Stock Markets Up In 2013

2013 was a very good year for the U.S. stock market. The S&P 500 was up 29.5 percent, the Nasdaq Composite was up 38.2 percent, and the DJIA was up 26 percent. Additionally, all 10 of the S&P sector indices were up for the year. Let's hope that 2014 brings this type of stock market performance.

Predictions About The Future

In early 2013, Bloomberg surveyed analysts about the year-end gold price. The median response was $1,815 per ounce. The actual ending price? About $1,200 per ounce. Although the article's author puts much of the blame for the wildly overestimated gold price on politics, we have a simpler explanation: Price predictions for any commodity or financial instrument are extremely difficult and are often incorrect, especially in the short-term. Of course, if this were not the case, the argument for market efficiency would be much weaker.

Japanese Yen Holdings

Much has been made of U.S. corporate cash balance, which reached $1.925 trillion in December 2013. However, Japanese companies have a larger cash balance at 224 trillion yen ($2.15 trillion). The large cash holdings by Japanese companies is attributed to a 15-year deflationary period. Prime Minister Shinzo Abe is encouraging companies to raise wages faster than the cost of living to help end deflation in Japan.

U.S. Treasuries Are Worst Performers

From January 1, 2013, the U.S. Treasury bond index tracked by Bloomberg fell 11 percent, the worst performance of the 144 bond indices tracked by Bloomberg. Of course, the cause is the rise in U.S. interest rates. While the performance of U.S. Treasuries is poor, the increase in interest rates is in part due to better performance in the U.S. economy, which is a positive.

Record Junk Bond Issuance For 2013

Standard and Poor's announced that more than $3 trillion in corporate bonds were issued worldwide from January through November this year. S&P projects that the total junk bond issuance for 2013 will be more than $500 billion worldwide, which would be a record. Junk bond issuance has likely been aided by the currently low default rates. From November 2012 to October 2013, only 2.2 percent of junk bonds defaulted, a drop from 2012's 2.5 percent default rate.

2014 Forex Hedging

A recent article in CFO argues that companies should consider hedging currency risk in 2014. The reason for the increased need for hedging is a possible volatile year in currencies. For the past several years, monetary policies across the globe were in relative synch, with growth a key goal. In the U.S., quantitative easing may be coming to an end, while policies in other countries such as the euro area and Japan are expected to remain relatively unchanged. This divergence in economic policies could lead to more volatility in exchange rates during 2014. During the first six months of 2013, a relatively stable exchange rate regime, U.S. companies lost about $7.7 billion due to currency fluctuations.

The Wilshire 5000?

You are aware that there are many stock market indices. The Wilshire 5000, which was started in 1974, is designed to include the return of every stock in the market and is so named because there were originally about 5,000 stocks in the index. However, over the years, stocks have been added and subtracted from the index. So, would it surprise you that the index currently tracks only about 3,600 stocks? The reason is that the number of U.S. stocks has shrunk in recent years, from a high of about 8,800 in 1997 to around 4,900 at the end of 2012. Numerous causes have likely contributed to the reduction, including failed companies, an increase in mergers and acquisitions, and a decrease in the number of IPOs.

Johnson & Johnson's AAA Bonds

Johnson & Johnson announced that it would sell $3.25 billion in bonds. The proceeds will be used to repay existing debt. Johnson & Johnson is one of four AAA credit rated nonfinancial companies in the United States. The other three AAA rated companies are Microsoft, Exxon Mobil, and Automatic Data Processing.

Risk And Return Detroit Style

A judge ruled that Detroit can proceed with its bankruptcy, a ruling allows the largest municipal bankruptcy in U.S. history to go forward. And while we don't want to discuss many of the decisions that led to bankruptcy, Detroit's general pension board certainly didn't help. One of the key tenets of finance is that risk are return are related. Detroit had an annuity plan that allowed city employees to contribute as much as 7 percent of their pay and receive a guaranteed annual return of 7.9 percent, a guarantee we would love to receive ourselves! And in 2002 and 2007, the total return paid in these accounts was 21.4 percent and 22.9 percent, respectively. To fund the return, the pension managers took money from the general retirement funds used for pensions to pay the 7.9 percent return, even in 2009 when the annuity account lost 24 percent. In all, the payments from the pension plan cost about $1.9 billion.