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The Blackwell Guide to Wall Street.

BUSINESS GUIDES are like road maps. They give you the definitions of the financial instruments, the regulations affecting them, and all come in alphabetic order. Handbooks are different. They rarely resist the encyclopedic temptation, and, paradoxically, they rarely fit in your hand.

I enjoyed reading Putnam and Zimmer's "Guide." I enjoyed also their clear style, despite many typos. It is good to see that sometimes obscurity is not in the self-interest of the economic writer. The 194 pages of text, not including a Glossary and the Index, are divided into four parts. The so-called financial revolution is the opening theme, followed by the basics on risk and return. Then comes the real stuff: equity markets, bond markets, and foreign exchange markets.

Yes, there's a "revolution" in Wall Street - the second one in this century. The first was during the interwar period when we were challenged with the recycling of the German reparation. This one, as the authors explain, has to do with the recycling of the Desert Arab nations' surpluses and is caused by the institutionalization of the markets, by the drop in information costs, and by the severity and quality of risks faced by participants. New instruments have been introduced to "pass the risky buck," the response time lags and around the world have been severely reduced, and governments have been led to implement new regulations to facilitate the adjustment flows.

Parts I ends with the notions of risk, return, the diversification of risks, and their symmetry, or lack of it. Market expectations and their rationality lead to such diverse topics as insider trading, the role of consensus forecasts, the random walk theory of prices, technical analysis, market timing, and the credibility of policy announcements.

Part II reviews the equity markets. Stock valuation and the notion of cost of capital are one of the most achieving sequences of the "Guide." These two chapters enrich the traditional views on the relation between the level of planned investment spending and the level of total income.

Some applications of the free cash flow theory also are covered in Part II: mergers and acquisitions, financial disclosure, and the dividend controversy. The authors side against the payment of dividends while echoing popular virtues - the cash you make at the end of the day is what counts.

Bond markets are the subject of Part III. My preference here goes to Chapter 12 on Duration Analysis. Putnam and Zimmer succeed in explaining what it is and what its applications are in the areas of asset/liability management and portfolio immunization. The yield curve of nominal interest rates, real interest rates, mortgage-backed securities, futures, and options also are treated with care. And the discussion on the U.S. bond markets does not ignore other international bond markets.

The primary linkage among the world's economies - the foreign exchange market - appears in Part IV. Two lessons from Chapter 16: only barriers to the workings of the classical parity relations make riskless arbitrage a profitable business; and the allocation of savings to their best economic uses is, and has always been, a "global" endeavor. An increasingly popular view of the determination of the exchanges is taken in the next chapter; like assets, currencies should be analyzed in terms of their risks and returns. Here lies the ability of the foreign exchange market to uncover hidden corporate exposures and to transmit unexpected disturbances across borders.

The "Guide" concludes with an exegetic note on the degree of evolution versus revolution that awaits us in Wall Street. The authors already feel the winds of change blowing again. Tracing the unifying cord that has brought us from barter to the most complex financing structures of today is a job for a "handbook."

It is clear by now why I enjoyed reading Putnam and Zimmer's "Guide". It does not "tell" you what today's world of finance is about, it "explains". It is not your "finance for everyone" type of book; neither is it the require-reading textbook on scholastic finance. But it shows how common sense and simplicity are still alive in Wall Street. Reading it is like having your best friend take your arm and walk you around his neighborhood. And, even if you've been in the Street for some time, I am sure that you'll find Putnam and Zimmer's company as pleasant as a "Michelin".
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Copyright 1989 Gale, Cengage Learning. All rights reserved.

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Author:Comprido, Francisco J.
Publication:Business Economics
Article Type:Book Review
Date:Jan 1, 1989
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