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Tuesday, August 27, 2013

On why Finance must be combined with IB and political science..

or any other similar degree...

M&A used to be easier... the era of domestic deals is over. Nowadays many small and medium sized firms have a global footprint. This makes any deal very like to touch upon different legal and political systems.

Targets are ever more likely to be global. We now seem be in the era of "born global" firms. These are firms that from their inception have their "eyes" on foreign markets.

Consider Warren Buffet's (plus Brazilian Mr. Lemann) offer to take Heinz private. A recent article in the Financial Times shows how much red carpet needs to be covered from a number of countries to secure regulator's approval... In their case, they need Russia and China... Not easy

Don't know about you... I will be looking at GRE scores for law school

Tuesday, August 20, 2013

How hard should you work in an internship?

I am not one to post sketchy topics, but this very tragic one one caught my attention.

Apparently (cause not clear) an intern at BofA died after pulling one too many all nighters...
See article here

As a professor and supervisor of many internships I have to ask my self
Can this be true? I mean does this reflect a hidden trend?
Are students so desperate to impress that would risk their health?
What should companies do?
What should universities and professors do?

Tuesday, August 13, 2013

Adult Diapers

OK. I get it. Not precisely dinner table topic. Japan's largest diaper maker already sells more for adults than babies... I am not making this up...It gets worse... See this Huffington Post article if you don't believe me.

The World Bank estimates that fertility rate (births per woman) needs to be around 2.2 to simply "replace" the current population. Any number below means negative growth.

Highly correlated is the issue of age dependency*... Do you have a clue about what any of this means for the future?
All I know is that Japanese workers will have to work a lot harder

*Age dependency ratio is the ratio of dependents--people younger than 15 or older than 64--to the working-age population--those ages 15-64. Data are shown as the proportion of dependents per 100 working-age population.

Wednesday, August 7, 2013

Are living wages bad for companies (and investors)?

Feeding into the debate of living wages, a recent article from CNN money shows the great disparity in entry level wages at flagship companies. The contrast seems to be between miserly Wendy's & Walmart ($7.35 and $9.40 per hour respectively) versus generous Costco with almost $23 per hour on top of benefits.

Paying more than double for something can't be good. Can it?  If I pay double I expect double. Over the last five years Costco employees have been able to generate twice as much revenue than their Walmart counterparts. However, these higher sales have not translated into profits... What do investors think? Forward PE ratios seem to say that Costco will do just fine...

What do you think?

Thursday, March 28, 2013

How to forecast long term exchange rates

Imagine you are interested in estimating the exchange rate between the Chilean Peso and the USD in say...   20 years. Using Interest RateParity, we can easily tackle this question. Imagine the current spot rate is 500CLP=1USD.  Assume you are given the following rates and yield curve.

Recall that Interest Rate Parity states that   

This means that the future exchange rate is a function of the interest rate differentials between the two countries. It is VERY important to be aware of what is home and what is abroad…
Our spot rate is given in CLPs per USD. This implies that home is Chile.   With this in mind, we can calculate that the exchange rate 20 years from now should be  813.29 CLPs per 1 USD.

Thursday, March 14, 2013

Bilinguism... Moving along, far from destination

An excellent article in today's (3/13/2013) Financial Times shows some the benefits of being bilingual; flexible thinking;              
"...enhanced awareness of other people’s points of view, born from their deeper understanding, from an early age, that some people have a different perspective. They are also better than monolinguals at giving selective attention to specific features of a problem, while ignoring misleading elements, and at switching between different tasks."

This follows a March posting by the New York Times stating that "bilinguals are more adept than monolinguals at solving certain kinds of mental puzzles."  

It is very informative to see that despite the above, the US is far behind Europe.

Obtained from the DANA foundation

A great summary of benefits is below. I obtained it from the Ecole Bilingue de Berkeley website.


  • Bilingualism increases mental flexibility for children. Bilinguals will have two or more words for a single object, concept or idea.
  • Bilingual children are more willing and able to learn a third language, and show an increased analytic orientation to language.
  • Children who study a second language score higher on verbal standardized tests conducted in English. Bilingual children also perform better in math and logic skills than children with just one language.
  • Learning a second language helps children build self-esteem, creativity, problem-solving skills, and math ability.


  • Bilingual children maintain a strong sense of their own identity while developing sensitivity towards other people and cultures.
  • Since bilinguals need to be aware of which language to speak in which situation, a bilingual child is more aware of the needs of the listener.


  • Being taught in two languages gives children a head start in competition for universities and jobs.

Wednesday, February 27, 2013

Triple X returns, how do levered ETF work for (against) you!

One of my students in Finland (Aalto University) asked me a simple (enough) question this winter...

Why would any young person not invest in a levered ETF?

My first inclination was to agree (I still do)... I  did mention that because of compounding the long-term returns would not be exactly 2X or 3X those of the benchmark index. I was not sure how big of a discrepancy this would be so I decided to do some work. I chose UPRO, the well known ETF that aims to give 3X the return of the SP500. It began trading on 6/25/09. Conveniently that is right after the worst of the crisis.

The following chart shows the results of investing $1,000 in both, from 6/29/09 - 1/10/2013.
The winner is... well, this is an easy one. More than XXX, UPRO is almost 4X!!! I don't think I need to point out anything about UPROs volatility

Data from yahoo finance
 So what if we had had a bad few years? I reversed the daily returns and added them in the chart below... The lines "BEAR" show what would have happened to an investor if every return had been the opposite of what it was (a 1% gain turns into a 1% loss). The "Bull" lines are the same as the chart above.
Toting up in this case

Bull SP500=60%
Bull UPRO=235%
Bear SP500=-44%
Bear UPRO=-89%

The winner is...hard to tell...

Data form yahoo finance
I will never say this in my classroom, (too afraid someone will sue me): I am still for the levered way... If you are 20 and have nothing to lose... had you started with $476 on 6/25/09 in UPRO, you would be in the same place as someone who invested $1,000 in SP&500. Young people can worry about re-balancing their portfolios later.

Data from yahoo finance

 It is a probabilistic game... This is from a previous posting on this blog... if the percentage of winners is loaded on my favor, why not take advantage of it and go XXX?
Data from Thomson Reuters

Tuesday, February 5, 2013

Peeing in bed

Shortly after Brazil's finance minister Guido Mantega famously declared to the Financial Times in 2010 that we were in the midst of a global currency war, James Rickards published his best seller book (same name).  The rest is history, not a day goes by when the press does not mention the term...

The following chart (from LexisNexis) shows some interesting trends: The term "currency wars" was not on the world's mind in 2009. In fact only 36 articles used this term during the year. Guido Mantega made the term very popular in 2010. Its popularity decreasing year after year... Until... the new Japanese government decides to take action early this year. If this trend continues, it will be a record

The problem with all of this is what Francesco Guerrera from the WSJ reports, "Devaluing a currency," one senior Federal Reserve official once told me, "is like peeing in bed. It feels good at first, but pretty soon it becomes a real mess."

I think the problems that Brazil, China and Japan have are a lot more serious. It is going to take a big diaper!

Friday, February 1, 2013

Borrowing from Paul to pay Peter

Who would have thought...

It used to be a bad thing. Borrowing money to pay dividends...

It now makes sense... Last year Pepsi borrowed $2.75 billion USD at record low rates... so low that they will use the money to pay dividends instead of repatriating cash from overseas...

Do we need to rethink our tax system or what!

The three-year debt pays 45 basis points above similar-maturity Treasuries, the 10-year debt offers a spread of 80 basis points and the 30-year bonds yield 95 basis points above Treasuries, Bloomberg data shows

That is better than Australia, Austria, Belgium, France, New Zealand just to mention a few...

Very recently,CNN reported that the wholesale giant Costco borrowed $3.5 billion USD for the same purpose. Other companies are taking note and following.


Take a look at this great FT piece.

Just two years ago, my Financial Developments in Latin America class was fiercely debating the future of Mexico. China had completely overtaken Mexico as a manufacturing location. Brazil had taken Mexico out of the global political scene. There is no "M" in BRICs. Drug cartels were making Mexico famous for all the wrong reasons. The US downturn was making things all the worse. Mexico was famously feared to become  failed state by some in the US government.

Slowly but surely, the world was changing, the same forces that were dooming Mexico are now the wind beneath its wings.  A very nice account by Adam Thomson of the Financial Times on how Mexican businesses are overcoming obstacles to establish themselves in the heart of America.

No longer exporting cheap materials. Now the question is, can Brazil compete with Mexico