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Legislation That Will Knock Your SOX Off!

January 13, 2005
Lawrence R. Levin

The Sarbanes-Oxley Act (often referred to as “SOX”), with its criminal penalties and broad impact on everyday corporate behavior, is the most far-reaching reform of corporate governance, financial practices, and reporting since the creation of the SEC as part of New Deal in the 1930s. While it is well understood that SOX impacts large publicly held financial institutions, few have recognized that it increasingly affects even small private financial institutions. Are all financial institutions (banks, credit unions, savings and loans, and other depositary institutions), regardless of size, focused and ready for the impact of SOX?

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Turning Losses into Profits

January 10, 2005
Charles M. Carpenter

Last year, Kurt Fritz shared the J-Curve with our readers (The Disciplined Investor® Volume 11, Number 9, titled “The Matrix,” dated March 4, 2004). The J-Curve represents a trade-off of short-term costs today in exchange for long-term benefits in the future. These trade-offs are the foundation of any successful person or business.

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Why Christmas? A personal message from Rich and Phil

December 22, 2004
Rich Berg, Phil Nussbaum

This Friday our company along with many others all across the country (in fact all across the world) will be closed for business. In preparation for this upcoming holiday people have made numerous trips up and down stairs getting the decorations and tree set up, climbed ladders to hang lights from the gutters, and frantically gone from store to store (or on-line) to purchase just the right gifts. Most everyone celebrates the “holiday season,” yet what is this day we call “Christmas?”

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EITF 03-01 Update

November 17, 2004
James V. Lorentsen, CPA

As many of you know, the Financial Accounting Standards Board delayed the implementation of EITF 03-01 for a second time. The EITF rule could require institutions to recognize an other-thantemporary impairment charge through earnings on debt securities that suffered market value declines solely due to changes in interest rates. The delay was influenced by an overwhelming response to the FASB’s request for comments on their proposed position. Over 235 comment letters are available on their web site (FASB.ORG); several of which were sent by Shape Management® practitioners.

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To Our Customers

November 3, 2004
Richard S. Berg

We are pleased to announce that on November 2, 2004, Nicholas W. Betzold, Jr., Chairman, CEO, co-founder and majority shareholder of the Betzold Companies has agreed to sell all of his shares in the Betzold Companies to Richard S. Berg, a co-founder of the Betzold Companies, and Philip M. Nussbaum, also one of the firm’s original partners. At closing, Rich and Phil will be the sole shareholders of the Betzold Companies.

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The Portfolio Optimization Dilemma

October 19, 2004
Sunil O. Kothari

In 1952, Harry Markowitz introduced modern portfolio theory and optimization to the world of finance when his paper “Portfolio Selection” appeared in the Journal of Finance. Since then, portfolio optimization has become a popular topic of research in both industry and academia. Despite its sustained popularity, optimization still causes a great deal of confusion. Although the term portfolio optimization itself implies a superior means of choosing allocations, many portfolio managers still choose to rely on heuristic approaches rather than utilizing optimization programs. While the theory behind these programs is sound, there are a number of practical issues that arise when implementing them as a stand-alone portfolio management tool.

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Custody Costs and Small Holdings

August 20, 2004
Charles M. Carpenter

One of our clients recently shared with us a strategy presented to them by another investment advisor and asked for our opinion. The proposal recommended the liquidation of a large number of smallbalance holdings from their portfolio and the reinvestment of the proceeds into one, larger-balance security holding.

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The July 2001 – 2004 Three-Year Look-Back®

August 2, 2004
Disciplined Investor®

We will be conducting our annual Three-Year Look-Back® for 2004 in two teleconferences which will be broadcast via MS Office Live Meeting on:

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Insulator Monitor

July 1, 2004
Seung Y. Lee

Over the last year and a half, many Shape Managers have purchased Price InsulatorsSM to add defense to the overall portfolio shape. We placed them in your portfolios with the mutual understanding that shapes change, and in the event of a rate rise, we must be prepared to divest from these shapes that were originally sold as InsulatorsSM.

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Disciplined Investors Don’t Bet on Rates

June 30, 2004
Lawrence R. Levin

Recently a group of top economists predicted the Federal Reserve would raise interest rates by at least 100 basis points over its next three meetings. Now that we all know where interest rates are going, can we just smile and go home or do we have to continue to manage our portfolios if we want success?

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The January 2003-2004 One-Year Look-Back®, “The Final Numbers”

April 13, 2004
Eric C. Brown

You may recall from “The January 2003-2004 One-Year Look-Back®” (Disciplined Investor® Volume 11, Number 5, dated February 5, 2004) that we broke our analysis down into three sections. Section I, “The Validity of Shape ManagementSM,” was completed and put to rest given the data then available.

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The NFL and Your Investment Portfolio

March 12, 2004
Mark P. Bodett, Andrew J. Hixson

The other day, I was scrolling through some of the earlier Beyond “Average Life” Letters (now known as the Disciplined Investor®) and came across the B.A.L.L. Volume 3, Number 18, titled “Ditka, the Fridge and Modern Portfolio Management,” dated May 13, 1996. The original B.A.L.L. compared assembling a football team to managing a bond portfolio. And, since we are in the midst of the NFL free agency period, I thought this might be the appropriate time to revisit the topic. Mark Bodett, a co-author of the original article and a Chicago Bears fan, assisted me with the update.

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The Matrix

March 4, 2004
Kurt A. Fritz

Have you ever had one of those ideas that hit you like a ton of bricks? I was reading an article about a business principle called the J–curve (Growth curve), and one such idea hit me. The general idea of the J–curve made me think of the movie, “The Matrix” (more on that later), but first let me briefly explain what a growth curve represents. The principle can be illustrated by a picture similar to the one below in which two different experiences are in force: positive (smiley) and negative (frowney). In business management, this curve is used for a variety of purposes, but usually it is used to describe productive change within an organization.

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A Call to Action: Sell this Bond ... Whether you own it or not!

February 11, 2004
Brad Bonga, Andy Hixson

Yes, you read the title correctly. We know of a bond that is such a great sale candidate that we are recommending you sell it even if you do not own it. Fannie Mae issued $125 million of the bond below earlier this week.

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The January 2003-2004 One-Year Look-Back®

February 5, 2004
The Disciplined Investor®

The purpose of this teleconference is to validate our methodology by looking back at The Disciplined Investor® Volume 10, Number 4, “The January 2003 Level Playing Field®,” dated January 16, 2003. We encourage you to review that document in preparation for the teleconference. If you no longer have it or have joined us since its publication, please call your advisor to have it sent to you.

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A Call to Action:

December 4, 2003
Andy Hixson, Seung Lee

This is a revised version of today’s Call to Action. In our efforts to present “Call to Action” information in a timely manner, haste is required. When time permitted today, we discovered a couple of minor errors. In addition, while correcting these, we also took the opportunity to add a few clarifying textual revisions.

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Bumpin’ on Up

December 1, 2003
David V. Raphael

In this Disciplined Investor®, we will utilize Shape ManagementSM to evaluate a liability product that has been around for a few years, but is picking up steam in the marketplace – the bump-up CD. We’ll explain the structure, examine its intended purpose, and provide you with a framework to evaluate whether the bump-up CD has a role in your liability portfolio. What we will come to discover is that this product looks attractive on a total cost basis if we strongly believe that only a limited number of depositors will ever take advantage of the “bump-up” feature embedded in this CD.

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ARM Funds and Other Random Musings

November 20, 2003
Kurt A. Fritz

Every couple of months, someone will ask if they should park some money in one of several ARM funds. My gut instinct is that it is probably not a good investment. Nonetheless, since these ARM funds come up time and again, I decided to review the facts surrounding one such fund.

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Traditional & Options-Based Credit Analysis

October 28, 2003
Raj Nandkumar

This article compares traditional and options-based credit analysis, and explains why options-based models should be used in conjunction with traditional models to gain an understanding of the true credit risk of a corporate bond. The emphasis will be on understanding the differences at an intuitive and conceptual level rather than a mathematical one.

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The Perfect Storm

August 4, 2003
Michael L. Coogan

There is an old saying that warns, “Be careful what you wish for.” On June 25th, the Fed cut rates to 1%. The 10-year Treasury was trading around 3-¼%. Swap spreads were tight as a drum. Prime had just moved to 4%. Mortgage prepayments were projected to intensify further. As we all know, they did. Deflation, not inflation, was the current economic topic. Bank interest margins were compressing each month. As we looked at our asset/liability report, further interest rate decreases would crush the economic value of our institution. In short, most portfolio managers wished for higher rates. Be careful what you wish for.

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Revisiting a Floating Perpetual Trust Preferred Stock

July 31, 2003
Girish M. Patel

Three years ago, John Behof wrote an article (“FNMA 2-Year Floating Preferred Stock,” dated 8/3/00) warning us about a floating perpetual callable preferred stock issue. Here, we will look back at the risks John discussed and see what has transpired.

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The Ups and Downs of Shape Management℠: A Case Study

July 11, 2003
Eric C. Brown

We are in the midst of a bond market that can only be described as extreme in the experience of any currently active investor. Rates are at lows not seen in over forty years, mortgage refinancing volume is at all-time highs, and the word “deflation” is being bandied about as something other than a punch line. Investors in general, and depository institutions in particular, are experiencing an array of pains and challenges that accompany this unusual environment.

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Magician’s Secrets Revealed – Part I

June 20, 2003
Kurt A. Fritz

Editor’s note: Kurt’s article on step-up callable securities has a magical theme to it. Despite his overwhelming literary talent, we have our doubts regarding his capability to compete with the magic and wizardry of the new Harry Potter book being released tomorrow!

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The May 2000 - May 2003 Three-Year Look-Back®

May 29, 2003
Eric C. Brown

The purpose of this teleconference is to validate our methodology by looking back at The Disciplined Investor® Volume 7, Number 24, “The May 2000 Level Playing Field®.” We encourage you to review that document in preparation for the teleconference. If you no longer have it or have joined us since its publication, please call your advisor to have it sent to you.

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Liability Select / Part II

May 27, 2003
Brad Bonga, Craig Johnson, Larry Levin

Our goal is to reduce our cost of funds in the same way that the Agencies (Freddie Mac, Fannie Mae, etc.) have been doing for years. Currently, we can fund with floating rates and fixed rates but we are at the mercy of the marketplace. Funding with a customized callable liability that has been specifically crafted for your individual institution allows you to control your liability destiny.

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Trust Preferred Update IV...

May 21, 2003
Craig S. Johnson

We are announcing the issuance of another Trust Preferred Funding deal, the MM Community Funding X, with Citigroup (formerly Salomon Smith Barney). We are beginning to collect collateral for the current deal that is planned to close late July 2003.

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Introducing the Strategic Credit Union Portfolio

May 15, 2003
Andrew J. Hixson

Over the past few years, our strategic partnerships with credit unions have grown steadily and since a credit union investment portfolio is generally different from a bank portfolio, we introduced a Typical Credit Union Portfolio in the March 2003 Level Playing Field®. With this newly introduced typical portfolio, I took on the challenge of designing a Strategic Credit Union Portfolio that would outperform this “benchmark.”

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The 2003 Advanced Course℠: Driving Strategy into Dollars

May 8, 2003
Nicholas W. Betzold, Jr.

Volatility was the theme of last year’s Advanced CourseSM. And as we have seen since that program, the world continues to be a volatile place fraught with peril for those who are unprepared. As I’m sure you agree, last year’s theme was very timely! Those of you who attended last year acquired knowledge and skills that have, once again, paid off handsomely over the ensuing year.

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A Diamond, or a Lump of Coal?

April 30, 2003
Kurt A. Fritz

Earlier last week, I was faced with a day when there were very few good quality securities available on the street. I began to peruse some of the street’s inventories and came across a very interesting bond, but before I share this new discovery, let me first set the table for our discussion.

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Watch Out Below

April 1, 2003
Mark P. Bodett, Kurt A. Fritz

As you know, we talk to literally hundreds of bankers in any given week – customers, Bond Math UniversitySM attendees, and prospects. Inevitably we end up talking about interest rates and one thing has remained constant – a debate on where rates are going.

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Amortization and Your Income Statement Revisited

March 12, 2003
James V. Lorentsen

Please review Jim Lorentsen’s comments on accounting practices and the attached article from the past, which provides two mechanical explanations of terms like “retrospective method” and “experience method” prior to this week’s Level Playing Field®.

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“Wave it in?!”

February 4, 2003
Craig Johnson

As most of you know, we on the desk are shown hundreds of bonds everyday. Some are good risk/rewards (shapes), some are average risk/rewards (shapes) and some are down right lousy risk/rewards (shapes). Sometimes, just a quick glance is all a bond needs before dismissal and at other times, we explicitly calculate the shape to ascertain a bond’s true value.

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Trust Preferred Update III…

January 24, 2003
Craig Johnson

I am writing to announce the issuance of another Trust Preferred Funding deal, the MM Community Funding IX. We will participate with Salomon Smith Barney and are planning a mid-to-late March 2003 close for the current deal.

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The January 2002-2003 One-Year Look-Back®

January 23, 2003
Disciplined Investor®

The purpose of this teleconference is to validate our methodology by looking back at The Disciplined Investor® Volume 9, Number 3, “The January 2002 Level Playing Field®.” We encourage you to review that document in preparation for the teleconference. If you no longer have it or have joined us since its publication, please call your advisor to have it sent to you.

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January 10, 2003
Kurt A. Fritz

In a previous Disciplined Investor, “We Can Never Take the Bond Math on Faith” (Volume 9, Number 15, dated April 3, 2002) many of you will remember Girish Patel’s account of inaccurate Bloomberg analytics. For those who may have missed it, the main theme of his article was to always “trust but verify” someone else’s bond math.

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Where Are Rates Headed This Year? (Same Song, Umpteenth Verse)

January 6, 2003
Eric C. Brown, Seung Y. Lee

Every year for the past several years (and now every six months), the Wall Street Journal publishes a survey of fifty-odd economists with their projections for future interest rates (as well as other economic indicators).

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Continual Look-Backs®: 2002

December 20, 2002
Eric C. Brown

Many of you may be aware that since May of this year, we have been conducting in-house “Mini Look-Backs®” on all Level Playing Fields® as they reach their one- and three-year anniversaries. We finally got it through our thick skulls that if this is important to do once a year, maybe it is important enough for every Level Playing Field.

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Collateral Matters

December 4, 2002
Mark P. Bodett

The prepayment report for October, which shows up on CMO deals as the November print, has been out for several weeks. In general, prepayments came in even quicker than the fast prepayments that were projected. We are at all time highs on speeds.

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Trust Preferred Update II …

November 6, 2002
Craig Johnson

I am very excited to announce the issuance of TPref Funding III. This will be the last opportunity this year to participate in this approach to raising capital. The deal is scheduled to close in December, and for those who participate in issuing, you will receive your funds before the end of the year.

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A Lesson about Keeping our Secrets

October 28, 2002
Eric C. Brown

I would like to share an exciting story about a recommendation Shape ManagementSM produced a year ago, and the value of our collective policy of non-disclosure and non-circumvention that it demonstrates. It is basically a story in three parts: the good news, the good memories, and the good lesson.

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One Move Ahead

October 23, 2002
Eric C. Brown

If you attended either the June or the September editions of the 2002 Advanced CourseSM, you will recall that we devoted two talks to the topic “Best Moves We’ve Seen You Make.”

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Can’t Scratch the Itch

October 18, 2002
Kurt A. Fritz

Have you ever had a song get stuck in your head? For many months, I have been quietly humming Rocky Top to myself (wife, kids, co-workers, etc). I can’t shake it. “Good ‘ole Rocky Top, Rocky Top Tennessee…” The other thing I can’t shake is a nagging concern I have about this market. Many of you have heard Craig Johnson touch on this theme at the Advanced CourseSM – it is the dilemma regarding all these options we are all “short” a.k.a. prepayment risk. Craig’s talk focused on several aspects of the market, which on the surface differed from his intuition including the surprisingly good performance of current coupon sequentials. As Craig and I discussed his talk, several offshoots of his theme popped into the forefront of my brain. I Kurt A. Fritz couldn’t shake ‘em. Let me explain.

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A Different Twist on Deposit Growth and Funding

October 16, 2002
Girish M. Patel

Several days ago, a community banker asked us to look at a new product that is designed to attract deposits and / or provide funding. New products always pique our curiosity and we were excited to examine this one.

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Trust Preferred Update

October 9, 2002
Craig Johnson

As our second trust preferred (TPref Funding II) transaction of 2002 comes to a close, I would like to update you regarding our involvement in the issuance of trust preferred securities.

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Updating the Typical Bank Portfolio

August 19, 2002
Celia T. Wong

Six months have passed since we last reviewed and updated the Typical Bank Portfolio to represent the “average” bank’s portfolio holdings. It is time once again to go through the process and see what the typical bank now holds. We will use this for all Level Playing Fields® from now until we update it once more.

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Investor Alert! We are Again in Interesting Times

August 5, 2002
Michael Coogan

Since it is the beginning of August, an ominous process is already in the works. Mutual fund statements are getting ready to invade the homes of millions of investors. I have developed a new theory on market value. Market value only matters in stocks when you open the envelope. I, for one, plan to deposit the envelope unopened in a file with other unopened statements. I will open those envelopes either when the stock market recovers or I retire, whichever is sooner. We can take bets on which will occur first.

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World Class Earnings: Victory Through Volatility!

July 2, 2002
Disciplined Investor®

Please join us September 18-20, 2002 in New York City, for our annual Advanced CourseSM program.

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Here We Go Again?

July 1, 2002
Mark P. Bodett

Since the May 2002 Level Playing Field, treasury rates have fallen 40 bp on the 2- and 5-Year, and 30 bp on the 10-Year. More importantly, mortgage rates as measured by the Fannie commitment rate have fallen 26 bp. While treasury rates are still some 60 bp above the lows of last fall, mortgage rates are only about 25 bp above their lows of the same period.

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A Call to Action: Breaking News about Prepay Pools

June 25, 2002
Brad Bonga

This is a call to action to bring to your attention two interesting opportunities that may facilitate your investment in Prepayment Penalty Pools (PPP) or which may allow you to make some of your existing investments more convenient.

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The May 1999-May 2002 Three-Year Look-Back® (Supplemental Document)

May 14, 2002
Disciplined Investor®

The following table is an accompaniment to Section V. Down to the Atomic Level.

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