Sunday, September 30, 2012

It's September, Time To Buy

At the beginning of the month, we referenced an article which suggested that investors should sell in September. And we are happy we didn't follow the advice in the article. For the record, the S&P 500 increased by about 2.4 percent in September, from 1,406.58 to 1,440.67. We would be happy with that return in any month.

Friday, September 28, 2012

Duke Energy Coup, Part Deux

Back in July, we posted about the two hour CEO job that William Johnson held for two hours as CEO for the merged Duke Energy/Progress Energy. As with many complicated stories, time allows for more information to be disseminated. For example, in an interview, old/ex/new CEO Jim Rogers said that he had only given up his position as a CEO of Duke Energy in order to pay a lower premium for Progress Energy. This implies that William Johnson helped aid the sale of Progress at a discount in order to be the CEO of the combined company, an accusation he vehemently denies.

Thursday, September 27, 2012

Investors Happy About RIM Loss

Research In Motion (RIMM), the manufacturer of the Blackberry, announced a loss of $235 million or 45 cents per share for the second quarter compared to a profit of $329 million or 63 cents per share in the second quarter last year. The loss per share excluding one-time expenses was 27 cents per share. While this would seem to be bad news, RIMM shot up 14 percent after the announcement. So why the big jump in the stock price? Analysts had expected a loss of 46 cents per share. As one analyst stated: "It's still bad, but it's a much smaller disaster than expected."

Student Loans Climb

The average student loan debt has climbed to $26,682. Currently, unsubsidized Stafford loans have an interest rate of 6.8 percent. So, if you graduate with an average student loan debt and pay off your loan over the next 20 years, what are your monthly payments? See if you don't agree that it will be $203.67 per month.

Tuesday, September 25, 2012

IPO Doubles Stock Market Size

Morgan Stanley has withdrawn as the lead underwriter for the Asiacell IPO, which is set to take place on the Iraqi bourse. It will be the first major IPO on the Iraqi market since 2003. One interesting fact about the IPO is the large size relative to the Iraqi bourse. The Iraq Stock Exchange has a market capitalization of about $3.4 billion and trades an average of $3 million per day. Asiacell is expected to have a market capitalization of about $4.4 billion on its own.

Monday, September 24, 2012

GM Looks For A Revolver

GM is seeking a new revolver, or revolving credit line, for between $8 and $10 billion. The revolver will be used to replace an existing revolver of $5 billion, pay down other debt, and to provide liquidity. The commitments from individual banks will start at $600 million and go down to $350 million for the second tier. The upfront fees are 35 to 50bp (bp is a basis point, or 1/100th of a percent. One basis point is equal to .01%) depending on the amount committed by the bank. The interest rate on the loan is expected to be 250bp over LIBOR, and GM will pay 37.5bp on the unused amount of the revolvers.

Thursday, September 20, 2012

IPO Bump?

It is well documented that there are cycles in IPOs. Recently, the IPO market has been relatively slow, but some analysts believe that the time may be right for an increase in the number of IPOS. The stock markets have experienced good returns over the past year, recent IPOs have performed relatively well, and the VIX, the market's "fear gauge," is low.  Additionally, the JOBS Act, which allows companies to file a confidential first draft of its registration documents, may increase the number of publicly traded companies.

Should FX Exposure Always Be Hedged?

For a company with an exposure to currency risk, hedging with derivatives is one way to reduce or eliminate that risk. However, a risk manager at one bank argues that companies should not automatically hedge exchange rate risk. For example, if a U.S. company is going to receive euros at a future date, it will lose if the dollar weakens. If the company expects the dollar to strengthen, a good hedging strategy may not involve a hedge at the current exchange rate, but to allow a small risk in order to give the market time to move in the expected direction. While we are not endorsing or condemning the particular strategy used in the article, we definitely agree that hedging is not a one size fits all activity and should be fit to the particular company and situation.

Wednesday, September 19, 2012

Turkey Issues Sukuk

Turkey announced that it was issuing its first sukuk, or bonds compliant with Islamic law. Turkey expects that it will sell $1 billion of the dollar-denominated bonds. Turkey will sell certificates to investors, who then lease them back at a fee. The offer is oversubscribed, with about $6 billion in orders for the bonds. The sukuk will pay an interest rate about the same as comparable Turkish government bonds. Overall, about $13 billion of the $24.3 billion worth of bonds issued in the Middle East in the first half of 2012 have been sukuk.

Tuesday, September 18, 2012

Cash They Can't Spend

Companies seem to have a lot of cash on hand recently. For example, Google has about $44 billion in cash and short-term investments and Apple has about $28 billion on its balance sheet. But the tech giant with perhaps the biggest cash horde is Microsoft, with about $63 billion in cash on its balance sheet. So why doesn't Microsoft spend some of this cash? One reason is that of the $63 billion in cash, $54 billion is held by the company's overseas subsidiaries. In order to spend this cash, Microsoft would need to repatriate it, resulting in taxes being paid on the overseas profits.

Saturday, September 15, 2012

Twinkie Goes Stale?

According to the urban legend, a Twinkie never goes stale, but its parent has gone stale. Hostess, in the middle of bankruptcy filing, has asked the bankruptcy judge to force a new contract on one of its employees' unions. Hostess is in its second bankruptcy since 2004 and has argued that without a new labor contract it will be unable to continue operations. Fortunately for junk foodies, even if Hostess does not emerge from bankruptcy it is likely that most of the company's iconic brands such as Twinkies, Ding Dongs, and Cupcakes will be sold to another company.

Friday, September 14, 2012

Early Release for Lockups

Lockups, agreements that restrict the ability of insiders to sell stock in an IPO, have traditionally lasted for 180 days after the IPO. Recently, lockup provisions have been shortened for many IPOs. In fact, the lockup period for ExactTarget was only 7 days after the IPO. One reason may be an increase in fees for the underwriter. The lead IPO underwriter is almost always the underwriter on the secondary offering from the lockup shares if the secondary offering is less than 180 days from the IPO. After 180 days, the underwriter for the secondary offering is up for grabs.

Wednesday, September 12, 2012

I'll Take That Negative YTM Treasury

Recently the U.S. Treasury sold new bonds at a record low YTM of negative 1.286 percent over five years. The reason investors were willing to a take a negative YTM is that the bonds are TIPS. With TIPS, the government increases the par value each year by the inflation rate. Given that regular Treasuries with the same maturity had a YTM of .71 percent, buyers of the TIPS are expecting inflation to average about 2 percent over the next five years in order to break even. The expected break even inflation rate is 2.376 percent over 10 years and 2.39 percent over 30 years, all well below the average inflation rate of 3.1 percent since 1926.

Tuesday, September 11, 2012

Moody's May Downgrade U.S. Debt

In August 2011, S&P downgraded U.S. Treasury debt from its vaunted AAA credit rating. Over a year later, Moody's announced that it may also downgrade U.S. Treasury debt from its current Aaa rating. Moody's blamed the the possible downgrade on the "fiscal cliff". In January 2013, government spending cuts and tax increases are set to take place, which analysts believe may lead to another recession.

Monday, September 10, 2012

Chevrolet Volt: Bad Capital Budgeting

By most accounts, the Chevrolet Volt has been a dismal failure. Year-to-date, Chevrolet has sold just 13,500 Volts, well below the 40,000 cars that GM had projected for 2012. The car's $39,995 base price, along with long charge time, has not helped sales. Of course, reporting on the Volt's financial results can be as weak as the car's sales. For example, as the article notes, it currently costs GM between $75,000 and $88,000 to build each car, including development costs. GM spent between $1 billion and $1.2 billion in development and tooling costs, or just under $56,000 per car sold since the model's introduction. In any capital budgeting analysis, such calculation are meaningless for several reasons. One notable reason is the shaky analysis in the first line of the article that implies it isn't a good thing for GM to sell more Volts. The actual cost to build a Volt is estimated to be $20,000 to $32,000, so any sale above that variable cost increases the NPV of the project. One thing the article does point out is that the development of the of the Volt does provide technology that can be applied to future vehicles, a strategic option in green technology.

Sunday, September 9, 2012

Profit Margin = Net Income / Sales?

When you are examining ratios, you must be careful that you know how that ratio is calculated. For example, the profit margin for private companies in 2012 has reached 9.1 percent over the past three months, about triple the profit margin in late 2009 and early 2010. You would think that everyone would calculate a ratio as basic as the profit margin in the same manner, but that isn't true. If you read the last paragraph carefully, you will find that the profit margin for private companies often excludes taxes and includes owner compensation in excess of market-rate salaries. In this case, we can't compare the profit margin for a private company and a public company even if they are in the same industry since the calculation of the profit margin is different.

Why Take This Class?

Based on our experience, many students have a negative view of Finance at the beginning of the class. So why take this class? A recent study found that most retail investors “have a weak grasp of elementary financial concepts and lack critical knowledge of ways to avoid investment fraud.” Only 14 states currently have a required personal finance class. While we do not believe that this class will make you an informed investor by itself, many of the concepts are applicable to basic investment decisions and can serve as a foundation for your future financial literacy.

Wednesday, September 5, 2012

Sell In September?

"Sell in May and go away," an old stock market adage, advises investors to sell stocks in May and not reinvest until the fall, typically around Halloween. Since 1896, September has been the Dow Jones Industrial Average's worst month with an average loss of about 1 percent. And since 2000, September has seen an average loss of 2.12 percent. On the bright side, 5 of the last 7 Septembers have had positive returns.  Whether or not September 2012 has another negative return remains to be seen, but technical analysts should have already left the stock market.

Tuesday, September 4, 2012

EU Warned About Credit Problems

Moody's cut the European Union's creditworthiness from "stable" to "negative". In July, Moody's revised the outlook downward for Germany and the Netherlands. Moody's stated that it believed that member countries would likely back their sovereign debt rather than EU debt. The EU recently announced a bond buyback for the sovereign debt of Spain and Italy, two countries that have large deficits and borrowings, leading to very high sovereign debt interest rates.

Monday, September 3, 2012

Dividend Tax Expires, Stock Unaffected?

A recent opinion article in CFO argues that allowing the Bush dividend tax cut to expire will not affect stock prices. In other words, the author argues that tax rates on dividends do not affect stock prices for four reasons: 1) Dividends are critical to returns and smart investors do not turn their backs on dividends. 2) Dividend paying stocks remain in high demand, the widows and orphans argument. 3) Institutional investors will not be impacted, a rephrasing of the widows and orphans argument. 4) There is no evidence that companies adjust dividends based on shareholder taxation, an argument that Figure 14.5 would contradict on the surface.

Sunday, September 2, 2012

The Bonds They Are A Changin'

Goldman Sachs recently pulled its Dylan bonds from the market. Goldman had originally expected to sell $300 million worth of the bonds, backed by the royalties received from songs written by Bob Dylan. The bonds were expected to be issued with a BBB- rating, but Goldman pulled the bonds to separate the cash flows into two classes, or "tranches". The senior tranche will carry a higher credit rating, while the subordinated, or junior, tranche will have a lower credit rating and bear more default risk than the senior tranche.

Samurai Bond Issuance Rises

Samurai bond issuance is rising due to low Japanese interest rates and demand from Japanese investors. About $7.2 billion worth of Samurai bonds have been issued this year by Asia-Pacific borrowers. While this is down from the $8.2 billion issued over the same period the previous year, it is up 20 percent from 2010. Japanese investors are eager for the samurai bonds after the 2011 tsunami revealed the problems with too much domestic debt exposure, resulting in "reverse roadshows". Typically, a lender will have a roadshow to attract potential investors, but demand for samurai bonds is so high that borrowers are running reverse roadshows in which they search for potential lenders to offer samurai bonds.