that happens because wages (the price of jobs) can’t change with demand or the right types of employees aren’t available for existing jobs.

Structural unemployment can be lowered in the short term by sparking inflation, but the unemployment goes back to its previous rate, so trying to push the unemployment rate below a certain level tends to make the economy unstable. Milton Friedman, who won the Noble Prize for Economics in the 1960s, called this level “natural unemployment” or NAIRU (the non-accelerating interest rate of unemployment). It’s the level of unemployment in an economy at which prices and jobs are stable. The NAIRU for the United States in the past two decades has been about 5%, and for most of that time, the economy has been quite healthy.

So, it’s not good if YOU are unemployed (assuming you want a job), but unemployment is a natural, unavoidable part of any economy.

Why is there a stock exchange in Cleveland?

Wednesday, November 18th, 2009

All publicly traded companies can be bought and sold on one of the many stock exchanges that exist all over the country and the world, but rarely do you hear about any exchanges other than the New York Stock Exchange or NASDAQ. And wait… why do we even need more than one?

Why is there a stock exchange in Cleveland? Well, there isn’t one, but there used to be. Many of the small, regional exchanges that no longer exist were necessary because, without the Internet and computers, it wasn’t possible to buy and sell stocks quickly across vast distances. Today, huge exchanges like the NASDAQ only exist on a computer network – there is no NASDAQ trading floor.

Each different exchange only trades a limited number of companies and can impose rules on the companies it lists, or only allow companies of a certain size or stock price. The NYSE has a minimum share price and share volume so that only big companies can trade, so it’s considered a less risky exchange than say the NASDAQ which doesn’t have those types of restrictions. Exchanges can also only trade specific types of securities. The Chicago Mercantile Exchange (CME) only trades financial and commodity derivatives for example.

Being familiar with the differences between the various exchanges can help you make decisions about investing in companies traded on those exchanges and empower you to have an informed discussion of your investments with your broker or financial advisor.

Investments in Art Roaring Back

Friday, November 13th, 2009

Huge sales continue to beat expectations as collectors and investors start to buy art again.

  • Pieces by Andy Warhol, David Hockney and Alice Neal were among large lots sold for prices that have not been seen since before the recession.
  • Large auction houses like Sotheby’s or Christie’s host auctions and then take a percentage of the sale price of every lot.
  • Auction houses lowered expectations by 50-75% so that when they make large sales, it looks as if the numbers are better than they actually are. Still, selling a large amount of high-priced art is impressive, regardless of the recession.

Facts & Figures

  • Warhol’s 1962 “200 One Dollar Bills” sold at a Sotheby’s auction for $43.8 million. The seller originally paid $385,000 for the piece in 1986.
  • The Sotheby’s auction totaled $134.4 million against the company’s earlier/ estimate of $97.7 million.
  • Sotheby’s highest auction total was $362 million in May of 2008.

Best Quote

“The art vacation is over. Art has come back more than stocks or housing.” – Jack Tilton, New York Art Dealer

“Avatar” Brings NewsCorp Into The Film Business In A Big Way

Friday, November 13th, 2009

Avatar is one of the most expensive movies ever made, but will it earn for its investors?

  • Avatar is a new film about a foreign planet and the humans who naturally want to invade it. Director James Cameron (Titanic and Terminator) has worked on the movie for 15 years.
  • Although the film is being released through 20th Century Fox, the film company is carrying a small percentage, as little as 40%, of the production budget. Private equity groups pick up at least 60% of the budget.
  • Because the marketing campaign and technology used in the film are so wide-scaled and elaborate, companies such as Panasonic and Weta Digital have contributed to production and promotion in exchange for advice and cross-marketing opportunities.

Facts & Figures

  • Avatar has an estimated $500 million budget attached to it, including a $150 million marketing campaign.
  • Highly complicated and advanced technology was used in the creation of Avatar, and the creators of that technology will turn their involvement in the film into an advertisement for their emerging business and technology.
  • Because the film is showing in 3-D, ticket prices will be about 30% higher than in conventional theaters.

Best Quote

“We’re turning it into a business, as opposed to a path where everybody’s supposed to service ‘Avatar.’” – Vince Page, Co-Developer of Digital Technology for “Avatar’s” production.

McDonald’s To Serve Billions More, Faster Than Ever

Tuesday, November 10th, 2009

Could shaving off seconds from a Big Mac order retain some customers for the fast-food giant? What about ordering while waiting in line at the register?

  • Even-though McDonald’s is the world’s largest restaurant chain, it ranks 7th out of the ten top fast-food chains on the American Customer Satisfaction Index.
  • In an effort to get more customers through their “golden arches,” McDonald’s will focus on serving burgers faster, fitting more food on every tray and squeezing more cars into the drive-through line.
  • The company is experimenting with hand-held ordering devices that would allow workers to come from behind the counter to improve efficiency and shorten long lines.

Facts & Figures

  • Sales in the last year at McDonald’s restaurants (open for at least 13 months) climbed 3.8%.
  • McDonald’s aims to serve each customer within 90 seconds of their order.
  • The company has an “innovation center” 20 miles southwest of their headquarters in Illinois, where they practice new serving techniques and other new ideas.

Best Quote

“The moment of truth comes in the transaction. We have to get better at that moment of truth.” – Jeff Stratton, McDonald’s Chief Restaurant Officer

Buffet Invests In American Economy

Monday, November 9th, 2009

Warren Buffet, America’s most well-known investor, has purchased the Burlington Northern Santa Fe Corporation in hopes that railroad traffic will increase in the future.

  • Burlington Northern Santa Fe is a railroad company that ships products by train all over the country.
  • Buffet believes that railroads will become increasingly popular for shipping and transportation as oil becomes more expensive.
  • Buffet’s company, Berkshire Hathaway, followed his rules of investing in this particular deal: invest in companies that people can understand, and buy quality products at discount prices.

Facts & Figures

  • Buffet will pay roughly $26 billion for the 77.4% of Burlington Northern Santa Fe that he does not already own (at $100/ share).
  • Buffet is splitting Berkshire Hathaway’s B Class stock 50 to 1 (meaning that if you owned 1 share of stock before the split, you know own 50!) in order to pay for the acquisition.
  • In an investor owned $1,000 worth of Berkshire stock in 1965, that same investor’s stock would be worth millions of dollars today!

Best Quote

“This all happened because my father didn’t buy me a train set as a kid.” – Warren Buffet, CEO and Chairman of Berkshire Hathaway

A Savings Rate is…

Thursday, November 5th, 2009

A savings rate is the percentage of your disposable income that you save. For example, if your annual savings rate is 5%, that means you save 5% of your disposable income every year.

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