November 3, 2008

Third quarter earnings season is in full swing. We started class by discussing the earnings calls that took place in the last few weeks. Earnings call discussed included: LKQ, GRMN, IBKR and KSU. We discussed fears of LKQ management enriching themselves and making poor acquisition decisions. Also, the class had mixed feelings about GRMN. Although the company has potential to do well in the future, the delayed release of the nuvi phone and uncertainly about a mapping company acquisition has led some class members to recommend selling. The class as a whole feels that KSU has a great business model, however, the uncertainly in the credit market may create a potential problem for this highly leveraged firm.

Steve Koenig, manager director and JP Morgan, was our guest speaker this week. He is managing director of the Latin America derivative trading and sales desk. He began his discussion by describing the five major components of a sales and trading floor: trading, sales, research, middle office and capital markets. The highest pressure and more demanding job was by far trading according to Koenig because they have to make the customer and trader(bank) “happy.” Trades include foreign exchange swaps, credit default swaps, exotic/hybrid securities and interest rate swaps. Of the Latin America countries, Koenig recommends staying clear of Argentina, Ecuador & Venezuela because of their default risk.

Many of the questions asked revolved around the ensuing economic crisis. Koenig stressed that he has never seen anything like this in his lifetime. Interestingly, the crisis didn’t reach Latin America until near the Lehman bankruptcy. They made it through the subprime very well—it wasn’t until currencies changed and corporations’ currency derivatives pushed them over the brink. Although Lehman has had its share of losses, the bank has withstood better than others because of its sound risk management group. Working out of New York, Koenig has seen the effect of the market collapse firsthand. It is his belief that the government should have prevented all major bank collapse, including Lehman. The bailout package was a necessary step that helped to prevent a second Great Depression. Banks and hedge funds not being able to get their money from Lehman has created devastating loss. Moreover, thousands of trades were lost.

Going forward, it is clear there is going to be a new breed of investment banks on the street. The merging of investment banks and commercial banks will create a new banking environment. According to Koenig, increased regulation will likely lead to banks seeing limits in private equity, tier two capital ratios coming to bank levels and a decrease in leverage ratios. Similarly, Koenig is concerned about not having enough counterparties to trade with. It seems that the crisis is far from over—the bailout is likely to top $1 trillion and move to consumer credit cards and Detroit. Commercial real estate will likely see a major decline. Emerging markets are likely to be bailed out through international monetary fund. Until public borrowing resumes, private borrowing will become the new trend.

Lastly, Koenig left the class with some insightful advice. “Nobody is too big to fail,” said Koenig. We should all keep this in the back of our heads. Furthermore, we were left with some encouraging words of wisdom regarding the job search. Although banking job opportunities are few to none, Koenig stressed that a career is a marathon, not a sprint. W may have to take an alternative route to reach our goal. He recommended that we continue our education or enter another job market temporarily because the financial market is destined to rebound.

Individual projects were due this Monday. Next week, we are extremely excited to have Dennis Gartman come to class. The case next week focuses on technical analysis. Since voting on forward calls has been unsuccessful, the class will vote on buy and sell limits for each company in the portfolio this week in the case that there is a swing from the election.