The Top 1% own 50% of Stocks in the U.S.

According to Goldman Sachs, stock ownership is extremely concentrated because of the growing wealth gap in the U.S., and thus the market’s performance affects households making up the wealthiest 1% of Americans much more significantly than the other 99%.

“The wealthiest 0.1% and 1% of households now own about 17% and 50% of total household equities respectively. This is up compared to the 1980s when it was 13% and 39% respectively.

America’s wealthiest own 50% of stocks elf by

households (David Foster/Yahoo Finance)

The above chart shows the growing wealth gap via ownership of financial assets. It illustrates the sharp decline in stock ownership share among the middle to upper-middle class citizens over the past few decades, while the richest Americans’ exposure to the market increased sharply.

Daan Struyven, Goldman’s chief economist explained that many believe that now when stocks sell off, there is a smaller decline in consumer spending because the richer people, whom by definition are insulated by more wealth, take the biggest hit. However, Struyven argued this is not the case. On the contrary, the higher concentration of stock ownership results in a bigger drag on consumer spending when the market sells off.

“While the share of equities owned by the wealthiest households has risen over the last three decades, equity holdings have more than tripled as a share of disposable income at the aggregate level and have also risen substantially for middle and upper-middle wealth groups. Therefore, a 1% move in stock prices now has a much larger impact on wealth levels for most groups,” he explained.

Additionally, Struyven said that the spending on luxury goods purchased by wealthy people is highly sensitive to stocks. This includes jewellery, watches, yachts and planes.

So what does that mean? Inequalities have grown significantly. Rise in the stock market is no real measure of the average Joe’s welfare. A severe drop in stock will impact sale of luxury goods.

Reference:

The richest 1% own 50% of stocks held by American households, Heidi Chung, Yahoo Finance, January 17, 2019

The end of P2P boom?

Weeks ago, another peer-to-peer (P2P) lending crisis happened in China - one of the country’s top P2P lending platforms collapsed, causing 220,000 investors losing 14.5 billion yuan. In 2018, the growth of China’s P2P lending sector dramatically reversed: 1,407 internet platforms that offered P2P lending services were shut down due to tightening regulation between July 2017 and June 2018, indicating the end of the P2P boom in China, according to China Fintech Today.

 

In Malaysia, how has the sector performed?

According to Kristine Ng, CEO of Fundaztic, P2P in Malaysia has been driven largely by younger users, up to 59% of its investors are under 35. She thinks that the Millennials are open to investing, even if they don’t have much money. She believes younger investors have less preconceptions about what to invest in and are more connected on their phones and computers when it comes to investing, often even outpacing automated buyers.

Malaysia’s P2P Lending Performance

There are six P2P licensed lending players in Malaysia. The market share of funds raised by each operator from Nov 2016 to Jan 2018 is shown below:

P2P Lending Malaysia – Market Share of Funds Raised by Operators (Nov 2016- Jan 2018)

Source: FintechNews Malaysia

Currently, the largest P2P Lending platform in Malaysia - Funding Societies, has successfully funded up to RM1.63 billion in total. As on 24 April 2019, its default rate is 0.86%. On the other hand, B2B Finpal has funded RM76.3 million with 0.18% default rate, whereas Fundaztic has funded RM45.3 million with 4.39% default rate.

Although default rates of most of the P2P lending platforms remain low, complaints on late or missed repayments can often be seen on forums. Investors should remember that any investments will carry risks.

Reference:

China Fintech Today: The P2P Boom Is Truly Over, SARA HSU, 27 Feb 2019

P2P financing is booming in Malaysia, Qishin Tariq, The Star, 28 Nov 2018

CFA Institute Investment Foundations Program: Chapter 1 – The Investment Industry

In a previous article, we introduced the CFA Institute Investment Foundation Program (Read more here).  It is a free program designed for anyone who wants to enter or advance within the investment management industry, including IT, operations, accounting, administration, and marketing.  Candidates who successfully pass the online exam earn the CFA Institute Investment Foundations Certificate.

There are total of 20 Chapters in 7 modules, covering all the essential topics in finance, economics, ethics and regulations.  This series of articles will highlight the core knowledge of each chapter.

Chapter 1 provides an overview of the investment industry. The learning outcome of chapter 1 is as follows:

·        Describe the financial services industry;

·        Identify types of financial institutions, including banks and insurance companies;

·        Define the investment industry;

·        Explain how economies benefit from the existence of the investment industry;

·        Explain how investors benefit from the existence of the investment industry;

·        Describe types and functions of participants of the investment industry;

·        Describe forces that affect the evolution of the investment industry.

The financial system helps link savers who have money to invest and spenders who need money. Within the financial system, the financial services industry offers a range of products and services to savers and spenders and helps channel funds between them (Exhibit 1).

The type of financial services includes financial planning, investment management, investment information, trading and custodial (Exhibit 2).

The main financial institutions are banks and insurance companies. Banks collect deposits from savers and transform them into loans to borrowers. Insurance companies are not only financial intermediaries that connect buyers of insurance contracts with providers of capital who are willing to bear the insured risks, but also among the largest investors.

The investment industry provides numerous benefits to the economy, including the efficient allocation of scarce resources, better information about investment opportunities, products and services that are appropriate for providers and users of capital, and liquidity.

The benefits for investors of a well-functioning investment industry include a broad range of investment products and services that meet their needs, competitive markets that provide liquidity and keep transaction costs low, timely and efficient disclosure of information, and the ability to modify their risk exposures.

Four key forces that drive the investment industry are competition, technology, globalisation, and regulation (Exhibit 3).

Source: https://www.cfainstitute.org/en/programs/investment-foundations

Sample Question:

An institutional investor that invests a government’s surpluses is a(n):

foundation.

endowment fund.

sovereign wealth fund.

 

pollcode.com free polls

U.S.’ Focus for College Degrees (2019)

Brian Krueger, believes for certain majors the demand continues to outstrip supply. At entry level, the best ones are the following:

1.          Computer Science

             Degrees from name brand schools remain highest in demand of all majors. Graduates have multiple job offers to choose from.

2.         Marketing

            Sales is one of the best paying professions, especially if you are selling stuff that people need or want.

3.          Nursing

             With ageing population medical support team like qualified nurses will always be in demand.

4.           Electrical Engineering

              Graduates are well-paid to design, develop and test electrical equipment.

5.           Accounting

             Of top 10 employers, four are accounting firms. This is a career that leads to management and upper management.

6.          Chemical Engineering

             Opportunities galore on new technologies including renewable, medical, plastic resins and biotech. Diverse opportunities in the U.S.

7.          Finance

             Great demand but need excellent grades and a name brand school to compete for good positions.

8.          Biomedical Engineering

             Biomed field is growing due to demand from healthcare and medical devices sectors.

9.           Human Resources

              There are two roles in this area – HR Generalist and Recruiter. The former is corporate overhead role and the latter is a combination of sales and HR.

10.         Actuarial Science

              U.S. does not have many actuaries, so insurance companies look out for entry-level graduates. Better opportunities if they have done internship and passed the professional exams.

So there you have it, the focus in the U.S. But that doesn’t mean it is the same in Malaysia. Nor, does it mean Arts or Humanities are not in demand or for that matter Economics.

Reference:

Top ten best college majors for jobs, Brian Kruger

Malaysian Ringgit: Fixed or Floating?

2019 could be a really difficult year for the Malaysian Ringgit (“MYR”).  We are vulnerable to both external and internal forces including trade; sentiments of short-term investors/ traders; interest rate and inflation differentials; movement of FDI; and also aggregate domestic demand – public/ private investment and consumption.

The recent decline of the MYR because of the potential downgrade of Malaysian bonds by FTSE Russell in its World Government Bond Index.  The potential capital flight could reach RM33 billion.  And foreign holdings of Government debt has been on the decline since 2016 – from 30.6% to 23% in 2018.  Then we have our honourable PM adding to the mix by suggesting a fixed rate regime in the event of a meltdown.

Fixed or pegged rates are not new.  But are they something we should yearn for?  MYR pegged to USD for example gives currency stability.  Foreign direct investors know the currency’s worth and there is no wild swings in the currency’s value.  China keeps its rate in a tight 2 percent trading range around its value.  But it can be expensive to maintain – enough foreign reserves to manage the value.  For China, that is not a problem.

Historically, no one system (fixed or floating) has operated flawlessly in all circumstances.  Probably, the best reason to adopt a fixed rate system is when the central bank is unable, for whatever reason, to maintain a prudent monetary policy.  Otherwise, the floating rate system proves better.  More than USD5 trillion is traded in the currency markets on a daily basis (2018).  Malaysia has stayed on a managed float-basis as we are an open economy and well connected to global financial flows.  We need to remain on this basis, if we are to be part of the world economic system.  But what is MYR’s outlook?  NO one really knows – but one could venture to suggest for 2019, 2020 and 2021 it could be follows:

The above is not a forecast but a range that reflects after “morning coffee”.

What Happened to Bitcoin in 2018?

After a surge in 2017 to USD20,000 bitcoin crashed to USD3,000 in 2018. What happened?

Guthrie Weissman in his article on “Beyond the Bubble” suggests some reasons:

       i.          Classic Bubble – international fever, FOMO element, and random companies involved in the surge;

      ii.          No institutional support – clampdown, financial institutions balked and some bank CEOs denigrated the bitcoin; and

    iii.          Internal battles – infighting by participants. Bitcoin cash was developed by some miners, who disagreed with fundamentals of the initial bitcoin system.

Is there any hope for bitcoin?

A hot commodity has turned into a hot potato. Even some toughest critics do see some sort of future. This is a legitimate technology that is going to expand. Dubai believes in blockchain and its future. It wants to become the world’s first blockchain powered government. The initiative is to see blockchain technology improve client services including banking, mortgages and utilities.

So there is still hope for a rise but that depends on market participants and government support.

Reference:

Beyond the Bubble: What happened to bitcoin in 2018?  By Cale Guthrie Weissman

(https://www.fastcompany.com/)

The Monopolization of America

America used to have antitrust laws that stopped corporations from monopolizing markets. No longer. It is a hidden upward redistribution of money and power from the majority of Americans to corporate executives and wealthy shareholders.

You may think Americans have lots of choices, but take a closer look:

1. The four largest food companies control 82 percent of beef packing, 85 percent of soybean processing, 63 percent of pork packing, and 53 percent of chicken processing; 

2. There are many brands of toothpaste, but 70 percent of all of it comes from just two companies;

3. You may think they have choices for sunglasses, but they’re almost all from one company: Luxottica – which also owns nearly all the eyeglass retail outlets;

4. Practically every plastic hanger in America is now made by one company, Mainetti;

5. What brand of cat food should one buy? Looks like lots of brands but behind them are basically just two companies. 

6. What about pharmaceuticals? Yes, you can get low-cost generic versions. But drug companies are in effect paying the makers of generic drugs to delay cheaper versions. Such “pay for delay” agreements are illegal in other advanced economies, but antitrust enforcement has not laid a finger on them in America. The cost is an estimated $3.5 billion a year.

7. You think they have a lot of options for booking discount airline tickets and hotels online? Think again. They have only two. Expedia merged with Orbitz, so that is one company. And then there’s Priceline.

8. How about your cable and Internet service? Basically just four companies (and two of them just announced they’re going to merge). 

The problem with all this consolidation into a handful of giant firms is they don’t have to compete. Which means they can – and do – increase prices.

Such consolidation keeps down wages. Workers have less choice of whom to work for have a harder time getting a raise. When local labor markets are dominated by one major big box retailer, or one grocery chain, for example, those firms essentially set wage rates for the area. 

These massive corporations also have a lot of political clout. That’s one reason they’re consolidating: Power. Antitrust laws were supposed to stop what has been going on. But today, they’re almost a dead letter.

In the new economy, information and ideas are the most valuable forms of property. This is where the money is. Google and Facebook are now the first stops for many Americans seeking news. Meanwhile, Amazon is now the first stop for more than a half of American consumers seeking to buy anything. Contrary to the conventional view of an American economy bubbling with innovative small companies, the reality is quite different. The rate at which new businesses have formed in the United States has slowed markedly since the late 1970s. Big Tech’s sweeping patents, standard platforms, fleets of lawyers to litigate against potential rivals, and armies of lobbyists have created formidable barriers to new entrants. Google’s search engine is so dominant, “Google” has become a verb. The European Union filed formal antitrust charges against Google, accusing it of forcing search engine users into its own shopping platforms. And last June, it fined Google a record $2.7 billion. 

Economic and political power cannot be separated because dominant corporations gain political influence over how markets are organized, maintained, and enforced – which enlarges their economic power further. Big Tech — along with the drug, insurance, agriculture, and financial giants — is coming to dominate both U.S. economy and U.S. politics.

 

Reference:

 

The Monopolization of America: The Biggest Economic Problem You’re Hearing Almost Nothing About, Robert Reich (http://robertreich.org).

Why Analysts’ Valuation Does Not Apply To Retail Investors?

Not many retail investors do their own valuation analysis when investing in the stock market.  Some rely on news, technical analysis or analyst’s report.  In many analysts’ reports, especially those who use discounted cash flow method or dividend discount model (DDM), the stock value is estimated based on certain assumptions, which may not be applicable to retail investors.

One of the key factors in valuation is the required rate of return, k.  It is inversely proportional to the value of the stock.  There are few methods to estimate k, the most common one is Capital Asset Pricing Model (CAPM).

The formula for CAPM is

where,

k = required rate of return

R_f = Risk Free Rate

β = Beta

R_m = Market Return

R_f and R_m are the invariant to all investors.  The factor that differentiate analyst and retail investor is the β.  Beta (“β”) is a measure of the risk arising from exposure to general market movements as opposed to idiosyncratic factors.  β is measured through the eyes of the marginal investor in equity (rather than the retail investor). The marginal investor is an investor who owns a well-diversified portfolio and trades frequently, for example, a Fund Manager.

If you are a retail investor who does not hold a well-diversified portfolio, the beta has to be adjusted to reflect your risk.  Aswath Damodaran, the valuation guru from NYU Stern Business School, stated that “total beta” is more appropriate for the average investor (Read more here).   The “total beta” is derived by dividing the beta with the correlation coefficient of the stock and the market portfolio.

The mathematics involved in calculating “total beta” may be discouraging, so what could a retail investor do in order to correctly adjust for the risk?  Since the correlation coefficient is always less than 1, which means the “total beta” will be always higher than beta.

As such, the required rate of return, k, is relatively higher for a retail investor.  This means that the value of the stock from the eyes of retail investor shall always be lower than the number reported by an analyst!

10 Most Useless University Degrees in the World!!

There was once a time when having any sort of degree would set you apart from the crowd. But those times have gone. And the graduate market is highly saturated. It is important therefore to avoid useless degrees – a list, that could be very subjective. For example, many people would deem golf management to be a ridiculous option, but if you want to manage golf resorts for a living, then it’s an absolute requisite.

These then are the 10 most useless degrees in the world as listed by Shutterstock: 

1. Culinary Arts

Budding chefs may previously have thought that culinary college is a no-brainer, but recent statistics actually suggest otherwise. With tuition costs rising out of line with wages, the returns of an expensive degree simply aren’t there anymore – and neither is the requirement.

Although some restaurateurs view culinary college as an indispensable career step, most are of the view that academic credentials are inferior to raw talent and experience. It’s better for your time and money be spent in a kitchen rather than in the classroom.

 2. Fashion Design

The primary issue is like many design-based subjects, fashion design requires an innate artistic ability and a strong aptitude for creativity – things that no school in the world can teach. When you consider that competition for jobs in the fashion industry is notoriously fierce, with demand heavily outweighing supply, developing a strong portfolio and a robust personality may well be a more fruitful use of your efforts than getting a degree.

 3. Art History

Art history is something of an easy target on lists like this, but there is a compelling reason for it: William and Kate went for it?

That’s fine, of course, except when you’re paying upwards of $50,000 (£35,300) to distinguish your Monet from your Manet, you need some kind of verifiable return. Unfortunately, this often presents itself as a choice between working at Starbucks to pay back those loans or starting afresh in a different field – complete with the extra debt that comes with it.

 4. Music

Ask any successful musician how they made it in the music industry and they are likely to attribute their success to a wide combination of factors: luck, hard work, stage experience and, of course, those fabled 10,000 hours of practice. The one thing they won’t have relied on is an expensive music degree.

5. Psychology

Psychology is a hugely popular degree choice these days. As awareness of mental health issues becomes more mainstream, increasing numbers of potential students are understandably drawn to the fascinating prospect of understanding the human mind. Unfortunately, when you are one of hundreds of thousands of people with the same degree, the chances of you landing a role in the field are slim to none.

A doctorate is the minimum academic level needed to reach to have any realistic hope of pursuing a relevant career, let alone interacting with patients. Otherwise, undergraduates have to get creative; for example, you could sell your understanding of human behaviour to potential employers in order to try and obtain a marketing position.

6. Communications

Communications is a strangely vague degree, in that it is applicable to almost any form of media, visual arts or broadcasting; yet at the same time, it is not focused enough to be of any real use. Then there is of course social media!

As a result, communications is often seen as the go-to course for those who are unsure of what it is they actually want to do. Maybe it is better to do law, theology or philosophy! 

7. Liberal Arts

Although liberal arts may be the go-to punch bag for all those ‘dumbest degree’ barbs, this might be a little unfair; after all, it encourages the development of critical thinking and other various soft skills that a university education is supposed to arm you with.

The problem is that: that’s all it does. In a STEM-driven economy, fewer than 2% of employers are actively looking to recruit liberal arts graduates as a result of their lack of vocational skills or work experience. Unless you’re willing to do additional qualifications in order to bridge the gap, you are unlikely to find much return on your investment.  

8. Studio Arts / Fine Art

Arguably, the idea of studying studio arts is not necessarily stupid, as no painter, sculptor or performer has ever gone out into the world expecting to get rich (the term ‘starving artist’ wasn’t coined by accident). What is silly, however, is spending upwards of $50,000 to pursue something that you can do in your parents’ basement.

It might be a far more practical idea to freelance your creative talents on top of a more secure income source; photographing weddings might not be your cup of tea, but it may pay the bills while you work on developing a more creative portfolio. 

9. Performing Arts

Many budding actors take the plunge into drama school, but like all of the creative professions on this list, the key ingredient to success isn’t taught in any course curriculum: talent. Although some famous actors have followed this path, many haven’t – the only constant is that an expensive college degree is not a requirement to be able to act, sing or dance.

The best way to break into such a ruthless industry is by constantly attending auditions, learning to develop a thick skin and volunteering on film and theatre sets in the hope of making a few contacts. While the 1% may earn the big bucks, the harsh reality is that acting is a poorly paid, unrewarding job; an existence tough enough as it is, without the additional burden of crippling debt.

 10. Anthropology and Archaeology

At first glance, the study of either anthropology or archaeology are both attractive propositions; they develop sought-after cognitive and analytical skills, are both genuinely interesting subjects and, well, who’s never wanted to be Indiana Jones? Or, the Prince of Wales or even Rosmah Mansor?

The only slight hitch is that neither offers a realistic career path. Indeed, to achieve anything within either field requires at least a doctorate, and even then – with all that debt, time and effort – there is no guarantee of a viable career.

Although the unemployment rates and graduate salaries for these degrees are among the worst, it doesn’t necessarily mean that you should be put off; as in all walks of life, your motivation, experience and aptitude will always be of more interest to employers than a piece of paper. While STEM subjects may be more in demand, not everyone wants to be an engineer, doctor or scientist. And that’s fine – just make sure you are seriously aware of the implications of your major before you start.

  

Reference:

The 10 most useless university degrees, Sion Phillpott (www.careeraddict.com/useless-degrees)

Why the Drive for Renewable Energy?

According to a recent MIDF Research report, carbon emission has become an increasingly important environmental issue for countries around the world. Global carbon emission has grown from as low as ~3.7mt/capita in the 1980s to as high as 4.9mt/capita in recent years. Among the major global economies (and the world’s largest CO2 emitters), China has been one of the key contributors to global CO2 emissions followed by the United States and the EU. CO2 emission growth in the US and EU have been kept in check, but this is not the case for China which has seen its CO2 emission rising quite significantly. India too, has seen a gradual rise in its CO2 emissions.

How has Malaysia fared? Relative to the world, Malaysia’s carbon emission has been growing at a pretty substantial pace. On a per capita basis in fact, Malaysia has outgrown the global average since 1993 – this is partly driven by industrialization.

Where is it coming from? The majority of global CO2 emission is driven by the electricity & heat sector accounting for 31% of total CO2 contribution, followed by the transportation sector (15%) and the manufacturing & construction sectors (12%). Within the electricity & heat sector, energy clearly accounts for the bulk of CO2 emission contribution at 72%. In Malaysia, the electricity and heat sector takes up a much larger portion of CO2 emissions at 54% (vs. global average of 31%). The transport sector in Malaysia meanwhile, contributes some 30% to CO2 emissions in the country.

In Malaysia, the reliance on fossil fuel is much higher with fossil fuel based power accounting for some 96% of the generation mix. Coal accounts for the majority 56% of generation mix followed by gas at 40%.

Malaysia Electricity Production by Source

Malaysia’s CO2 emission per capita is among the highest in ASEAN

Progressing with RE? Malaysia has stepped outside its solar PV “comfort zone” by exploring the potential of onshore wind energy to be included in its energy mix. It also issued the world’s first green Islamic bond to finance sustainable, climate-resilient growth projects. The implementation of several new initiatives on solar PV, such as auction and net metering, has shown significant progress.

Malaysia has pledged to increase RE contribution to 20% of capacity mix by 2025 from 5% currently. Various schemes including FiT, LSS, NEM are all trying to gain traction. Of the RE mix, 66% is solar energy.

More needs to be done to encourage RE development in Malaysia. The eco-system has to be more conducive for more players to be interested. Individual households also could be encouraged into the sector with heavily subsidised roof-top solar panels.

Reference:

“Power”ing Green Initiatives, MIDF Research, 19 March 2019