Friday, December 28, 2012

Do Buybacks Create Value?

There are several reasons a company would buy back its stock. A buyback could be used in lieu of a dividend, the company could be altering its debt-equity ratio, or the company could feel that its stock is the best investment possible. So do buybacks increase shareholder value? In a recent interview, Greg Milano, CEO of Fortuna Advisors, argues that buybacks result in a temporary stock price pop when the buyback is announced, but over the long-term, companies that buy back more stock tend to perform worse than other stocks. Further, the bigger the increase in the EPS due to buybacks, the lower the PE ratio falls.

Thursday, December 20, 2012

NYSE No More

The Intercontinental Exchange (ICE) announced that it would purchase the NYSE for $33.12, a 38 percent premium over its market value. ICE, which operates Commodities and derivatives markets around the world, was formed in 2000 yet has a larger market value than the NYSE. ICE intends to spin off many of the European operations into a separate company. Although the particulars of the spin off were not announced, it appears that much of the spin off will include assets acquired in the Euronext acquisition made by the NYSE only five years ago. NYSE shareholders will own 36 percent of the combined company after the acquisition.

Tuesday, December 11, 2012

LIBOR Arrests

The recent LIBOR scandal has resulted in three arrests. British police arrested three men after searching their homes. LIBOR affects an estimated $300 trillion in derivatives and about $10 trillion in loans worldwide are tied to LIBOR.

Convertible Bond Issuance Near Record

New convertible bond bond issues have a chance to reach last year's record of $20.7 billion, while at the same there has been more than $1 trillion in high-grade bonds issued during 2012. One downside of convertible bond issuance is evidence that the announcement of a convertible bond generally has a negative effect on the stock price. When electronics company Sony announced its recent convertible issue, the stock price dropped 10 percent. And anecdotal evidence suggests that some stockholders sold stock and purchased the bonds even though the bonds were zero coupon bonds.

Sunday, December 9, 2012

The 2012 Stock Market: Early Returns

Year-to-date, the S&P 500 is up around 12 percent, an average return for the market since 1926. Both the Nikkei Index in Japan and Euro Stoxx 600 are up around 13 percent. Given the problems in Greece and other European countries' sovereign debt and the recent threat of a fiscal cliff, an average market return seems pretty good. Surprisingly, the VIX, a measure of stock market volatility, is also down by 40 percent since the beginning of the year. 

Tuesday, December 4, 2012

Does Apple Really Have $121 Billion In Cash?

At the end of September, Apple reported a cash balance of $121.25 billion. But does Apple really have a savings account with that balance? Yes and no. While Apple's worldwide cash balance is $121.25 billion, the company only has $38.65 billion in the U.S. For the 600 U.S. multinationals that report cash balances held overseas, about 60 percent of the cash is overseas. Johnson and Johnson reported a cash balance of $24.5 billion, but the company holds essentially no cash in the U.S. The reason companies have not repatriated overseas earnings is that these funds would be subject to a 35 percent tax rate. The effect is to reduce a company's liquidity and ability to pay dividends or repurchase shares. For example, Emerson Electric recently borrowed money in order to pay dividends, repurchase shares, and make debt payments and pension contributions in spite of the fact that the company reported a cash balance of $2 billion.

The Average Investor

Even with our discussion of the Efficient Markets Hypothesis (EMH), we often get the feeling that many students still believe that when they leave our class they will become superstar investors and greatly outperform the market. So, how have investors done on average? In the chart of the week at BlackRock, it appears that the answer is poorly. Over the past 20 years, oil has averaged 8.6 percent, stocks have averaged 7.8 percent, and bonds 6.6 percent. Inflation has been a relatively mild 2.6 percent. Yet, over this period, the average investor has returned only 2.1 percent per year! The reason given by BlackRock is that the average investor allows emotion to rule their decisions, moving into and out of different investment classes at the most inopportune times.

Sunday, December 2, 2012

Inflation As Measured By The CPI

The Consumer Price Index (CPI) is  a common measure of inflation, however a more interesting CPI is the Christmas Price Index, calculated each year by PNC Bank. This CPI calculates the cost of all of the gifts mentioned in the Twelve Days of Christmas, from a partridge in a pear tree to 12 drummers drumming. This year, uncovering the cost of the CPI requires you to take a virtual journey around the world. Over the past year, the CPI increased 4.8 percent to $25,431.18, a fairly expensive Christmas! The biggest price jump was the 29.6 percent increase in the six geese-a-laying. Six items remained unchanged, including the partridge, turtle doves, and lords-a-leaping. And for the really interested individual, the website has prices for each of the items back to 1986, the beginning of the CPI.