Friday, November 18, 2016

Dollar Strengthens

With housing starts at a the highest point in nine years and the weekly jobless claims reaching a 43-year low, it appears that the U.S. economy is strengthening. As a result, it now appears likely that the Federal Reserve will increase interest rates in its December 13-14 meeting. This also lead to a stronger U.S. dollar as the dollar reached a 13 1/2 year high against a basket of six major currencies. The U.S. dollar reached its highest level against the euro in almost a year, and its highest level against the yen since early June.

Fewer Negative Bonds

As signs for a more expansionary U.S. monetary increase, the market value of negative yield bonds worldwide fell this week. Since June, the market value of negative yield bonds in the Bloomberg Global Aggregate Index has fallen 28 percent from the peak value of $12.2 trillion. An expansionary monetary policy will likely lead to higher interest rates and a steeper yield curve, at least in the short term. Japan is still the leader in negative yield debt, accounting for 58 percent of worldwide negative yielding debt.

Saturday, November 12, 2016

Financial Distress Costs For Sears

For several years, the performance of Sears Holdings has been declining. Now, it appears that the company's suppliers feel that the company may be headed toward bankruptcy. JAKKS Pacific announced last month that it would stop shipping toys to Sears' Kmart stores, fearing Sears would file bankruptcy, making collection on the receivables problematic. Now it appears that other suppliers have reached the same conclusion as at least six suppliers have reduced shipments to Sears for the same reason, including at least one supplier who stopped shipping to Sears entirely. Chairman and CEO Eddie Lampert had extended credit to Sears three months ago to stop speculation by suppliers and some Sears suppliers have been paid in 30 days rather the typical 60 to 90 days. Given that Sears is headed into the Christmas season, the biggest sales season for retailers, problems with suppliers could signal a spiral into bankruptcy for the company.

Tuesday, November 8, 2016

Record Treasury Bill Sales

The U.S. Treasury Department sold a record $65 billion in one-month Treasury bills at an interest rate of .27 percent. Even with the record dollar sales, the bid-to-cover ratio, that is the ratio of bids to available bonds, was only 3.39, which is the lowest level since March.

Bond Call Provisions

A callable bond is typically only callable on the anniversary date of the bond or coupon date. However, this is not a requirement as the bond indenture is an individual contract specific to that particular bond issue. A common reason bonds are issued is to finance the acquisition of another company. These bonds are generally callable if the deal falls through and the call price is often set at 101 percent of par. Bondholders can be hurt by this fixed price call provision as bond prices can rise in the intervening period between bond issue and the deal being terminated. For example, when Sysco’s bid to buy US Foods  feel through last year, bondholders lost $309 million as the bonds were called at 101, well below current market price, which had reached as high as 113.3. Now, major bondholders are pushing to change the call value of bonds issued to fund acquisitions to a make-whole call premium, which commonly used for bonds issued for purposes other than acquisitions.

Monday, October 3, 2016

Ethics In Finance

You may have noticed that there is not a lot of discussion of ethics in your textbook. A major reason is that from a financial view, if the market or society values ethical behavior, unethical behavior by a company will hurt its market value, thus defeating the goal of maximizing shareholder value. Consider the case of Wells Fargo, which is under fire for fraudulently creating up to 2 million deposit and credit card accounts. In addition to the fines paid by the company, last week, California announced that it was barring state transactions with Wells Fargo, including underwriting state bond issues. Today, Chicago announced that it was divesting $25 million that it has invested with Wells Fargo and next week Illinois plans to announce its plans to suspend Wells Fargo from the state investment network. So, while Wells Fargo may have temporarily increased value by fraudulent actions, these actions will now negatively affect shareholder value. 

Ticked Off

If you look at stock prices, you will see bid and ask prices that may only be different by a penny. What you may not realize is that this has only occurred since 2001. Prior to that, stock prices were quoted in eighths or sixteenths, so a price quote of 40 1/8 meant $40.125. Part of the reason for the change was that the bid-ask spread was the dealer profit, which also meant that investors were paying this difference. However, it has been argued that small cap stocks were hurt by decimalization because market makers have less incentive to trade less liquid small cap stocks and this has also lead to less research on small companies. Today, a pilot program was begun in which 10 small company stocks began trading on 5 cent tick sizes, meaning the smallest change in the stock price for these stocks is now a nickel. About 1,200 stocks will eventually be included in the test program, with three different groups with different trading rules. The goal of the study is to determine if increasing the tick size can lead to increased liquidity in small cap stocks.