Jumbo Mortgages and Securitization

After a home buyer secures a loan from a bank (i.e., a mortgage), the bank often securitizes the loans, which means they package them for sale to investors. This process is much easier if the loans are backed by Fannie and Freddie, the government sponsored mortgage agencies. Fannie and Freddie, however, will only back loans below certain values -- the so-called jumbo loans. This amount has generally been capped at $417,000 (although higher in certain high-cost areas). Regulators plan to lower these caps, which means jumbo loans may be harder to come by since it will be more difficult to securitize such loans. See article here, LA Times.

Preferred Stock

Preferred stock, also called perpetual stock, is considered a type of hybrid security. It has characteristics of debt, the primary of which is a fixed dividend. However, it also has similarities to equity, in that it is equity, so the dividend is not guaranteed. So, it has higher risk than comparable bonds, but less risk (and less upside) than common stock. Moreover, the price of preferred stock is primarily responsive to changes in interest rates (i.e., like a bond). See related article here, Wall Street Journal.

Exchange Consolidation

BATS and Direct Edge, two large electronic exchanges, are merging to form the second largest exchange operator in the United States, taking over the ranking currently held by Nasdaq. This change exhibits the transformation of the industry toward electronic trading. While electronic increases speed and likely lowers trading costs, it doesn't come without risks, as the recent Nasdaq outage illustrates. See article here, Wall Street Journal.

Even Adults Like "Happy Meals"

Higher risk companies, in order to sell bonds at lower interest rates, must often attach "sweetners" to the bond offering. Historically this has included warrants or conversion options. Recently, however, some companies have offered a combination of bonds and a loan of the company's shares, a so-called "Happy Meal." The bond buyers subsequently sell the shares short. If the company fails, the investors lose on the bonds, but make a profit on the short sale. This strategy is typically employed by hedge funds. See article here, Wall Street Journal.

P/E Ratios

Most investors know that the PE multiple is the ratio of price to earnings. While the market price is easy to agree upon, the earnings number that should be used in the ratio is not. Some investors prefer historical earnings, while others focus on forecasted earnings. Each of these approaches can provide widely different PE estimates, making comparison difficult. See article here, Wall Street Journal.

Broker vs. Advisor

Over the past decade, more retail investment professionals have transitioned away from a pure broker relationship to a more advisory role. This switch is potentially good for both sides, as it reduces the incentive to churn (i.e., excessively trade) an account simply to generate commissions, while also providing a more stable revenue for the advisor. See article here, Financial-Planning.com.

Market Timing vs. Market Efficiency

Market timers may occasionally be correct, but it takes more than a few right calls to beat the market over the long term. In reality, this continued success is virtually impossible. See the article here, Wall Street Journal.