Author Archives: CFAMNEB

Recap of Society Luncheon – The Return of Volatility – Monetary Policy Divergence Brings the Return of a Long Forgotten Friend

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By Tom Halloin, CFA Society Minnesota Intern

Central banks are starting to diverge in their monetary policies. Marvin Loh, a Managing Director at BNY Mellon Global Markets and the firm’s senior fixed income market strategist, spoke with CFA society members about potential consequences of diverging monetary policy between central banks. Interest rates, for instance, have collapsed worldwide since the financial crisis in 2007, with some countries such as Germany realizing near-zero or negative yields on bonds out to seven years. While the Federal Reserve of the United States has stopped purchasing securities through Quantitative Easing, European and Japanese central banks continue their own quantitative easing programs in order to stimulate their economies. As a result, the best currency trade in recent months has been to buy the dollar and short the euro.

The diverging monetary policies also extend to the Federal Reserve’s decision whether to raise the Federal Funds rate. Many investors are anticipating the Federal Reserve will increase the Federal Funds rate as early as this June.  While the consensus among economists is that inflation will remain low for the foreseeable future, the Federal Reserve wants to mitigate the creation of asset bubbles as a result of a prolonged period of near-zero interest rates. There is less consensus, however, as to when the Federal Reserve will start to raise rates and how quickly rates will increase in the next two years. This lack of a consensus is an issue because markets can react violently to any slight change in monetary policy. With diverging policies between central banks internationally and diverging expectations on interest rate changes in the United States, expect volatility throughout the fixed income world in the near future.

Recap of Society Luncheon – Behavioral Finance: Modern Theory and Application

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By Tom Halloin, CFA Society Minnesota Intern

Investors are increasingly turning their attention toward behavioral finance in order to find an edge in the markets. On March 4th Dr. Sergey S. Barabanov, a professor at the University of St. Thomas, spoke to CFA Society members about classic repetitive mistakes investors frequently make and ways to avoid them in the future. The data show, for instance, that investors hold on to their losing positions for far too long and sell their winning positions far too soon. This is because investors are much more likely to feel pain from losing money than they are to feel euphoria from gaining that same amount. In addition, trading frequently statistically leads to lower returns over time. Dr. Barabanov suggests examining behavioral sentiment after quantitatively screening for companies with a large, unexpected increase in earnings per share, and then using fundamental analysis to determine whether this earnings increase is sustainable. After screening using fundamental analysis, he also recommends examining market sentiment and capitalizing on earnings overreactions. One final suggestion he gave was to watch out for falling airplane parts. A person is 30 times more likely to die from a falling airplane part than to die from a shark attack. And while it is highly unlikely for either of these events to happen, the anecdote is a clever one that reminds investors to be aware of their emotions and biases when making investment decisions.

A Successful 2015 Annual Economic Dinner

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More than 500 people packed the Marriott City Center ballroom for our 2015 Economic Dinner featuring Jim Grant, founder and publisher of Grant’s Interest Rate Observer. Jim spoke with wit and insight about the causes and implications of our current zero-interest-rate environment. Zach Pandl, Portfolio Manager and Strategist at Columbia Management, moderated the Q&A session immediately afterwards.

Click here to read “Low interest rates have us in uncharted territory,” a recap of Jim’s presentation by Star Tribune columnist Lee Schafer.

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Photos Credit: Knoebel Portrait Design

Happy Thanksgiving from the Freezing Assets Editorial Board!

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We at Freezing Assets would like to wish everyone a very Happy Thanksgiving. We are thankful for a lot here at our blog. First and foremost, we are thankful for your readership. We value your time and attention more than anything, and we know that you have thousands of other reading options so we appreciate you choosing us.

Additionally, we are thankful for our contributors. Like every other website, our content is everything to us. Nothing happens without it. Here at Freezing Assets we are blessed with many outstanding local volunteer content contributors. This is what makes our site unique—excellent and diverse material submitted by our peers and friends for our CFA Minnesota members.

Though this is a site specifically designed for our region, others are taking notice. In fact societies around the country have either launched a site like ours (e.g. CFA Society Chicago), or from what we hear are in the process of starting or considering one of their own based on the success we have had with Freezing Assets.

That is just one reason we feel blessed this Thanksgiving. Let us know what you think of the site, and how we can make it more useful for you. Better yet, consider becoming a contributor yourself. Just write to info@freezingassets.org, and we’ll let you know how to get started. It really is very easy. If you wish to help out in other ways besides writing, that’s great too. We take all comers.

Thanks for your readership, and everyone at the CFA Society of Minnesota for making Freezing Assets special.

 

Have a great Thanksgiving,

The Freezing Assets Editorial Board

Ask the Ethicist: Discussing Work at Home

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I live with a significant other, and we are not engaged or married. We talk about our days at work openly. I strongly trust my significant other, but being in the securities industry I am terrified of inadvertent information leaks and others we know trading on the information. That person agreed verbally never to talk about my activities outside our home. I want to keep myself covered, but I also want to be open to my significant other about my life’s work. What can I do?

Dear terrified investment professional afraid to discuss work at home:

You raise some good points but have nothing to fear. You are smart and it is prudent to agree with your significant other that he should not discuss anything about your work with third parties. This understanding should also include not tipping or trading on any such information. You, like most people, naturally want to talk at home about what happens at work since we spend so much time at work. The need to share with our significant other often conflicts with employment and compliance policies that prohibit disclosure of proprietary information, and securities law and fiduciary duty restrictions that prohibit disclosure of work-related activities.

This issue got a lot of attention recently when the SEC Enforcement Division brought an insider trading case against Filip Szymik, whose roommate worked as an analyst at William Ackman’s Pershing Square Management. Szymik learned from his roommate that Ackman was going to make a public presentation on why Herbalife, a publicly traded company, is a ponzi scheme.  Szymik had told his roommate that he would not trade on the information. Despite the understanding, Szymik told a friend named Peixoto about the upcoming presentation. Peixoto bought put options that traded in the money when Herbalife stock tanked after Ackman’s presentation.  Peixoto made only about $47,000.  The SEC charged Szymik with insider trading for tipping material nonpublic information to Peixoto who traded on the information and made a profit.  This case demonstrates the risks of trading and tipping material nonpublic information, and shows that the SEC will bring cases even against relatively small players to deter misconduct.

You have nothing to worry about from the SEC if you do not disclose material nonpublic information that your significant other could trade on or tip to another who trades.  What constitutes material nonpublic information is often a difficult interpretative question. Because Ackman is a prominent activist investor and his views and positions will affect the market, his views on Herbalife were clearly material.  Materiality is usually defined as what a reasonable investor would deem to significantly alter the total mix of information available or what a reasonable investor would deem significant in making an investment decision given the total mix of information available.  The SEC has not defined materiality, it has been defined in court cases.  Usually, but not always you know if you have material nonpublic information.  If you learn about key events before they are public such as a merger, tender offer, earnings information, loss or acquisition of key contract or business relationship and the like, you probably have material nonpublic information.  If you are trading for a client that is acquiring or disposing of a large position, you probably have non-public information.

If you need to talk about your work at home, try to talk about work in a general way without revealing nonpublic information to avoid breaching duties to clients, violating employer’s policies or securities laws.