Tick tock tick tock - the second year

Yes, I am still here, even though I don't write much anymore. There is just too much going on. As always I was hoping for a relaxing term but I have the ability to always end up doing lots of exciting things that keep me busy. The downside of this exciting life is that time is passing much too fast, the term is as good as over and there are now less than 4 months till the end of the MBA. It feels even less because lots of my friends are taking the summer term off to go traveling, so there are a lot of people now in the classroom who are finishing up.

I have been traveling a lot this term, working on a consulting project in the Scottish highlands, and going to Southeast Asia with three friends, I absolutely love Thailand!! I have been reading a lot this term, something I used to do a lot when I was younger and almost gave up while I was working at McKinsey, and now I am getting into the habit again, which is great. I have also just spend a few lovely days with my family in Hamburg, enjoying the great food and spending time with my grandmother and parents. Hamburg is such a great place to live and so cheap compared to London. No wonder it has won 3rd place as one of the best places to invest in for 2008 (along with Moscow and Istanbul) :-).

Now there is one week left of the spring term. I am working hard to finish up the consulting project for the Scottish tourism venture that I have mentioned before, and other than that really need to get started with my take home exam for time series analysis due on Monday. It was handed out 1 or 2 weeks ago but I just haven't had any time to even look at it so far. I also need to prepare for the Fixed Income exam next week, and since this is a course I have enjoyed a lot, the outcome is much more important to me, so I will need to prioritise my fixed income preparation over the rest for the next week.

On the side, I have also joined a team of classmates for our inter-school Tennis league, and we have won the first round, yay!! Playing Tennis in Regent's Park on a Friday morning is just something I need to enjoy as much as possible while I'm not working.

That's it for today, I will keep writing once I get all the exams and papers out of the way!

the job market in finance (and equity markets): should have listened to the Harvard MBA indicator!!

In the mid of frantic interviewing for summer positions in investment banking a year ago, the president of our finance club posted this interesting article on our discussion board:

If 10 percent or less of a given year’s graduating class take jobs in investment banking, investment management, trading, venture capital, private equity or leveraged buyouts, that is a long-term “buy” signal. If 30 percent or more take such jobs, it’s a “sell.” This year, the indicator doesn’t look good, with 37 percent of H.B.S. grads taking jobs in the securities business.
(full version here)

The article had actually been published in November 2006, but we were discussing it in January 2007. The first sell-off in equity markets and then in credit markets started few weeks later, and really gained speed in August. So the indicator was a few months early, but it is very impressive.

I remember my thoughts when I read it: that probably it was true, but that hopefully the bubble would continue for another year or two and burst only then. Greed is what keep bubbles growing: you know it can't last, but if others had benefitted from the bubble, perhaps I could also have a little bit more before the party was over? Greed makes people grab for overpriced assets hoping they will appreciate further. But in the end it all ends the way it has to end. Probably this year the numbers will be down to below 30% (although for the class of MBA2008 at least at London Business School we will certainly be more than 30% going into finance I believe).

Talking of bubbles, the UK housing bubble is also bursting these weeks (finally!!). Today's FT has a very insightful commentary on the UK economy. I am quite happy about the bursting housing bubble (all else equal, obviously), as I am planning to move closer to the financial district, the City, in a few months, and the rental prices are just plummeting. Housing near the City is a big bubble, in recent years they are building housing like crazy for all the investment bankers supposed to move there, but this year most likely people will be moving out rather than in, and hundreds of new units will come onto the market.

I have watched the rental price of a 2 bedroom flat that I have my eye on in walking distance to my future job drop from $3,000 per month to $2,700 in the last 3 weeks, but I will wait another couple of months and am fairly sure things will go down - or DOWNTOWN!!!, as our fixed income professor likes to shout :-). The fixed income class is very heavy stuff by the way, first time I am doubting if interest rates are a good area to go in, it's complicated!! I'm a bit of a macro person I guess, I always think - what difference does it make if the interest rates are 4.17% or 4.21%? Really, it is so removed from reality. But the class is great, I am learning a lot, especially I am learning to be more humble about my intellectual abilities :-))). That's certainly a good thing.

london, the markets, and the second year MBA

Well, life in London is as exciting as ever. The big story in the markets is obviously the alleged $7 bn fraud at Societe Generale, though I am very sceptical about their version of the events. At least, the story solves one mystery I heard about at the end of my hedge fund internship. We, the analysts, would look at investment ideas, while the traders would manage the open positions and talk to sell-side traders to see what's going on in the market. I remember we had running gag for a while, as some traders in the market were telling our head trader that there was a mysterious "DAX man" in the market, that somone was buying up billions of dollars worth of DAX futures, and everybody was wondering who this crazy guy could be, buying billions of DAX futures while the market was so volatile and headed for a strong correction. We would speculate if it could be one of the Middle Eastern investment funds, or if it was someone who knew something. Or we would dismiss the story and think the story about the mysterious DAX man was a big joke. Well, it seems it wasn't a joke. It might be a mere coincidence and it might be that this was an unrelated event, but I somehow feel this new "rogue trader" might just be him.

And if that wasn't exciting enough, summer recruiting is starting off next week and the first years are freaking out. It is very stressful, especially with markets as they are, banks seem to have less slots for the summer and some people are disappointed not to have many interviews lined up. I have done some mock interviews over the last week and am happy that some people are really well prepared, but I still feel that some people are overconfident and should prepare harder, this year it won't be easy to land a, investment banking internship. So please prepare as hard as you can!! You have been warned :-).

In the world of academic finance, I am enjoying my course in Fixed Income Securities immensely. The professor, Suleyman Basak, has set himself a very high standard of making sure we know more "than the average smart guy on Wall Street who has read Fabozzi". In fact, two alumni from my school who work as prop traders now both told me his course was the best course ever preparing them for landing jobs at the most desired trading desks, so I am hoping to get a lot out of the course. I enjoyed the first two lectures so much that I dropped an advanced financial analysis course that I had signed up for for next term, and have signed up for a Financial Engineering course with professor Basak instead.

As a distraction from the world of finance and investment, I am working on a great paid second year consulting project for a tourism venture in the Scottish highlands, which we are very excited about. In a few weeks we will go up to the highlands for a week to check out everything on-site. From hedge fund internships to consulting projects in the Scottish highlands, Diwali parties and making friends from all over the world, I cannot believe how varied my MBA experience has been so far. Luckily it is still not over :-). Next week I'm setting off for a short holiday in South East Asia with three friends, followed by a trip to the Scottish highlands and then spring break! Life is good.

Interview questions to prepare for Sales&Trading

I have written up this list for the MBA2009s from my school but thought I might as well share it with others applying for summer internships in Markets. Writing it up, I realized there is a lot to prepare actually. Lots of questions are easy if you follow the markets and have been in the field before, but for career changers there is actually a lot to prepare! Here it goes:

Technical questions

• How are bond prices and yields related?

• How do you price a bond?

• How do you calculate implied forward rates?

• How do you price an option?

• What is a Credit Default Swap? How does it work?

• What is a CDO? How does it work?

• What happens to bond prices when interest rates rise? What happens to equity markets? What happens to currencies?

• What is an inverted yield curve and how do you interpret it?

• What is a carry trade? How does it work?
  

Market awareness

• Know the price of oil, gold, the level of the FTSE, S&P500, Nikkei, Dax, know FX rates USD/EUR, USD/Yen, EUR/GBP, what have these been doing over the last months?

• Know central bank rates of US, Euro area, UK and Japan, what have they been doing over the last months, what does the term structure look like, why?

• How would you invest $1million?

• Have you ever invested money?

• Tell me a trade idea?

• What stocks do you like and why?

• What do you think the Fed/Japanese Central bank etc. will do at their next meeting?
  (A really good source of commentary on rates and currency markets is Daily FX)
  

• Where do you think interest rates are going?

• What happened in the markets yesterday?

• Draw me the US yield curve. Draw me the UK yield curve. Why is it inverted?
  (check Bloomberg rates for the graphs, much easier than looking up the yields in the Financial Times and drawing it yourself. Wow, the UK yield curve looks funky right now!)
  

• What do you think about the current credit markets?

• What's your view on the US economy?

• What do you think is the next big investment opportunity in the markets that can offer spectacular returns?

• etc. (all questions like that to check if you have an opinion and read the newspaper, answer can be short and concise, there is no right answer as long as it is logical and moderately well informed)

• + questions that you provoke -i.e.
  If you say you are interested in emerging markets, they will ask you about which EM stock you like or what happened in Thailand last year,
  if you say you are interested in oil they might ask what's going on in Venezuela or Kazakhstan,
  if you say you come from financial engineering they might ask something more technical,
  if you say you want to do sales they might say “sell me something now” and so on

Fit

• Why do you want to do this?

• Why do you want to leave your previous job?

• We have invited 15 of your classmates for the final round. Why should we take you and not your classmates?

• How will you decide between different offers?

• What do you like about Deutsche Bank/Lehman Brothers etc.?

• Why Sales & Trading and not Investment Banking?

• Tell me about a time in your work when you really felt the power of a team and what a team can achieve
  

Teaching yourself programming for financial modeling

In preparation for my trading (or structuring) job, I have decided to finally learn programming. In case there are people out there also considering to learn programming for financial modeling, I have started a separate blog

C++ for financial modeling

I intend to keep it as a sort of diary to document how to teach oneself programming, and to discuss the roadblocks on the way. I have wanted to learn programming for a long time and have realized that the main reason I never did it was lack of self confidence and doubts about lots of things. I think I have finally overcome these doubts and hope I can encourage others who have been shy or hesitant about learning programming. My main learning from today is that it is really nothing mysterious once you get started, so I cannot believe it has taken me so many years to get started. But I will keep all this in a separate blog, since it is of no interest to most of my readers.

Read the Gloom Boom Doom blog for sales & trading interviews

Interviews for summer jobs are coming up, and I have talked to some MBA2009s concerned that they still don't have an opinion on the market or much overview of how to understand the markets despite reading the FT for the last months. I strongly recommend Marc Faber's blog "The Gloom, Boom, and Doom Report", which gives a very independent and insightful view on the direction of the markets. Journalists can be short sighted and like to regurgitate consensus opinion rather than give insights, so it is good to have an investor with excellent writing skills covering the markets with a monthly column. I like this part of Marc Faber's current column:

But how can a responsible central bank cut interest rates and pursue an expansionary monetary policy when the stock market is close to an all time high and when it is faced with a weak currency and soaring food and commodity prices?

'Only in America' one should say because the US-infected IMF and World Bank would advise any country under these conditions to 'tighten' monetary policies and to raise interest rates. But since the Fed's only objective today is to 'inflate' asset markets further at the expense of totally debasing the currency we need to look at a new currency as a 'unit of account' and as a 'store of value'. (continue reading)