From Wall Street to the Web
By Linda T. Patterson
Making investment decisions requires information: all types of information. Before a particular security is evaluated the investor has to have a general view of market conditions and the overall business environment. We have to know not only where the yield curve is at that particular point in time, but, where it has been in order to give some indication of where it might be going. Current business and world events play as great a role in this process as research on a particular market sector or security type. The difficulty is getting all this information in a timely and concise manner especially if investing is only one of the many jobs you do!
With the accessibility to information available today the problem is often not what information to get as where to get it efficiently and effectively without going into information overload! Research tools which make data available, timely, understandable and reliable are critical. One of the best is the Wall Street Journal. It is easy to read, inexpensive, and timely. But, it takes a little practice to see how to use the Journal (and other sources patterned on it) effectively. And, once you master the Journal, other financial publications seem less daunting also.
Investment decision-making normally includes five main analytical areas that guide the investor to the best investment decision for that unique portfolio and parameters. The data for each of these are available in the Journal. First, yield curve analysis determines the current interest rate environment. But the current rates are matched in importance with where the curve has been and a projection of where it might be going (historical yield analysis). The investor is looking primarily at the maturity segments required by his policy or cash flow, but, a look at the whole curve is necessary to see how it is changing. For example, the investor would rarely go long if the rates were rising quickly (because of missing the higher rates). For this reason the financial press will normally show a graph of the current curve, the curve last week and the curve a month or several months ago. In that way, the investor can quickly see the general trends of rates on any segment of the curve. Even the occasional investor can see general trends.
Spread analysis is the second area of research. Dependent on policy authorizations, diversification requirements, and risk tolerances, the investor needs a reference on general spreads initially and then on specific spreads between the types of investments authorized. The listing of rates from US obligations to prime CDs can show spread analysis quickly and guide the investor to the best market yields in the chosen maturity range. Naturally a historical market perspective helps the investor judge what part of the business cycle is at hand. This develops from an overview of business information. Finally, for the investment decision the investor needs to complete a relative value analysis. All five of these areas can be researched in the Journal and a study of the major sections of the paper can teach you how to read everything you need as an investor in about 10-15 minutes. After that you can return later for an in-depth look stories and news interesting to you.
The Journal comes in three main sections (with occasional special sections). Section A contains all the news from international politics to leisure and arts. Simply read the front page here for your economic view and a beginning to your business cycle overview. To stay on top of all the major stories simply read the WHATS NEWS in the second left-hand column for articles from business and finance or world-wide. These stories are presented in order of importance. On days when a major economic indicator has been released a graph of the indicator is shown in the top center of Section A. And, if you need a lift, the middle column on the front page is designed for that. It ranges from mildly humorous to silly and bizarre perhaps to prepare you for the rest of the news stories!
One last column to read on the front page of Section A is column five. This column changes each day. Monday is The Outlook which is a look future trends and policy views; Tuesday is Work Week which looks at our work-a-day world; Wednesday is the Tax Report which tracks tax changes and legislation; Thursday has the Business Bulletin which tracks trends in finance, industry, health, manufacturing and investing; and Fridays contain the Washington Wire which looks at what is and what might happen on Capitol Hill.
Section B has the least to do with governmental investors and usually needs only a glance in two spots. Section B is the Marketplace and focuses primarily on marketing, media, law, and corporate focus. The section however also includes articles on career and family. For investors, a quick glance to the top of its front page will suffice on first reading because the top business story of the day will always appear there, usually blocked off from the rest.
Section B often merits a revisitation because of the rotating column opinion pieces. It is only in this section that the Journal allows its writers to present opinions. The weekly line-up includes: Mondays E-World, Tuesdays Managing Your Career, Wednesdays Work & Family, Thursdays Personal technology, and Fridays Health Journal. Otherwise its just the facts mam. A column referred to as the "Orphan" in the lower right hand corner is another comic spot for the Journal. Maybe it is prepare the reader for the really hard core market news to come in Section C!
Section C "Money and Investing" is the most important for the investor beause it has all the numbers and the analysis for the market decisions to be made. It contains a wealth of detail on the markets and its myriad securities from stocks to commodities to bonds, but, more importantly, it summarizes and assimilates that mound of data into useable information. The Treasury yield curve used to appear on the front page of Section C but now is often pushed out by mutual funds, stocks, funds, and commodities. The major markets or market movers however are graphed along the left side Market Diary to display to the reader general trends during the past week and the past year. A quick glance helps formulate your forecast as it provides the needed historical perspective for decision-making.
The right hand column is the place for yesterdays biggest market story and where the Journal tries to bring it all together for the reader. There are two very informative columns in Section C for new investors. Your Money Matters covers the basics of personal money management from home financing to evaluating stocks. Getting Going is for new investors to learn the fundamentals of investing. Like most of the Journal these are great educational tools because the Journal rarely uses a term or references a concept without giving the reader the definition or a general idea of that concept. By reading it regularly or intermittently a new investor can gather a wealth of knowledge and build the foundation for the knowledge at the same time.
There are two main articles that every governmental investor should read in Section C. The first Heard on the Street and the second Credit Markets almost always start on page one. Heard on the Street contains not only factual information but often major rumors and anticipatory actions. Although most of this deals with stocks it can also be directed at interest rates and around FOMC meeting time the references to Mr. Greenspan and the Board are fast and furious. Finally the Credit Markets is your best source of fixed income (credit) information. If it does not begin on page one the index in the lower left corner gives you the site. Even this column can be read quickly because all the major credit market news in summarized in a few short paragraphs.
Inside Section C the Credit Market column always contains a graph of the yield curve. Where it was yesterday at close, a week a ago, and a month ago. It is there for a purpose: a quick glance everyday is your start on yield curve analysis. The column will summarize and analyze the major moves affecting fixed income securities. This often deals with Fed policy or US Treasury plans. Then the column is divided in news on various types of fixed income securities. US Treasury securities are first and after a quick description of yesterdays moves it will usually tell you the influencing factors which forced the move. The column also summarizes information for corporate bonds and sometimes focuses on US agencies if there is breaking news.
On the same inside page as the Credit Markets column is a large block called Money Rates which is your starting point for spread analysis. Money rates contains current major rates such as prime rate, discount rate, Fed Funds rate, repo rates, and Libor. Investors in floating rate securities can judge impending rate impact here and investors in CDs can determine whether the spread they are getting is sufficient or whether an investment in the direct obligation (repo, treasury bill, etc.) would be more beneficial. Caution is needed in reading this section however because the CD rates are for uncollateralized money center banks CDs and the repo rates are those for major investors. However, understanding this, a general spread between Treasuries, CP and agencies can be determined at a glance. The last item in this block contains information on any major economic indicator that was released the previous day. Overall the block represents a one stop shopping spot for comparison investment shopping.
Detail on most fixed income security types used by governmental investors is in two succinct listings which are normally near the Credit Market inside column. These listings are Treasury Bonds, Notes & Bills and Government Agency & Similar Issues. Because Treasuries are our bellwether, the Treasury list has every Treasury issue in the market and contains a key to reading the columns at the top. A glance down the list tells a great deal about the market. The column format appears as:
Treasury Bonds, Notes & Bills Rate Maturity
Bid Asked Chg Asked
6 _ May 02n 100:08 100:10 + 1 6.32
The list, in maturity order, paints a picture of the entire yield curve. The Rate is the coupon rate of the note. Since Notes always mature on the 15th or last day so no middle date is given. The Bid/Ask are the sell and buy price at the close of business the previous day. The Chg column (change in 32nds) gives specifics of how the prices are moving. Most important for any investor of course is the Yield because that, and not the coupon, will determine how much you will earn on this security at the current price. Below we will look at how prices equalize those coupon rates and impact your earnings.
On first reading only the date and yield need be noted. A short term investor knowing what maturity is needed need only look at the yields in that maturity segment for yields that can then be compared to other market sectors like the agencies for the best relative value.
The Treasury Bills have their own column which is printed in a slightly different format because they are always sold at a discount. Matching and comparing the Bill yield to a comparable CD or discount note is easy by looking at the days to maturity column. Like the Notes the most current three, six, and twelve month Bills are bold faced.
Treasury Bills Maturity Days to
Bid Asked Chg Ask
Oct 12 00 91 5.99 5.98 .06 6.16
The Government Agency & Similar Issues listing gives previous day information on the most active US government agency securities. Unlike Treasuries, the Agency listings do not have all the agencies securities or structures but the major active issues trading. All the major agencies (FHLB, FNMA, SLMA) are normally represented but specific issues change. There is also no change data since in a slightly less active market an investor would be unsure when that change occurred in price. The column is similar but not identical to Treasuries.
Government Agency & Similar Issues Rate Mat. Bid Asked Yield 5.01 2-02 97:12 97:14 6.75
An investor doing spread analysis can look at these two columns at the same maturity for agencies and Treasuries to determine if the spread differential is sufficient to warrant the extra risk. By watching this regularly the investor also gets a sense of historical spreads and can then determine if this spread differential is sufficient on an historical basis. This brief look only brushes the surface of the information available on these two listing alone. Minimum expected rates in your maturity sector become apparent as do abnormalities due to bad end date securities.
It is good to remember that the market is incredibly efficient and abnormalities that appear on first reading to be the equivalent of a blue light special that only you have found probably has a basis in some factor of the security! One common mistake is illustrated below.
Rate Maturity Bid Asked Chg. Yield 5 _ Aug 01 98:17 98:19 -1 6.49 6 3/8 Sep 01 99:23 99:25 -0 6.53 6 _ Oct 01 99:16 99:18 -1 6.49
At first glance an investor might note that the yields are increasing at a steady rate except for that blip in September 2001. Many situations might be affecting the yield on this security such a squeeze by a trader but more than likely the investor is being compensated in yield for a risk to be taken. Normally such an occurrence in Treasuries results from the fact that they mature on the 15th or the last day of the month. As such this September 01 note is probably a Saturday or Sunday maturity or even the Saturday of a three day Labor Day weekend! The extra yield is to compensate the investor for investing days lost. As the investor you must decide if you are being compensated adequately with 4 bp for these lost days.
As mentioned above, one important factor to remember when choosing specific securities is that the decision rests on yield. Yield is the equalizing factor that allows us to evaluate and compare. Yield and not coupon rate should be your determining factor. Once the yield decision is made however a secondary look at coupon and price in these security columns of the Journal will teach a valuable lesson on the effect of price. Lets look at a common situation. Two Treasury Notes have the same yield in the same time frame, but, they have very different coupon rates. (This occurs because they were auctioned in very different interest rate scenarios and one might be an old 30-year bond that is now a three year while the other was originally a three or five year auctioned in a low rate environment.) Regardless of the history the effect can be significant.
Rate Maturity Bid Asked Chg. Yield 5 _ Apr 03 97:16 97:18 -1 6.61 10 _ Apr 03 111:14 111:16 -0 6.61
Which one would you choose?
If you were lured by the high coupon you would learn a hard lesson. These two securities both yield 6.61 because the market feels that an Apr 03 security is currently worth 6.61%. The price equalizes the coupon and although the security would pay more in cash flow, the additional cash would be lost in amortization cost. Not only is the cash flow diminished but the investor can not buy as much par.
5 _ Apr 03 10 _ Apr 03 Price 97 18/32 111 16/32 Yield 6.61 6.61 PAR 1,000,000 1,000,000 Principal 975,625 1,116,875 Accrued 19,271 31,600 Net 994,896 1,148,145
The hidden results clearly show that the buyer of the high coupon security will have an enormous premium to amortize and will have to pay up in both principal and accrued interest. As a result, the front end investment to earn the same yield as the lower coupon payment is not warranted. The lower coupon buyer could actually buy more (almost $1.1 million) in par for the same amount of money as the high coupon buyer.
The final step in the investment decision-making process is always relative value analysis which finds the best security for your maturity range and within your authorized investments. That analysis will require a view to the current market information from your broker on the current rates today not yesterdays rates as shown in the Journal. However, the Journal will have already narrowed your specific analysis to shorten this process and focus on the best value at the current time. It gives you the complete frame of reference from which to work and the specifics from which to direct the broker.
- Sections A and B alert us to current events and create an historical frame of reference for the timing in the business cycle.
- Section Cs graphs give a picture of the yield curve and how it is moving (yield curve analysis).
- The Credit Market gives insight on the governmental fixed income and money markets by sector.
- The Treasury and Agency listing, along with "Money Rates", gives the spread analysis between sectors and maturities, and
- The detail listings pinpoint value, for relative value analysis, in the investors chosen maturity and sector.
A few minutes each day with the Journal helps any investor develop the tools needed for making investment decisions - even when these decisions are needed only intermittently. Safety in investing is built on good, timely information. By having that information at hand, the investor is better able to evaluate choices and risks presented by the broker community. It is the positive power of the press!!
Developing New Sources of Information
Along with the Journal the Web is bringing even more information to the investor including current rates. For the intermittent or occasional investor these websites will provide information much as the Journal does but on a more timely basis. Since a broker/dealer will still be required for the trade in most cases it is merely the choice of delivery type.
One notable exception which is extremely helpful for small governmental entities is Treasury Direct a service of the US Treasury and Federal Reserve which allows the small (or individual) investor to buy US Treasuries on line directly from the Treasury. (The securities are safekept for your entity at the Federal Reserve which complies with the Public Funds Investment Act requirement for delivery versus payment and independent third party safekeeping.) For a nominal $25 fee the entity can establish an account and make security purchases on-line or print out the forms and use the low-tech post office to place an order. Either way small entities should check out this site for purchases if a Journal analysis shows that those T-Bills are indeed earning more than the local CDs or other investments. There are many ways to access Treasury Direct but the two easiest are perhaps:
("frb" is the Federal Reserve Bank site)
Some other websites which may be of interest to governmental investors are listed below by type. Naturally there are thousands more but this partial list may alert you to the wealth of financial information available on the web.
Current market rates and prices you can use to price your securities and collateral:
Wall Street Journal (http://www.wsj.com)
IBC rates (http://www.ibcdata.com)
Association of Financial Professionals (http://www.moneyline.com)
Bloomberg (http://www.bloomberg.com/markets) (for a hefty fee)
As on-line markets develop there will undoubtedly be more on-line trading. One group of broker/dealers has already established an on-line trading site called TradeWeb at tradeweb.com. Remember if using this that all necessary documentation and compliance or certification agreements must still be in place as well as clear delivery versus payment settlement instructions. On-line trading will not change the fundamental of safe investing needed for public funds!
Remember information and knowledge are your best defense against risk and problems. To invest safely and wisely takes time and energy, but, having accurate and timely information at hand that you understand can help you make the important investment decisions.
This article is reprinted with the permission of:
Patterson and Associates
301 Congress Avenue, Suite 570
Austin, Texas 78701
(512) 320-5042 or 1-800-817-2442