CFA Society Chicago Euchre Tournament

20160303_180851_resizedOn March 3, more than 40 investment professionals joined CFA Society Chicago at Exchequer Restaurant and Pub for its first card tournament.

The evening brought out a diverse group including:

  • Over confident card players (after all, over confidence is a trademark of our profession isn’t it?).
  • Novices wanting to learn a new game while networking with peers.
  • Deal stealers? Yes, that’s part of the game.
  • Deck stackers? Probably were, but none were caught.

DSC_2623Throw in an open bar along with pizza and chicken wings (included in the price of admission) and what do you get? The CFA Chicago’s first Euchre tournament.

What exactly is Euchre? Euchre is a trick-taking card game most commonly played with four people in two partnerships with a deck of 24 standard playing cards. Euchre appears to have been introduced into the United States by the early German settlers in the Midwest. DSC_2621It has been more recently theorized that the game and its name derives from an eighteenth-century Alsatian card game named Juckerspiel. (From Wikipedia).

Euchre retains a strong following in some parts of the Midwest; especially in  Indiana, Iowa, Illinois, Ohio, Michigan, and Wisconsin. A survey of several players confirmed where they learned the game – typically from parents or relatives, or in college.

There were 19 teams that took part in a single elimination style tournament. The winners of the tournament were Hans Stege and Ankit Bhutada!DSC_2630

Looking to play? You can find bar sponsored leagues especially in the northern suburbs. Several players mentioned that they would partake in a periodic (semi-annual) Euchre tournament, so stay tuned for future tournaments.

CFA Society Chicago Book Club:

My Side of the Street: Why Wolves, Flash Boys, Quants, and Masters of the Universe Don’t Represent the Real Wall Street by Jason DeSena Trennert

my sideIf you have a history in this business or seeking to pursue it, have read any of the popular finance books, or simply sat back and enjoyed some of the classic Wall Street movies, you will certainly appreciate this well-crafted and first hand perspective of the finance industry.  The title was quite interesting because if you are a voracious reader of investment literature, you will reflect back on the excesses in the Wolf of Wall Street, the questionable high frequency trading dark pools in Flash Boys, or the so called “Master of the Universe” in Bonfire of the Vanities.  The author paints a much different picture for people who have formed their views on Wall Street based on the financial crisis, outsized bonuses, insider trading scandals, options back-dating, and movies like Boiler Room.  He describes the hundreds of thousands of finance professionals that work hard every day to support their families, pay their mortgage, and act with ethics in their business practices.

You can learn a significant amount from someone as successful as Mr. Jason Trennert.  The opportunity to learn his side of the street can be very valuable to our own careers.  Mr. Trennert, also known as “Jase” by those close to him, takes us through his experiences starting off as a cold caller, moving on to institutional sales with extensive travel and client facing interaction, business school at Wharton, and eventually starting his own firm.  Ultimately, it seems that his love for macro, entrepreneurial spirit, and past experiences set him on the path to start Strategas.  You can learn from Mr. Trennert’s experiences on how to break into Wall Street, build connections, go from back to front office, the value of reading both investment literature and non-fiction, the importance of curbing the late night entertaining, when to say no to opportunities, and perhaps when to know it’s time to become the captain of your own ship.  At the end of the book, Mr. Trennert offers some wise career tips such as assuming no one will help you until you’ve accomplished something, focus on achievement rather than status, live CAPM, play your strengths, Wall Street is both large and small, and finally….Read!


Upcoming Schedule:

April 19, 2016: While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis by Roger Lowenstein

May 17, 2016: The Green and the Black: The Complete Story of the Shale Revolution, the Fight over Fracking, and the Future of Energy by Gary Sernovitz

June 21, 2016: Age of Ambition: Chasing Fortune, Truth, and Faith in the New China by Evan Osnos


To sign up for a future book club event, please click here:

Illinois Institute of Technology Takes Top Prize in Chicago’s Local Level Final of the CFA Institute Research Challenge

DSC_2393The CFA Institute Research Challenge is an annual global competition for university students who assume the role of a research analyst. This multi-round competition provides hands-on mentoring and intensive training in financial analysis. Students value a stock, write an initiation-of-coverage report, and present their recommendations to a panel of judges, each of whom is a Charterholder and a highly regarded industry professional. Chicago’s Local Level Finals was held on February 5th and included five teams from local universities. The winning team advanced to the Americas Regional Finals, which will be held the week of April 11th in Chicago.

Each team had 10 minutes to present their reports on Mead Johnson Nutrition which sells nutritional products for infants and toddlers across the globe. The firm sells most of its products in the United States and China and primarily focuses on infant formula. The teams were given wide latitude to use any financial modeling and business analysis tools they believed to be most appropriate to generate a target price and to make a buy/sell/hold recommendation on the stock. Following the presentation, the judges had 10 minutes to ask the teams questions about their research process and the results. Teams were assigned colors to disguise their university affiliations.

DSC_2477The Purple Team (Illinois Institute of Technology) went first, focusing on Mead Johnson’s brand loyalty among customers as well as the growing Asian market. A detailed projection of the firm’s financials and a SWOT analysis were among the modeling tools used to determine a target price of over $93 and to issue a Buy recommendation on the shares. Drivers of their positive view included the lifting of China’s one-child policy, a strong brand presence in the U.S. and Asia, good customer loyalty, extensive supply chain and distribution channels, a robust financial position, and their belief that  the firm’s introduction of more premium priced products would add to the bottom line.

DSC_2483Next, the Blue Team (University of Illinois at Chicago) issued a Hold rating with a target price of $76. Positives for the firm according to this team were the lifting of the one-child policy in China, low dairy costs, and high brand loyalty, but they had concerns about downward currency pressures on the Yuan. The group’s valuation analysis combined a discounted cash flow analysis with relative comps among similar firms, including price to earnings data. They also included a scenario analysis, focusing on currency movements. In all, they believe that Latin America and Asia have strong growth potential for the firm, but have concerns about currency headwinds.

DSC_2468Team Orange (University of Illinois at Urbana–Champaign) also issued a Hold rating with a target price of $78. They pointed to China’s one-child policy as a potential positive, but noted that a rise in breastfeeding could put pressure on the firm’s sales. The team noted that revenues and EBITDA have been growing, but the rate of growth has slowed. They also pointed to volatile currency movements as a risk factor for the firm. Multiple valuation models were used, including comparing similar segments of competitors and Monte Carlo simulation to generate a price target range. Finally, they used discounted cash flow models to pinpoint their target price.

DSC_2471The Gold Team (Loyola University Chicago) was decidedly more positive on the firm, issuing a Buy recommendation at $83, but noted that this recommendation was an upgrade from their initial Hold based on recent share price decline. The team determined that industry rivalry was a critical factor for the firm to contend with and pointed to a new contract with the U.S.’s WIC program which will help the firm’s products gain more shelf space in those markets. Valuation models used by the group included discounted cash flow, multiples valuation, and dividend discount. Before closing, the team noted the firm faced some head winds including commodity prices, foreign exchange risk, and a slowdown in China.

DSC_2475The final team, Brown (Valparaiso University) was the most pessimistic of the five groups and issued a Sell recommendation with a target price of $27. This team believes the threat of substitution is very high and was most concerned with the rising popularity of breastfeeding. They also believed the firm was pinning a lot of hope on the rising share of revenues from the Asian market and said the elimination of the one child policy may not have as big of an impact on increasing the birth rate as many believe. Their price target was built around a risk-adjusted discounted cash flow analysis which took into account a “macro risk” which upped the discount rate significantly.


Winning Team! Illinois Institute of Technology

In the end, Illinois Institute of Technology won the judges favor. The team included Venkata B. Chintaluri, Thai (Samuel) H. Doan, Ming-Tao Lee, Rasinee Pongchairerks, Salonie Sehgal, and faculty advisor Michael Joseph Rybak, CFA. Congratulations IIT students and good luck at the Americas Regional Finals!

We would like to thank everyone involved with making this event possible including all the students, faculty advisors, judges, scorers, graders, and CFA Chicago’s Membership Engagement Advisory Group. Special thank you to Mead Johnson Nutrition for participating as this year’s feature company, Michel Cup, Executive Vice President and Chief Financial Officer (Mead Johnson Nutrition), and Kathy McDonald, Vice President – Investor Relations (Mead Johnson Nutrition for taking the time to present to the participants at this year’s Company Presentation kickoff on November 20th, 2015. Thank you!


Illinois Institute of Technology: Venkata Chintaluri, Thai H. Doan, Ming-Tao Lee, Rasinee Pongchairerks, Salonie Sehgal, Faculty Advisor – Michael Rybak, CFA

University of Illinois at Chicago: Collin Scott Baffa, Michael DeSalle Jr., Ritesh Ghosh, Matthew Thomas Lewellen, Faculty Advisor – John Miller

University of Illinois at Urbana–Champaign: Zulay A. Sosa Bazante, Siwei Li, Vanditha Mysore Ravindranath, Tanvi Rotkar, Ning Wang, Faculty Advisor – Kevin Waspi, CFA

Loyola University Chicago: Robert Joseph Englert, Bryan Madding, Trung V. Nguyen, Rick Osty, Faculty Advisor – Steven Todd

Valparaiso University: Benjamin John Coxey, Kyle J. Crawford, Trent Tanber, Faculty Advisor – Bruce MacLean


CFA Society Chicago Membership Engagement Advisory Group Research Challenge Committee:

Deborah Koch, CFA: Co-Chair of Research Challenge Committee, Northern Trust

Larry Lonis, CFA: Co-Chair of Research Challenge Committee, U.S. Trust

Maura Murrihy, CFA: Co-Chair of Membership Engagement Advisory Group

Daniel Welker, CFA: Co-Chair of Membership Engagement Advisory Group



Graders Industry Mentors
Bruce Ebel, CFA

Joseph Grandis, CFA

Justin D. Hance, CFA

Kerry Jordan, CFA

Alan M. Meder, CFA, CPA

Carla Norfleet Taylor, CFA

Dorothea C. Gilliam, CFA

William Hyatt, CFA

Stephen Moy, CFA

Branimir Petranovic, CFA

Daniel J. Phillips, CFA

Joan Rockey, CFA, CAIA

Edward Trafford, CFA

Kevin Clearly, CFA

James C. Goss, CFA

Ben Hier, CFA

Jaime M. Katz, CFA

Kenneth Perkins, CFA

Stefan Quenneville, CFA

Steven Schwartz, CFA

John C. Simmons, CFA

Marie C. Winters, CFA, CAIA

John T. Wong, CFA

CFA Institute Research Challenge

Regional and Global Challenge Schedule:

CFA Institute Research Challenge: 2015-16 Tournament Bracket

Distinguished Speaker Series: John V. Miller, CFA


A State of Political Brinkmanship: Illinois at the crossroads, again.

How can a state with a large, diverse economic base have a credit risk premium in junk bond territory? It’s easy, when political brinkmanship and years of fiscal mismanagement create an enduring state of legislative paralysis.

That’s right, according to John V. Miller, CFA, Managing Director and Co-Head of Fixed Income at Nuveen Asset Management, Illinois’ economic base should support a AAA credit rating and yet its general obligation (GO) bonds currently trade below investment grade—at a 140 basis point credit risk premium.

Miller, who recently spoke at CFA Chicago’s Distinguished Speakers Series luncheon, cited decades of budgetary imbalances and the state’s failure to properly fund its pension plans as primary reasons why Illinois has the lowest credit rating in the nation (Baa1 from Moody’s, A- from S&P and BBB+ from Fitch).

Yet, all is not lost. If the political gridlock in Springfield can be broken, the path back to fiscal health is not that complicated. It will just take time and discipline

The Illinois Budget Stalemate: A Public Disservice

Illinois has been operating without a budget since July 1, 2015. Disagreements over needed spending reforms, increased taxes or both have created an epic budget stalemate which may drag into fiscal year 2017. Miller says the stalemate is, “more entrenched than anyone can imagine. The parties are far apart and passionate about it.”

In the meantime, the citizenry suffer. State appropriations for higher education and funding for social services have been cut off. This led Moody’s to downgrade the credit ratings of Northern Illinois University, Northeastern Illinois University and Eastern Illinois University on February 24, 2016. The list of affected organizations, and the people they serve, is long and includes:

Sadly, from Miller’s point of view, the legislators appear more concerned about picking up additional seats in the November 8th general election than resolving the budget stalemate. He feels that eventually there will be enough voter angst for someone to lose political support—and that would be a good thing. After all, it’s supposed to be about public service, right?

Long-term Problems Require Long-term Solutions

One of the most important points Miller made was that it took a long time for Illinois to build up the magnitude of deficits we’re dealing with and we should all realize that it will take a long time to fix them.

The 2017 fiscal year budget gap is estimated to be about $6.6 billion, or about 20% of revenues. While that sounds insurmountable, Miller says that if Illinois were to increase the individual income tax rate back to the 5% rate that was in effect from 2011 to 2014, it would raise $4.1 billion and cover most of the projected deficit.

Even with that increase, Miller says Illinois would have the 16th lowest personal tax rate in the nation and he feels it’s highly likely that a tax increase will need to be part of the solution. And, in my opinion, we need spending reform and term limits as well.

Public Pension Plans

Illinois’ public pension plan deficit is another story. At $111 billion in unfunded liabilities, and a combined funded ratio across all plans of only 41.9%, it’s often described as the worst funded pension system in America.  How did this happen? According to David McKinney, of Crain’s Chicago Business, it didn’t happen by accident.

In McKinney’s October 2015 article, The Illinois Pension Disaster: What went wrong?he shows that Governors and legislators, Republicans and Democrats, repeatedly approved financially toxic changes to the plan. In short, here are the big reasons why Illinois’ plan is so underfunded today:

  1. Deferred Pension Payments– Known as “The Edgar Ramp,” state contributions were set artificially low in the 1990s causing contributions to accelerate dramatically in 2012. This is an example of “kicking the can down the road.” The deferred amounts eventually have to be paid but with compound interest.
  2. No Pension Payments– If deferring pension payments is a bad idea so is skipping them. Illinois declared a “pension holiday” in 2005 and 2006, avoiding $1 billion in payments per year, based on false sense of security created by a 2004 borrowing plan that boosted the funding status to 61%. In total, underpayments from 1985 to 2012 were $41.2 billion.
  3. Increased Benefits– In 1989, a compounding 3% cost-of-living adjustment (COLA) was added to the benefit promise and another round of enhancements in the 1990s. Today a “consideration plan” is being discussed which presents a choice between giving up COLA increases and including pay raises in the calculation of the calculation of retirement benefits. Miller points out that the “consideration” model could save up to $1 billion in annual costs and cut the annual contribution by 15%.
  4. Early Retirement Offers – A 2002 early retirement offer (for those over 50 years old) created a stampede of 11,039 retirements that increased the liability by $2.3 billion.
  5. Poor Investment Results– The collapse of the 2000 dot-com bubble and 2008 stock market meltdown then added $15.9 billion in investment losses to the liability. Some perceive these events as largely outside of the state’s control but, in reality, they are related to the plan’s investment policy statement and risk management program. For more on how to effectively manage a defined benefit pension plan see Pension Finance: Putting the Risks and Costs of Defined Benefit Pension Plans Back under Your Control by M. Barton Waring.

In Miller’s opinion, the Illinois Supreme Court’s decision finding Illinois’ 2013 pension reform law unconstitutional was brutal from an economic point of view. He points out that other states have been able to make adjustments to their plans, the COLAs and/or complete conversions to 401Ks.  However, Illinois law has some of the toughest language in the nation on protecting pension benefits. And last week, the Illinois Supreme Court also rejected plans to cut future retirement benefit plans for Chicago city workers.

The fact remains that both Illinois and the City of Chicago significantly underfunded their pension plans, well below actuarial required payments, for years. In my view, the Supreme Court has it right. Illinois has always needed legislative leaders with the fiscal discipline to carry through on the state’s commitments, while avoiding toxic financial mistakes, and the ability to appropriately modify future retirement programs.

The following quote, by Winston Churchill, aptly describes the conundrum.

“When the situation was manageable it was neglected, and now that it is thoroughly out of hand we apply too late the remedies which then might have effected a cure. There is nothing new in the story. It is as old as the sibylline books. It falls into that long, dismal catalogue of the fruitlessness of experience and the confirmed unteachability of mankind. Want of foresight, unwillingness to act when action would be simple and effective, lack of clear thinking, confusion of counsel until the emergency comes, until self-preservation strikes its jarring gong–these are the features which constitute the endless repetition of history.”

—House of Commons, 2 May 1935, after the Stresa Conference, in which Britain, France and Italy agreed—futilely—to maintain the independence of Austria.

Act and the Bond Markets will Respond 

As simple as it sounds, the bond markets will respond favorably to positive fiscal actions. Miller noted that the credit risk premium on Chicago GO bonds dropped by over 100 basis points after the City of Chicago approved a $543 million property tax increase in October of 2015 (slide below). He explained that that getting rid of variable rate debt and swaps while raising taxes sends the right signal to the market.



However, Chicago’s GO spreads are up again due to contagion from the Chicago Public Schools (CPS) deteriorating fiscal condition. The Chicago Teachers Union has approved a one-day teacher walk out on April 1, 2016 which adds more pressure to the situation. Unfortunately, as we saw earlier in this story, it’s often the most vulnerable that get hurt when we reach this level of political brinkmanship. Let’s hope some positive steps can be taken, and the markets will take notice.