Dylan adelman
Erin-Marie Deytiquez
Caroline Li
Jeremy Rhome
Jeremy Rhome
Jeremy Rhome

The Wharton Undergraduate

Finance Club is an independent
student-led organization of the
University of Pennsylvania.
All content is the
responsibility of the club.

FASHION FORWARD
by Elena Clarfield & Bernardo Sarti

PHARMACEUTICALS UNDER SCRUTINY

by Cindy Fan

THE RESCUE OF FANNIE MAE

& FREDDIE MAC
by James Megibow

VOLKSWAGENTOO FAST, TOO FAKE

by Jose Del Solar

CAN COPPER CONTINUE?

by Shravan Balaji

8
10

THE DARK SIDE OF UNICORNS

by Hersh Solanki

11

EUROZONE NEWS: GREECE

by Alex Deligiannidis

Fashion Forward
With changing consumer preferences, will Ralph Lauren and
Abercrombie & Fitch catch up to brands like Zara or H&M?
Elena Clarfield & Bernardo Sarti
Recent years have seen the dramatic rise in popularity of fast fashion labels
such as Zara, H&M and Topshop. These
companies have successfully captured the
ever-changing preferences of modern consumers, who tend to favor individualized,
on-trend styles over the classic, identifiable styles of labels such as Ralph Lauren.
These changing preferences are exemplified not only by the financial successes of
fast fashion brands, but also by the financial struggles of Ralph Lauren and other
historically popular labels, such as Abercrombie & Fitch (A&F). In order to compete with fast fashion labels, these brands
are making significant changes including
a change in leadership at Ralph Lauren
and a near-complete rebranding of A&F.
Founder of his self-titled American fashion label, 75-year-old Ralph Lauren, has decided to step down from his
role as chief executive amidst news of the
companys recent financial struggles. Lauren founded the company in 1967 as a line
of neckties under the Polo name since
then, it has expanded into multiple lines
of apparel, accessories, fragrances, and
home furnishings. Ralph Lauren is currently divided into several distinct, recognizable labels, including Polo Ralph Lauren, Ralph Lauren Collection, Lauren by
Ralph Lauren, and RLX. In addition, the
company has continued to expand in the
last two years, adding three new brands:
Polo for Women, Polo Sport, and Denim
& Supply. Lauren will stay on as executive chairman and chief creative officer.

Ralph Lauren Corp (NYSE:RL)

Taken from CNN Money

Despite the companys huge and lasting

success throughout its near-half century of existence, it has recently displayed
signs of financial struggle. Ralph Lauren
reported $7.6 billion in sales last year,
but its revenues dipped 5.3% on a yearover-year basis and share price fell over
44% in the last year. Part of the reason
for the companys decline has been the
strength of the dollar, which has resulted
in less international tourism to the United States and, consequentially, fewer sales
from foreign buyers. An additional factor
to note is that the bulk of the companys
profits now come from its most affordable
brands, such as the Polo line. Thus, strong
competition from fast fashion labels such
as Zara and H&M further threatens the
companys market share. Although these
brands produce apparel that differs from
Ralph Lauren clothing in many ways, their
products appeal to many of the same buyers of Ralph Laurens more accessible lines.
Interestingly, the man who will
take over Laurens place as CEO of Ralph
Lauren originally hails from a fast fashion
label himself. 41-year-old Stefan Larsson
spent 15 years as an executive at H&M
on the senior management team that led
the company through its early, yet major,
growth phases. Throughout those 15 years,
he played an important role in the companys annual revenue increase from $3 billion
in 1997 to $17 billion in 2012, and in its expansion from 12 countries to 44. After his
tenure at H&M, Larsson spent 3 years at
Old Navy, a subsidiary of Gap Inc. Before

he joined in 2012,
Old Navys sales
had
dropped
by over $1 billion
between
2006 and 2008,
as
competition
from more fashionable
brands
grew
stronger.
Larssons strategy for revival
included better
matching supply
and demand by
decreasing
the
amount of time it
took for clothes
to
go
from
the design stage to the shelves. His tactics were effective: last year, Old Navy
brought in $6 billion in sales nearly as
much as Gap and Banana Republic combined and made up 40% of the companys global revenue. Though he did not
entirely transform Old Navy into a fast
fashion brand, he certainly helped rescue it
from its dowdy discount brand reputation.
Ralph Laurens more inexpensive
lines, such as Polo, share competitors with
Old Navy even though their styles differ in many ways. The similar price points
and appeal to younger consumer bases mean that both brands compete with
Larssons original home of H&M, along
with Zara, Forever 21, and Topshop. One
of the most important reasons why these
brands are so competitive is their ability to
cater to the desires of the consumer in a
rapid manner. Zaras parent company, Inditex, for example, can fill a clothing order in Hong Kong from its Coruna, Spain
headquarters within 48 hours. Furthermore, each of the 2,000-plus stores place
clothing orders twice weekly. The orders
are contingent upon what is selling best
at each location, so each store will feature
different items. Additionally, it takes only
3-4 weeks for products to move from the
drawing board to the production line. This
incredible degree of specialization and accuracy allows Zara to meet and adjust to
its customers demands extremely quickly.
H&M has a similarly high level of control
over its inventory, though it does not turn
out designs as frequently as Zara does.
Beyond Ralph Lauren and Old
Navy, another brand that has struggled to
keep up with the likes of Zara and H&M in

2
Abercrombie & Fitch Co (NYSE:ANF)

Taken from CNN Money

recent years is Abercrombie & Fitch (A&F).
The upscale fashion retailer with over 1000
locations worldwide has had an interesting
journey through a changing landscape of
consumer preferences. Throughout the late
1990s and early 2000s, Abercrombie was hugely popular with young consumers after being
revamped by CEO Mike Jeffries. Jeffries ambitious vision included heavily scented stores
with loud music, dim lighting, and attractive
sales representatives (termed models) selling
the clothes. Once Jeffries assumed control,
the brand became a haven for high schooland college-aged consumers through its dynamic mix of sexual marketing and preppy,
technicolored clothing. The companys aggressive advertising strategy frequently featured models in the semi-nude. A&F leveraged

its logos to become a status symbol among

teens, leading to a sales jump from $165 million in 1994 to $1.06 billion in 1999 as well
as continued growth into the next decade.
Some of the reasons for Abercrombies successful brand development included
its perceived exclusivity, overt branding
and brash sexuality. Many of Abercrombies current struggles can be attributed
to those same qualities of the company.
Earnings have declined for over 10 straight
quarters and shares have plummeted. Abercrombies downfall seems intrinsically linked to its inability to compete with
stores like H&M, Zara, and Forever 21,
who offer similar items for lower prices and with more rapidly changing styles.
Furthermore, teens no longer see the Ab-

ercrombie brand as a status symbol and

are moving towards the trendier, individualized items of the aforementioned stores.
Abercrombies decline is also connected to
changes in teen spending. For the first time
in history, teens are spending as much on
food as they are on clothing, which translates into more consumption of fast fashion than pricier, yet more generic brands
like A&F. Sensing these changes and its
own disappearing value proposition, A&F
has reversed course completely. Stores now
are quieter, brighter and feature clothes
without the ubiquitous logos. Marketing is
taking on a more wholesome direction as
well, in contrast with its historical overt
sexualization, in an attempt to win back
its ephemeral base. Stores are closing fast
and the company is investing heavily in online and international offerings. Although
it may be too soon to determine whether
or not Abercrombies rebranding efforts
will be effective in the long run, indicators show that they have made a small impact thus far. In August 2015, after posting a surprise profit, the companys shares
rose 9.5% to $18.91. Its comparable-store
sales fell by less than expected, and its
Hollister chain performed even better.
Before the rebranding efforts, some design
concepts between Polo Ralph Lauren and
A&F were very similar, with their highly
identifiable logos the moose for A&F and
the polo horse for Ralph Lauren on nearly every article of clothing. Ralph Lauren
shouldnt look too closely at Abercrombie
for rebranding inspiration, however, as the
Ralph Lauren iconography appears to be
much stronger and longer lasting than Abercrombies, with the polo horse logo remaining a very recognizable status symbol. Thus,
the question remains: What will Larsson do
to revitalize the classic American brand
without sacrificing its history and integrity?
If Larsson chooses to infuse Ralph Laurens lower tier brands with a fast fashion
character, he faces the risk of undermining
its brand credibility and losing customer interest. However, if he chooses not to follow
the profitable lead of fast fashion brands,
he risks further obsolescence. Additionally, the fact that Ralph Lauren himself will
remain in a high position of power within
the company may mean that Larsson might
not have enough control to implement the
changes that he sees necessary. Ralph Laurens history has been fascinating thus far,
and it will be interesting to see the brands
further progression or lack thereof.

Pharmaceuticals
Under Scrutiny
Soaring drug prices had consumers unhappy. Massive sell-off
in biotech stocks had investors worried. Now, the Trans-Pacific Partnership is further intensifying political debates about the
pharmaceutical industry.
Cindy Fan

Hiking Up Drug Prices

Turing Pharmaceuticals CEO
Martin Shkreli became the latest poster boy for Wall Street greed when hiked
up the price of a drugDaraprimfor
AIDS and cancer patients by more than
4,000 percent from $13.50 to $750 a pill .
Now, lawmakers are scrutinizing the pharmaceutical industry even more as such
dramatic price hikes are not new in the
United States. A Wall Street Journal article reported how increases in drug price
typically outpace inflation, even when demand for the drugs falls. In fact, another
company, Valeant Pharmaceuticals, raised

the price for two life-saving heart drugs

in February of this year overnight, one by
525 percent and the other by 212 percent .
The pharmaceutical industry defends such soaring price hikes as a way of
funding research to develop new drugs in the
future . Contradicting what the companies
usually claim, a closer look at the finances
of these public pharmaceutical companies
indicates that these price hikes are perhaps
supporting the marketing and operation
costs than research and development expenses. CBS MoneyWatch took a list of 30
top-selling drugs from a Wall Street Journal
analysis of How Drug Company Revenue
Is Driven by Price Increases and analyzed

Source: Public Filings/CBS MoneyWatch

the 2014 financial data for the 16 publicly

held pharmaceutical companies. Here is a
list of companies with annual revenue (in
billions), R&D (research and development)
and SG&A (sales, general, and administrative, company overheads) as profit as percentages of annual revenue, and net income
(profit after taxes). As seen in the table, for
all companies but one, the SG&A of these
16 companies were higher than their respective R&D expenses. Thus, this fact hints at
the possibility that the high prices consumers are paying for these drugs may be going
more into SG& A such as marketing activities than R&D as the companies claimed.

Drug Prices, Massive Sell-Off,

and Politics
Mr. Shkrelis hiking actions prompted a heated tweet from former Secretary of
State Hillary Clinton, who promised to crack
down outrageous price if elected. Clinton
and Senator Bernie Sanders, also a Democratic presidential frontrunner, have both
released plans for lowering prescription
drug prices in their campaigns for the presidency. Their plans and especially Clintons
tweet, sent biotech and pharmaceuticals
shares plummeting due to investors fears
that politicians are tightening regulation on
drug prices in the United States drug prices in the worlds largest healthcare market.
In fact, since Clinton vowed on September 21, 2015 to lower prices if elected, the
NASDAQ Biotech index has fallen about
17 percent and shares of Valeant Pharmaceuticals International Inc. have fallen
more than 10%, causing investors to worry
whether Valeant, the most active acquirer
in the pharmaceutical industry, can sustain regulators crack down on drug prices.
The involvement of pharmaceutical industry in politics is not a new phenomenon. Since 1999, the pharmaceutical
industry has invested more money annually into lobbying than any other industry.
The industry donated $229 million last year
alone, and the Pharmaceutical Research and
Manufacturers of America donated $16.6
million hoping to advance drugmakers priorities in Washington. During the last presidential cycle, pharmaceutical companies
gave $51 million to federal candidates, political parties, and outside spending groups.
One of the industrys greatest victories has been preventing Medicare from
negotiating drug prices with pharmaceutical companies. This victory was ensured
when President George W. Bush signed

Continued on page 5...

The Rescue of
Fannie Mae and
Freddie Mac
Following the Housing Crisis, the US Treasury assumed control of
Fannie Mae and Freddie Mac. Many though are displeased with
the conditions that followed
James Megibow
Fannie Maes Economic and Strategy Research Group recently released its
housing market predictions for 2015s
fourth quarter, asserting that while an appreciating dollar and slowing global growth
will inhibit domestic real estate markets,
increased consumer spending will weather
these headwinds. It submitted a predicted
expansion of the mortgage market by a factor of approximately 7.7% over the entirety
of the 2015 fiscal year and 3.5% in 2016.
While Fannie Maes recent housing forecast envisages notably ambitious
home sale numbers, in particular the Federal Housing Finance Agencys (FHFA) Purchase-Only Index growth (4.9% for 2016),
Its market capitalization has remained virtually constant for several quarters hovering just below $2.884 billion or $2.50 per
share. , Despite accounting for over 80%
of their holdings, shifts in the domestic real
estate market have had an almost negligible
impact on Fannies share price. A recent
court case, Thomas Saxton, Ida Saxton,
and Bradley Paynter v. The Federal Housing finance Agency will almost singlehandedly determine Fannie and Freddies share
value in the future. Recent developments
suggest this case could be a defining moment for the courts involvement in government intervention in the world of finance
and the role of GSEs (Government Sponsored Enterprises) in mortgage markets.
Fannie Mae and Freddie Mac are
government-sponsored enterprises established during the Great Depression to
shore up US credit and promote liquidity
in mortgage markets. Their primary market lies in the securitization of mortgages
in the form of mortgage-backed securities. By formulating these financial products, Fannie Mae and Freddie Mac allow
banks to quickly capitalize on the issuance
of loans and consequently provide the

opportunity for banks to distribute more

credit to the US marketplace. They were
and remain the largest demand side force
in the secondary market for mortgages.
In the depths of the 2008 recession, experts found mortgage backed financial products issued and held by Fannie
and Freddie to hold considerably higher
risk profiles than initially thought. With
extraordinarily high default rates driven by
plummeting real estate prices and the subprime crisis, Fannie Maes holdings devalued into de facto junk bonds and it faced
near-imminent bankruptcy without rapid
recapitalization. As a government sponsored enterprise with a public-good centric
mandate, the federal government held precedent to intervene and restore the companys financial solvency. However, as a precaution to prevent the recurrence of risky
security issuing (at leverages of 70:1 in some
cases) and to increase federal oversight as
the nation emerged from the recession, the

US treasury took control of the company and assigned a conservatorship headed

by the Federal Housing Finance Agency.
This federal action, condoned
by The Housing and Economic Recovery Act of 2008, gave the Treasury near
limitless fund allocation to infuse capital
into the organizations. The Federal Reserve then purchased over $23 billion in
GSE debt and the Treasury bought over
$1 billion of preferred stock. Following these investments, Fannie and Freddie regained some financial solvency.
However, the legal battle over
Fannie and Freddie today rests squarely on the controversial 3rd amendment
sweep. As one of the conditions of its
conservatorship, the Federal Treasury imposed this third amendment to the original legislation that mandated Fannie Mae
and Freddie Mac cover their debt obligations to the Treasury and Reserve before obligations to investors. Further, the
FHFA liquidated shareholder owned assets
to cover corporate debt to the treasury.
Investors Thomas Saxton, Ida
Saxton, and Bradley Paynter have filed suit
this year against the FHFA citing a number of complaints largely related to the
third amendment and all linked to alleged
violations of the Housing and Economic
Recovery Act. They affirm that not only
has the FHFA failed to act as a conservator
within their mandate by refusing to bring
Fannie and Freddie toward the end of government oversight, but also directly violated their property rights as shareholders.

Continued on page 5...

5
Pharma continued from page 3...
and Congress passed the Modernization
Act of 2003, which permitted Medicare
to cover outpatient prescription drugs and
prohibited re-importation from Canada
and Europe, countries where prices are often lower. President Obama tried to convince lawmakers to allow Medicare to negotiate down drug prices, but many believe
President Obama missed his chance when
Congress was under Democratic control.
Currently, the plans of Clinton and Sanders would allow Medicare
to bargain over drug prices. On the other hand, pharmaceutical companies are
looking towards the 21st Century Cures
Act, a bill to accelerate new drug approval by Food and Drug Administration.

Trans-Pacific Partnership on
Pharmaceuticals
The Trans-Pacific Partnership,
the largest regional trade accord, aims to
free 40% of the world trade from tariffs
and quotas.
One of the reasons why
the U.S. is sharply divided on the impact
of the TPP is that TPP will increase the
protection for pharmaceutical innovation. TTP negotiators have wanted to
balance the need for greater access to
medicines and adequate patent protection for pharmaceutical companies. One
of the main arguments by TTP negotiators is the minimum period of protection
to the rights for data used to make biologic drugs. The United States sought up
to 12 years of protection while countries
such as Australia, Peru, and others wanted
no more than five years of protection .
The TPP compromises a mandatory min-

imum of five years, with another three

years of regulatory review, but no set
maximum, leaving victory for both sides .
Negative responses have sparked
from the TPP. Doctors Without Borders
claims the TPP will go down in history
as the worst trade agreement for access
to medicines in developing countries
as the patent extension for brand-name
drugs will prevent similar generic drugs
from entering the market, and therefore
driving up prices. Many believe the TPP
agreement will affect health-care budgets
and the drug access across several countries but especially the poorest as TPP
will delay the release affordable generic
drugs. As of now, the specifics of TPP
agreement have not been released. Stakeholders around the world are waiting to
see the impact, be it positive or negative,
of the TPP on the worldwide economy.

FM continued from page 4...

Noted legal scholar Richard Epstein from
the NYU School of Law concurs with the
cause of action brought forward by the
plaintiffs and described the third amendment sweep as a sham transaction. Matthew McGill, a partner at Gibson, Dunn,
and Crutcher added, The most fundamental point is that the FHFA actions
as conservator totally disregarded the fiduciary duties they held as conservator.
There has been no pretense of acting in
the best interest of the companies. The
claimants argue that the company held a
positive balance sheet at the moment of
government intervention and were not,
in fact, facing insolvency. They believe
that the liquidation of shareholder owned
assets to cover debts to the government
before the shareholders violated the statutory mandates of the conservatorship.
The FHFA, on the other hand,
argues that it has the authority to manage the firms as it sees fit to protect the
taxpayers who continue to back them.
They contend that the third amendment
sweep came as a direct consequence of
mounting cyclical debt owed to taxpayers that Fannie and Freddie covered with
additional funds from government bailouts. The question that the court faces is whether or not the FHFA had the
statutory right to place the Treasury
ahead of the stockholders in the repayment process. Neither party opposes
managements right to liquidate corporate assets even under a conservatorship.

Most recently, a federal court

ordered the FHFA to release confidential government documents regarding
the maintenance of the conservatorship
in a case brought to court by Fairholme
capital, and this precedent applies just
as easily to Saxton et al. v. the FHFA. ,
This suit will have tremendous
import for both the legal scope of feder-

al government intervention with respect

to finance and, perhaps most importantly, the state of the mortgage market. If
the conservatorship is ended and Fannie
and Freddie are allowed to resume distributing profits to shareholders, famous
hedge fund manager Bill Ackman predicts
the stock price could be worth $40$50, a far cry from its current $2.50 rate.

VolkswagenToo
Fast, Too Fake
How do you know that your car isnt lying to you? Dont worry it
has nothing to do you, instead blame the creators
Jose Del Solar
Volkswagen finally succeeded in its
arduous task of
surpassing
Toyota as the worlds
biggest automaker
this summerthree
years ahead of
schedule. VWs plan involved penetrating
the American market through its fuel efficient diesel TDI engine. Though the companys share of the American market remains
small compared to Toyotas, it has doubled
in the past year and its TDI engine has become one of the most popular and rapidly
growing diesel engines in America . But its
success has been both unethical and costly.
VW admitted in September, after
months of investigation by the Environmental Protection Agency, that it installed
software in 11 million diesels that made
the cars operate differently when tested, allowing them to pass the EPAs demanding NOx emissions tests. But when
the cars were actually driven by consumers, these emissions controls were deactivated and the car would emit up to
40 times the maximum allowed level .
VWs handling of the scandal has
been similar to that of BPs after the Deepwater Horizon oil spill; rather than fight it
in court or try to pass the blame, it admitted
guilt and promised to do what is necessary
to repair the brand. The company has suspended staff, remained open and apologetic,
and appointed a new CEO, Matthias Mller.
The day before the German executive was
appointed CEO, former chairman of the
board Ferdinand Pich, returned to exert
control over the predominantly German
board of Volkswagen. The board is now
headed by former VW CFO, Dieter Ptsch,
also a fellow German. But a key weakness
at VW remains the lack of diversity of opinion and expertise on the companys supervisory board , and experts wonder whether the particularly homogenous company
could have used outsiders. This insularity

may have contributed to creating an atmosphere where decisions go unchallenged .

While VW has indeed taken important steps to prevent any further
damage to the brands image of reliable,
trustworthy, well-engineered cars, the automaker has taken a massive hit since it
came clean, shedding as much as $40 billion in market cap and facing up to $18
billion in fines. Lawsuits are piling on as
well: France and Italy have launched independent investigations, and individual
car owners are already threatening to sue.
One third of the cars coming down the assembly line legally not allowed to be sold,
and a massive recall is imminent. Mller
has also signaled that massive cost cuts
are impending in order for the company
to preserve a good credit rating . If one
thing is certain, its that Audi will need to
rethink its Truth in Engineering slogan .
GM was in a similar position in
2014 after news broke that company executives knew about faulty ignition switches
for about a decade before finally recalling
cars. Although GMs death toll is more
quantifiable, both companies have blood
on their hands. This pattern of negligence
has been recurring, from Goldman Sachs
to Toyota to BP. The way to prevent this
in the future is to go beyond fines and
merely punishing the shareholders, and
to actually prosecute the executives in-

volved. In GMs case, to the surprise

of many, nobody was actually charged.
And like most companies that have
been in similar situations, GM has recovered
since. Its fines were lower than expected, at
just over $1 billion, and its shares and sales
have recovered. Like GM, VWs sound financial structure will likely weather the shock
of the emission scandal in the long term.
The consequences could still prove
more severe, however, as the effects of the
scandal on consumers become evident. The
question is whether consumers care about
their wallets or about the environment, as
the TDI engine still remains a cheaper alternative, but not an eco-friendly one. But
consumers may not even have that option unless VW finds a way for its diesel
engines to pass the EPAs tests. Even for
VW to pass Europes more lax environmental standards it would need to lower its
NOx emissions by 2000%, and Europes
emissions tests may soon become more
stringent . In Europe, car companies can
perform the test at the highest possible ambient temperature, remove side mirrors, and
tape up any cracks, making it so that fuel
efficiency and emissions are around 40%
worse on the road than in the laboratory .
It seems that Volkswagens desperation for growth has resulted in just the
opposite, at least in the short term. This
scandal will certainly not mean the death
of Volkswagen, but it may mean the death
of diesel, the companys driving force for
growth in recent years. On the bright side,
this scandal may simply hasten diesels inevitable obsolescence. VW can now divert the
billions of dollars it spends developing its
diesel engines each year to better alternative
technologiesand, of course, to pay fines.

Volkswagen AG (OTCQX International Premier:VLKAY)

Taken from CNN Money

Can Copper Continue?

Looking at the Copper Market, why is volatile and what could
this mean for the future?
Shravan Balaji

Copper December 2015 Contract

$ / Pound

Taken from CNN Money

Historically, few metals have been
as relevant to global technological advancement as copper. From architectural feats like
the Statue of Liberty to breakthroughs in
warfare like bronze (a copper alloy) spears,
coppers significance cannot be understated.
Yet today, copper lost its pre-eminence on
the global market due to the development
of synthetic materials and seen its value
as a commodity rapidly shift. Due to newfound economic threats in supply because
of the currency appreciation in the USA
and demand through the recessionary fears
in China, coppers volatility has dramatically shot up in recent times with possibly
ominous effects on commodity long term.
Like all commodities, coppers market value is linked to the nature of its production. Political and economic stability in
regions of production translates into stable,
hopefully bullish markets. These markets
then sustain themselves on the confidence
that trading these commodities will be safe
and that production can be easily predicted. These principles in trading copper have
been heavily challenged in recent events

given the global economic volatility that is

present. In terms of pure resources, copper is found primarily in four regions across
the globe: Canada, south-central Africa, the
Andes, and the western basin-region of
the United States . But due to a variety of
economic and political factors like colonial
resource management and implementation
of theories like comparative advantage in
public policy, the top copper producers include South American nations and China .
Unfortunately, both regions are undergoing
tumultuous economic periods in the present. It is in these nations where we see the
distressful manifestation of the copper markets on both the supply and demand sides.

Case Studies: South America

and China
South America

Two of the three largest copper

producers (China being the exception) lie
in South America, an economic region
tied closely to the fortunes of the United
States dollar. Historically, a strong Ameri-

can dollar has hurt South American nations,

with the rally of the 1980s triggering
the continental debt crisis which eventually required the stringent and unpopular
measures of the International Monetary
Fund . After a 0.3% decrease of industrial
production6 and 0.5% decrease in capacity utilization in the United States since
July, the fears that the United States dollar
could appreciate were exacerbated by predictions of an interest rate increase from
the Federal Reserve in the fall . Though
these expectations were not met and quantitative easing continued, investors were
still wary given the imminent threat of an
eventual increase in the Federal Funds Rate.
Such events have particularly damaged the copper prospects of Chile and
Peru, which rely on commodities for economic growth8. Chiles peso has depreciated 10% against the dollar over the past 12
months, while the Peruvian Sol has depreciated 14 percent against the dollar in that
same time frame8. Though copper producers attempted to adjust to this global phenomenon through the reduction of production from 6 million to 5.94 million tonnes ,
the contradiction with market expectations
added to the bear market, with prices fluctuating into a downward spiral. Chilean
companies like Antofagasta PLC have been
responsible for this shift, though the Central Reserve Bank of Peru has attempted
to alleviate the symptoms of a commodity crisis through expansionary open market operations8. Regardless, if two of the
largest copper producers have their metaphorical economic hands tied by external
forces, there is little safety in the metal.

China

Unlike Latin America, China is

mostly responsible for its own shortcomings. The second largest copper producer in
the world, China and its fortunes are less
tied to commodities than Latin America.
Yet the nations economic state can still
certainly affect copper markets, due to the
nations large scale demand of the metal.
After years of economic growth supposedly meeting the government objective of
7% a year , its economy has finally slowed
down, with markets in Shanghai collapsing
in July . In typical fashion, the Chinese government intervened through artificial increases in stock prices, devaluation of the
Yuan, and the addition of $483 billion in
liquidity to bolster Chinese brokerages.
Though this did provide a short

Continued on page 9...

Regulatory Shifts: U.S.

Retrenchment and
European Unlocking
Frank Geng
In the past month, the Consumer
Financial Protection Bureau has taken several sweeping measures towards tightening
lending regulations. The CFPB, the offspring
of the 2010 Dodd-Frank legislation, holds
jurisdiction over consumer protection from
banks, credit unions, mortgage lenders, debt
collectors, and other financial companies.
And recently, as part of these Dodd-Frank
reforms, the Bureau has been increasing its
scrutiny of lending practices. On the other side of the Atlantic, however, there is a
different atmosphere. In response to slow
economic growth and high unemployment,
the EU and European Commission have
started tapering off a six-year program of
post-crisis rule-tightening. It will be a while
before any of these changes can make lasting effects, though perhaps these regulatory
shifts indicate a divergence in American and
European post-2008 regulatory attitudes.
It has been a productive few
months for the CFPB. On October 3rd, the
CFPB enacted the new Know Before You
Owe rules which will require mortgage
lenders to show borrowers the final terms of
the mortgage before the closing date. The
rules are supposed to be a quick remedy
that discourages a repeat of pre-recession
risky borrowing and lending behavior. Major
banks have since the new rules implementation pulled back from lending to those with
weak credit histories. Opponents claim that
at a time when US home ownership is at 50year low, this legislation may prove untimely
and inopportune. The Know Before You
Owe rules, however, come in complement
to the Ability to Repay rules previously
introduced with Dodd-Frank, which provided legal protections to banks who made
qualified mortgages. It is thus a refocusing--rather than a punishing--campaign by
regulators to increase bank accountability.
At the same time, the CFPB has introduced new legislative language targeting
the consumer lending firms that managed to
survive the financial crisis. Companies such
as World Acceptance or Regional Management are finding that the big banks underpinning their financial operations are be-

ginning to tighten their purses. The CFPB

claims that the installment loans provided
by these lenders have unnecessarily quick
repayment schedules as well as confusing
refinancing packages that drastically increase
interest and pile-on fees. To protect themselves from CFPB investigation, these large
banks behind the lenders have introduced
new legal triggers in their loan agreements.
World Acceptance in August revealed in a
report that the CFPB was considering taking
legal action against the firm. In a scenario
where a consumer lending firm faces legal
action from a regulatory agency that would
have a material impact on its business, the
banks could consider this as a case for default and thus be able to seize the lenders assets. Wells Fargo, for example, has cut World
Acceptances credit line from the current
$630 million to $400 million by 2017. Bank
of America has similarly added an amendment to its loan agreement with Regional
Management despite the fact that Regional is

not facing any regulatory threats. This cautionary behavior from the banks and lenders
is precisely what the CFPB is aiming for with
this new legislation. Its the next step by regulators to prevent another borrowing-triggered financial crisisa good example is in
the case of student loan debt (a major driver
of consumer lending firms business) which
stands at a staggering $1.2 trillion in the US.
Four days before the CFPB mortgage rule announcement, there was a markedly different tone in the halls of the European Commission when it appealed for
evidence of unnecessary regulatory burdens. In the aftermath of the financial crisis, Europe too saw the birth of a legion of
supervisory organizations: European Banking Authority (EBA), European Securities
and Markets Authority (ESMA), and the
European Insurance and Occupational Pensions Authority (EIOPA). It has since been
a culture of hard-hitting banking and capital
reforms. The recent meeting at the Commission, however, has called for the creation
of a Capital Markets Union (CMU). Its a recently proposed solution to the overreliance
on borrowing from banks and the underdevelopment of cross-border capital markets
funding in Europe. At the core of the proposal lies the removal of barriers of types of investments funds can make, insolvency rules,
and tax reform. In the U.S., capital markets
funding for mid-sized companies was five-

Continued on page 9...

9
Shifts continued from page 8...
times greater than those in Europe in 2014. In
order to spur economic growth, then, the EU and
Commission simply wish to give business owners
a broader range of options for raising capital and
for what the organizations call unlocking funding for Europes growth. The process, however,
involves heavy deregulation of the loan markets.
Perhaps evidence of Europes new attitude comes in the form of the U.K.s own consumer lending industry. On Oct. 2nd, the British
Financial Conduct Authority (FCA), the equivalent of the American CFPB, announced that
it would establish a deadline for loan insurance
compensation claims. Over the past several years,
consumer lending and loan insurance companies
have been under the scrutiny of British regulators for overly complex pricing systems. The
result was a free flow of individual claims that
have exceeded both the FCA and lenders expectations. The recent decision to put a countdown
on these claims, thus points to a desire to relieve
regulatory pressure on these lenders and banks.
It will of course be difficult to tell if the years of attempted Dodd-Frank reforms or if the proposed
Capital Markets Union are able to address their
respective concerns. It is also difficult to compare
the entireties of each regulatory environments.
The examples of consumer lending are simply
indicators of specific trends which can allow for
an examination of trends in specific industries.
Though for now, the recent movements of the
financial regulators speak to the increasingly divergent lending regulatory philosophies of the
two economies: one which hopes to safeguard itself against another crisis, while the other hopes
to climb out of the hole that the crisis had dug.

Copper continued from page 7...

term boost to the Chinese economy, the
slowdown reflected a drop in demand that
had already been seen with copper. Chinas
demand for Chilean copper had declined
dramatically over the last year due to the
impending slowdown and the growth of
Chinese copper production in Southeastern provinces like Jiangxi . The Chinese
even bought the Aynak mine in Afghanistan for $3 billion dollars, a record transaction for Afghanistan. However, due to
the reemergence of the Taliban and consistent conflict near the mines, the Chinese have all but given up on maintaining
stable productions with the mines, instead
focusing on the basic protection of the
location and their workers13. Today, investors simply feel uncomfortable trading
copper without the knowledge of reliable

Dodd-Frank
Legislation
Courtesy of Investopedia
A compendium of federal
regulations, primarily affecting financial institutions and their customers, that the Obama administration passed in 2010 in an attempt
to prevent the recurrence of events
that caused the 2008 financial crisis. The Dodd-Frank Wall Street
Reform and Consumer Protection
Act, commonly referred to as simply
Dodd-Frank, is supposed to lower
risk in various parts of the U.S. financial system. It is named after U.S.
Senator Christopher J. Dodd (Photo
on the top) and U.S. Representative
Barney Frank (Photo on the bottom)
because of their significant involvement in the acts creation and passage.

Chinese demand behind the commodity.

John-Sebastian Jacques, CEO of copper
producer Rio Tinto , has acknowledged
that copper serves as a proxy for Chinese
markets, reflecting the strength of Chinas
demand in determining copper stability14.

Upcoming trends

Though copper production seems

to be a mainstay in the global economy, its
volatility has certainly disenchanted investors and traders. With respected producer
Glencore has stating that it will reduce the
number of mines it holds to allow production to meet demand, many in the market
see this as a sign of slowdown . The Noble Trading Group has announced that it
will phase out of trading commodities
such as copper, given that metals are far
too capital-intensive and make up 20% of

the groups portfolio . The metal has seen

a bear market for the last five years with
worrisome decreases in price and occasional peaks given the global economic state
and seems to be heading downwards in the
future . Given this volatility and the importance of copper for a significant number
of nations, producers must look to avoid
both dependence on the commodity for
economic growth and dependence on other nations to purchase said commodity. If
investors realize that this simply isnt possible due to the nature of the commodity market, then coppers struggles are unlikely to subside in the foreseeable future.

10

The Dark Side of

Unicorns

Snapchat, Uber, Instagramwhat do they all have in common?

With the innovative use of technology, they have become valuation giants. These are the modern day Goliaths; these companies are the unicorns.
Hersh Solanki
Snapchat, Uber, Instagramwhat
do they all have in common? With the innovative use of technology, they have become
valuation giants. These are the modern day
Goliaths; these companies are the unicorns.
Unicorns are technology companies with valuations that exceed $1 billion;
the current count is 142 as noted by CB insights3. The ideas are great, the valuations are
terrific, and everyone is happy at the end of
the dayor so it seems. However, there is
a dark side to the inflated valuations of unicorns. Three of the biggest underlying issues
are that their exit option lies in going public, they have trouble being acquired by other companies, and they often lie in the red.
One of the biggest issues is that
unicorns are funded by institutional investors
rather than venture capital firms, which is a
risky model when looking at the liquidity of
the invested money. Institutional investors,
which include mutual funds, pension funds,
and some hedge funds, have long participated
in venture capital rounds as limited partners5.
The problem rises when the institutional investors drain their money, causing the startup to run into a multitude of issues such as
loss in capital leading to bankruptcy. When
there is a forced selling (due to lack of capital), it causes the unicorn to cut from other
parts of the business, leading to a downward
spiral for the business. In addition, mutual
funds, unlike venture capital, are owned by
public investors. But as their investments in
private companies are relatively fixed, a dying
unicorn could cause a selloff in other parts
of the portfolio that are liquid, which in turn
could put downward pressure on the market.
Not only is there harm to the unicorn, but also
to the market itself. Such an issue highlights
why unicorns tend to be risky investments.
As a spinoff to the phenomena
above, it difficult to acquire a unicorn simply
because of the outrageous valuation. Some
valuations are not warranted and will drop in
the future, but a company looking to acquire
must pay the present value price for the target.

CB Insights go on to note Last year, 6 VCbacked companies had exited for over $1B via
M&A by May with a total value of $30.9B. This
year, there has been just 1 unicorn exit. Less
M&A and less IPOs. Should VCs be worried?
which portrays the downward trend in Mergers
and Acquisitions. It is evident how there is an
issue with, otherwise known as M&A, in the
market. Because of the over the top valuations,
company are less likely to acquire unirons due
to a lack of capital. Another underlying cause
could be that unicorns are often valued based
on speculation rather than their fundamentals. Though potential is a way to be valued,
it is quite risky in that potential is speculation
at the end of the day. A reason could be the
tech bubble, which has led to the phenomena
of money throwing. No matter how much
potential there is for a company, the market
will ultimately want hard proof to acquire uni-

corns as seen by the declining numbers above.

Seeing multiple issues including liquidity and lack of exit opportunities, why are
they valued so much? They are valued based
on how many users they can garner. In fact,
Snapchat has been taking a loss yearly in order to gain a strong consumer base. According to Gawker, The 3-year-old start-up had
a loss of $128 million and generated just $3
million in revenue last year2. Often times, the
mentality for them is to maximize their user
base in order to monetize in various ways at
a later point in time. Today, Snapchat is valued at $16 billion by CB insights despite still
being in the red. Such a ludicrous idea, which
could not have been though of as sane just a
couple decades ago, is now commonplace.
It is clear how unicorns may be
in trouble due to their liquid investors, huge
size which hurts them in getting acquired,
and shift of focus from profits to customer
base. Next time one looks at a unicorn, he/
she must realize that the Silicon Valley has
seemingly done wonders for startups, but it is
a double edged sword. Is it possible that the
next big step is the age of the decacorn (currently 13), which are startups worth excess of
$10 billion? Snapchat, Uber, and Instagram
would certainly like to think so, but it may
not necessary be in their best interest. Only
time will tell how the inflated valuations play
out for the not so mythical beastsunicorns.

Top 10 Unicorn Companies

by Valuation
Valuation (B)

Date Joined

1. Uber

$51

08/23/2013

2. Xiaomi

$46

12/21/2011

3. Airbnb

$25.5

07/26/2011

4. Palantir Technologies

$20

05/05/2011

5. Snapchat

$16

12/11/2013

6. Flipkart

$15

08/06/2012

7. Didi Kuaidi

$15

12/31/2014

8. SpaceX

$12

12/01/2012

9. Pinterest

$11

05/19/2012

10. Dropbox

$10

10/05/2011

Source: CBInsights

11

Eurozone News:
Greece

This is the third time that Greece is getting bailed out, is this
finally the beginning to the road to recovery?
Alex Deligiannidis
Greek legislators and the countrys creditors have been busy negotiating
the terms necessary to release $2.3 billion
in bailout funds. The new plan includes
several highly contentious measures, including the expansion of a property tax
that has proven extraordinarily unpopular
among Greek citizens. Additionally, in order to unlock the $2.3 billion in loans, the
Greek government will have to implement
significant pension reform, increasing the
retirement age to 67 and imposing penalties on those who choose to retire earlier.
Further measures include significant privatization of former government enterprises,
such as Greek ports and the power industry.
The 2.3 billion dollars in funds
that Greece will receive are just a small
part of a larger $98 billion dollar international bailout. Although the previous government, New Democracy, received bailout
funds in return for implementing changes
such as those listed above, the majority of
the changes were never actually put into
place. Greeces current ruling party, Syriza,
has promised to make good on the promises introduced in the new austerity measures.
On the other hand, the Greek gov-

ernment has, in recent talks, been pushing

extensively for the debt relief that its
creditors have promised. Debt relief has
been suggested as a necessary part of any
Greek relief package by the International
Monetary Fund and has been supported
by President Francois Hollande of France.
This would restructure and decrease the total amount owed by Greece to its creditors.
The Syriza governments and Alexis Tsiprass acquiescence to the majority of
the demands of its creditors is surprising in
light of the circumstances under which it
came to power. Preaching leftist ideals, the
Syriza party primarily was elected to avoid
the bailouts that many Greeks believe are responsible for the countrys current financial
woes. However, presently, it has become evident that many of the concessions that were
made by previous governments will also
have to be made by Syriza in order to unlock
the funds that Greece desperately needs.
This said, it is important to note
that, no matter what the solution will be, it
will have to deviate significantly from the
route followed by previous governments
and their creditors. This year, Greeces
economy is set to contract fully by 2.3 percent, and next year by 1.3. For compari-

son, the United States economy grew by

approximately 3.7 percent last year. Any
new bailout plan and debt relief package
will have to concede that previous implementations have simply not worked
and that a new solution will be required.
Earlier this year, Greece nearly
failed to finance itself; feeding off popular discontent, the Syriza government attempted to defy the German government
and the rest of its creditors, threatening
an exit from the Eurozone. When Tsipras
finally conceded that this would be an untenable position, there was a split in the
party, bringing about snap elections. Despite rising unpopularity and a section of
his party that insisted upon spurning a continuation of the bailouts, Tsipras and the
majority of the Syriza party were reelected.
They have since set about implementing reforms in order to unlock the bailout funds.
Despite Greek discontent, it has
become apparent at this point that the
Greek government will need to implement
these reforms in order to successfully fund
itself. After the past few years of instability, it is imperative that it succeed in doing
so. Failing to meet creditor demands will
not only severely discredit Syriza as a ruling party, but also plunge the nation into
further economic and social chaos. New
solutions are needed, and both Greek politicians and creditors must recognize the
importance of finding novel ways to improve the fiscal stability of the country.

Greece Financial Deal

Source:BBC, Euro Summit Statement/Open Europe

85 billion Euros
To recapitilize banks, repay debts,
interest payments etc

25 billion Euros
To repay recapitilization
loan for banks

12.5 billion Euros

To reduce debt to GDP ratio

12.5 billion Euros

For investment

85 billion Euros

50 billion Euros

35 billion Euros

7.16 billion Euros

Total bailout

Trust Fund

EU Funding

Bridgining Loan

From the European Stability Mechanism

(ESM), plus IMF contribution

From privatizing assets

For growth and new jobs

To cover immediate
repayments to ECB and IMF
and other July debts