Alan Cring Productions and Associations with Emergent Light Studio presents the Illinois
State Collegiate Compendium, academic lectures in Business and Economics.
This is Business Finance, FIL 190 for spring semester 2024.
Today, financial institutions and then we'll move on to financial statements.
But before we do that, as always, we're going to look at the numbers as we have in the past.
Now if you look at these numbers, I usually ask is this a bull day or a bear day, but
in this case, it is an utterly flat day for most of the markets.
Look at this, you've got it's actually if there was a bull run right, it's a bell.
You see that bull run as the bell came on and then it just sort of dropped off and then hit
the bottom and bounced.
NASDAQ is still all over the place, but it's still up and then the Russell is achieved a little bit.
The thing here is that what seems to be going on is a lot of weight and see a couple of big
things.
The heavies in the SP 500, some of the heavies are releasing earnings this week.
And on one hand, you know, they might be good.
On the other hand, they might not be bad, but we just don't seem to have a direction right now.
Another wild card is the Federal Reserve.
There are some who are thinking that the Federal Reserve for the first time in some years is going
to actually cut the discount rate at its next meeting.
I don't personally think they're going to do that.
I think they're going to hold the rate where it is for the time being, even though we seem to have
finally beaten down the inflation, there's still some worried that the expected inflation is still
there and that's the critical one.
It's not inflation that is of concern in financial markets, it's expected inflation.
That is the one that is hard to kill.
After you kill the inflation, the market will still expect it and put an inflation premium into
interest rates.
We've got to make sure that that is drained out.
In other words, strangle down the economy until it cries on.
But that may still be a while, the Fed may not lower.
But right now, it's just one of those markets where the players are staying on the sidelines.
They're going to keep the volume low for a while.
Just see what comes next.
Now also, there is some concern.
Wars generally, rumors of war don't really rattle markets too much unless there is something
really significant going on.
And we're at that point now where we've had another attack by Iran backed forces and now
there's and it kills a few of our soldiers.
So we have some concern that the president is going to act aggressively against Iran.
And our hope is that that's not going to be what happened.
It will take some hardcore action but it won't be bombing the whoopie doo out of the country
itself.
Crude oil, notice that it is coming down, commodity.
And that's always of course good news for gas prices.
And we do want these gas prices to stay low because those are the fuel as it were that
moves goods from one place to another.
And so we like to have that oil price down there in some calm, comfortable place so that
we don't have high gasoline, diesel and jet fuel prices.
Now coming over here, gold had a little, as you can see, there's been this wavy up and
down and up and then it's coming back down.
Like I said, there is something of a neckline, sort of a psychological $2,000 an ounce line
there.
So it seems to still be staying above that but it's not really too spectacular right
now.
So that's good and the silver is quiet too.
They're both dropping off the cliff right now so that's kind of nice.
Now I want to mention currencies and I'm not going to ever delve too far into them.
But when you have currencies trading, and this is important for much bigger subjects
and more important to our class, interest rates in an economy are the price or the rental
rate as it were of the currency of that economy.
So relatively to other countries.
So interest rates in the United States are higher than interest rates, let's say, in
Europe.
That will mean that the US dollar will be stronger against the euro.
The US dollar will appreciate against the euro or any other country.
If our interest rates are lower or going down relative to interest rates in another country,
the US dollar will depreciate.
It's cheaper, it's worth less because the rental rate, our interest rates are lower.
So if the Fed does act with lower interest rates, that could be a sign that the dollar
is going to depreciate against the euro.
Well, spank me Jesus, look at that.
Little bit of international market expectation.
You see, Europe and Great Britain got on the anti-inflation bandwagon later than we did.
To the Federal Reserve credit, and I don't always give them credit for much, they attacked
the inflation rapidly, jacked up the interest rates in the United States to throttle off
the inflation and the expectation of inflation.
So now we're on the downside of the slope.
We can ease off our interest rates, whereas the Europeans, the British, and other countries
must still keep theirs up there for a while longer to throttle off their inflations in
their countries.
So, hence, you might see a depreciation of the dollar against the other currencies just
because of that.
Now I will caution you that the yen is quoted backwards simply because the yen is such a
small value compared to the dollar.
We actually have to quote the exchange rate in reverse so we don't have to use scientific
notation for it.
But anyway, that aside, let me go back over here.
Let's have a look at our bonds.
Bond yields, look at that.
Do you see how they've dropped?
They've fallen.
Now they've done a little recovery since the opening bell, but that 10-year benchmark is
well down.
The yield is down.
Now remember that this isn't a price.
This is a yield.
So the price would be going up.
So there's buying of the bonds, which causes the price to appreciate, which causes the
yield to fall.
This is something that in 240, this is harder to do than it is with you folks.
You're more key to finance and economic concept.
But even for you, it takes a while for this to soak in these kinds of chains of logic.
And this is all just science.
It's the mathematics of prices and yields and the economics behind supply and demand
dynamics and all of that kind of stuff.
So we see the 10-year bond has fallen, the yield has, reflecting some expectation that
the Fed might back off interest rates soon enough.
And so everything is about what is expected to happen.
History, as you see again, doesn't mean anything to us.
It's what we think is about to happen next.
Because if we're not there to grab it before it happens, then the son of a bitch next to
us is going to be there to grab it when it happens, before it happens.
That's how we work.
It's just a gamesmanship.
We've got to move before something happens, because if we move when it happens or after
it happens, well then it's too late.
Sort of like in the service.
Imagine you were my battle buddy and you wait until the bullet hits you to react to it.
Oh, I better get out of the way.
God damn, that hurts.
You see, you're going to try to move before it gets to you.
You're going to say, because by the time, well, two days ago I got shot.
Look at that.
Son of a biscuit eater, I'm bleeding.
You got to do things before they happen.
That's what we are all about in finance.
History and those charts and all of that.
That's not where the markets look.
They look out there.
What's the best understandings?
I've mentioned this before, but it's so rough now that we already knew that there was one
brokerage house that could see prices in the future with a high probability, about 70%.
Now my information is pretty old here.
A couple of years ago, they could see about more than 100 milliseconds into the future
what a price would be with an accuracy of about 70%.
Where we are now, it's getting better a little bit farther out.
With these idiotic AI nutcase computers that can fast process data that's incomprehensible,
it's going to get more that they can see what's going to happen there and make it happen here.
Now you can get into some really, really twisted physics doing that if they go too far, but
that's your problem.
Not mine.
Okay, now, Tokyo last night.
Tokyo had a surge day.
You notice that there was some good news and it was just more than just one piece of good
news.
There was kind of a flow of optimism in the market.
You see that it just kept rolling up.
It wasn't anything spectacular, but there was just more bull action than bear action.
That allowed the markets, the Nikkei 225 in Tokyo to push upward through the day.
You notice that there by the little after their lunchtime, it began to sag back off
again because the good news had passed and then there was a little more realism about
what was going on and the euphoria kind of passed, but none of it was really dramatic.
It was just mostly very mild positive sentiment, bullish sentiment, and then later a little
bit of bearish sentiment, possibly some profit taking off the high.
As I said, oftentimes you'll see a rise and then there will be a pull off from it as some
of the investors say, well, I've done good for the day.
I'm going to sell out and go have my dinner with my profit kind of thing.
So that's nothing surprising.
You notice that London, as you've seen before, see that volatility there?
There's more uncertainty.
The bulls and the bears were just battling back and forth.
Like I said though, as with the Nikkei, it all amounted to 0.03% up day, which is basically
saying the day was flat.
From the start to the finish, it was a flat day.
When you got 0.03%, that's not even worth worrying about.
Generally speaking, and I think I've mentioned this before, anything less than about a quarter
of a percent, 0.25% is pretty much, it's a flat day, nothing to read from it.
If however, all of the markets are up by 0.20%, well, that's a little bit more to say.
Well, they were not terribly bullish, but it was across the board that they had this
mild bullish sentiment.
Now, going through a few, we have companies that are going to be pulling earnings out
and I'm thinking Advanced Micro Devices, I think is on tap for earnings this week.
And let me see, when the earnings call is.
Usually I can see this down here.
Yeah, today.
Earnings are today.
And they may have already been released pre-market and it's a little bit of a smackdown, 1.3%
down and it's still pulling downward.
Really nasty.
You, we're going off a cliff here.
Look at that.
So there you go.
Now, your turn.
See if you can remember what I've told you here.
You may see it already, but let's try this.
First of all, madam, is this a low risk or a high risk stock?
Or a market risk type of stock?
What does it say?
It's okay if you don't do it.
Yeah, we're going to do this every day.
That's fine.
What do you say?
High risk.
This falls into the technical category high risk AF.
Okay.
You might want to remember that in your notes.
1.70 is really risky.
One is, yeah.
Above what number would you say?
One.
One is market risk.
Anything below one is less volatile in a well diversified portfolio than the market.
Above one.
Now, when you get to 1.25, that's when you start feeling your hind leg itch.
When you get up to about 1.5, well, then you're in the territory where your back leg is starting
to go up and down.
This is, this one's hardcore.
It has a history of that beta.
A beta above one, well above one.
Far above one.
Now, usually you'll see 1.25, 1.2, 1.
If you get up far enough, it gets to the point where in a case like this, we're in a business
where one of our terms we always keep in our minds is appropriateness of investment.
Appropriateness of investment.
You have to keep remembering that term because that doesn't apply if you're, well, if you're
in a corporation and you're in charge, you're a corporate, but you're in charge of putting
money and their earnings, their positive free cash flow into investments.
What is appropriate versus what is not?
Here's a hint.
AMD would not be appropriate in almost any corporation.
They don't want you taking risk with those retained earnings.
So yeah, okay.
Now, but then, okay, you're on the level of advising, being a financial advisor.
You've got a couple in their mid-60s and they want to put their money into investments for
their, to earn money for their retirement.
Get a check every month or every three months or whatever.
This is not in any way, shape or form appropriate for them.
You don't want them having to eat cat food because they had this, their investment go
into the toilet.
The same would be true even for you.
Very few, well, okay, if you're young, you can recover from a hard hit and at 1.70, you'll
be up one day and then the next day you'll be on the street with a hat looking for change
for passersby.
This might not be appropriate for you, but at a young age, at least if you did take this
risk and it didn't work out, you'd have time to recover much wiser than you were before.
But investments like this are more for high risk takers, the high rollers who that's their
thing is to do this.
So that appropriateness of investment, I can't emphasize that enough in our business is you
ask yourself, okay, this looks like fun.
Well, fun is a relative term.
You've, anyway, now the P-E ratio, I'm laughing because I didn't know I was about to walk
into this.
P-E ratio, do you remember the number that I said was like the fulcrum for P-E ratio?
30.
A price to earnings below 30 means that the stock is undervalued relative to intrinsic.
The price is lower than the earnings can support.
And so it has some, some, we have some reason to believe that the price will go up so that
the P-E ratio, that price divided by earnings will get closer to 30.
If the stock is much above 30, and again, 30 is mine, some say 25, some say 40, but
if it's much above your intrinsic value P-E, then you say to yourself, this stock is overvalued
and it has a good chance of coming back down over time.
Now we have here a stock which has a P-E ratio that is in the technical range of stupid.
This is 1,591, which means that an investor is willing to pay $1,591 for every dollar
the company has earned for the shareholders.
That's insane.
They think that AMD is going to turn a dollar that the company has made at the net income
line.
The company is going to turn that into each one of those dollars into $1,591.
You should short it.
Oh, I would say this is, I mean, you should short this one.
I mean, I don't even care what Wall Street Bet says.
This is a short asking for trouble.
I'm going to teach you about shorts and the trading strategies with shorts a little later
in the course.
When I get to the part where I teach you the terminology of buying and selling, what the
wording we use is, what the strategies are and what the kind of simple tricks are so
that you don't get yourself burned when you put in orders or when you make sell orders
and all that.
But yeah, this one is absolutely stupid.
Notice that this company doesn't pay a dividend.
See that forward dividend and yield, no dividend.
And this stock, actually the company is barely profitable.
It's made 11 cents a share.
So yeah, whoop de doo, 11 cents and we made 11 cents a share.
So we're going to pay almost $1,600 for every dollar of earnings.
Yeah, what about that?
Okay, now just to remind you, the bid on this, whoa, look at the volume on that.
Now you see the volume, now look at the bid ask spread.
You see how tight the bid ask spread is?
It's a one penny, 175.10 if you want to sell it, 175.11 if you want to buy it.
That's a very tight bid ask spread.
And that's because of look at that volume.
We're not even halfway through the day.
We're not even close to halfway through the day.
And we've already topped half of the volume of a typical day.
So there's a lot of activity on this.
And that lot of activity is mostly because apparently, and I didn't get a chance to look
at it, they came out with rather grim earnings for the day compared to what they had said
they would.
So the markets are simply giving them a potty trading session for this one.
Let me look at another one that's coming up, Merck, Merck, MRK.
I think they're giving earnings out too.
Tame, oh, this one's an interesting one.
Look at this.
Okay, notice the bid ask spread.
You see, if you want to buy the stock, you're going to pay 120.94.
If you want to sell it, you'll get it, get 120.91.
It's still a pretty tight bid ask spread, three cents on $120.
And notice a couple of other things real quick here.
The volume is very normal.
It's tame.
I can see.
I can, well, let me come up here.
I can see this stock is actually near its 52-week high.
Do you see that?
Look at the 52-week range right here.
Do you see that?
Now the price right now is up near the top.
So for this last 52 weeks, this thing is actually sitting near its high for that period.
Okay, now real quick over here.
First of all, okay, your turn, madam.
Is this a risky or a safe stock?
Very safe.
I mean, you would expect that with a company, a big, long-standing pharmaceutical company.
They're going to make money because people think that if they take their Merck meds,
they won't die.
And that's always good for a sale.
You can buy our stuff or you can die.
Sucker.
And all that kind of stuff.
Good news.
And then of the P-E ratio though, now this is more what you would normally see.
It's overvalued.
I see that the price is up there high enough that the price divided by earnings is well
above 30.
So I would say it's overvalued.
So I would anticipate some downside momentum on the price of the stock.
Just because of that.
Now notice that it's a profitable company, $1.80 a share.
So if you multiply that by the number of shares outstanding, you'd get your net income or
something like that.
And notice that this one actually pays a little dividend, a decent dividend.
So even if the stock price goes through the toilet, you're going to get a dividend check
in the mail.
So that also makes a company have a lower beta in general because there's that underneath
that you won't, you're going to get something out of it.
So when you see the yield, which it matters to us, when you see that yield, that's telling
you that you're going to get a check for $3.08 for an investment of $120.79.
So in other words, you know that if that dividend stays at $3.08, you got a 2.55% return on
your investment right there, annual.
So that's why that yield, it matters to us because it's going to be there and a company
that doesn't pay one, well, all you can do is make, the only way you make money is off
the stock price going up.
And if it doesn't, you don't have that happy little dividend.
Now I'm going to go over here and have one last, one more look at Tesla.
Okay, here we go.
One more time just to make sure you understand why I say this is ridiculous.
Okay, sir, say for risky stock, risky AF, this one is even worse than AMV.
This is not an appropriate investment for any, okay, the type of investment you would
build for a stock like that is what we technically call a crazy mofo.
You are asking for a but that on that one.
Notice PE ratio, is it overvalued or undervalued or appropriately valued?
What would you say?
I would say it's overvalued.
Yes.
The scary thing is it might be two times overvalued because the price to create 60 in order to
bring it to 30, that price would have to be half of what it is now.
And that's why I was talking to some two market makers just last night who work in a market
making environment and they're saying 80, 80 to 90.
And they're probably looking at one of their metrics for their forecast.
They're looking for PE ratio, 80 to 90 on it.
And you'll hear a whole lot of sobbing and crying on Wall Street because they've put
so much into it and they can't, don't dare get out too fast.
Okay, so, and one more.
Anyone want to see something?
What?
Yeah?
Don't a lot of companies have major plays in Tesla?
So like if you went down to...
Oh God, yes.
But that was one of the things.
We're going to get into this a little bit.
The I.B.'s are in it, obviously, and funds, heavy duty funds.
Most corporations, companies, just plain companies, that would be against their policy to be buying
stock in Tesla.
They might, but it would be surprising if there weren't heads rolling because of that.
Because normally, as I said a few minutes ago, companies that have excess cash to make
investments tend to not want to put those new investments at much risk.
And any financial analyst worth his salt that wasn't being paid by Tesla or one of its
toties on Wall Street knew two years ago this was going to happen.
We knew it was going to happen.
So any analyst in a company that was looking at reputable resources would have said no.
However, banks went into it, certain types of specialized banks went into it.
The investment bankers on Wall Street and in other countries went into it because they
don't have those stocks on what they invest in.
And so yeah, they're sitting on the line for an awful, awful lot of money right now, counted
in the tens of billions, if not the hundreds of billions.
And that's a problem.
I don't know.
I can't get into it.
I'd have to look at more of the disclosures.
But from what I've heard, certain countries are heavily invested or the powerhouses in
like Saudi Arabia.
Go ahead.
I remember like two years ago the Price of One Stock Festival was like a thousand bucks.
Yeah, they kept splitting the stock and then it would go up and then it would tank, split
it again, go up, tank.
Yeah, it's been a very grim road for the stock.
We knew this would happen.
But the problem is that you get hustlers who have an interest in stirring up the pot.
This is true in the financial news networks.
It's true in the entertainment industry.
It's true in the blogs.
You don't get followers.
You don't get ad revenue by being the asshole, the bitch, the naysayer.
You just don't get it.
You have to hype.
You have to pump.
And that way you get money from the people behind the curtain and you also get money
from ad revenue on impressions on your, if it's an internet site.
So you've got to think for yourself and that's what I do is I get you to start thinking for
yourselves that way.
And you're not going to make as much money doing it the way I, as if you're a hype merchant,
go for it.
Know, know that you are, you don't believe this for you.
You don't really believe it, but you got to hype it.
Anyone got another sock before I get to the main lecture?
Nothing that's interesting to you.
Say AT&T.
AT&T.
The market is just a little bitchy today.
Okay.
Now this one's an interesting one.
Glad you brought it up.
Can I just show you something else?
Well okay.
The bid and ask are the same there.
I don't buy that.
Yes delay, yeah, yee-haw delaying quotes.
But notice that it, for the last 52 weeks, I'm showing you some of the numbers that we
do look at.
We just have a look at these as part of your pattern of analysis.
And I see that it's sitting right about in the middle of its 52 week.
You see that?
It swung from about 13 and a half to 20 and a half.
And right now it's sitting at 17 and some change.
So it's right in the middle.
The vol is pretty much normal.
The bears are kind of beating it up today.
But you see the beta is below one.
Relatively safe investment.
It's a giant company.
And it's one of the powerhouses in mobile networks as well as a lot of other things.
And PE ratio is telling us this is undervalued.
So this has some room to come up.
And so as far as more of a when do you buy in?
Now that doesn't mean you buy in and then sell.
But when do you buy in?
It's when the PE ratio on a stock is low.
That's at least some assurance that you're not going to take a butt bath on it.
I know that it's got some room on the upside because of that PE ratio.
So let me just grab some of it now and put it into my more or less my long term portfolio.
Or if I have some, add to it.
Kind of thing.
Okay and you see that this is a very profitable company.
At nearly $2 per share of earnings.
And it pays, oh that's a fat ass dividend.
Do you see that thing?
See that yield on that 6.42% dividend yield.
So in other words, even if the stock tanks, you got a darn nice dividend.
You paid $17.13.
That's like getting a checking account or a bank account where money you put in pays
6.42%.
You can't beat that in a stock with a beta that's three quarters of the market under
valuation on the PE ratio.
Well that's a pretty decent, that tells you there are a lot of signals in this one that
this would be something that you would put into a responsible portfolio.
Now would be the time.
Well the PE ratio is low.
And also simply you've got a really darn nice dividend yield on it.
So this is more of the kind that you would think to yourself, hmm yeah I think that this
is one that I would probably go for.
And I'll show you more about calculating your projected holding period, annual holding period
returns over the next few lectures as we go forward in time.
But there you go.
This is, and you've seen actually kind of a nice garden variety from the sublime with
AT&T to the ridiculous like AMD and Tesla today.
And it's your call but the one thing I will be darned if I leave you at the end of the
semester.
But I will make sure that you know how to think for yourselves, how to look at the numbers
and stop listening to others including me.
The great commander is the one who doesn't need to be one after he has properly trained
his soldiers.
That's the whole idea.
Now let me get into some financial stuff here.
And I mentioned this first one before.
Let me kill this so that I can get lights back up.
Okay first things first, big term for us is financial intermediation.
I think I've mentioned it.
Financial intermediation is the matching of surplus and deficit economic units.
Here's a surplus unit and here is a deficit economic unit.
Matching those is financial intermediation.
Now don't think that that necessarily means a bank or something like that.
We'll talk about that in a minute.
Financial intermediation can be informal.
Financial intermediation is now happening in cyberspace with smart contracts.
There is no bank in the middle of a smart contract.
So the world is changing.
Ten years, oh twenty years ago, well this is done by a certain type of bank, my lolly.
Well now it's not anything.
Or a matter of fact, you might need twenty dollars and you might have some money.
I know both of you, you tell me about your meeting and you tell me about your bounty
and so I, oh, you guys get together.
Over coffee, I'll pay for it.
Work it out.
That would be a financial intermediation, matching.
I'm matching.
However, it is not as easy as that because this can't work unless three things work or
match.
The first is the level.
That's a fancy word for the amount.
Level.
In other words, you have to have, the surplus unit has to have what the deficit unit wants.
You sir, might be a very wealthy man, but you're not going to lend anyone more than
a hundred dollars.
You need a thousand dollars, no match.
That's it.
Game over.
The next one is timing.
Okay, you've got a hundred dollars, you need a hundred dollars.
Criterion one is done.
Level is the same.
But you want to lend out a hundred dollars.
You don't want it back for another six months.
But you want to hold it off, you want to pay it back in five years.
No match because the timings are off.
So the timing has to be there.
And then finally, risk.
You madam, I need a thousand dollars.
You have a thousand dollars.
I want to pay it back in six months and you would like to have your money back in six
months.
So both the first ones.
But then you look at me and you say, you are risky.
No, you're a yenny, you're an animal.
You're probably going to be dead by then you're old.
So there's too much risk.
You would prefer not to have that risk.
Give you an example, interestingly enough.
In the world of insurance, I'll get into this a little later.
There are a lot of surplus economic units.
Interestingly, one entity could be both at the same time.
At some point, you are building up a 401k.
You're doing good, you're 30 years old and you decide that you, you know, you make investments
and through your 401k, but you want to buy a house.
You can't buy a house.
You've got to go to a bank to get that house.
So with respect to investments in a long term environment managed by someone else, you're
a surplus unit.
But with respect to buying a house, well, you're not.
You're a deficit economic unit.
So you could be both at the same time.
Now, I'll give you some examples here.
There are, banks are not permitted, or kind of not permitted, at least not to any great
extent to put, make investments, make loans in speculative markets because they decide
to stabilize the bank's long term prospects and all that.
So you would have a bank that could have a lot of money, but it wouldn't be willing to
do a real estate, a speculative real estate project in Chicago or somewhere, although
God knows some of them try to and then the auditors catch them.
All that kind of stuff.
But take one like, for example, a life insurance company.
Life insurance companies are major, major surplus economic units.
I mean vast amounts of money because they get those premiums from all those people coming
in and it builds up these large piles of capital, of funds.
Now here's the thing though.
Here's the thing though.
You know you're going to die today, right?
But it's probably not going to be for a long, long time.
It's going to be even 100 years.
Well in your case maybe 20 years.
100 years.
You're going to be out there.
Or 80 years.
Or something like that.
So you see, a life insurance company would not want an investment that would bring its
returns back immediately.
Or even for 20, 30, 50 years.
40 years.
See that would be, that they would be one of those where the timing is long, long haul.
I gave you the example of commercial paper last Wednesday where you've got companies
that have some extra cash for a few weeks or a few months.
And then, so they would like to do something with it.
But they sure want that money back when they have to pay their bills.
Tell you a funny story about this.
And you're going to hear stories from me all through this semester so get used to it.
There was a company not far from here.
It had gotten a payment in of a large amount of money.
And so this was where Treasury was going to put it into some short term investment.
Commercial paper and money market instruments, short term CDs, stuff like that.
And they went to check on the amount of money and suddenly there was hardly any in the account.
They were just going crazy.
What the hell happened?
Well it turned out someone in their accounts payable saw all that money and paid off all
these bills.
Now these were bills that had terms like doing 30 days, doing 45 days.
But well I got the money so I better pay it right now.
And oh my god, that poor young puppy who did that.
He was like watching the Treasury official, a risk manager, lawyer, she a cruel vicious
woman.
It was like seeing an orca finding a baby seal and tossing it around in the ocean before
eating parts of him just to have fun.
Yeah you see timing is going to be crucial.
It's all kinds of financial intermediation.
Risk is obviously a big issue too.
And the amount, capital is flowing so efficiently now that it's just ridiculous anymore.
So anyway there you go that's the idea of financial intermediation.
So who are the financial intermediaries?
Well they don't come in any particular order but there are definitely specializations within
the industry.
Example would be the IB, the investment banker.
Some of you may get jobs or internships as an IB, with an IB.
Those are the very large houses that when a company wants to sell stock or wants to
sell bonds, wants to sell stock to raise equity capital or wants to sell bonds to raise debt
capital, the IB, the investment bankers, if it's any kind of a big offering at all, they
will underwrite it.
They will buy the offering.
That's a primary market transaction from last week.
They buy the issue.
I'm using terminology here and I'm using over and over and you'll get into it.
They'll buy the issue.
They bought the issue in the IPO of Facebook.
They bought the issue in the IPO of Rivne.
And we call it syndicates because there will be a lead underwriter, you'll be the heavy,
but then, well gee this is like $500 million, let me get some other IBs involved in this
too.
You form a syndicate.
They'll say well I'll handle $50 million of it, I'll handle $75 million, they'll handle
$2,250 million of it.
So the syndicate, it's called a syndicate, that will underwrite the offer with a lead
underwriter being you.
You're sort of the one who brings it in.
Your syndicate negotiates, let's say that I'm Mark Zuckerberg.
Yeah I'm much better looking, but anyway.
I'm Mark.
You and I will negotiate the price of it, what the fees will be that will charge you
to do this, and all of that kind of stuff.
It's an enormous process.
You as the IB have to keep an eye on the markets, on your clients, to do what's best for them.
Me as Mark Zuckerberg, I want the highest price per share that I can get so I can get
a lot of money out of this offering and all that.
That's how IB, very simplified version of how IBs work, it doesn't matter.
And like I said, that's hot, hot stuff and some of you, maybe two, three in a class of
size might end up in some kind of an IB.
Now there are the giant houses that are global IBs and then there are regionals that are
still just huge, but they don't do anything anywhere in the world.
And then there are the small houses, boutique.
You'll hear me use that term boutique for a lot of different things, but the boutique
houses that might do some very small but highly prospective startups and things like that.
I mean they're of all kinds of sizes and you do make awfully good money.
If you go into one of those, you've got the right character, you know what the rules are,
you know how to present yourself, you think very well, you've got coding skills behind
you, you can do your Excel, you can do your economic analysis, you've got good skills
with interpersonal skills and all that kind of stuff.
I took my finance students maybe six, seven years ago up to a regional IB that had its
main office, I think that was its main office in Chicago in the financial district.
And it was quite a thing.
They did a good show, they offered some internships, they had some internships available and I
don't know if anyone ever got a permanent job out of that one or not, but it's a really
one of the core things in finance, the IBs.
Now another type of bank is your typical commercial bank.
It is nothing but a bank that does things like makes loans to individuals, loans to
businesses, it has checking accounts, draft, in other words demand deposit accounts and
all of that kind of good stuff.
Now distinguish a bank, a commercial bank from a credit union.
They can do a lot of the same things but credit unions do not offer demand deposit accounts.
In other words, they don't offer checking accounts.
You're saying, now wait a minute fat boy, I've got a checking account at a credit union,
no you don't.
It looks like one, it smells like one, it farts like one, except that it is a negotiable
order of withdrawal account.
Now on any given day you walk in, I've got a check that was written to me from a credit
union, I go in, they'll honor it, $100, $1000.
They don't have to, they almost always will, but a negotiable order of withdrawal account
does not have the instant liquidity of a demand deposit account.
For most and all intensive purposes, they look the same but they are not quite the same.
They even have their own regulatory body.
So keep that in mind.
Now another thing, just as a side quick note here, when you go to a bank, okay let's try
this, let me do that.
You sir, you want to live the dream, you want to buy a home, you've got your eye on this
double-wide house trailer on the outskirts of Decatur.
There's enough room for you and your woman and her eight kids from a previous marriage.
On the weekends you do Elvis impersonation for a children's party, she works as a part-time
assistant manager in a biggie loop near Springfield, living the dream.
You come to me, I said like to borrow a mortgage, I said no you don't.
Yes I do, I said no you don't, you're going to borrow on a loan, you will have a mortgage
attached to it.
That is collateral, the mortgage agreement is not the loan itself, the mortgage agreement
is the attachment to make something I can take when you go to half city and you will,
mainly because you decide to start that strange business in that outbuilding where you come
out with a gas mask on.
As soon as I get that loan, I've made it into a loan.
You know what I'm going to do?
I'm going to sell it.
I am not in the business of a bank holding those kinds of assets.
I'm going to sell it to what's called a secondary mortgage market.
I'm going to flip that loan, I'm going to package all the loans for the day and I'm
going to turn them into one thing and I will sell it to you, a representative for Jenny
May, Fannie May, Freddie Mac, one of those, those trillion dollar international funds.
They buy the loans, they squish them together into this massive ball and they cut them into
different parts depending upon what parts of the cash flow certain investors want.
I'll get rid of it.
But I'm still making my payments to the bank.
Yes, they will get a fee for servicing the loan.
They'll take care of that.
But they don't want your loan.
That's not their thing.
They are merely a pass through agent.
Okay, that's commercial banks, credit unions.
There are other animals too out there.
One mutual funds.
Mutual funds are kind of cool.
And essentially you join a mutual fund and then that mutual fund takes your money that
you deposit and it puts it into stocks and bonds.
And then you make money.
You can get the money out but often times you can just, you can watch your shares, your
ownership of that mutual fund go up as a fund you make money in the fund.
You get more, more shares in the fund.
Now a couple of different kinds of mutual funds.
No-load, low-load and high-load.
That means how much money you have to pay as a fee to join.
If you ever pay a fee to a mutual fund, you're stupid.
There are so many no-loads out there that do great.
Now another cool thing about mutual funds is you can actually, there are just tens of
thousands, families of funds offered by Fidelity, PIMCO, Invesco, whatever.
You can target, tailor.
Well I like a fund that would be kind of international.
Okay.
Or I'd like a fund that was mainly in healthcare.
Okay.
Or I'd like a fund that has high dividends.
Okay.
There are just tons of them out there.
And it's a wonderful way, in fact a lot of retirement plans allow you to manage your
own money and they offer you, well we've worked with this mutual fund family so choose something
in there, something you can do.
It's goodness.
It's a way to participate in the market and you've got professionals managing the fund
so they're not doing stupid things and all that.
And some of them are good and some of them aren't so great.
Now if you are managing a mutual fund, getting into a little bit into the investment side,
normally you, okay I want to have my money in three mutual funds.
So what you do is you have a list of ten or more than that that you always keep an eye
on.
And every year in those mutual funds you look at your lowest performers and you kick them
out and put in the best of the ones that you're looking at.
You're skimming the cream off your mutual fund.
Maybe every year.
Now remember you can't just willy-nilly buy and sell mutual funds.
You'll have windows when you can do it.
But during a window or you can look at the economy.
I see the economy is doing really great so I'm going to balance more towards mutual funds
that are stock oriented.
And or the economy looks like it's kind of beginning to turn on us so maybe I'd rebalance
to go more towards mutual funds that have bonds in them.
These are simple rules and I will tell you right now that the simpler the rule the more
likely you are to be a long run winner.
Just keep an eye on a little group of them that you're always keeping your eye on and
then make a rule every six months every year when I can I just move out the lowest performer
and put in the highest or maybe a couple the lowest two and put in the two from my from
my back list.
Okay those are mutual funds.
Now there are other things I mentioned life insurance companies as financial intermediaries
and also as sources of capital.
Remember money is short term capital is long term.
Many sources like that and then there are of course all the dark places where there
is stuff there is a playground.
Another one which is in the evil darkest of the dark would be a place like what we call
private equity funds.
They essentially a private equity fund.
You're a corporation that's in trouble.
My private equity fund will come in and we'll say we're going to help you out here.
We're going to get you out of your problems.
First things we're going to rearrange your supply chain gets things made in China instead
of with these expensive Americans and we're going to also lend you a large amount of money
and we're also going to take some stock in your corporation.
And the fun begins.
We get things realigned you a lot of layoffs in the United States another factory in China
says oh this is good and then we pipe it pump your stock up and we dump the stock and then
of course we didn't change your management.
You're still crap.
You eventually collapse and then as the bondholders we take over your company.
See because the bondholders will shut you down if you can't pay the bills.
You can't pay us our interest payment.
I guess we're just going to have to take you over and cut you up turn you into juices and
sell that to our friends.
That's how private equity funds work.
You're going to say well I wouldn't do that if I know that's going to happen.
Yes you will.
You're so desperate.
You will take the first common comes to you with a good suit on and a lot of money he
can write out of a checkbook.
Sure you will.
And right now I mean the examples is I could throw you one example after another Sears Staples
the big one now that we're talking about is Panera.
Panera fell into the trap in 2017 and we're predicting it's got a year to live before
it dies and the fund the private equity fund takes it.
Okay follow that.
Now understand that this one and the next one I give you are both almost completely
unregulated and there are two reasons for this.
They are unregulated because one the investors the big dogs who do them and are wealthy enough
that's the SEC thin route they say they know enough we don't need to we don't need to
be their nanny.
The other reason the darker reason is because these funds have so much money they can buy
any politician they want.
So every year when there's screams of regulate these damn sons of bitches well they just
go in and make some campaign contributions money goes into super PACs and all that self
righteousness just kind of fizzles away.
That's how it works.
So now mutual funds they're not quite as evil mutual funds I'm sorry hedge funds hedge funds
that hedge funds they started out mainly just as what's the name implies hedge funds.
They would help companies hedge away risks that the companies didn't want to bear was
part of their core business.
I told you the stories about hedge funds how they if you are a farmer you want to grow
corn you don't want to speculate on corn prices you want to grow corn.
I mean that's what you do and so you could a whole huge group of co-ops could get together
and come to a hedge fund say well can you make it so that if corn prices go down we'll
lose on the corn prices but we'll make money on something or if corn prices go up we'll
make money on that something even though we're losing we'll make money on the corn but we'll
lose on the other something.
So in other words the risk is gone or at least highly muted so that you have a stable income
as a farmer from year to year.
When corn prices are low you lose on the corn but you win on the futures contracts.
When corn prices are high you win on the corn but you lose on the futures contract but you
get a stable income you are no longer in the business of corn price volatility.
That's what hedging is all about on the bright side.
There's a dark side to hedging too the speculators who take the opposite side but that taking
that aside you follow what I'm doing here is that was what hedge funds do but they've
gotten into a lot of other things now but generally speaking they have a higher reputation
than private equity funds.
They're not out to destroy anything.
Private equity I mean I've been working to create a private equity fund in another country
just because I mean it's worship Satan it's okay at least until you go to hell but then
again I'm here in Illinois so there's that but anyway you understand that this is what
those are.
Now there's one more that I want to mention here ETFs electronically traded funds.
ETFs are let me show you an ETF.
ETFs when you look at an ETF you look at a stock but that stock represents a portfolio
of stocks managed by professionals.
There's one I've got one but I sure am not going to tell you because then you go in and
take my win away from me.
This is Spider.
Spider is the standard porous 500.
You buy a share of SPY you own a massively well-balanced diversified portfolio of 500
companies for $487.86.
Imagine it this way.
You sir you are at the finance single floor.
You're going there and some very attractive person comes up to you and says so what do
you do?
Why I'm an investor.
Well what kind of portfolio do you have?
Well I hold the standard porous 500.
Well wow you do but that's going to SPY you own the whole 500.
That's if that other person hears that you will not go home alone.
Okay?
Has that worked for you before?
Hell no.
Take a look at my face but you're a yeti.
But understand what I'm saying here is that you can diversify professionally managed.
Let me show you something real quick here.
Look at the beta.
It's got the beta of the market world portfolio.
Well not surprisingly because you don't 70% of the world portfolio.
It's a mark it's basically the market.
So the market and you will go the way the same way.
It's not high risk.
It's not low risk.
It is the world market risk.
In other words that 1.00 says it has 100% of the volatility of the market of the world
market itself.
Now notice the expense ratio.
Keep an eye on that.
This is only 0.09.
I'm a little bit skittish at anything above 0.3.
That's for myself.
It's just I they're charging you a fee.
Of course they are.
They're the professionals.
They're every day balancing this portfolio making sure that it has the portfolio control
theory becomes practice.
And we'll learn a little about portfolio control theory in this class.
But that's their job is to take care of that portfolio.
And so you don't have to.
You've got the S&P 500 and each stock in there is in the correct amount to maintain the balance
of the portfolio as prices change from day to day.
They do it for you.
Now there are other ones that are.
Let me show you.
I think I'll avoid that.
There are some that I'm trying to think.
Here's one.
I ran this a while back and it's just so tempting.
This is an ETF.
P.S.I.L.
It is the stocks of a group of companies that are under license from the federal government
studying psychedelic mushrooms, magic mushrooms, to see if they can be used for therapeutic
purposes on psychotic patients.
Someone back there.
Yeah, yeah.
No, it's an ETF.
So if you want to get into the good stuff, this is it right here.
ETFs, you could do anything.
You could do the Russell ETF, the NASDAQ.
There's a couple of them.
Honestly, I don't know the difference between the different NASDAQ ETFs.
How many stocks?
The NASDAQ is like a zillion stock.
Do they buy them all or what?
But they're in every industry.
You can go into ETFs that are oriented toward healthcare or toward international or toward
industrial processes or consumer goods or based upon certain characteristics.
There are ETFs that hold stocks that have high dividend deals.
There are some that hold bonds.
Here's one I want to show you.
This is a benchmark.
AGG.
And when I say that, others' bonds are measured against AGG, which is a pure bond fund.
It is an ETF.
I hope that's an ETF.
Yeah, ETF.
And it is, look at this.
Beta 1.00.
Expense ratio, I'm lousy, 0.03%.
So one thing that you could think about is, okay, I am an investor who wants to maintain
over longer periods of time about a good portfolio structure based upon the economy.
So at good times, I might go 80% SPY, 20% AGG.
And then as the economy begins to turn a little sour, and remember, these are stocks.
You can buy them day and night.
They're stocks.
It's not like mutual funds where you have to wade away.
No, they're just, you trade these.
You buy them and sell them just like anything else.
Any other stock.
But behind them is an 800 pound gorilla, whatever is the portfolio that you're buying into.
You follow that one?
It's cool stuff.
So ETFs are, okay, we all have our fun little slush portfolio, but your responsible big
adult person portfolio should be well balanced.
And we're going to learn about balance, about portfolio control, about all of that kind
of stuff in this course.
But you'll have, I'll buy this stock, or I'll buy that stock.
And usually, sometimes you hear people talking about, well, I made a lot of money doing that.
Well, yeah, but don't get biased by that.
Let me try something with you.
When you see lottery commercials, do you ever see lottery ticket buyers who lose money all
the time?
You don't see those people in the ads.
You see the people, I just made a million dollars.
The same is true in stock markets too.
You'll have some idiot, I've got a system for winning in the stock market and you can
have that system too for 1995 and if you order it before midnight, I will also sell you a
war on co-legion.
It's like this guy's going to make a few of the ads.
Isn't that amazing?
I want you to buy my system because I made a lot of money.
Question one, why are you talking this if you've already made your money?
Question two, one, have you ever seen an ad on one of the stock market channels?
Ha, I bought a lot of stock and I've lost my shirt.
I am so poor I can't even afford to go to war.
I'm P.O.
Poe because I'm stupid and I want you to know my system and I'll sell you my system.
No, you never see those kinds of people driving down the highway.
You sir, you drive like a blind trout.
You drive like a maniac.
I'm driving along at the speed limit, single factor.
And you go boom, you go boom, everybody's going faster than I am.
Not everybody.
You're not going to see the people who are going to speed in your war.
You will have a bias and that's one of the problems we have in stock markets, in financial
markets is the bias that comes about.
Last thing for today, this comes from the world of behavioral finance.
You're going to go into a casino and you know you're going to lose every penny.
Some kind of a nut, you're going to be wiped out.
But you also know that the first table, you have a good chance of winning.
So are you going to play that table or are you going to walk out of the casino?
Play the table.
You play that table and you see the next table and you think I've got a good chance of winning
at that table.
And you play that table.
Now you know that you're going to lose with your strategy.
But every next move seems to be one that works.
That's called behavioral finance.
It's a new twist where economics would say rational agent, you say FTS, you walk out
right away.
You don't play.
But behavioral finance tells us no you won't.
You'll keep gaining until you lose.
That's why the responsible people, us in finance, try to educate or help people not make that
mistake.
That's all I have for you today I think.