The Shortest Treasury Bills

As we mentioned in the textbook, generally the shortest Treasury bills issued are 13 week maturity. However, given the recent debt ceiling problems, the Treasury issued cash management bills (CMBs), with a one day maturity. On Friday, June 2, the Treasury sold $15 billion in one day CMBs, to be issued on June 5 that mature on June 6. Over the past 25 years, the Treasury has held six CMBs auctions with a maturity of one day. And on June 1, the Treasury auctioned $25 billion in three-day bills.

Accounting Fiction?

A recent article in the Wall Street Journal notes that as of May 26, 77 percent of the 485 companies in the S&P 500 that had reported earnings beat earnings, compared to the historical rate of 66 percent. What is even more surprising is that the earnings beats are 6.9 percent above expectations, compared to a 4.1 percent historical average. But accounting choices, which have been labeled as potential earnings manipulation, may be the cause. For example, Google extended the life of its server infrastructure from four years to six years. The extension added 6 cents per share to earnings due to lower depreciation. The company also shifted employee stock awards from January to March, which also increased reported earnings. And Carvana, which was expected to lose $2.03 per share only lost $1.51 per share. The company had taken charges in the previous quarter when used car prices had plummeted and expected to sell cars for less. When used car prices increases, the company unwound those loses, increasing earnings per share by $.48, almost all of the earnings beat. 

A Green NPV

European low cost carrier Ryanair announced a new project that will install Split Scimitar winglets on each of the company's Boeing 737-800s. The installation is expected to reduce fuel consumption by 1.5 percent and reduce CO2 emissions by 165,000 tons per year. So, the project is green for the environment, but is it green for stock holders? A quick calculation shows that it is. Based on the numbers, Ryanair spent €1.14 billion on fuel in a recent quarter, which amounts to €4.56 billion per year. A 1.5 percent savings in fuel costs is €68.4 million per year. This savings results in a payback period of 2.92 years. Assuming a 10 percent discount rate and 20 years of operation, the NPV is about €382 million. Sounds like a green, green project to us.   

Your Song (Is For Sale)

Any stream of cash flows can potentially be sold for the present value of its cash flows. And one of the biggest cash flows being sold recently is an artist's song catalog. The owner of a song catalog receives the cash flows from the royalty paid whenever a song is played. It was announced yesterday that Justin Bieber's song catalog was sold for a reported $200 million. And although we agree that this is a tidy sum, it is still smaller than the $500 million that Bruce Springsteen or $300 million that Bob Dylan received last year for similar sales. The price isn't cheap as song catalogs are reportedly being sold for 30 times annual royalties.

Future Stock Returns

As Mark Twain once said,  "Prediction is difficult - especially about the future." And while investors would wish otherwise, predictions about the stock market are especially difficult. Many investors will use historical returns as an estimate of future returns. However, the job of an analyst is to make stock market predictions based off additional evidence. Recently, Vanguard, one of the largest mutual fund companies in the world, released its 10-year annualized forecast for financial markets. Vanguard is estimating only a 4.7% to 6.7% annual return for large-cap U.S. stocks and a 5.0% to 7.0% annual return for small cap stocks. So will the stock market achieve its historical average return over the next 10 years, or is Vanguard correct? Check back with us in 2033!

It Was In My Other Pocket

Have you ever been short on money and gone through your clothes, only to find a $20 bill that you had forgotten about? We are sure that you were relieved. The same thing just happened to cryptocurrency exchange FTX, which filed for bankruptcy back in November. FTX attorneys announced that the company had found $5 billion in cash, liquid cryptocurrency, and other liquid investments! Of course, it appears that there may be other pockets to check as the total value of missing customer assets is $8 billion.

Liquidity and Bankruptcy

As investors have learned, like any other investment, cryptocurrency is subject to volatility. The recent bankruptcy filing of crypto exchange FTX shows, this volatility can be extreme. For example, the Ontario Teachers' Pension plan wrote down $95 million due to the collapse. As you probably know, bankruptcy occurs when liabilities are greater than assets. However, bankruptcy can result from a finer distinction between liabilities and assets, namely liquidity. In the case of FTX, the company had $8.9 billion in liabilities and $9.6 billion in assets. So was the company forced to declare bankruptcy? Liquidity. When you look at the balance sheet, FTX had $900 million in liquid assets, $5.5 billion in less-liquid assets, and $3.2 billion in illiquid assets. Think about it like way: You owe $10,000 at the end of the week but your only asset is a $100,000 house. Yes, your assets are greater than liabilities, but you likely won't be able to sell the house and receive the cash for the sale by the end of the week, so you could be forced into bankruptcy. But FTX had other problems as well. John Ray, who was appointed to oversee the FTX bankruptcy and has overseen other large bankruptcies such as Enron, stated "Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here."