Yield Curve Inverts

In the textbook, we discussed a normal, or upward sloping, term structure, and an inverted, or downward sloping, term structure. The U.S. Treasury yield curve inverted again on Monday, after inverting at the end of January and in March 2019. An inverted yield curve has preceded the last seven U.S. recessions. However, several analysts are not convinced a recession will result from this inversion. U.S. Treasuries are regarded as a safe haven investment. Given economic issues around the world, the low 10-year yield may be driven by the demand for this bond, not U.S. economic conditions. Here is a question for you: Notice in the first sentence (and in the textbook), we discuss the term structure, but then change to the yield curve. What is the difference between the term structure and a yield curve?

Cash Balances Increase

The old expression "cash is king" is often followed by corporate treasurers, especially when the economic outlook is uncertain. In the 2019 Cash Management Survey, 42 percent of companies increased cash balances, while only 22 percent reduced cash. Additionally, 62 percent of companies are net investors, with only 38 percent are net borrowers, another indication of a fight to cash. One significant issue found in the survey was that more companies experienced a decrease in operating cash flow during 2019 compared to 2018, an indication of why corporate treasurers are becoming more conservative.

FX Hurts North American Profits

According to a recent report, currency exchange fluctuations reduced North American corporate profits by $11.55 billion in the third quarter of 2019. The loss amounts to an average reduction of $.03 in EPS. The euro was the currency which caused the most losses, affecting about 46 percent of companies. The British pound, Argentine peso, the Australian dollar, and Chinese yuan were next on the list of most impactful currencies.

IPOs Get Direct

Spotify and Slack have recently gone public using a direct listing. In a direct listing, the firm arranges for its stock to be listed directly on an exchange without the help of underwriters. One downside to a direct listing for the company is that it cannot sell new shares in the listing. Now, the NYSE and NASDAQ are proposing new rules that not only would allow more companies to use a direct listing. The proposals would allow also companies to raise capital in a direct listing. Both exchanges are proposing methods to allow a company to sell new shares in a direct listing, although the mechanics have not yet been decided. Additionally, a drawback of the current direct listing process is that a company must have at least 400 shareholders who own at least 100 shares each before the listing. NASDAQ is proposing to allow a 90 period after the listing for a company to meet this requirement.

DraftKings Goes Public

Daily sports wagering company DraftKings will be going public in 2020 in an unusual way. DraftKings will complete a merger with the publicly traded blank check company Diamond Eagle. Since Diamond Eagle is already publicly traded, DraftKings will become publicly traded after the merger without having to file all of the necessary SEC paperwork associated with a traditional IPO. DraftKings will also purchase sports betting technology company SBTech for $300 million, with the financing for this acquisition from institutional investors.

Bill.com's Partial Adjustment

When Bill.com filed for it's IPO in November, the indicated price range was $16-$18. Earlier this week, the company raised the range to $19-$21, before settling on $22. When the IPO hit the market yesterday, the price jumped 61 percent. The company raised $215.6 million, but apparently left about $131 million on the table. Whether that comes back to haunt the company is yet to be seen: Sales increased about 60 percent from the previous year, but losses have also increased.

Grade Time!

As many of you are aware, it is that time of year for grades. And while we hope you earned an A, it appears that many companies haven't. The inaugural American Corporate Governance Index was released and only 16 percent of companies received an A- or better. Ten percent of companies failed. The worst average grade was a C- for Principle 8, which requires a company to regularly evaluate its system of corporate governance and commit to addressing deficiencies. The next lowest grade was given for Principle 4, which requires companies to maintain strategies focuses in long-term performance and value. Looks like more studying is needed.