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Is the IPO Back?

With three successful IPO’s surpassing expectations on Wednesday some were asking whether the IPO market is back to its pre-crash normal self. First Interstate BancSystem, chipmaker MaxLinear, and telecom equipment maker Calix networks all saw shares rise over 8% (MaxLinear up 32%) in their first day of trading. This is in stark contrast to an IPO market that has been virtually non-existent for a good part of the year. An uncertain market and less appetite for risk have lead several IPO’s to be either canceled or postponed damaging an already beaten down market. However, Wednesday’s news offers hope. In fact this is the first time six months we have seen three IPO’s price and trade higher in a day. And with eight more IPO’s planned to price over the next two weeks, IPO’s could see their biggest month in over two years. Several companies waiting for a sign that market conditions have improved may see this week’s success and want to jump in on a hot market. While they may not be as richly valued as the IPO’s of old, the market may just be in for a comeback.

BY GROUP 11

The U.S. and China

The political rhetoric between the United States and China has heated up once again. Just last week, Premier Wen Jiabao chastised America's call to de-peg the Yuan as well as it inflationary monetary policy, "I understand that some countries want to increase their exports, but I don't understand the practice of depreciating their currency and forcing others to appreciate theirs in order to accomplish this... I think this is a type of trade protectionism."[1] Referring to the both the recent bill being considered in Congress to name China a 'currency manipulator', which would activate certain parts of the WTO treaty that China signed when it joined in 2001 as well as some of the 'quantiative easing' methods being used by the Federal Reserve which has increased the money supply and some say will lead to a declining Dollar.

And following this, we have also seen high-level American diplomats become increasingly involved in Google's recent exit from the Chinese market. By redirecting to the uncensored version hosted in Hong Kong, Google has essentially ceased all operations on the Mainland; any uncensored results are filtered by the "Golden Shield Project" also known as the Great Firewall of China.

Whether or not this back and forth is a sustainable strategy for both parties is unclear, however, what is clear is that that both Washington and Beijing are jumping at the chance to go tit-for-tat with each other.

[1]http://www.washingtonpost.com/wp-dyn/content/article/2010/03/14/AR2010031402304.html

--Stephen Balaban

Financial Overhaul Is Next Priority of Democrats

After a successful pushing of healthcare reform, congressional Democrats have come out and expressed that, "an overhaul of financial regulations was the next legislative priority." No one is clear on what this "reform" will include and how far out it truly is, and that uncertainty is leaving a large overhanging cloud on the financial industry.

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Group 3

Warren Buffet: More Creditworthy than Uncle Sam

As reported by Bloomberg on March 22nd, the bond market is implying that it is now safer to lend to Warren Buffet than the United States of America.

The two-year US Treasury note is currently yielding 1.09%, whereas Berkshire’s notes of the same maturity are yielding 3.5 basis points less. In other words, putting your money into a two-year US note is more of a risk than putting your money in Berkshire Hathaway. Beyond just Berkshire, Proctor and Gamble, Johnson and Johnson, and Lowe’s debt also traded at lower yields in the not so-distant past.

The chief fixed-income officer at Fifth Third Asset Management, which oversees 22 billion dollars dubbed this development as a “slap upside the head of the government.” In our view, America’s budget deficit is now 10% of GDP, thereby making it a perfect time for a wakeup call.

Another very important statistic is that by 2014, 5 of the G7 countries will have debt-to-GDP ratios of more than 100 percent, representing “acute” challenges in tackling high public debt.

With Portugal getting downgraded by Fitch today, and the IMF having to step in to bail out Greece, it won’t be long before our unparalleled leveraging and deficit spending come back to haunt us.

-- GROUP 8

AIG Sells American Life Insurance Division

In an attempt to expedite the process of paying back government debt, giant insurer AIG will sell its American Life Insurance Co. division to MetLife for about $15.5 billion in cash and shares as well as its AIA insurance unit in Asia to U.K. insurer Prudential PLC for $35.5 in cash and shares. Although both sales will generate approximately $31.5 in cash to pay back the New York Fed, some are worried about AIG being able to generate further capital after selling off these two valuable divisions.

AIG has announced it will withhold $21 million in bonuses from current and former employees of its Financial Products unit to reach its $45 million giveback target. The giveback target was set as a response to public outcry over $165 million paid to employees following the $182.3 billion taxpayer-funded bailout. Thus far, AIG has recovered about $40 million of the giveback target.

The new AIG intends to focus on selling property-casualty coverage to corporations as the core of its business after selling off its major life insurance units. Despite the progress, the American taxpayer’s role as an investor in AIG is still uncertain. There are concerns about the profitability of AIG’s property-casualty operations due to its recent charge to cover the claims of previously sold policies. Liberty Mutual and Chubb Corp have said that AIG lowered prices to levels that may be inadequate to cover claims. Analysts have speculated that AIG may need more than a decade to pay back all of its U.S. bailout obligations.

Why a Career in Finance Should Be Chosen for Passion, Not Money

A recent news report from the National Association of Colleges and Employers has found that eight of the top ten best-paid majors are in engineering, with the other two being in computer science (4th) and information sciences and systems. Petroleum engineering tops of the list with an average salary of $86,220. Comparatively, the average starting salary for liberal arts majors is at $32,555.

For Ross students recruited by companies such as Goldman Sachs, whose average employee compensation has been estimated as $500 thousand a year, this is not an issue of concern. However, it should be noted by students that are considering a finance degree simply because they assume that is where they will make the most money, as this may not be the case if you are not among the top 15% in your graduating class.

Therefore, it is very important for those choosing a career in the financial markets that this is where their passion lies and that they would love nothing more than to construct valuation models, perform technical analysis, and live in a fast-paced and dynamic environment for the duration of their career. For the members of MII, I have no doubt this is the case.

Cisco

Cisco's over-hyping of the new CRS-3 router is being compared to, "the equivalent of Steve Jobs promising a "magical and revolutionary product" and then delivering an iPhone with a faster processor." This has left many asking why Cisco pushed so hard to hype up the release of the CRS-3.

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Greek Debt and Credit Default Swaps

The scourges of Wall Street, the slayers of Sovereign Debt, the root of the
Financial Crisis! No, we're not talking about robber barons or Wall Street
bankers, we're talking Credit Default Swaps (CDS). CDS have come under
fire by the European Comission, the fist of the European Union. CDS are
being blamed for the current Greek debt calamaty. The Greek Prime
Minister, George Papandreou, pitched his gripe against CDS to the European
Commission. He says that CDS have pushed up borrowing costs for his
country, who's massive budget deficits are coming back to haunt it.

Now for some opinion on the matter. It is not the European Unions business
to interfere in contract between private individuals. I hope the European
Union will implement the proposed all out ban on CDS so that investors will
come to American and contract freely with each other. Furthermore, I am
perplexed as to why banning CDS seems to be a viable option to what seems
to be a much larger problem. The real problem here is not Credit Default
Swaps, it's the Greek government's spending. If Greece had kept a balanced
budget they would not have to come running to the Mommy-State when the big
mean investors come knocking at their door looking to collect.

Written by Stephen Balaban

Is Spain the Next Greece?

The tumbling Euro zone’s fourth-largest economy, Spain, has a towering unemployment rate of 19%, a deflating housing bubble and a budget deficit that is approaching 12% of its gross domestic product. We all know that Greece has sparked fear into the minds of countless global investors, as bond and equity markets get rattled on any news of Greek debt default. However, it could now be Spain that adds fuel to the fire in Europe.

According to the WSJ article by Stephen Fidler, the main problem for weak Euro-zone countries is that as a result of their involvement in the Euro they lack the ability to manipulate their currency or artificially set interest rates. In other words, Spain cannot devalue their currency to make exports more attractive and its “sunny beach resorts cheaper.” Since 1999, these monetary policy decisions have been made at the European Central Bank in Germany, making any thoughts of a global currency absolutely preposterous.

Of course, Spain could attempt to stimulate growth via fiscal measures, such as cutting taxes or increasing spending, yet stimulus spending has already been enormous. Just like our leaders did at the outset of the financial crisis, Spain’s economy minister said in an interview, “The fundamentals of our economy are solid.”

If they turn out to be anything but, it would be far costlier for Germany and France to provide a backstop, as they have pledged to do for Greece already. It’s clear that Spain has many options, yet this process can take a long time to unravel.