Many people are familiar with the Super Bowl indicator: If an old AFL team wins the Super Bowl, the stock market will be down for the year and if an old NFL team wins the Super Bowl, the stock market will increase during the year. A new sports-related stock market indicator is the home run/strikeout total for Major League Baseball. As total home runs and strikeouts increase, the stock market increases and as the total home run runs and strikeouts decrease, the stock market decreases. Unfortunately, the researcher who discovered this relationship argues the connection is reversed, so the change in the stock market predicts the home run/strikeout total. Guess we won’t be able to use this as a predictor of stock returns.
Wednesday, October 18, 2017
A proposal to reduce the U.S. corporate tax rate from 35 percent to 20 percent also includes a provision to limit the tax deductibility of interest expense. Corporations have responded in a dramatic fashion to this proposal by repurchasing $178.5 billion worth of bonds through early October of this year. In contrast, companies repurchased only $87.3 billion of bonds for the same period last year. Of course the potential increase in interest rates could also be driving debt repurchases as companies look to lock in low coupon rates. For example, Wal-Mart issued $6 billion in new bonds to help finance an $8.5 billion repurchase. Both causes have driven debt repurchases to astounding levels.
Tuesday, October 10, 2017
Activist investor Nelson Peltz has apparently lost his bid for a seat on the Proctor & Gamble board. Peltz had sought to gain one seat on the 11 person board. At a market cap of $232 billion, the proxy fight was the largest in history, with the sides spending more than $100 million on mailings, phone calls, and advertisements. Peltz is expected to contend the results as the final outcome was within one percent. A major explanation for the win by P&G is believed to be the large number of individual stockholders in P&G stock.
Tuesday, September 26, 2017
At first blush, it may appear that an inverted yield curve is desirable. After all, this is a possible indication of expected lower inflation in the future. However, the the past six recessions in the U.S. dating back to the 1960s have been preceded by an inverted yield curve. Recent Fed actions have led to a change in the interpretation of yield curve as Fed actions have flattened the yield curve by taking risk out of the system, reducing the term premium, or extra return for taking the risk associated with longer term bonds. Instead, the term premium between other financial instruments such as high-yield bonds may be more indicative of future economic stability. As this article highlights, even though the term premium for Treasury bonds has flattened, the term premium for high-yield bonds (Actually credit default swaps on those bonds: Think of it as insurance that only pays out if those bonds default.) has increased.
Even though Mark Zuckerberg currently controls the majority of Facebook's voting shares, it appears that even that has limits. Facebook recently announced that it would not seek approval of Class C shares that would effectively allow Zuckerberg voting control forever. Market sentiment on dual class shares has shifted, as indicated by the announcements that no new companies with dual voting share classes would be admitted into the S&P 500 or any FTSE Russell indices. Additionally, the approval of Class C stock with super-voting power would probably have prompted a shareholder lawsuit in which Mark Zuckerberg would have been for a deposition or as a witness, something he would likely wish to avoid.
In the second quarter of 2017, S&P 500 companies repurchased $120.1 billion worth of stock, down 9.8 percent from the first quarter and a 5.8 percent decrease from the second quarter of 2016. Only 66 of the 500 companies reduced the number of shares outstanding by 4 percent, while more than 20 percent repurchased more than 4 percent of shares outstanding the the second quarter of 2016. Apple and Boeing led the way, repurchasing $7.1 billion and $2.5 billion in shares, respectively. The S&P 500 companies did set a dividend record, paying out $104 billion during the quarter, up from $100.9 billion in the first quarter.
Wednesday, September 20, 2017
A recent article indicates that financial managers may not be following good capital budgeting techniques. The median hurdle rate used to value new projects is 12.0 percent, with an average rate of 13.6 percent. Meanwhile, the same survey notes that the median WACC is 9.8 percent, with a mean of 10.6 percent. While that article infers that these numbers should be the same, we differ on this assumption. If new projects are riskier than the company, which would likely be the case, then the cost of capital for new projects would necessarily be greater than the WACC since the required return on a project depends on the use of funds, not the source of funds.
Underinvestment still does occur, as 67 percent of respondents answers “No” when asked if their company undertook all projects that create value. Common reasons given for not pursuing value creating projects were:
Shortage of management time and expertise (51%)
The project is not consistent with the company’s core strategy (41%)
The risk of the project is too high (39%)
Shortage of funds (38%)
Shortage of employees (32%)