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March 2021
THE OFFICIAL RAMAZ UPPER SCHOOL BUSINESS INVESTMENT JOURNAL
FROM THE EDITORS JOSH CHETRIT, MICHAEL PAGOVICH, ILAN PUTERMAN, JORDAN RECHTSCHAFFEN, AND NOAM WOLDENBERG We noticed that Ramaz was missing a business and investment publication for students to express their interest and knowledge of the business world. For this reason the Editors decided to create The Ram Street Journal (RSJ). The RSJ is a journal for all students to express their knowledge and insight in the business and investment world. We plan on publishing issues on a monthly basis. Our issues will discuss economic principles, stock market trends, stock market outlook and opinions, and current events on the most pressing issues on Wall Street. We look forward to the Ramaz student community to support this publication by writing articles for the RSJ (more info on this opportunity to follow!). By writing articles for the RSJ students will be able to find and develop their passion for finance, get a better understanding of the stock market, and learn how to write about the stock market. We plan on meeting on a periodic basis, and are hopeful for the opportunity to host meetings with Wall Street journalists to help us improve our reporting of stock market events.
THE STOCK MARKET PULLBACK. WHAT IS GOING ON? BY ILAN PUTERMAN '23 This year, the stock market has had a significant pullback after a huge rally in 2020. When the market closed on Friday, March 5, 2021, the Nasdaq composite was down 8.3% from its Feb. 12 high. The significant drop is due to the rising Treasury yields. To borrow money, the US government sells Treasury securities and in return promises to pay interest on the money it borrows. The Treasury yield is the interest rate that the US government pays to borrow money. The 10-year Treasury yield increased significantly in February and so far in March. On February 1, the 10-year Treasury yield was at 1.08%; however, by March 5, it hit as high as 1.62%.
It is important to understand what is causing the Treasury yield to climb. Firstly, investors are expecting economic growth as the country continues to re-open due to robust vaccination programs. Shops and THE RAM STREET JOURNAL
IN THIS ISSUE The stock market pullback. What is going on? What Are SPACs? Algorithmic Trading Increasing Minimum Wage Debate
businesses are expected to continue to reopen, and the unemployment rate is expected to continue to decrease. The International Monetary Fund expects the US economy to grow 5.1% in 2021, which would be the strongest performance since 1984 and is a significant increase from 2020’s 3.5% decrease. Treasury securities are considered the safest investments because they provide a fixed return on investments. When investors predict an increase in economic growth and a healthy economy, they are less likely to purchase safe Treasury securities because they are willing to make more risky investments that offer much higher returns. Investors are less keen to purchase Treasury securities earning 1% when they can invest in the stock market and average 8% returns, despite the added risk. When there is little investor demand for Treasury securities, the government needs to offer a higher Treasury yield to make the Treasury securities more attractive for investors. Page 1
ISSUE 1 This is what happened on Thursday, February 25. The government was auctioning $62 billion of 7-year Treasury securities that received weak interest from investors. Bloomberg data stated that on February 25 there was the lowest investor interest for the 7-year Treasury securities since at least 2009. To sell these Treasury securities, the government was forced to increase the Treasury yield significantly. There is a second significant contributing factor to the rising Treasury yield. Investors believe that the economic growth increase will lead to an increase in inflation. As the economy continues to reopen, there is a significant expected increase in the money flowing around the economy. This added money into the economy contributes to inflation because it significantly increases the demand for products and services. As demand increases faster than supply there is inflation. In addition, the $1.9 trillion stimulus bill is going to increase liquidity in the US economy and is furthering expectations of increasing inflation. Increased inflation leads to higher Treasury yields. Increased inflation hurts investors in Treasury securities because it means the interest they receive from the government will be worth less in the future. For this reason, as investors expect inflation to increase, they demand higher Treasury yields to compensate for the risk of inflation.
A third factor contributing to higher Treasury yields is the Fed’s position on the current situation. On Thursday, March 4, Federal Reserve Chairman Jerome Powell acknowledged the rise in Treasury yields; however, he did not hint to a shift in policy to take action against the rising Treasury yields. Investors were THE RAM STREET JOURNAL
March 2021 hoping that Powell would signal a plan to prevent the rise in Treasury yields. This sent the Treasury yield further up that Thursday. Investors are unsure what Powell will do if the Treasury yield continues to climb. The steady increase in the Treasury yield over the past 3 weeks has had significant impacts on the stock market. First of all, rising Treasury yields reduce the appeal for stocks. When investors can make a significant amount of money by purchasing safe Treasury securities, they feel less compelled to invest in stocks, especially growth stocks with lofty valuations, and more compelled to purchase Treasury securities. One thing that the stock market had on its side during the post March rally, was that the Treasury yield was super low. This forced investors to throw their money into the stock market. Now this edge for the stock market is fading as Treasury yields rise, posing a threat to the stock market’s run up. As Treasury securities become more attractive to investors, stocks become less attractive. A second impact is that rising Treasury yields lead to rising interest rates for business loans and corporate bonds. The Treasury yield is the benchmark for interest rates. As the Treasury yield rises, interest rates tend to follow in the same direction. This makes it more expensive for companies to borrow money which could hurt the future growth of stocks. This especially hurts real estate investment trusts (REITs) which require a lot of money, and often debt, to operate. Alternatively, several stock market sectors are benefiting from the higher Treasury yields. Value stocks have not been too negatively affected by the rising Treasury yields. Investors seem to be optimistic about a stronger economy, due to the falling unemployment rate and massive stimulus package, which is benefiting value stocks that have underperformed significantly. The Financial sector, especially banks, have gained recently. This is because the rising
interest rates mean bigger profits on consumer loans and mortgages. The rising Treasury yield particularly hurts high growth stocks. This is because high growth companies’ value is based off of expected earnings, years into the future. Future cash is worth less in today’s dollars because today’s dollar has a greater time value since the money today can be invested. As the interest rate increases, the valuation of growth companies decreases because the predicted future money earned becomes worth less in today’s dollar.
WHAT ARE SPACS? BY JOSH CHETRIT '23 One of the hottest trends in the market now are Special Purpose Acquisition Companies, also known as SPACs. A SPAC is a company that, on its own, has no commercial operations. A SPAC does not sell or manufacture anything. It is created by a group of investors and/or sponsors that assemble the SPAC’s management team. The sole purpose of a SPAC is to raise money through an Initial Public Offering, also known as an IPO, to acquire another company. IPOs are a way for companies to be traded publicly on the stock market. An example of a SPAC is Diamond Eagle Acquisition Corp., which went public in December 2019. After this company went public, it acquired DraftKings. Once the Diamond Eagle Acquisition Corp. acquired the company, its ticker symbol changed, and DraftKings went public. SPACs are also known as “blank check companies'', which means that when they go public, their business plan of the companies they are targeting is not publicly known. SPACs generally have two years to make an acquisition or they return their investor’s money with interest. The SPAC sponsors/investors typically get a 20% stake in the merged company at a discounted price compared to the public. For example, initial investors of Chamath Page 2
ISSUE 1 Palihapitiya’s SPAC, Social Capital, got 20% of the company at $0.002 a share, while the public got the other 80% of the company at $10 a share.
Pros: The benefits to SPACs for companies are tremendous. First, the process for going public through a SPAC requires much less regulation and is faster than the traditional IPO. It takes about 3-4 months to go public through a SPAC, while it can take 4-6 months to go public through a traditional IPO. Furthermore, there is much more certainty that a company will end up going public through a SPAC than other methods. For example, WeWork withdrew its IPO when it was revealed that the company had many issues such as leadership issues and massive losses. In addition, the management team of a SPAC could be a group of high quality investors. If one finds a SPAC that is run by an entrepreneur or investor they trust, then the SPAC will foster more confidence and show good signs to investors. If a SPAC does not find a viable target company to merge with within the deadline of two years, the investor gets their money back with interest. This offers a way to get rid of some of the risks of SPACs. Cons: There have been multiple studies that have shown how SPACs fare in the market. For example, Goldman Sachs did a study in 2018 that showed that during a three, six and, twelve month period, SPACs generally underperformed the S&P 500 after they made an acquisition. Moreover, a study from Stanford and NYU showed that after SPACs merged in 2019-2020 they fared poorly. For instance, in three months, SPACs had an average return of -2.9% after six months they had THE RAM STREET JOURNAL
March 2021 an average return of -12.3%, and over twelve months, they had an average return of -34.9%. Furthermore, retail investors know little about a SPAC’s target company while they are looking for a merger, except for rumors. Additionally, the lack of scrutiny towards SPACs and their target companies can lead to serious issues such as fraud. For example, Nikola, a company that went public through VectoIQ’s SPAC, was riddled with scandals and false claims. While the sponsors, initial investors and the management team of a SPAC could have positive effects on a company's performance, it could also have the opposite, negative outcome. Such as, the company not being run well and ultimately failing. Another issue is that because SPACs are currently such a hot trend in the market, there could be too many SPACs, and not enough companies to acquire. This could have drastic consequences on SPACs as a whole. Furthermore, the time constraints on a SPAC could be detrimental. If a SPAC is nearing the two year deadline, the management team may rush to find a company, even if it is sub-par.
Overall, SPACs are an interesting trend and have many pros and cons to them. For the institutional investor and big time Wall Street investors, it makes sense to invest into SPACs but for the retail investor, there are few benefits. With the increasing number of SPACs entering the market, it is possible that more benefits could come from them. They might get better returns once more high quality management teams run them and merge with better companies.
SPACs might also do better with the increases in scrutiny that the SEC will implement soon. Investors might have more confidence in SPACs once they know the target company is reputable. There are so many possibilities that could come from SPACs that they could go in any direction, yet currently, the cons seem to outweigh the pros.
ALGORITHMIC TRADING BY JORDAN RECHTSCHAFFEN '22 As the 21st century has progressed, algorithmic trading has become an increasingly popular mechanism among market participants. It is true that algorithmic trading is far more ubiquitous in developed markets, such as the U.S., than emerging economies, such as India -- whereas in the United States algorithmic trading accounts for about 70-80 percent of overall trading, in India it only comprises around 40 percent. But it is undeniable that algorithmic trading has become a dominant force in the markets. So...what exactly is “algorithmic trading”? Algorithmic trading refers to automated systems and programs that use computer algorithms to trade. These algorithms create trades that are sent to the brokerage firm when certain conditions are met. The “trading algos” search the trading markets for conditions that match the rules or instructions in the code that they follow and buy or sell positions in a quantity in accordance with the instructions in the code. The fundamental concept in this process is that everything is automated – no humans are involved in decision making once the algorithm is launched. But what makes this so appealing to investors? The first, and obvious, reason that algo trading has drawn such a large
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ISSUE 1 audience is that the entire process is automated, meaning that once the algorithm is in motion, no human judgement is required. In addition, algorithms show investors the probability of success of trades, facilitating investors’ capital allocation decisions. Furthermore, there are a couple of benefits to trading algos in the actual trading process. They both trade all of the time – computers do not need sleep, and thus can trade at all hours of the day – and trade extremely fast, which ensures a purchase at the immediate desired price. Lastly, and perhaps most importantly, trading algos are not subject to powerful, or any, emotions. Human traders are susceptible to having their own personal feelings, such as greed, anger and fear, interfere in the trading process. Since algorithmic trading ensures that the entire procedure is automated, human emotions can not prevent the original desired trade from being executed. In conclusion, there are myriad advantages to algo trading that explains its exponentially increasing popularity.
What are some of the strategies that algo trading deploys? Algos use many different strategies to maximize efficiency and profitability. Some algos use “mean-reversion strategies”, which are based on a philosophy that says that although stocks may fluctuate, they have a certain mean price or range that they tend to revert to. When a stock price gets too far below or above its appropriate levels, an algo will buy or short that stock accordingly. Alternatively, some algos employ “trend-following strategies,” in which they use data to try and predict when a trend is beginning or ending and profit accordingly. Still other algos use a THE RAM STREET JOURNAL
March 2021 strategy called the “breakout strategy,” where they benefit from price momentum that oftentimes follows breakouts. Lastly, certain algos can use a strategy known as the “biased strategy,” which classifies algos’ ability to profit from markets’ tendencies to move in a certain direction at certain times of the day. This all sounds great...what’s the catch/concern? The biggest concern with trading algorithms is that they can lead to dramatic increases in volatility, and have in fact increased the frequency of flash crashes. Flash crashes are sudden and rapid sell-offs in markets, meaning that many stocks go down a lot in a very short period of time. People believe that flash crashes result from trading algos selling stocks en masse as a result of anomalies in the market. A recent example of a flash crash is the October 7, 2016 flash crash in the GBP/USD, where the GBP fell 6 percent against the USD in 2 minutes. A popular recent mechanism that has been introduced to combat flash crashes are circuit breakers, which temporarily halt trading when there are major, sudden market fluctuations. Circuit breakers were used multiple times in early March 2020 (the coronavirus stock market crash). Trading algorithms are by no means perfect. They have endured periods of poor performance, and they significantly increase systemic risk that results from increased volatility. Still, in many ways, they are a superior alternative to traditional human investment strategies. And, above all else, it is clear that they are here to stay.
MINIMUM WAGE DEBATE BY MICHAEL PAGOVICH '22, AND NOAM WOLDENBERG '22
Fair Labor Standard Act setting the minimum wage at twenty-five cents. At a time of deep economic upheaval, Roosevelt responded to calls from labor unions to create a minimum living wage. Today there is a federal minimum wage of $7.25/ hour while each state can choose to set its own minimum above the federal rate. An increase in the minimum wage will have negative consequences and disproportionately hurt the very people it is intended to help. The Congressional Budget Office issued a report that shows while some employees would certainly make more money, many others would suffer cuts to their work hours or even worse, loss of their jobs. That happens when businesses are forced to pay employees more but with no corresponding increase in revenues to help pay for it. Ultimately, they have to resort to a combination of cutting employees’ hours, laying off employees, replacing employees with automation, shipping jobs overseas, permanently closing their doors, or passing the costs on to customers. Most of the time, the cost of a higher minimum wage can’t be entirely passed on to customers, as many customers refuse to pay—or aren’t able to afford—higher prices and end up buying less of what the business is selling. That leads to more hours cut, more layoffs, and more employers— especially small businesses—shutting their doors for good. A real-world example could look something like this: If a restaurant owner had to pay every entry-level worker $15, their incomes would be too close to people who had been working there for three or four years and had more experience. As a result, the restaurant owner would have to raise
Con (Michael): The topic of minimum wage is a hotly debated topic today. The minimum wage was first introduced in 1938 by President Franklin Roosevelt under the Page 4
ISSUE 1 current employees’ wages, even more, to make it fair. Small businesses make up almost half of all employees in the United States. Many small businesses don’t have the resources or reserves that other big companies have. Increasing the minimum wage will affect small businesses from hiring additional employees and in many cases, it will cause layoffs. According to the Federal Reserve Bank of Chicago, a minimum wage increase doubled unemployment for low-skill jobs and tripled unemployment for restaurant jobs. Due to increases in the minimum wage, we see large companies like Nike and Apple outsource many jobs to China where they don’t need to pay their employees as much. A 2019 CBO(Congressional Budget Office) report estimates that raising the minimum wage to $15 an hour by 2025 would result in the loss of approximately 1.3 million jobs as a result of outsourcing. An increase in the minimum wage will cause overqualified people to apply for minimum wage jobs impeding younger less experienced people to get the job and valuable work experience. An increase in the minimum wage actually hurts lower-income people. According to a study of Seattle's minimum wage increase by the National Bureau of Economic Research, an increase in the minimum wage helps experienced workers to receive higher pay and increased job opportunities, while less-experienced workers saw a loss in job opportunities. While it seems like a noble idea to raise the minimum wage, the longer-term effects on the economy and society at large are much greater than proponents of the increase are discussing. Pro (Noam): The federal minimum wage, which is currently just $7.25/ hour, hasn’t been raised in more than a decade. It would be a wise move - both morally and fiscally for the government to increase the federal minimum wage. From a moral and frankly practical perspective, a THE RAM STREET JOURNAL
March 2021 major benefit in raising the minimum wage is that it would reduce poverty. According to a 2014 Congressional Budget Office report, increasing the minimum wage to $9 would lift 300,000 people out of poverty, and an increase to $10.10 would lift 900,000 people out of poverty. A 2013 study by University of Massachusetts at Amherst economist Arindrajit Dube, PhD, estimated that increasing the minimum wage to $10.10 is “projected to reduce the number of non-elderly living in poverty by around 4.6 million, or by 6.8 million when longer term effects are accounted for.” The current federal minimum wage of $7.25 per hour is simply too low for anyone to live on. The pandemic has exacerbated this issue, as millions have slipped into poverty over the past year, and 11 percent of adults are now facing food insecurity. The declining value of the minimum wage is also one of the primary causes of wage inequality. Raising it would help address this problem, as well as the long-standing issues of racial and gender inequities that ensue. Minorities, who unfortunately contribute more than their fair share of low-wage work, would stand to benefit from the bump. Raising the minimum wage is also what the vast majority of Americans want. In fact, over half the states have already raised their minimum wages to meet this request and restore fairness to the workforce.
From an economical standpoint, a raise in minimum wage is long overdue. Since it was last raised in 2009, the minimum wage has failed to keep up with inflation (i.e., the purchasing power of money has significantly declined since 2009), failed to keep up with average wages, and failed to keep up with incomes of the top 1
percent and CEOs, contributing to America’s growing inequality crisis. As a result, low-wage workers are not benefiting from economic growth and productivity. If the minimum wage had kept pace with productivity increases, it would be around $24/hr according to the Center for Economic and Policy Research. Just 30 years ago, the average pay gap between CEOs and workers was 59 to 1. However, by 2018, that number had soared to 361 to 1. The average CEO at one of the top 350 firms in the US made $21.3 million in 2019, 320 times as much as the typical worker; a minimum wage worker still makes $15,080: a gap of 1,400 to 1. The magnitude of this wealth gap is truly difficult to grasp. Raising the current minimum wage would also save taxpayer money and reduce the use of government programs. This is because when employers don’t pay employees enough to secure a livelihood, those workers are compelled to seek government assistance, resulting in taxpayers essentially subsidizing corporations. In 2016, the Economic Policy Institute found that, among recipients of public assistance, most work or have a family member who works, and are concentrated at the bottom of the pay scale. Raising wages for low-wage workers would surely reduce this large spending on public assistance. Lastly, raising the federal minimum wage would fuel economic growth. The roughly $120 billion extra paid to workers, resulting from an implementation of a $15 federal minimum wage, would be pumped back into the economy for necessities such as rent, food, and clothes. The Economic Policy Institute stated that even a less ambitious federal minimum wage increase from the current rate of $7.25 an hour to $10.10 would inject $22.1 billion net into the economy and create about 85,000 new jobs over a three-year phase-in period.
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ISSUE 1 Economists from the Federal Reserve Bank of Chicago predicted that a $1.75 rise in the federal minimum wage would increase aggregate household spending by $48 billion the following year, thus boosting GDP and leading to job growth. Economists have long recognized that boosting purchasing power by putting money in people’s pockets for consumer spending has positive ripple effects on the entire economy. Economists also argue that increasing the minimum wage leads to increased worker productivity and reduced employee turnover rates. Alan Manning, DPhil, Professor of Economics at the London School of Economics, stated in 2014: “As the minimum wage rises and work becomes more attractive, labor turnover rates and absenteeism tend to decline.” A 2014 University of California at Berkeley study found “turnover rates for teens and restaurant workers fall substantially following a minimum wage increase,” declining by about 2% for a 10% increase in the minimum wage. A 2014 survey found that 53% of small business owners believed that “with a higher minimum wage, businesses would benefit from lower employee turnover and increased productivity and customer satisfaction.” Additionally, a recent poll found that 67 percent of small business owners support the minimum wage increase to $15 an hour. This makes sense, as a raised minimum wage would spark consumer demand, which would enable businesses to retain or hire new employees. Ultimately, the federal minimum wage should be raised because higher wages have proven to reap immense benefits for workers, employers, and the economy as a whole.
THE RAM STREET JOURNAL
March 2021
BIC RECAP: CY AMINZADEH ON REAL ESTATE BY ILAN PUTERMAN '23 This meeting, we listened to Cy Aminzadeh present on the effects COVID19 is having on the Manhattan real estate market. He explained an interesting idea that purchasing a house requires touch, sense, and feel; this has been prevented by lockdowns and social distancing. Cy explained the effects COVID-19 had on residential real estate. During lockdown, people living in Manhattan wanted a larger living space and no longer needed to live near their office. This led to people moving out of their small expensive Manhattan apartments, and moving into houses in the suburbs such as the Hamptons. Cy also explained that commercial real estate was severely hurt. Hotels, office buildings, and shopping malls were empty because everybody was staying at home. We concluded by discussing our outlook on the future of the real estate market in Manhattan. Many of us are optimistic of the residential real estate market recovering, while many of us believe that the commercial real estate market will never recover to pre-pandemic levels.
BIC RECAP: MR. DWEK ON INVESTMENT BANKING BY JOSH CHETRIT '23 This meeting, we listened to Mr. Dwek speak about how investment banking works, and the requirements that are needed to become an investment banker. For example, Mr. Dwek explained that investment bankers help companies marry each other and they help run the financial activities of their clients. Furthermore, to become an investment banker one must have gone to an Ivy League school (most of the time, he is an exception), and at Morgan Stanley
specifically, you must have done a rigorous summer internship with them. The internship is super hard to obtain and even if you do get the opportunity to do the internship you, still might not get hired.
BIC RECAP: JORDAN RECHTSCHAFFEN ON RECOVERY STOCKS BY ABE KOHL '23 This meeting, we heard from Jordan Rechtschaffen, a fellow Ramaz student in the 11th grade. Jordan spoke about “Leave the House Stocks”,which refers to stocks that were heavily impacted by the pandemic. He gave examples of the main sectors that were hit the heaviest: airlines, restaurants, hotels, the cruise sector, and retail. He explained how the stock market had a sudden decline in late February as rumors of a novel virus spread. The repercussions that it could manifest on the economy began to take hold. He gave statistics from each sector to show the true effects COVID had on the valuation of each corporation. Jordan then went into detail about the turnaround currently occurring. He explained the impact of government intervention in company debt that allowed for an almost full rebound for many companies. Vaccine talk further aided in the recovery of the market back to its former self. However, Jordan warned that the government intervention and even total nullification of the virus will not be enough for some companies. He stated that COVID accelerated the eventual demise of the retail sector, especially those not as involved in ecommerce corporations. Therefore, many companies will never be able to rebound and may even go bankrupt from the virus.
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