Is it time for a reckoning in stocks?

Is it time for stocks to sell off? In light of the 10th anniversary of the collapse of Lehman Brothers last month, we should remember that it’s a mistake to be complacent about what could happen in markets. Extreme economic and financial events are far more likely to occur than we like to believe. But the real lesson of Lehman is not so much that very bad things can occur — it’s that anything might. Investors should be mindful of the risk of further crises, but they should also keep in mind the possibility that things might turn out just fine. This is hard to do. It’s far easier to think of ways that things might soon go wrong. The U.S. stock market is the most expensive stock market in the world currently, according to renowned Yale economist Robert Schiller. The economy has enjoyed a long expansion — maybe too long. The S&P 500 hit its market bottom in March 2009, and since those lows, it has rallied 334 percent in the longest stretch on record since World War II without dipping into a bear market. Perhaps the Federal Reserve will tip it into recession. The trouble in emerging markets

October 8, 2018 No Comments

What the Lehman Brothers anniversary teaches us about Islamic finance

Nine years ago this month, Lehman Brothers investment bank filed for Chapter 11 bankruptcy, triggering a global financial crisis in earnest as millions of families lost their homes, savings, and jobs. Though most of the world has since recovered from the crisis, it benefits us all to consider measures to prevent similar problems in the future. Concepts from Islamic finance can offer simple yet effective guidelines to help us avoid the worst of financial crises. With the Lehman debacle in the rearview mirror, let’s take a look at some of those ideas and how they might help in the future. Avoid debt Lehman was highly leveraged near its end; in 2007, the firm’s ratio of debt to equity was around 30:1. It was even borrowing to invest in risky mortgage-backed securities, which made it increasingly sensitive to market turbulence. Islamic finance principles call for companies to avoid excessive debt. In tough times, companies with less debt are likely to fare better because they have flexibility and fewer outstanding liabilities. Low debt keeps a company’s interest costs down and gives it more latitude to grow the business. Promote risk sharing Islamic finance practitioners don’t invest in interest-based loans generated by financial

September 1, 2017 No Comments

Lehman Brothers eight years later

Eight years ago this month, Lehman Brothers filed for Chapter 11 bankruptcy. With that, the Global Financial Crisis (GFC) kicked off in earnest, and millions of families lost their homes, savings, and jobs. Concepts from Islamic finance can offer simple yet effective guidelines to help us avoid the worst of financial crises. With the Lehman debacle squarely in the rear-view mirror, let’s take a look at some of those ideas and how they might help in the future. Avoid debt Lehman was highly leveraged near its end; in 2007, the firm’s ratio of assets to shareholder equity was 31. This made it increasingly sensitive to market turbulence. Islamic finance principles call for companies to avoid excessive debt. In tough times, companies with less debt are likely to do better because they have flexibility and fewer outstanding liabilities. Low debt keeps a company’s interest costs down and gives it more latitude to grow the business. Promote risk sharing Unlike Lehman, Islamic finance practitioners do not invest in interest-based loans generated by financial and insurance companies. Speculation and short-selling are also discouraged, in keeping with internationally accepted guidelines. Those excesses were at the heart of the GFC, when an unconstrained banking sector

September 21, 2016 No Comments