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Rogue Trader, Steven D. Dolvin Sep 2012

Rogue Trader, Steven D. Dolvin

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On June 30, 2009, the price of oil jumped $1.50 per barrel during the night. This was curious since no major political event had taken place. Well, the Financial Services Authority just released a report that a drunk trader purchased futures contracts on 7 million barrels, which pushed the price up. Even more ironic, the trader was so drunk he didn't even remember doing it. See article here, CNBC.

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Futures Exchanges, Steven D. Dolvin Sep 2012

Futures Exchanges, Steven D. Dolvin

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Most people are familiar with the primary futures exchanges, such as the CBOT, CME, and the NYMEX (all part of the CME Group). However, there are some more specialized (and interesting) exchanges. For example, check out Intrade, which is a futures market based on political outcomes. Also, you can invest based on Hollywood movies ().

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High Yield Debt, Steven D. Dolvin Sep 2012

High Yield Debt, Steven D. Dolvin

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High Yield Debt is a nice way of saying "junk" debt, i.e., debt that is considered speculative grade. As you would expect, the yield on such debt, due to higher default risk, is higher than standard investment grade debt. However, with historically low interest rates, even the yields on "high yield" debt don't look so high any more. See article here, International Financing Review.

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Short Squeeze, Steven D. Dolvin Aug 2012

Short Squeeze, Steven D. Dolvin

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Short interest may be considered an indicator of overall market sentiment regarding a stock, with high short interest being bearish. However, if short sellers rush to cover their positions, a so-called "short squeeze," the price of the stock may increase substantially. This is what recently happened with Pandora stock. See the article here, Pandora.

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Plan Now, Steven D. Dolvin Aug 2012

Plan Now, Steven D. Dolvin

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Almost half of all retirees have $10,000 or less in savings when they die. While social security or pensions may provide adequate income, it illustrates the dependence on these outside sources. Going forward, there will be fewer pension plans (switching to defined contribution plans), and social security is no guarantee. So, plan now. .

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Media = Contrarian Indicator, Steven D. Dolvin Aug 2012

Media = Contrarian Indicator, Steven D. Dolvin

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The media often focuses on financial stories; however, they tend to be late to the game. Meaning, once they report on an event, the market has likely already digested it. Recently, Bespoke Investment Group found that the number of financial stories posted on the Drudge Report was negatively correlated to the subsequent market performance. See the article here, Yahoo.

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Weather Derivatives, Steven D. Dolvin Aug 2012

Weather Derivatives, Steven D. Dolvin

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Most people are aware of stock options or futures contracts on commodities such as gold and oil. However, the derivatives market is very diverse, including such things as weather derivatives. With hurricane season upon us, you may want to do some research on hurricane futures and options (http://www.cmegroup.com/trading/weather/hurricanes/hurricane.html). Essentially, these contracts allow insurers to transfer risk to other parties, such as hedge funds. See the article here, CME Group.

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Investor's Pain = Government's Gain, Steven D. Dolvin Aug 2012

Investor's Pain = Government's Gain, Steven D. Dolvin

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In the wake of the Crash of 2008, the government stepped in to bail out multiple institutions, including AIG. Following the economic recovery (albeit a moderate one), the government was able to exit its position, netting a $17.7 billion gain. So, while many people opposed the bailout, it actually served as a transfer from investors (generally considered the wealthy) to the government. See article here, LA Times.

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Short Sale Trading Glitch, Steven D. Dolvin Aug 2012

Short Sale Trading Glitch, Steven D. Dolvin

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Following the Crash of 2008, the SEC reinstated the uptick rule, albeit a modified version. The uptick rule kicks in if a stock's price drops 10% in one day. This prevents short selling except on an uptick. However, a trading glitch (which are increasingly common) effectively overlooked the rule. .

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Facebook Ipo Lockup Expiration, Steven D. Dolvin Aug 2012

Facebook Ipo Lockup Expiration, Steven D. Dolvin

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When a firm undertakes an IPO, insiders (owners and venture capitalists, among others) agree to retain their shares (i.e., lockup) for a period of time, typically six months. When the lockup period expires, it is customary to see a large block of shares flood the market, having an adverse effect on the stock's price. Facebook just hit its lockup expiration. See article here, NY Times.

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High Frequency Trading, Steven D. Dolvin Aug 2012

High Frequency Trading, Steven D. Dolvin

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With recent events such as the Flash Crash and the trading glitch at Knight Capital, high frequency trading has come under increased scrutiny. So, what exactly is high frequency trading and flash orders? Essentially, these traders attempt to exploit differences in bid/ask prices and capture any spread that exists. Check out this video for an illustrated discussion.

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Will Lightning Strike Twice?, Steven D. Dolvin Aug 2012

Will Lightning Strike Twice?, Steven D. Dolvin

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Just before the real estate crisis really hit, the Fed said that the issue was "contained." As we know, this was not correct. Recently, Bernanke said that the $1 Trillion in asset backed student loans won't cause a crisis. Hopefully he is right this time. See article here, Kansas City Star.

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Target Date Funds, Steven D. Dolvin Aug 2012

Target Date Funds, Steven D. Dolvin

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Target date funds (or lifecycle funds) have simplified the investment process for many people. However, they are not without their own potential problems and differences. This article (CNN Money) gives a good overview of the main issues.

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Etfs Vs. Etns, Steven D. Dolvin Jul 2012

Etfs Vs. Etns, Steven D. Dolvin

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While ETFs are essentially market-traded products that are similar to mutual funds, ETNs are actually more like a variable rate fixed income product that is "guaranteed" by the issuer. This difference adds a significant element of counterparty risk. Further, most ETNs are treated like partnerships, which means that taxes on gains (and losses) are treated differently, with recognition required each year (Statement K-1) rather than simply at sale. See a brief article here, USA Today.

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Control Yourself!, Steven D. Dolvin Jul 2012

Control Yourself!, Steven D. Dolvin

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Sometimes we are our own worst enemies. Research shows that our brains are wired to trade stocks actively, and this often works against us. Even professional managers (such as mutual funds) have a hard time generating consistent outperformance. So, the best managers may be those that understand the psychology of investing and are able to control themselves. See the article here, Wall Street Journal. A good book on the topic is Psychology of Investing, by John Nofsinger.

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Contrarian Indicator - Short Sales?, Steven D. Dolvin Jul 2012

Contrarian Indicator - Short Sales?, Steven D. Dolvin

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Short positions spiked recently, eclipsing the recent peak in 2011. After the previous peak, stock prices stages a five-month rally. Hopefully it will be the same this time. See article here, Bloomberg.

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Negative Bond Yields, Steven D. Dolvin Jul 2012

Negative Bond Yields, Steven D. Dolvin

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During the Crash of 2008, a "flight to quality" drove yields to unprecedented low levels. In fact, many Treasuries were being issued with negative yields, meaning investors were paying the government to safely hold their money. Recently, with the crisis in Europe, German bonds have exhibited similar negative yields.

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Selling Fear = Making Money, Steven D. Dolvin Jul 2012

Selling Fear = Making Money, Steven D. Dolvin

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Buying put options is commonly understood to provide a measure of insurance against price declines. As such, the cost of options is strongly correlated to the amount of fear in the market. It might be prudent in these cases to make the opposite trade -- selling put options. The seller (or writer) collects the premium, which during times of fear is very large. The risk is a significant decline in prices. See the article here, Forbes.

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Don Quixote -- Investment Guru??, Steven D. Dolvin Jul 2012

Don Quixote -- Investment Guru??, Steven D. Dolvin

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Don Quixote is a well-known literary figure, most commonly remembered for seeing the world through his own lens. He fights windmills thinking they are giants and slaughters a flock of sheep because they look like a mighty army. As investors do we make similar mistakes--seeing an asset the way we want to instead of the way it actually is? See article here, CFA Magazine.

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Improving Alpha, Steven D. Dolvin Jul 2012

Improving Alpha, Steven D. Dolvin

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Alpha is a measure of risk-adjusted performance. Positive alpha means an investment manager has generated returns in excess of what should have been earned given the level of risk taken. However, what if two funds have the same alpha--are they equally good? Well, tracking error helps to distinguish which fund might be better, as a lower tracking error might mean less risk and a more significant alpha. (See article here, Wall Street Journal.) The Information Ratio divides alpha by tracking error to provide a more comparable performance metric.

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Even The Best Investors Can't Time The Market, Steven D. Dolvin Jul 2012

Even The Best Investors Can't Time The Market, Steven D. Dolvin

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Warren Buffett is considered to be one of the greatest investors ever; however, even he is not perfect. In fact, his company (Berkshire Hathaway) is named after one of his failed investments. More recently, his timing on the purchase of GM stock has not worked so well. Fortunately, his holding period is generally very long, thus it could turn out to be a favorable investment over the long-term. See article here, Bloomberg.

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Municipal Bond Risk, Steven D. Dolvin Jun 2012

Municipal Bond Risk, Steven D. Dolvin

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While municipals generally carry lower yields due to their tax benefits, beware that they are more risky than comparable Treasury securities. Municipals can default since, unlike the federal government, they do not have the ability to print money. The most recent (and largest ever) city to declare bankruptcy is Stockton, CA. See the article here, Fox News.

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Actively Managed Etfs, Steven D. Dolvin Jun 2012

Actively Managed Etfs, Steven D. Dolvin

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ETFs were originally designed as alternatives to index funds, but ones that could be actively traded like stocks -- meaning continuous trading and the ability to short and margin. As ETFs have developed, however, they are now moving into active (as opposed) to passive management. This may increase costs, but it provides another avenue for potential investors. See the article here, Index Universe.

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Mutual Fund Oversight, Steven D. Dolvin Jun 2012

Mutual Fund Oversight, Steven D. Dolvin

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Like corporations, mutual funds have board of directors. However, they often exhibit much less oversight and control. Thus, there is debate whether they actually provide any value or simply serve as figureheads. See article here, Smart Money.

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Reputational Capital, Steven D. Dolvin Jun 2012

Reputational Capital, Steven D. Dolvin

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Ratings agencies are supposed to provide an independent view on a firm's (or country's) financial outlook. However, their involvement in the subprime crisis (i.e., their AAA rating on defunct MBS securities) revealed that the rating agencies are often more reactive than proactive. Thus, they seem to have lost much of their respect and influence. See article here, Breakout.

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Step On The Gas, Steven D. Dolvin Jun 2012

Step On The Gas, Steven D. Dolvin

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With the economy hitting a "speed bump," market participants increasingly believe the Fed will "step on the gas" to get it going again. Similar thoughts seem to exist in regards to potential action by the Chinese central bank. As a result, markets around the world were up. See the articles here (xinhuanet) and

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It Pays To Be Young, Steven D. Dolvin Jun 2012

It Pays To Be Young, Steven D. Dolvin

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The model is changing, as wealth management firms may need to increasingly hire younger advisors.

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Is Diversification Dead?, Steven D. Dolvin Jun 2012

Is Diversification Dead?, Steven D. Dolvin

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Diversification (primarily based on asset correlation) is a key component of Modern Portfolio Theory (MPT). However, the recent financial crisis illustrated an increase in correlation across asset categories. Thus, many debate whether diversification still helps. Even with increasing correlations, diversification still provides benefit (possibly just not as much). However, the more relevant issue is that increasing correlation across the typical asset categories suggests that diversification is now more critical across "non-typical" categories -- such as commodities, hedge funds, and private equity funds. .

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"Dumb Money" Pushing Treasuries, Steven D. Dolvin Jun 2012

"Dumb Money" Pushing Treasuries, Steven D. Dolvin

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Demand for Treasury bonds pushes prices up and yields lower. Given that Treasury yields are at all-time lows, the implication is that demand for these securities has increased. Many attribute this to buying by the Fed, but this demand is really being driven by retail investors. For contrarian investors, this would be an indicator to sell Treasuries, as retail investors are often referred to as "dumb money." See the article here, CNBC.

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Health Or Money?, Steven D. Dolvin Jun 2012

Health Or Money?, Steven D. Dolvin

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When asked whether they would have health or money, most people would probably choose money. However, a recent study shows that investors actually trust their investment advisors more than their doctors. So, does this imply they care more about their money than their health?????? See the article here, Investment News.

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