Aviation leasing and Aviation lending. The names sound similar, but aviation leasing represents a very different financing play from aviation lending. Aviation lending means lending money with an interest in someone's airplanes as collateral. This has become a big deal of late. It is a very different play from investment int he equity of an airline. Airlines are very dubious investments. Three events in my lifetime have made THAT very clear: the deregulation of the industry in the US under President Carter, the close-down of the whole industry as a national security matter in the wake of the 9/11 attacks, and the severe limits placed on the industry around the world for epidemiological reasons during the peak of the Covid-19 pandemic. In each case investors have taken beatings. But beneath the booms, the busts, and the crises, that afflict the companies, there are the assets. It is very easy to move these assets from one place to another -- since that is the point of them -- but i...
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In finance, there is a concept known as "skin in the game." It is used to warn against taking advice from anyone who does not share with you in the related risks. Though when it is offered as advice ("only listen to people with skin in the game") it can cut both ways. "Buy Xerox," says the television prophet. On the one hand, yes, I see the point of expecting that he has some skin in the game himself. If he doesn't own some stock, he doesn't really care whether the price of Xerox goes up or down. It is an academic exercise for him. It is a retirement fund for some sucker paying attention to him. But on the other hand: what if he does have skin in the game? That may work against his reliability. After all: he may be trying to drum up interest in Xerox, holding Xerox stock himself, precisely because he plans on selling INTO that drummed-up interest. :Pump and dump. His talk may be pumping so his broker can do the dumping. ...
If we were going to come up with a snappy name for each of the last two decades, what might we come up with? For purposes of clarity allow me to say: I regard a "decade" as beginning with a year ending with a 1 and ending with a year ending with a 0. So the period 2001-10 was one decade and the period 2011-20 is the next. The end of the second is in sight. So: snappy names Like "The Jazz Age" for the 1920s, or "the Me Decade" for the 1970s. Do the last two lend themselves to such treatment? My own stabs -- the first was "the Fever Dream" and the second has been "the Unicorn Decade." The early years were a fever dream of every more fancy ways of dressing up financial derivatives so banks could sell them to each other at ever higher prices, a fever that broke near the decade's end. The more recent block of time has notably featured a lot of money, chasing entrepreneurs, hoping that they (the venture capitalists) can thr...
Harvard University recently issued its annual report. Here is a link: https://finance.harvard.edu/files/fad/files/fy19_harvard_financial_report.pdf Finance nerds will be especially interested in the report on Harvard's famous endowment, a landmark example of institutional investing with an unlimited time horizon. The university gets revenue from a number of sources: research oriented subsidies, gifts, tuition ... but distributions from the endowment accounted for roughly one third of the income in the fiscal year that ending on June 30, 2019. The report of that endowment consists of pages 12-17. You can learn there that the balance sheet consists of 46% equity. That is a rather high percentage (it is broken down almost evenly between public and private equity). Another 33% consists of hedge funds. Harvard has gotten only a mediocre performance out of its hedge fund allocation, less than it has gotten out of public equity and far less than it h...
The use of the words "risk" and "uncertainty" in vernacular English leaves the relationship between the words imprecise. That is, if I were to ask you, dear reader, what is the difference between risk and uncertainty, there would be no univocal "right" answer, though the words clearly are not synonyms. In general, we think of risk as a less-than-certain loss, so uncertainty figures into it, but uncertainty figures into a lot of other words too (such as "hope," which we think of as a less-than-certain gain). In finance, and in other areas as well, there has been some movement toward using the two words in a rigorously paired way, such that, to borrow a formulation from the George W. administration, "risk" represents the known unknowns of a situation, "uncertainty" represents the unknown unknowns. Here's a straightforward example: I know that a certain stock is interest-rate sensitive. I know that the Federal Reserv...
For those of my readers not familiar with the lingo of the financial world, let me begin with a definition of clearing and then of a clearinghouse. Clearing is the process by which transactions are reconciled, that is, money matched to the product or service it is purchasing. An institution that "clears" a transaction is also the institution that, in the first instance, runs the risk of default. Simple example: I make some large purchase with a check. The seller accepts my check in payment. In that case, in a common arrangement my bank would be the clearing party, and would bear that initial risk of default. It is the bank, not the seller, and not in the first instance me either, who will be "out" if my check is in excess of my deposit account. In finance, then, a clearinghouse (sometimes written in two words as 'clearing house') is an institution that provides clearing and settlement services for commodities, derivatives, or securities transact...
Everybody's favorite avuncular billionaire, Warren Buffett, has said that the academic theory known as the capital asset pricing model and its underlying notion of beta (the systemic risk of a particular portfolio versus the market as a whole) is worthless. After all, he says, “ a stock that has dropped very sharply compared to the market … becomes ‘riskier’ at the lower price than it was at the higher price.” Value investors, like Benjamin Graham, know better. It may well be a bargain at the lower price, while it was an unreasonable risk while it was still at the higher price. Avuncular Charm Is there really paradox here? Let us now let ourselves be lulled by Buffett’s avuncular charm into seeing paradox where there is none. Let’s analyze this in pieces. I won't make you wait for the conclusion though. My own view is that though there are problems with the CAPM, Buffett's aphorism (if that's what the above sentiment is) doesn't address them. Indeed, C...
IPO filings. month by month, when graphed as above yield a very volatile line, much more volatile than the S&P 500 index represented by the overlain blue curve there. Nonetheless, the recent collapse in the quantity of IPO filings by United States companies is remarkable. As you see, in late 2007 and in the early months of 2008 the IPO market almost disappeared entirely. But the line was headed back up BEFORE the worst of the crisis. The worst, you may remember, began with the bankruptcy of Lehman and the sale of Merrill Lynch for a fire sale price. That was in mid September 2008, during the upswing in IPO rates you see in the middle of the graph. Simplifying greatly, there was a high in 2010, a month with 35 IPOs, and a lot of lows later that year and throughout 2011. Then a recovery getting above 40 IPOs per month a couple of times in 2013 and again in 2014. Since then, though ... collapse, fairly consistently month to month. ONLY THREE IPO FILINGS ...
I generally ask myself at this time of year what were the biggest stories of the past twelve months in business/financial news. Of course, I choose the ones I do largely because they illustrate an important theme, and in the list below I'll spell out and boldface the theme. Yet the theme itself isn't the story. In terms of regional mix, with this line-up I've one whole-Pacific-basin story (March). One story is Australian (December), two European (January and June), one Chinese (May) and one Middle Eastern (July), The remaining six are US based (February, April, August, September, October, November). A nice thematic point: I both begin and end with issues over different currencies both traditional and innovative. January: Currency wars I: Switzerland abandons a peg of the franc to the euro (at 1:1.20) that has lasted for more than three years. The suddenness of the abandonment takes many market participants by surprise. February: Economics of crude oil ...
Aristotle, in his book on POLITICS, tells the following story about Thales, the Ionian philosopher portrayed above and best known for the theory that water is the essence of all matter. "Thales, so the story goes, because of his poverty was taunted with the uselessness of philosophy; but from his knowledge of astronomy he had observed while it was still winter that there was going to be a large crop of olives, so he raised a small sum of money and paid round deposits for the whole of the olive-presses in Miletus and Chios, which he hired at a low rent as nobody was running him up; and when the season arrived, there was a sudden demand for a number of presses at the same time, and by letting them out on what terms he liked he realised a large sum of money, so proving that it is easy for philosophers to be rich if they choose, but this is not what they care about." Fascinating story. Someone who apparently had the reputation of being what we would call today an 'ab...
Finance studies the way in which liquid resources, cash and cash-like stuff, moves about in a broader economy, and – if all works well – gets to where it is needed. Finance is a branch of economics, and so as you might suspect is concerned with “supply” and “demand.” But it is concerned with a very particular branch of each. Consider the cash that some people have saved. We’ll call them the Jones’. They’ve put cash away somewhere – in a safe, let us imagine, or in a pillow case – where it is immediately available to them should they want it. Consider also that there are other people and institutions who very much want the use of that cash. These others may have a very restaurant and a distinctive brand, but may need a new infusion of cash in order to expand the restaurant, perhaps making it a chain. In this case, the idea naturally arises that the Jones’ money might be lent to the restauranteurs, as equity (in which case the Jones’ expect a share of profit) or as debt (in...