The Oracle of Omaha speaks — Financial Commentary

Business

Michael D’Angelo, Staff

Berkshire Hathaway’s CEO, Warren Buffett (right), and Vice Chairman, Charles Munger (left). Buffet is famously referred to as the “Oracle of Omaha.” His value investing strategies have created impressive returns for his company, which he views as a “collection of businesses.”

Warren Buffett is a big name in the financial sector. He is known for his down to earth approach when it comes to investing and his frugal personality despite being worth billions.

Buffett is the definition of the old-school Midwesterner who places his hope and confidence in his fellow Americans. He disdains Wall Street, instead choosing to operate his infamous holding company, Berkshire Hathaway, from Omaha, Nebraska. He is so frugal he chooses to purchase a McDonald’s breakfast sandwich with exact change every day before he goes into the office but chooses the cheaper option if the markets performed poorly the day prior. In addition, he still lives in the same house that he purchased in the early 1950s.

Buffett accumulated his wealth by practicing a value investment strategy he learned from Benjamin Graham. This strategy relies on analyzing a company’s book value to determine if it is worth less than the market price. If this occurs, the stock is considered to be an undervalued and a cheap option. Buffett emphasizes buying cheap companies with value and knowing how the company operates. Buffett and Berkshire Hathaway own shares of major companies like Coca-Cola, Apple, General Motors and Verizon.

In the past week, both Buffett and his company have been popping up over news headlines in many financial publications. This is due to the release of Buffett’s annual letter to shareholders and Berkshire’s 2020 annual report. I had the opportunity to read through Buffett’s letter and despite some criticism regarding the letter to be socially tone-deaf, I believe he is spot on and paves a strong future for Berkshire Hathaway.

In the letter, Buffett begins by detailing Berkshire’s earnings of $42.5 billion, then he jumps to emphasizing Berkshire’s retained earnings which he believes are building “value and lots of value.” Both Buffett and Charlie Munger, Buffett’s Vice Chairman at Berkshire Hathaway, view Berkshire as a collection of businesses in which the firm has invested in the “long-term prosperity” of those businesses’ success. He writes in the letter that Berkshire’s main goal is to own parts of, or all of, a diverse group of businesses with good economic characteristics and good management.

As the letter moves on, Buffett sheds light on a mistake he made in purchasing aerospace company; Precision Castparts. He paid the wrong price for the company and misjudged the average amount of future earnings. Also, Buffett takes a shot at bonds and says that fixed income investors face a bleak future. To increase Berkshire’s profitability, Buffett repurchased back 80,998 A class shares and spent $24.7 billion in the process.

Despite not addressing the pandemic, social justice protests, and other events of the past year, Buffett confidently concludes, “never bet against America.” Also, he ridicules market gurus and says they can find equities to fit their tastes instead of buying Berkshire. He goes on to describe investing as a positive-sum game where even a monkey can randomly toss darts at a board of S&P 500 companies and profit. This is certainly a response to bull market and retail trader enthusiasm since March. Buffet the letter iterating plans to meet with his best friend, Munger, in Los Angeles and to host the annual meeting on May 1.

I enjoyed reading the letter and I agree with the legendary investor, we should have faith in America. We need to look forward to our country’s prosperity, despite so many obstacles in our way. After all, why bet against America? A country which holds a report card of economic success and entrepreneurial prosperity achieved by generations.

dangelom2@lasalle.edu

Fed Chairman Jerome Powell testifies before Senate Banking Committee

Business

Elizabeth McLaughlin, Staff

Chairman of the Federal Reserve Jerome Powell listens during a hearing before the Senate Banking Committee in December 2020.

On Tuesday, Feb. 23 at 11 a.m. EST, the chair of the Federal Reserve, Jerome Powell, testified before the Senate Banking Committee regarding the central bank’s semi-annual Monetary Policy Report. The Committee’s chair, Senator Sherrod Brown (D-OH) began the session with opening remarks about the current state of economic affairs. Senator Brown made it clear from the beginning that he is in favor of the Fed using any monetary tools it sees fit to manage inflation and unemployment, stating, “most people are not worried about doing too much to get through this pandemic, they’re worried about doing too little.” Further, he recalled remarks from Janet Yellen, the treasury secretary, who stated that if the Fed doesn’t do more by way of monetary policy, we risk a “permanent scarring” of our economy and our future.

Ranking member Senator Pat Toomey (R-PA) disagreed with Senator Brown, stating, “the last thing we need is a massive multimillion-dollar spending bill.” Senator Toomey was chiefly concerned with inflation and urged Powell to roll back the Fed’s holdings of treasury securities and agency mortgage-backed securities in order to avoid uncontrollable and unwanted inflation. Senator Toomey stated that most American households are in better financial positions now than they were before the pandemic. He stated that in his opinion, the last two recessions were caused by asset bubbles that burst. In 2001, it was the stock market, in 2008, the mortgage credit market. Additionally, Senator Toomey believes that monetary policy contributed a great deal to the formation of those bubbles.

He also remarked that there is a link between record amounts of liquidity and unprecedented asset valuations, like those of GameStop and Bitcoin, as of late. Across the board, Senator Toomey stated, there are elevated asset prices and signs of emerging inflation. He asked Powell if he believes there is a link between the liquidity the Fed has been providing and some of these unprecedented asset prices, to which Powell responded, “there is certainly a link.” Despite this, Powell and the Fed plan to continue the bond-buying program “at least at its current pace until we make substantial progress toward our current goals.”

Powell presented his testimony in two parts: a review of the current economic situation and the Fed’s plans for monetary policy moving forward. Powell stated that the sectors most adversely affected by the resurgence of the virus are the weakest. Household spending on services remains low, especially in the hard-hit sectors of leisure and hospitality. However, household spending on goods picked up in January. Moreover, the housing sector has “more than fully recovered from the downturn.” Regarding the labor market, Powell stated that the pace of improvement in the labor market has slowed and the unemployment rate remained elevated at 6.8 percent in January. Participation in the labor market is notably below pre-pandemic levels.

Moreover, Powell stated that “those least able to shoulder the burden [of the pandemic] have been hardest hit,” citing low wage workers, African Americans, Hispanics and other minority groups as the most affected. During the questioning portion of the hearing, Senator Bob Menendez (D-NJ) explained the varying unemployment rates by race: in January, the unemployment rate among the black population was 9.2 percent; among Hispanics, 8.6 percent. The unemployment rate among white people was 5.7 percent. Additionally, the Black labor force exit rate increased dramatically while the white labor force exit rate returned to pre-pandemic levels, suggesting that the Black unemployment rate is misleadingly low compared to the white rate. Senator Menendez got Powell to agree that minority families are bearing the brunt of the damage caused by the pandemic, “along with those at the lower end of the income spectrum.”

Regarding inflation, Powell stated that there were large declines in the spring, but consumer prices partially rebounded last year. Powell also stated that as the very low inflation readings from last March and April drop out of the 12-month calculation on inflation, we should expect readings on inflation to move up. This is called the base effect and it should not be a cause for concern. Powell mentioned that overall, inflation remains below the 2 percent long-run objective. He stressed that the 2 percent goal is an average, so periods of lower-than-average inflation should be followed by periods with inflation rates greater than 2 percent.

In his overview of the monetary policy report, Powell emphasized that maximum employment is a broad and inclusive goal, so policy decisions should be informed by an assessment of the shortfalls of employment from its maximum level, rather than deviations from its maximum level. Furthermore, Powell mentioned that actions taken by the Fed in the early months of the pandemic have constrained their main policy tool by the lower bound. In other words, the Fed has been lowering interest rates in unprecedented ways since even before the start of the pandemic, so their ability to use lowering interest rates as a monetary policy tool is weakened.

If lowering interest rates isn’t really much of an option anymore, what will the Fed do? Simply put, the Fed will do what it has been doing throughout the pandemic: increase holdings of securities at least at their current pace. The Fed will closely monitor inflation; Powell stated that “well-anchored inflation expectations will enhance our ability to meet both our employment and inflation goals.” Powell assured Congress that the Fed “will continue to clearly communicate our assessment of progress toward our goals well in advance of any change in the pace of purchases.”

mclaughline7@lasalle.edu

Don’t be afraid of stocks: an examination of financial bubbles and their history

Business

Michael D’Angelo, Staff

Pictured above is the price index of Tulips from the infamous Tulip bubble burst of the 1600s in the Dutch Netherlands. The tulip bubble burst is the first ever recorded financial bubble in history.

Chances are if you checked the financial markets on Tuesday morning, indices were in the red. Many investors were concerned with a large federal stimulus package, the recent rise in commodities, and a rise in the 10-year U.S. Treasury Bond. Headlines regarding Michael Burry’s prediction about hyperinflation, Treasury Bonds, and WTI Crude Oil exploding to over $60 a barrel flooded the news on Monday and investors were alarmed. Tuesday’s open saw the tech heavy NASDAQ dropping nearly 3 percent.

Amid growing concerns among investors, talks of a potential financial bubble, which occurs when asset prices become based on inconsistent and irrational views about the future, surfaced and Ray Dalio’s bubble indicator found 50 of the 1,000 biggest companies are in extreme bubbles. Although this is only half of the companies considered in a bubble from the Dot Com burst, investors should certainly take notice but not let news headlines deter from their equity investing.

Nonetheless, financial bubbles and investor psychology is still a fascinating topic. I recently became interested in the concept of financial bubbles after picking up a copy of the novel, Irrational Exuberance by Economist J.D. Shiller. In his book, Shiller accurately predicted the housing crisis and suggests monetary policy tools to ease the consequences of financial bubbles. The term “Irrational Exuberance” was coined by former Fed Chairman, Alan Greenspan, in the late 1980s. Below is the breakdown and examination of the history of bubbles.

Financial bubbles have occurred all throughout history; In the 1630s, the Dutch went crazy for Tulip bulbs. The price soared from 1636 to 1637 and many went so far as selling their homes to purchase the simple garden plant. Eventually, the mass hysteria surrounding tulips faded and the price of tulips declined 90 percent..

Do you remember Isaac Newton, the pioneer of the concept of gravity? Well, Newton was burned hard and lost a fortune when the South Sea Company bubble burst in the 1720s. The South Sea Company was promised a monopoly by the British government to trade in South American colonies. British investors dived headfirst into the South Sea and the stock reached a high over 1,000 pounds and then came down after news of fraud and the monopoly fell out.

Bubbles are no phenomena to the past as we have seen in the modern era. The Japanese real estate and equity markets exploded in the late 1980s and then came down. The Dotcom bubble occurred in the United States in the late 1990s to early 2000s when investors dived into tech and internet stocks. The most recent bubble occurred with the U.S. housing market in the late 2000s to 2010s. Housing prices increased dramatically leading many investors to falsely believe the inability of the housing market to crash. The market declined dramatically, due to an excess of subprime mortgage loans, followed by the global recession due to mortgage securitization.

History certainly has a knack of repeating itself and we could be seeing another bubble occur in any sector of the economy. With bubbles and investor mania creating a collapse of asset prices, the key to surviving the next bubble is to rely less on weekend worrying, where we, as retail investors or institutional investors, absorb weekly news on the weekend leading to a belief in an economic doom at the start of a new week. To take from Peter Lynch, we should not get scared out of stocks.

dangelom2@lasalle.edu

Testing the mettle: banks to undergo arduous stress tests by Federal Reserve

Business

Elizabeth McLaughlin, Staff

The Federal Reserve is subjecting large banks to routine stress tests in order to measure their ability to cope with a worsening recession.

On Friday, Feb. 12, the Federal Reserve Board released scenarios for its 2021 bank stress tests. The tests are designed to measure the resilience of large banks by estimating their loan losses and capital levels. Last year, banks performed relatively well under the stress tests, and the Fed ultimately placed restrictions on bank payouts to preserve the strength of the banking sector. Large banks are subject to the stress test and some smaller banks have the option to opt-in to the test over a longer period of time. The banks that are required to take part in the upcoming stress test are Capital One Financial (COF), Citigroup (NYSE:C), Credit Suisse (NYSE:CS) Holdings USA, DB USA (NYSE:DB), Goldman Sachs (NYSE:GS), HSBC (NYSE:HSBC) North America Holdings, JPMorgan Chase (NYSE:JPM), Morgan Stanley (NYSE:MS), Northern Trust (NASDAQ:NTRS), PNC Financial (NYSE:PNC), State Street (NYSE:STT), TD Group (NYSE:TD) US Holdings, Truist Financial (NYSE:TFC), UBS Americas (NYSE:UBS), U.S. Bancorp (NYSE:USB) and Wells Fargo (WFC). This upcoming test will be the third stress test in the last 12 months.

The test comes in two parts. The first is the Dodd-Frank Act Stress Test, which analyzes a bank’s balance sheet performance under hypothetical scenarios using a standard capital management plan. The second part is the Comprehensive Capital Analysis and review, which subjects the bank to the same hypothetical scenario, but this time, under their own capital management plan. The test lasts nine consecutive quarters.

The hypothetical recession scenario begins in the first quarter of 2021 and places significant strains on commercial real estate and corporate debt. There will be a severe commercial real estate price decline in this stress test compared to the past three tests. There is also a global market shock component that evaluates banks’ abilities to trade under pressure. Moreover, the unemployment rate will rise by four percent, reaching a peak of 10.75 percent in Q3 2022. This year, the stress test is more severe than usual, given the COVID-19 pandemic and its harrowing effects on the economy. The 2020 stress tests featured a decline in GDP by 9.9 percent and 5.9 percent, as well as peak unemployment rates of 10.0 percent and 12.5 percent. The results of the stress test will be announced by the Federal Reserve on their website by June 30.

mclaughline7@lasalle.edu

Robinhood’s Long Nightmare Ahead

Business

Michael D’Angelo, Staff

Robinhood can be accessed by retail investors anywhere from their mobile phone. Robinhood boasts giving investors autonomy over their finances with low barriers to entry and nonexistent brokerage fees.

The old English tale of Robinhood has been passed down for generations and describes a story of populism where a legion of men equipped with bow and arrow take from the rich and give to the poor. Fast forward to the 21st century and Robinhood is known as a discount brokerage firm used by many new investors and retail traders. You may have heard in the past few weeks that Robinhood was at the center of the GameStop saga or you caught their Superbowl ad during the game, chances are you have heard of the investing app. The news certainly is filled with Robinhood headlines lately.

Introduced in March 2015, the platform gained popularity with their approach of having no commission fee investing. The story of Robinhood began with Stanford roommates Baiju Bhatt and Vlad Tenev. Both worked on Wall Street for a period of time, designing software, until the two decided they needed a change. They founded Robinhood with the purpose of eliminating barriers for the little guy and democratizing investing. Since Robinhood’s inception, the app now boasts well over 10 million users, but the company has been struggling with a public relations nightmare since the start of the year.

When the pandemic began in March, many people with strong gambling tendencies turned to both the stock market and the internet. They chose Robinhood as their choice of brokerage and they flocked to a reddit forum known as Reddit Wall Street Bets (WSB). Headlines popped up from the Wall Street Journal, Forbes, and, most notably, the Collegian about some of these traders and their impact on the financial markets. Robinhood was picking up some negative publicity at the time with complaints of slow software, minimal customer service support and hidden fees. They were even threatened with a lawsuit surrounding high frequency trading data and hedge funds. In addition, a Robinhood user committed suicide after an in-app glitch showed he was in the red for over $700k. Currently, Robinhood is faced with a pending lawsuit from the individual’s family.

But things went from bad to worse at the start of 2021. Users from Reddit WSB saw that hedge funds were heavily shorting GameStop (GME). Retail investors flocked to reddit and called for many to buy shares into GME. As many bought shares and GME’s stock price flew over $300 a share, Robinhood entered a cash crisis. They ran out of cash to clear trades with the Depository Trust Clearing Corporation (DTCC) and Robinhood changed orders of GME to sell only, after only a few days the stock price declined heavily. In that short period of trading, they were forced to raise $3.4 billion.

The world erupted and many were livid. They took to social media websites like Instagram, Reddit and Tik Tok preaching that Robinhood violated their rights to trade. The Federal Trade Commission (FTC) received more than 100 Robinhood related complaints between Jan. 24th to Feb 2nd and in response to the criticism, Robinhood issued a statement. They described a DTCC clearing issue and then aired a commercial during the Super Bowl promoting their slogan, “We are all investors.” The commercial did very little to help the company and many continued to complain over social media.

With a public relations nightmare on their hands, the company might be forced to postpone their plans to go public in the second quarter, but, as of now, Robinhood is in full swing to go public this year. They are currently valued at $20 billion or more. With the public’s frustration, Robinhood’s future is in question. If Robinhood is to continue on, they must update their customer service, apologize to the angry masses, and make right to achieve change in the financial sector.

dangelom2@lasalle.edu

Bill Ackman: famed hedge fund founder and investor, now a SPAC behemoth

Business

Bill O’Brien, Editor

Ackman was ridiculed for turning a $27 million hedge position against markets into $2.6 billion. Just a week before, he had been interviewing on media outlets warning that “Hell is coming” amid COVID-19 concerns.

Few figures have stirred as much buzz in the financial services industry as Bill Ackman. The self-proclaimed activist investor, or contrarian investor as known by others, has been a leader in financial services since 1992 when he founded the hedge fund, Gotham Partners. It was the same year he received his MBA from Harvard Business School. Although Gotham Partners did not pan out as Ackman had probably hoped, his career in asset management would continue to flourish with Pershing Square Holdings, the hedge fund he founded in 2003 and currently manages.

Ackman is currently the CEO and founder of Pershing Square Capital Management, a New York-based hedge fund which, according to SEC filings, boasts private funds with minimum subscriptions between $1 million and $5 million. He’s had a lot of success in the hedge fund industry with a highly profitable and publicized market exit from Wendy’s that netted his investors billions in returns. More recently, Ackman opened hedge positions against financial markets leading up to the COVID-19 pandemic. Ackman closed out the hedge positions for over $2 billion on March 23rd, 2020 following steep market downturns. The position originally cost a little less than $30 million to take on.

The success of the hedge fund manager has come with a lot of notoriety. Ackman was heavily criticized for a failed short position and a negative media campaign that landed him in hot water with regulators. Pershing Square Holdings also garnered huge losses over a 6-year period until he finally closed out the position in 2018 following an unbridled rise in Herbalife shares. The failed short resulted in losses for investors, but was heavily scrutinized for the negative media campaign Ackman waged against Herbalife that many saw as a means to manipulate the share price of the stock, an issue that has recently been at the forefront of Wall Street criticisms today.

In spite of great shortcomings and even greater successes, Ackman is as active as ever in financial markets and has recently decided to try his hand with SPACs or “Special Purpose Acquisition Companies.” The Collegian covered the upward trend in SPACs in its Sep 23 issue, and they have continued to be on the rise since. SPACs are somewhat known as “blank check companies” because they raise funds on the public markets without having any operational costs and expenses to start with. Their value is derived from investors anticipating the SPAC to merge with or acquire a privately-held company (target company) using the capital it raised from public markets, inherently bringing the target company to public markets in the process.

Bill Ackman’s Pershing Square Tontine Holdings (NYSE: PSTH) has had the most valuable SPAC initial public offering to date, raising $4 billion from public markets and an additional $1 billion from Ackman’s Pershing Square funds. That $5 billion in available capital to make acquisitions can potentially mean approximately $25 billion in acquisition capital for the SPAC depending on how aggressive a leveraged buyout strategy Ackman chooses to employ.

Pershing Square Tontine Holdings identifies its target company parameters on their website, “We will prefer targets that have low sensitivity to macroeconomic factors, with minimal commodity exposure and/or cyclical risk. We are willing to accept a high degree of situational, legal, and/or capital structure complexity in a business combination if we believe that the potential for reward justifies this additional complexity, particularly if these issues can be resolved in connection with and as a result of a combination with us.” Also notable, among other parameters, in their acquisition criteria for a target company is “formidable barriers to entry” or “‘wide moats” around their business and “low risks of disruption due to competition, innovation or new entrants.”

The goals of Ackman’s SPAC are nothing short of ambitious, but investors continue to put their faith in Ackman. After pricing at $20 per share during its IPO, Pershing Square Tontine Holdings, still without a business combination, is trading at $29.91 in secondary markets, yielding investors 49.55% since IPO. The premium can be partially accredited to recent buzz surrounding the SPAC potentially finding a target company, market speculation that has not been confirmed yet. Ackman has defended PSTH trading at a premium in Pershing Square’s 2020 semiannual report to shareholders “PSTH trades at a premium to its cash NAV because the market believes that it is probable that we will find an attractive merger candidate and complete a transaction that creates significant shareholder value.”

All of this may be true, but one can be certain PSTH will not be able to retain its value without an acquisition target. Speculation around an impending deal has risen significantly, and some are expecting an announcement when PSTH’s parent company, Pershing Square Holdings, holds its annual investors presentation on Feb 18 at 9:00AM. Market watchers will certainly be keeping their ear to the ground for the next eight days to see what direction Ackman takes his SPAC, if any.

obrienw4@lasalle.edu

GameStop and Robinhood: Power to the investors

Business

Elizabeth McLaughlin, Staff

GameStop stock reached an all-time high of $492.02/share on Jan. 28, 2021, putting Wall Street investors at risk of losing millions on shorts.

In January of 2019, GameStop (GME) was trading at $15. By January 2020, less than $5 per share. Shorting the stock of a company that becomes increasingly obsolete as we continue to redefine the digital age is widely regarded as a smart investment; that is why a lot of Wall Street investors felt confident in shorting GME. But on Jan. 28, 2021, GameStop reached an all-time high of $492.02—and those investors were taking on hemorrhaging losses. Who do they have to blame for initiating their downfall? Users from a Reddit forum called r/WallStreetBets.

These users conspired to drive up share prices of fledgling companies, yielding them significant profits while simultaneously stealing profit from Wall Street investors. When put that way, it sounds Robin Hood-esque. It then follows that these users waged their war via the online trading platform, Robinhood. This app aims to “democratize finance” by enabling anyone to buy and sell stocks and other securities. It was developed by two Stanford grads who built their own finance companies where they sold trading software to hedge funds. The app, which is designed to incentivize trading, makes trading simpler than ever. Robinhood transplants the stock market from the stuffy, befuddling environment of a traditional brokerage firm to your own personal smartphone. When a user makes a trade, an animation of confetti congratulates them, nudging them to keep trading. Robinhood’s design and objectives, combined with the economic effects of the pandemic, have prompted nascent investors to try their hand at the stock market. In the first quarter of 2020, Charles Schwab, TD Ameritrade, Etrade and Robinhood — the major online brokers — saw new accounts grow as much as 170 percent. The ease at which one can trade stocks is what allowed a group of Reddit users to wage an expensive attack on Wall Street.

Those on r/WallStreetBets started a trading frenzy, driving GME up 134 percent. On Jan. 11, GameStop announced three new directors to its board whose goals were to reposition GameStop in the modern video game retail environment; to save it from going under. For this reason, GME stock began to rise modestly. But once Redditors got a hold of it, its price rose so rapidly that they triggered automatic trading halts designed to stem market volatility.

Wide price swings and heavy volume fluctuations should prompt self-regulating organizations like the Nasdaq to take certain precautionary measures. But a bunch of lower-to middle-class citizens who decide to capitalize on financial literacy in any way they can — through a free subreddit rather than a pricey stock broker, for example — deserve access to the free market. Is this a battle between populists and institutions? Some of these “populists” have criticized those in the financial sector who have profited off of the coronavirus pandemic. The phrase “eat the rich” is quickly becoming a defining cultural statement; a memetic imitation of the frustration regarding 21st-century wealth inequality. Robinhood’s decision to restrict trading, effectively siphoning off profits from the everyman in favor of Wall Street hedge funds, is controversial.

Robinhood faces criticism on their trading restrictions not only from slighted day traders on Reddit, but also from Democratic and Republican politicians as well as the Securities and Exchange Commission (SEC). On Jan. 29, the commission released a statement that they will be investigating the situation with GameStop and that it will “closely review actions taken by regulated entities that may disadvantage investors or otherwise unduly inhibit their ability to trade certain securities.” Despite this, the Fed is not likely to get involved in the frenzy. For one thing, market fluctuations associated with GME, AMC and other similar stocks are not likely to impact the broader market. David Beckworth, an economist at George Mason University, said that fallout from GME means that “people would lose equity, but it wouldn’t lead to the problems of homes financed with mortgages and exotic mortgage securities.” In other words, the Fed has bigger fish to fry. Additionally, raising interest rates to change people’s expectations about the market would yield “a very high likelihood of causing a recession,” says Adam Posen, economics of the Peterson Institute for International Economics. “On the other hand, if you raise interest rates quite a bit, you are not by any means assured that you would pop the bubble.”

The SEC promises to investigate Robinhood’s actions; politicians continue to tweet angrily at Robinhood executives and their cohorts; the Fed can’t and likely won’t do much. So what can be done? The SEC could evaluate its leverage and reporting requirements on firms like Robinhood. Doing so would protect retail investors who serve as the app’s product, not its users. Robinhood employs an order flow payment model — they sell accumulated trading histories of retail clients to earn a substantial amount of its revenue in lieu of commissions. “On top of that, trades are executed in dark pools, which lack transparency and regulatory oversight,” said a representative from the International Financial Law Review. If their goal is really to empower “the next generation of investors to take charge of their financial futures,” then it should allow those who use it to execute the trades they want, even if Wall Street hedge funds lose some money and have to reevaluate their trading strategies. On the evening of Feb. 1, Robinhood released a statement saying that they “didn’t want to stop people from buying stocks and [they] certainly weren’t trying to help hedge funds.” Whether or not that is true, one thing remains clear: these disgruntled Wall Street investors simply have to learn how to adapt.

mclaughline7@lasalle.edu

Amazon’s Founder, Jeff Bezos, to pass reins and step down as CEO

Business

Michael D’Angelo, Staff

Pictured above is former Amazon CEO Jeff Bezos delivering a speech discussing Amazon’s future to investors in 2019.

The infamous Jeff Bezos is stepping down from his position as CEO at e-commerce giant Amazon Inc. and will move into the role of executive chair starting in the third quarter. He is the richest man in the world with a net worth over $180 billion. He is a majority shareholder of Amazon and also owns the Washington Post and space company Blue Origin. Bezos will be replaced by Andy Jassy.

Bezos is a Princeton alumni and began his career on Wall Street. He quit his job checking out balance sheets and investments in 1994 and opened Amazon.com in 1995. The company originally sold books on their website in the U.S. and other countries. Amazon went public in 1997 with an IPO price of $18 per share. The conglomerate has grown from a simple website selling books to a massive corporation that manages a video production segment, owns the Kindle reader, manages Amazon web services and owns Whole Foods. Amazon has plenty of room for potential growth in the future, and the stock price closed on Tuesday, Feb. 3, 2021 for $3,380 a share. The future is bright for Amazon and many consumers, from young college students to retirees, who love to purchase items on the site.

Bezos is reportedly stepping down to focus on other business prospects and devote more time to Blue Origin, the Washington Post, Day 1 Fund and his Earth Fund. If you are wondering if you can buy stock in Blue Origin to chase earnings like Amazon, you are out of luck. The company was founded in 2000, is privately held and the business intends to transform space travel. Many rumors have circulated online that Bezos will compete with Elon Musk for space travel objectives. The Washington Post is a major news organization and Bezos bought the company in 2013 for $250 million. The Day 1 fund is Bezos philanthropic approach to life and the fund intends to create preschools for underdeveloped communities. Bezos’s earth fund is dedicated to providing grants to people who fight and provide solutions for climate change. As Bezos will leave Amazon to focus on other prospects, he will pass the reins onto Andy Jassy.

Andy Jassy has been with Amazon for years and he assisted in developing Amazon Web Services (AWS) in 2003. He became CEO of AWS in 2016. Jassy, who is Harvard educated, came onto the scene with Amazon in 1997. AWS represents 10 percent of Amazon’s total revenue and they mainly compete with both Google and Microsoft. For the fourth quarter of 2020, AWS reported a 28 percent growth in sales but fell short of many expectations. Jassy would like to propel Amazon and grow the company.

The future is looking exceptionally strong for Amazon; the company has the opportunity to continue as a highly profitable business for shareholders. In addition, time will only be able to tell the legacy of Jeff Bezos, as he strives to push human innovation further by pushing the limit of space travel with Blue Origin.

dangelom2@lasalle.edu

Cathie Wood and ARK Innovation: the Newest Tech Bulls

Business

Michael D’Angelo, Staff

Founder, Chief Executive Officer and Chief Investment Officer of ARK Invest, Cathie Wood (pictured above), is known on the street as a star stock-picker.

Chances are if you are a retail or an institutional investor you probably hold long positions in exchange traded funds (ETFs) or equities relating to the technology industry. Many investors want to chase the next hot technology company that is going to change the world while, preferably, garnering high returns. Some retail investors do not have the time, knowledge, energy and/or skill to pick their own individual stocks. Instead of picking stocks by themselves, investors turn to institutional fund managers to pick heavy stocks for them. Investors will purchase ETFs and mutual funds which track tech companies’ performance.

Many institutional fund managers create ETFs dedicated to following tech companies. A major ETF which tracks the tech heavy NASDAQ composite, QQQ is managed by Invesco. Vanguard manages VGT which focuses on information technology and State Street manages multiple funds dedicated to tracking various tech stocks’ market performance.

The newest fund manager from the street to popularize tech fund management is Cathie Wood at Ark Investment Management, LLC. Wood is the real deal with managing portfolios. She holds the title of CEO and CIO of Ark Investment Management LLC. In the past, Wood worked as an assistant economist with the Capital Group in the late 70s, then as a managing director for Jennison Associates LLC and then as a limited partner for Tupelo Capital Services. Later she worked as a Chief Investment Officer at Alliance Bernstein. Wood joined ARK investment Management in 2014 and, as mentioned above, she holds the title of CEO and CIO. Wood certainly has plenty of experience in the industry and her fund returns are impressive.

Wood managed the largest actively managed ETF in 2020 which is the Ark Innovation ETF. The ticker symbol of the ETF is ARKK. ARKK’s objective is to seek an increase in long-term capital growth by investing at least 65% of the company’s assets in American and foreign tech equities that will change the world around us. Ark calls world-changing equities, a “disruptive innovation.”

Wood has been crushing the game since 2016 with the Ark Innovation ETF. A quick look at the prospectus for ARKK reveals the ETF returned at market value 66.47% for the year ended on July 31st, 2020. In 2019, the total market return was 12.27%, 52.38% in 2018, 43.72% in 2017, 4.9% in 2016 and from October 31st, 2014 to August 31st, 2015, the return was 0.50%. As of December 31st, 2020, ARKK’s top 10 holdings were Tesla (10.8%), Roku (6.9%), CRISPR Therapeutics (5.5%), Square (5.3%), Teladoc Health (4.4%), Invitae Corp (4.1%), Zillow (3.1%), Pure Storage (2.8%), Proto Labs (2.8%) and Spotify (2.7%). ARKK closed January 26th at $141.38.

Ark maintains other actively managed ETFs like Ark Next Generation Internet ETF (ARKW), ARK Fintech Innovation ETF (ARKF), ARK Genomic Revolution ETF (ARKG), ARK Autonomous Technology and Robotics ETF (ARKQ), the 3D Printing ETF (PRNT) and ARK Israel Innovative Tech ETF (IZRL). All of these ETFs are dedicated to finding innovative companies with the objective of changing their respective industry and the world.

Wood still has time to prove her stock picking skills and to return more money to her shareholders. Wood has expressed interest in creating a bitcoin ETF after bitcoin hits a $2 trillion market capitalization, and she has further expressed intent on creating an ETF dedicated to following space companies. The future is looking bright for both ARK and Wood. Time will only be able to tell the success of these companies and the bullish tech attitude of their founder.

dangelom2@lasalle.edu

Janet Yellen Confirmed as Next United States Treasury Secretary

Business

Elizabeth McLaughlin, Staff

Janet Yellen, pictured above, was recently confirmed by the Senate in a bipartisan, 84-15 vote, making her the 78th Secretary of the US Treasury and first woman to hold the position.

She got her undergraduate degree in Economics from Brown University and then a PhD in the same field from Yale. From there, she taught economics as a professor at Harvard. After that, she researched international monetary policy as an economist with the Federal Reserve’s Board of Governors. She taught at London School of Economics and University of California, Berkeley. She was confirmed unanimously by the Senate to chair the Council of Economic Advisers under Bill Clinton. Then, she became the president and CEO of the Federal Reserve Bank of San Francisco, as well as a voting member of the Federal Open Market Committee. From there, she graduated to the vice chair of the Federal Reserve Board of Governors and eventually the chair of the Federal Reserve — the first female to hold that position. As if that weren’t enough, she became a distinguished fellow in residence at the Brookings Institution. She holds nine honorary degrees ranging from a doctorate in science to a doctorate in philosophy. Her name is Janet Yellen, and her most recent accomplishment to be added to an already long list is being confirmed as the newest secretary of the United States Department of the Treasury.

Janet Yellen is the first female treasury secretary and the first person ever to lead the three most powerful economic bodies in the United States government: the Treasury Department, the Federal Reserve, and the White House Council of Economic Advisers. She was confirmed by the Senate on Jan. 25 in a bipartisan vote of 84-15. In her role as Fed chair, Yellen was well-liked by both Democrats and Republicans. Her ability to appeal to both sides of the aisle will likely bode well for the Biden administration, which begins amidst unprecedented partisan tension.

Yellen is a Keynesian economist and considered by many to be a dove, which is another way of saying she is generally more concerned with unemployment than with inflation. She received criticism for keeping interest rates too low for too long in her capacity as chair of the Federal Reserve. Some of her opponents admit that she can act more as a hawk by hiking interest rates if necessary.

As Yellen steps into her role as treasury secretary, she inherits a hefty to-do list: propose and pass another fiscal stimulus bill, advise President Biden on carbon tax policy, maintain the dollar as the world’s international reserve currency, provide insight on long-term economic recovery post-Covid-19…the list goes on. Some of these issues may appear more immediately pressing than others — Americans have been waiting months for much-needed and adequate stimulus. Regardless, Yellen will play a key role in bolstering a floundering economy.

On Jan. 20, Yellen appeared before the United States Senate Committee on Finance to persuade lawmakers to pass President Biden’s $1.9-trillion Covid-19 relief plan. The plan includes increasing the minimum wage and expanding family and medical leave — two policies that do not have strong Republican support. Yellen believes that “we have a long way to go before our economy recovers,” so Congress must “act big” to support millions of struggling American families.

Another item on Yellen’s agenda is climate action. For years, Yellen has opined that climate change poses a risk to global financial stability indicating that she will “act big” on climate action in her role as treasury secretary. Her support for a carbon tax goes all the way back to her time as chair of the White House Council of Economic Advisers under President Bill Clinton. In addition, she co-founded a nonpartisan, international think tank called the Climate Leadership Council (CLC), which advocates for a carbon tax of around $40 a ton and increases 5 percent each year. In turn, this tax would filter back into American pockets in order to offset the costs of increased energy prices. Moreover, the CLC advocates for penalties on carbon-intensive products in the form of border-adjustable taxes on imports. The plan has drawn some criticism from progressive climate activists and groups and, perhaps deservingly so; ExxonMobil and Shell were quick to sign on as “founding corporate members” of the plan. Beyond that, Yellen plans on pushing for emissions reductions. She does not believe that a carbon tax alone is enough to address climate change and ensure global financial stability. In her capacity as treasury secretary, Yellen could establish a national green bank to encourage investment in sustainable infrastructure. She could also pressure international financial institutions to divest from fossil fuels.

Yellen’s bipartisan confirmation by the Senate represents a marked shift in the political and economic cultures we have grown accustomed to for the past four years. An exceptionally qualified expert with a robust resume has been appointed to a cabinet-level position with support from both parties. Her appointment is uncontroversial, expected, and comforting; three adjectives we could all use a little more of these days. The only thing lengthier than her impressive curriculum vitae? Her to-do list.

mclaughline7@lasalle.edu