Op-Ed: It's time for the Federal Reserve to act independently

About 100 years ago, President Woodrow Wilson asked Congress to create the Federal Reserve System, which set off a fierce debate. Critics predicted that the Federal Reserve would become an economic dictator - an “invisible government by the money power.”

At the last Fed news conference, chairman Bernanke spoke of his timetable for scaling down quantitative easing  “If things are worse, we will do more,” he said of the nation’s economy. “If things are better, we will do less.” Talk about decisiveness! 

The debate about the role of a central bank in the U.S. has been raging since the founding of the country – and even today the Tea Party seeks to eliminate the Federal Reserve.

Is the Federal Reserve too strong? Is it now the all-powerful central authority that Americans feared it would become? Is it independent of the “money trust” it was created to tame?

These questions – and others - are being debated in op-ed pieces and faculty lounges across the country. I'm weighing in as well.

Bernanke said  “If things are worse, we will do more. If things are better, we will do less” when talking about the future course of monetary policy. For several days following his remarks, the financial markets tanked - stocks, bonds, commodities, and everything else. The markets' short-term hostile reaction to the prospect of a measured end to easy money should not make it harder for the Fed to reverse course. The Fed should act independently.

Like a trainer teaching a puppy, the Fed should follow through on its orders and remain in charge – not succumb the wishes of markets. Certainly during the financial crisis, the Federal Reserve had to step in and restore order – I think they saved the day.  

Since then, the super low interest rates and easy money drove investor funds into risky assets and sent prices higher, restoring bank and investment company balance sheets. Unfortunately the policy did not directly benefit the lives of the working class or seniors – as credit dried up and savings rates dropped to near zero. The bad actors got bailed out.

The Fed should follow through on a plan to taper down quantitative easing and allow the economy to function on its own by 2014 – despite the temper tantrum the markets will throw.  The economy can stand on its own two feet and its time to get back to normal - or at least its time to stop artificially holding interest rates below market equilibrium.

Rising College Seniors: Begin Your Job Search Now!

From the Undercover Recruiter site:

As rising college seniors approach the beginning of their last year of undergraduate study, they have a lot to think about besides exams and their social life. What they’re planning to do after college life is still a question left unanswered for many.

For those soon-to-be graduates seeking employment, Beyond.com conducted a poll, asking college seniors in their last semester how many jobs they had applied to. Here’s what the results showed:

• More than 33 percent reported they applied for over 40 jobs

• Just about 21 percent of respondents applied for somewhere between 10 and 20 jobs

• Almost 20 percent have applied for 21 to 40 jobs

• 17 percent have applied for less than 10 jobs

• The smallest percentage, 8.5 percent, applied for no jobs at all

While the economy is looking much brighter for recent college graduates than it has the past couple years, it still takes that extra something to help young job seekers stand out among the other applicants. Here are some tips to help college graduates be at the top of their games and score entry-level jobs in their fields.

1. Clean up your online image

Yes, employers do Google applicants. Make sure there’s nothing out there you wouldn’t want an employer to see. This includes ensuring your Facebook and Twitter privacy settings are intact and/or change your accounts to be employer-friendly to ensure you’re only viewed as a professional.

2. Start applying now…if you haven’t already

The earlier the better. Many employers start looking for candidates 6 months or more before graduation, so they are ready to fill the positions in May or June. Try to get ahead of the flood of resumes by applying early and often.

3. Don’t be afraid to network – in person and online

Every opportunity is an opportunity to network! Whether it’s chatting with a professor, staying in touch with an internship coordinator or creating a LinkedIn profile – don’t be afraid to put yourself out there professionally. The worst thing that can happen is nothing. Many people say landing a job is “all about who you know.” Well, the more people you are connected with virtually and in-person, the more chances you have of hearing about an employment opportunity.

4. Target your job search

While not every opportunity is going to be your dream job, you can target what you want if you find job postings in a niche job board or LinkedIn group. For example, if you’re looking for finance jobs, find a place where these types of jobs are posted specifically. Niche job boards offer more targeted job search results and a greater variety of relevant job opportunities.

5. Download mobile job search apps

Everyone is attached to their Smartphone these days, so why not receive job alerts and do some job-searching on the go?

6. Utilize your school’s career services

It’s likely that your college or university has a career services office. Some schools also offer further training like a project management certificate or other classes to deepen your education. While you’re still a student, make use of these services by making an appointment to have your resume critiqued or do a mock interview. Also, join a professional student organization or participate in groups/activities on campus that are good resume builders. For example, if you’re a finance major, you should join Financial Management Association (FMA) - and be active.

Blackrock's Fixed Income CIO Talks About the Normalization of Interest Rates

Rick Rieder, BlackRock's Chief Investment Officer of Fixed Income, was the speaker at this year’s Make a Difference –Wisconsin conference in May. He’s one smart fellow and when he talks, it makes sense to listen.

In his recently published June newsletter, Mr. Rieder acknowledges that the Federal Reserve has ‘crossed the Rubicon and is headed toward a normalization of interest rates’. The following is a summary of his observations.

• The Federal Reserve’s task in recent years (supporting the economic recovery, in the absence of sustained fiscal aid) has been tremendously challenging, but despite much criticism, its successes are significant.

• The eventual withdrawal of Fed asset purchasing (which he believes is nearer than other prognosticators) should keep market volatility levels elevated (and fixed income pricing under pressure), but it is also a signal of economic gains.

• In this context, he believes that investors should be more tactical in searching for opportunities, focus on liquidity, and mitigate interest rate risk via a shorter duration approach.

Like one of my other fixed income favorites, Dan Fuss, Rick Rieder is a straight-shooter who calls them like he’s sees them. His statements are pretty clear – he sees an ending of QE3 and the normalization of interest rates. I can't say I disagree with him.

The Supreme Court’s ruling yesterday on DOMA affects same-sex couples' financial planning

A pair of Supreme Court rulings Wednesday will bring major changes for financial advisors who work with same-sex couples.

The U.S. Supreme Court's decision declaring part of the Defense of Marriage Act (DOMA) unconstitutional likely will have a big impact on financial planning for same-sex couples. The ruling gives gay couples access to more than 1,000 federal benefits in 12 states and the District of Columbia, where same-sex marriage is legal.

There is still uncertainty about the ruling. It is supposed to take effect immediately and possibly even retroactively, which means that financial advisors and employers will have to reprogram tax reporting systems and update forms for enrollment, distributions and beneficiary designation, and more.

Key federal financial benefits available in the states that allow same-sex marriage include the right to:

·        -  Transfer property to a spouse during one's lifetime without owing federal gift tax.

·       -   Receive property from a deceased spouse without paying federal estate tax.

·        -  File federal taxes jointly.

·      -    Receive a spouse's Social Security benefits.

·        -  Receive pension survivorship benefits.

·         -  Eligibility to use federal Family and Medical Leave Act to care for spouse.

More details on the changes in benefits can be found here.

The justices' ruling on the Defense of Marriage Act allows the Obama administration to take executive action to broaden benefits in states where gay marriage is not recognized. In summary, financial advisors and planners will need to understand the implications of yesterday’s Supreme Court decisions as to how it affects past, present and future financial decisions of their clients who are affected by the rulings.

Listening Better Might Help You Land the Job

From ‘Listening facts you never knew’ by Kristin Piombino in Ragan’s PR Daily:

Do you want to be hired? Do you want a promotion?  If so, you may want to reevaluate your communication skills - especially your listening skills.

According to subscribers to the Harvard Business Review, they rated the ability to communicate "the most important fact in making an executive promotable." They ranked it more important than ambition, education and hard work.

The graph below lists other statistics about communication and listening. For example, did you know that we derive 55 percent of a message's meaning from the speaker's facial expressions, 38 percent from how he says the message and 7 percent from the actual words spoken?

Here are a few more facts: 

• We listen to people at a rate of 125-250 words per minute, but think at 1,000-3,000 words per minute.

• Less than 2 percent of people have had any formal education on how to listen.

Images go into your long term memory, whereas words live in your short term memory. During an interview, focus on listening. Make notes if necessary - and understand that listening might be just as important as talking. (Click on the image below to enlarge).

FIVE THINGS TO SAY IN A JOB INTERVIEW by NOLA GREEN

From the Come Recommended site:

"You always hear about what you shouldn’t say in an interview, but what should you say? What are those tid-bits you should mention that will set you apart from the rest? Here are a few that I found helpful:

That you actually want the position: This little tidbit could be the one thing that sets you apart from the other candidates. Don’t play it cool and aloof in this situation. If you are eager to be hired for the position, LET THEM KNOW. But remember to always be prepared to tell them why. Alison Doyle tells you more here.

Your familiarity with the company: Expressing your familiarity with the company you are interviewing with is a great way to SHOW the employer how interested you are and how invested you will be in your job, without actually having to say exactly that.

Good buzzwords: Whenever you are asked a question about yourself, like what skills do you possess, or do you think you are a team player, make sure to use your buzzwords. Collaborative, innovative, pro-active, drive, cooperate, team ethic, contribute…these are all great words to use. Come up with a few of your own that you feel really describe you, and make sure to use them in an interview. You can find a lot more information on buzzwords and how to use them here.

Future plans: If you have the desire to really build a career in one company, make sure to mention that in your interview. No company wants to invest time and money in you to have you leave after three years. That being said, if your future plans involve using this job as a springboard to launch you acting/singing career, it’s probably best not to mention that.

Ask questions: When asked at the end of an interview, NEVER say no. Always have some questions up your sleeve. Usually two or three questions would be sufficient. Questions should be centered on the company, and again show your interest. If you have noticed that they have won several awards, ask why they think they have that edge."

U.S. Housing Prices Increased More Than Forecast in April

Stronger housing market shows more evidence that the U.S. economy is back on track

During the past several years I’ve told my students and others that one of the most important indicators of economic activity to watch is the housing index – and that when this showed a rebound, the economy would be back on track. Well, the S&P/Case-Shiller index of property values, which was released yesterday, increased 12% percent from April 2012 to April 2013, the biggest year-over-year gain since March 2006. The average home price climbed more than forecast and showed further strength in the U.S. housing market.

The reason for the rise is simple: housing is in short supply, we’ve had record-low mortgage rates, and there is an improving job market.  The question that remains is whether or not the U.S. economic recovery is far enough along to overcome the recent surge in borrowing costs after Federal Reserve officials said they may trim unprecedented accommodative monetary measures meant to spur the economic expansion. I believe it is.

From Calculated Risk

The graph shows the year-over-year change in the Case-Shiller Composite 20 Index (a measure of sales activity in 20 major U.S. cities) is up 12.1% compared to last April – marking the 11th consecutive month with a year-over-year gain. That’s an amazing rise of essentially 1% per month. In April alone, the index logged a 2.5% gain in home values compared with March, the fastest gain in more than six years of tracking. 

Not all cities see equal gains. The biggest gainers over the past year have been those markets that were the hardest hit: Atlanta, Detroit, Las Vegas, Los Angeles, Phoenix, and San Francisco all posted price gains between 19 and 24 percent.

The next chart shows the nominal seasonally adjusted Composite 10 and Composite 20 indices. The indexes are off about 25% from the peak and up about 13% form the post bubble low set in Jan 2012. While the increase does not look dramatic, it clearly marks that we've turned the corner regarding the housing market in the U.S.

From Calculated Risk

Where did all the gains go? High-yield and preferred stock 2013 profits go up in smoke!

Many investors flocked to the high-yield bond and preferred stock ETFs during the past year and saw strong returns. In May, Federal Reserve Chairman Ben Bernanke gave a warning to these investors. He said the Fed was keeping close tabs on signs investors were taking on more risk to generate income with interest rates so low.

“In light of the current low interest rate environment, we are watching particularly closely for instances of ‘reaching for yield’ and other forms of excessive risk-taking, which may affect asset prices and their relationships with fundamentals,” Bernanke said.  Since that statement, the funds have seen their year-to-date gains wiped out - and more.

For example, SPDR Barclays High Yield Bond ETF (NYSE: JNK) is off 2.5% so far in 2013 and iShares U.S. Preferred Stock ETF (NYSE: PFF) is down 1.8%. The recent sell-off as Treasury yields surge has resulted in losses of about 6% over the past month for both funds. [Check out the charts below].

Stretching for yield is dangerous. With yields on the 10-year Treasury bond up about 100 bps in the past two months, bond investors in higher risk products such as the PFF, the preferred share ETF (currently paying a 30-day SEC yield of 5.3%) and JNK, the high-yield fund (paying 5.6%) have been clobbered.

They can't say they weren't warned...

 

SPDR Barclays High Yield Bond ETF

iShares U.S. Preferred Stock ETF

Impact of higher interest rates already being felt as companies and municipalities delay bond offerings

Raising capital has been relatively easy – that is until last week when Federal Reserve Chairman Ben Bernanke sent interest rates soaring with his comments that outlined a plan to wind down the central bank's massive stimulus program.

Referred to as quantitative easing and consisting of $85 billion a month in bond purchases, the program was instrumental in a rally of risky assets (namely stocks, bonds, and commodities), and had driven interest rates to all-time record lows. But since Bernanke's comments last week, the yield on the benchmark 10-year U.S. Treasury Bond has shot up nearly 50 basis points, briefly touching a two-year high of 2.67 percent on Monday.

Prospective borrowers ranging from U.S. companies to county governments on Monday shelved a raft of deals to raise new capital or refinance debt as a suddenly uncertain interest rate environment dented demand.

In the municipal bond market, half a dozen deals aimed at raising collectively more than $300 million were postponed, while several companies pulled plans to refinance syndicated bank loans. Corporate bonds, meanwhile, have gone nearly a week with no deals brought to market, either in the risky high-yield sector or the safer investment-grade sphere.

The impact of higher rates is upon us and it is hard to image the Fed reversing course. This is an important time to be watching the actions of the Federal Reserve Bank and the credit markets.

How did Dan Fuss get to be called a Bond God? By consistently making the right calls!

Dan Fuss

In a Business Insider interview in February (2013), Dan Fuss** stated that the world is changing and bonds are the most overbought he’d seen in his 55 year career. He also told this to the Milwaukee CFA Society during his January presentation.

For years, investors watched in disbelief as the 30-year bull market in fixed-income assets raged on, leaving bears in the dust. The bond skeptics are having another moment, as talk grows of a "great rotation" from bonds into equities, as rates finally start to rise, and the economy turns back into the old normal. Talk of the end of quantitative easing also is seen as a key driver.

Dan Fuss of Loomis Sayles is the third bond fund manager to be called a "bond god" (the other two are Bill Gross and Jeff Gundlach). He is strongly of the view that the current fixed income market is out of control, and that a reckoning is coming. [Looks like his call was again 'spot on'].

From a Bloomberg interview in February Fuss said:

“This is the most overbought market I have ever seen in my life in the business,” Fuss, 79, who oversees $66 billion in fixed-income assets as vice chairman of Boston-based Loomis Sayles & Co., said in an interview in London. “What I tell my clients is, ‘It’s not the end of the world, but for heaven’s sakes don’t go out and borrow money to buy bonds right now.’”

“The world is changing,” said Fuss, who started in the investment business when Dwight Eisenhower was U.S. President. “We are coming off a period of very low interest rates because the central banks have been buying the bonds. Interest rates are going to go up.”

The idea of the bond bull run coming to an end seems more popular now that yields have risen nearly 100 bps in the past month (see chart). 

** Dan Fuss has 55 years of experience in the investment industry and has been with Loomis, Sayles & Company since 1976. He is vice chairman of the firm and manages the firm’s flagship Loomis Sayles Bond Fund—which won the 2009 Morningstar Fund Manager of the Year award in the fixed income category—in addition to the Loomis Sayles Investment Grade Bond, Investment Grade Fixed Income, Strategic Income, Fixed Income, Institutional High Income, Capital Income and Global Markets funds. In 2012, Dan received both the Institutional Investor Money Management Lifetime Achievement Award, and the Lipper Excellence in Investing Award. In 2000, he was named to the Fixed Income Analysts Society’s Hall of Fame in recognition of his contributions and lifetime achievements toward the advancement of the analysis of fixed income securities and portfolios. He has twice been president of the Boston Security Analysts Society. Dan earned a BS and an MBA from Marquette University. He served in the US Navy from 1955 to 1958 and held the rank of Lieutenant.

AIM Fund Returns (as of 6/21/2013)

The financial markets have been challenging the past month. How have the AIM Funds performed?


AIM Equity Fund. YTD the fund is up 15.77% and is 1.83% above the benchmark. The past month has generated a -2.02% return (which was 137 basis points better than the Russell 2000 Index).

AIM International Equity Fund. YTD this fund is also up versus the benchmark (+155 basis points); however, the overall returns turned negative (-0.59%). The past month for non-US stocks has been brutal with the index off -8.55%. The AIM International Fund has more of an emerging market tilt than the index which explains the recent tough times for the fund. 

AIM Fixed Income Fund.   The YTD returns went negative (-3.12%) because of the rise in interest rates the past month. The AIM Fixed Income Fund is now lagging the benchmark because of the non-US bond exposure - and the greater US credit exposure - despite carrying a lower duration than the benchmark. 

ETFs were trading at discounts this week following the sell-off. Is this a problem?

Many exchange traded funds (ETFs) traded below their fair value this week following the global sell-off triggered by worries the Federal Reserve will pull back on monetary easing, the Financial Times reported. Discounts widened sharply as dealers had trouble keeping up with a flood of sell orders.

Emerging market ETFs were particularly affected as shares of iShares MSCI Emerging Markets (NYSE: EEM) traded at a 6.5% discount to net asset value. The EEM discount dropped to about 1% by the end of the week. Some bond ETFs also traded at steeper than normal discounts during the week, but by Friday they also were priced closer to fair value.

Exchange-traded funds are similar to mutual funds except you can trade them intraday like stocks. They've become extremely popular in recent years because they are an inexpensive way to gain exposure to a diverse array of asset classes, including US stocks, international stocks, bonds and commodities.

How does an ETF trade at a discount? The net asset value (NAV) of an ETF is calculated by dividing the total value of all the securities in its portfolio by the number of its shares outstanding. The market price of the ETF is determined by the forces of supply and demand. At times and for various reasons, the market price of an ETF can deviate from its NAV.

An ETF is said to be trading at a discount when its market price is lower than its NAV—if you are buying the ETF, this is good news because you will be paying less than the value of its holdings; however, if you were selling this week, you received less than NAV. Is this bad? No, the market self-corrects. Authorized participants (APs)—usually institutional investors that have entered into a contractual relationship with the ETF to create and redeem shares—play an important role in the efficient pricing of ETFs. Through a market mechanism called arbitrage trading, APs help keep ETFs trading at a price close to their NAV.

Simply put, when ETFs trade at a price above NAV on the exchange, APs can step in and buy large blocks of ETF shares at the NAV by exchanging the underlying representative securities in a transfer-in-kind transaction called a creation. APs can then sell these ETF shares at a risk-free profit, essentially pocketing the spread between the NAV and the market price. The reverse happens when an ETF trades at a price below NAV.

This sort of arbitrage trading demonstrates why ETF market prices above or below NAV are self-correcting. Large-enough deviations from NAV create profit opportunities for APs, and as they conduct arbitrage trades, an ETF's market price becomes more closely aligned with its NAV. For example, in the case of an ETF that trades at a premium, APs selling newly created ETF shares increases the supply in the market, which helps drive down the price of the ETF closer to its NAV. Therefore, if you are a longer-term investor, you have little to worry about ETFs selling temporarily above or below their NAV.  So is there a problem and is this a major story? No. It happens every time there is a huge sell-off in the markets. 

By the end of the week the price difference had eroded  As the table below shows, the average discount to NAV for the 1436 U.S. ETFs as of the closing on 6/21/2013 was -0.25%. The table below shows the average discount by broad ETF category. The data was obtained from Morningstar Direct.

It needs to be noted that some ETFs (i.e. municipal bonds) tend to be quite small and have limited trading volume - and will experience more variation from their NAV than larger ETFs - and tend to trade at a large average discount.   

In summary, the ETFs trading at larger than normal discounts during the sell-off on Wednesday and Thursday was not a problem.... unless you absolutely had to liquidity your ETFs during that period. 

US Treasury Yields at Higher Level Since Early 2011

It's been over two years since the 10 year Treasury bond yield has exceeded 2.50%. 

Is the Fed taking the punch bowl away? No, but they are flipping the light switch on and off to indicate that the party is nearing the end. Last call!?

The Current Financial Market Jitters Explained

The following NY Times video (http://nyti.ms/12XWWta) offers a short, clear explanation of the reasons for the recent financial market weakness. This includes the potential for the unwinding of the carry trade. You can also view it below:

Reason for the recent large drop in TIPS bonds

The 90-day chart shows the huge sell-off in Treasury Inflation Protected Securities (TIPS). The iShares TIPS ETF is off over 6% since mid-March, while the U.S. Bond Market Index (Barclays Aggregate, AGG) is off about 2%.

The drop in the TIPS has mainly been driven by the increase in yields on the 10 Year U.S. Treasury, which has seen yields rise by almost 100 basis points over the same time period. Much of the increase in the 10 Year Treasury yield is the result of expectations that the Federal Reserve Bank will start tapering down its quantitative easing program in the near future. This was somewhat confirmed this week, when Fed Chairman Ben Bernanke said that if economic data continues to come improve, the Fed will begin to scale back the level of bond and mortgage purchases later this year, and could end the asset purchases entirely by mid-year 2014. 

But the jump in nominal Treasury yields does not fully explain the recent increase in TIPS yields. The yields on TIPS are driven by two primary forces: nominal yields and inflationary expectations. Therefore, the increase in TIPS yields not explained by the increase in nominal bond yields is primarily attributable to falling inflationary expectations. 

It appears that the Fed’s quantitative easing program has been able to prevent deflation from occurring in the U.S. economy (i.e. increasing inflation). The simultaneous combination of higher nominal Treasury bond yields and falling inflationary expectations are the factors that led to the significant losses in TIPS over the past several weeks.

Marquette University offers our AIM students much more than a speciality finance program

While Marquette's finance program was recent ranked by U.S. News as the 17th best finance program in the nation, we offer our students many opportunities to explore a rich liberal arts curriculum. 

We provide our students the chance to live, study and play in the heart of a dynamic city; nationally known programs and powerhouse faculty; a Catholic, Jesuit tradition that emphasizes ethics and lifelong values. For more than 130 years, we have inspired students to Be The Difference in their professional and personal lives.  
 
While the AIM program provides a rigorous academic experience, Marquette is recognized for challenging students to grow intellectually, socially and spiritually. Our demanding core curriculum is grounded in the humanities, social sciences and natural sciences. This liberal arts core, coupled with the intense study of finance, provides AIM students with the balance of knowledge they need to succeed as a professional - and a person.

At Marquette our AIM program graduates are more than specially trained financial experts. We encourage creativity, something experts say is missing in most educational programs. In one of the most highly viewed Ted talks, Sir Ken Robinson makes an entertaining and profoundly moving case for creating an education system that nurtures (rather than undermines) creativity. 

In the embedded video below, Robinson challenges the way we're educating our youth. He champions a radical rethink of our school systems, to cultivate creativity and acknowledge multiple types of intelligence. It is less than 20 minutes long and is an outstanding and thought-provoking talk - and it reaffirms the need to provide a well-rounded education experience that encourages innovation and creativity. 

A workforce lacking robust a humanities and social science education could be just as detrimental to the country’s future economic competitiveness as one deficient in science and technological expertise, according to an American Academy of Arts and Sciences report released in June 2013.

“The Heart of the Matter” aims to highlight the importance of humanities and social sciences to the country’s economic future and urges Americans to value a well-rounded education. The findings are the social science community’s answer to a 2007 report that pushed the importance of science, technology, engineering, and mathematics (STEM) education into the national spotlight.

As China, Singapore and several European nations are boosting the humanities as “a stimulus to innovation and a source of social cohesion — we are instead narrowing our focus and abandoning our sense of what education has been and should continue to be — our sense of what makes America great,” the report says.

So within the AIM program we will continue to seek a balance between the quantitative and qualitative - between the math and the humanities - between the science and the art. We want our students to be well rounded and to move forward and Be the Difference.

CFA Institute's Future of Finance

The global financial crisis of 2008-2009 damaged the image of the finance industry. The AIM program supports the CFA Institute's efforts to shape a more trustworthy financial industry.

Marquette's AIM program was the first undergraduate investment program to become a CFA program partner - and it has long supported the CFA's goals and objectives. 


Investment Ethics (FINA 4370) is a required course in the AIM curriculum - and it is in this course that students have an opportunity to learn how they can work as a force for good to support the efforts to restore integrity within the industry. 




We encourage you to visit the Future of Finance site - which explains the CFA Institute's long-term global effort to shape a trustworthy, forward-thinking financial industry that better serves society. The site contains many useful articles and videos.