Saturday, February 28, 2015

Negative Rates Grow

Recently, we posted about negative interest rates for savings accounts in Denmark. Now, it appears that negative interest rates are sweeping Europe. Earlier this week, Germany sold five-year government bonds with a YTM of negative .08 percent. Normally, we would make sure to put an exclamation point after that sentence, but Finland auctioned off negative interest rate government bonds earlier this month. The Netherlands, France, Belgium, Austria, and Italy also all have negative YTM bonds outstanding. Even more unique, an entrepreneur in Denmark took out a small business loan at negative .0172 percent! In other words, she is actually being paid to borrow money. Sign us up! The negative interest rate phenomenon appears to have hit the U.S as JPMorgan Chase announced that it would start charging some institutional clients to hold their money.

Friday, February 27, 2015

Sweet Home Chicago?

Moodys' cut the credit rating on Chicago's debt to Baa2, two steps above junk status. The city's debt still has a negative outlook, meaning that another rating drop could happen in the future. The rating cut was caused in large part by the city's underfunded public pension plan. Only Detroit has a lower credit rating than Chicago among the largest U.S. cities, and Illinois is lowest credit rated state. S&P and Fitch maintained their credit rating on Chicago.

Wednesday, February 25, 2015

Shareholders Get Paid

2014 was a record year for shareholders of S&P 500 stocks. Companies in the S&P 500 paid out a record $350.4 billion in dividends during the year. The total dividends paid equals the GDP of South Africa. Share buybacks are expected to reach about $550 billion, the largest value since 2007. So, for 2014, the total payouts to shareholders are expected to be just under $900 billion, topping the $846 billion paid in 2007.

Tuesday, February 24, 2015

Allergan Golden Parachute

Allergan CEO Davis Pyott may have a very soft landing if the Activas acquisition of Allergan is completed. Actavis announced that after the merger was complete, it planned to replace most of Allergan's executives. In Pyott's case, if he were fired after the merger, he would receive $89 million in cash and stock for equity rewards that have yet to vest, $9.91 million in cash, and $2 million in accrued pension and health benefits, for a total payout of over $100 million!

Inventory Shortage Costs

What is the optimal days' sales in inventory? It depends! Too much in inventory will result in large opportunity costs. In other words, a company has cash tied up in inventory that costs the company money and does not earn a return. However, too little inventory can be problematic as the company can experience shortage costs. In this article, the costs of inventory shortages are explained. For example, although just-in-time delivery is popular, it does create problems in supply chain management. Not only does a company need to monitor its suppliers to ensure they will be able to meet obligations, but a company must also monitor the supplier of the company's supplier. A disruption at any point in the supply chain can result in an inventory shortage. So, how much does an supply chain disruption affect a company's value? One study indicates that supply chain disruption can reduce a company's value by up to 7 percent.

Saturday, February 21, 2015

RBS Goodwill Writeoff

An expected writeoff by the Royal Bank of Scotland (RBS) is further evidence that acquisitions are an inexact science. It is believed that RBS will announce a £4 billion ($6.2 billion) writeoff related to its acquisition of Citizens Financial. The writeoff will almost entirely erase the company's 2014 profit. RBS has already sold 29 percent of Citizens Financial in a public offering, and plans to sell more of the company. RBS purchased Citizens for $130 billion in 1988, but the current market capitalization of Citizens is a much smaller $13.7 billion.

Mutual Fund Efficiency

In a nod to market efficiency, 2014 was one of the worst years on record for mutual fund managers, with fewer than 20 percent beating their benchmark. In the article, several reasons are given for the poor performance. For example, relative, not absolute skill is what matters. In other words, if fund managers as a whole are getting smarter, it is harder for an individual fund manager to distinguish themselves from the pack. Additional explanations, such as the necessity of small caps doing better than large caps, cash not being a drag on the fund return, and good performance of international stocks, are given as possible explanations for the poor performance in 2014. While we see merit in these explanations, a simpler reason also emerges. In very few years do mutual fund managers as a whole outperform the market. This leads us to the argument that the market is efficient and the reasons given in the article are only reasons that mutual fund managers performed even more poorly than usual.

Saturday, February 14, 2015

Interest Rates Later This Year

It is difficult to make predictions, especially about the future.
                          - Yogi Berra, Niels Bohr, Albert Einstein, Mark Twain, et al. 

As you have seen in Finance what is happening now, while interesting, is not as important as what will happen in the future. Of course, that is easier said than done. For example, knowing what will happen to interest rates later this year can give valuable information about optimal decisions today. So, what will  happen to interest rates later this year? Many believe that the Federal Reserve will raise interest rates later this year, even though there is a currency war. Of course, this may not happen. In fact, economists at Goldman Sachs can even foresee circumstances that the U.S. interest rate goes below zero!

Tuesday, February 10, 2015

Coca-Cola's Currency Woes

Coca-Cola reported earnings in the fourth quarter of 2014 that were down 55 percent from the same quarter in 2013. However, sales dropped only 2 percent over the same period. The reason for the large drop in net income was currency related. Because of the devaluation of the Venezuelan bolivar, Coca-Cola experienced a revaluation of its assets in Venezuela in the amount of $393 million in the fourth quarter alone. Previously, in the first quarter of 2014, Coca-Cola was forced to write off $247 million because of the bolivar devaluation in that quarter.

Saturday, February 7, 2015

U.S. Winning (Losing) Currency Wars

With anemic global growth, most central banks are in a race to the bottom in an attempt to devalue the country's domestic currency. Over the past year, the U.S. dollar has gained 16 percent versus a basket of 26 major trading partners. And U.S. exporters are beginning to feel the crunch. For example, Proctor & Gamble blamed a 31 percent drop in second quarter profits on the stronger U.S. dollar. The stronger dollar expanded the U.S. trade deficit to $46.6 billion, the highest level in two years.

Russell 2000 Facts And Figures

A recent article about the Russell 2000 has some interesting facts and figures about the index. In case you don't know, the Russell 3000 index consists of the largest 3,000 stocks by market capitalization in the U.S. The Russell 2000 consists of the smallest 2,000 stocks in the Russell 3000 index. So, the Russell 2000 is a small cap index. The largest company in the index has a market cap of $5 billion and the median market cap is about $528 million. What we found interesting in the article was several ratios. For example, the current PE ratio for the Russell 2000 index is 22.7, higher than the historical average of 16.2. And, the current price-sales ratio is 1.6, 67 percent higher than its historical average. As for sales, while only 64.3 percent of the sales for all S&P 500 companies comes from within the U.S., 81.3 percent of the total sales for Russell 2000 companies come from within the U.S.

Friday, February 6, 2015

Amazon's Leasing Cash Flow

In the textbook, we argue that cash flows are most often a better measure of company performance than net income. Amazon fully exploits this concept. In most recent quarters, the company has shown an operating loss, but has touted its positive operating cash flow as the measure that investors should examine. Now, it appears that Amazon may have been glossing over a more negative reality for the company. In the company's most recent earnings announcement, it disclosed another cash flow, which is the operating cash flow minus the capital leases. Amazon has a large number of capital leases. Ignoring the cash flows necessary to pay these leases ignores a significant outflow each year to which Amazon has committed to paying. 

Pfizer Buys Hospira

Pfizer announced that it was buying Hospira for $15.2 billion. The cost savings from the acquisition are expected to be $800 million, with a present value of $1 billion more than the acquisition premium of $4 billion. On the announcement, Pfizer's market capitalization shot up $6 billion, implying that investors believe the acquisition of Hospira is a positive NPV acquisition. After Pfizer's other recent acquisitions, this would be a welcome note. In 2000, Pfizer acquired Warner-Lambert for about $90 billion, Pharmacia in 2003 for about $60 billion, and Wyeth in 2009 for $68 billion. So, in total, Pfizer spend about $218 billion for these three acquisitions. Since Pfizer is currently worth about $200 billion, Pfizer grossly overpaid for all these acquisitions.   

Wednesday, February 4, 2015

Staples-Office Depot Merger

Twenty years ago, a potential merger between Staples and Office Depot was halted on concerns the combined company would be a monopoly. Today, the companies announced that they would try again. In the merger, Office Depot shareholders would receive $7.25 in cash and .2188 shares in the new company for each share currently owned. Synergies from the merger are an expected annual cost savings of $1 billion by the third year of the merger.

Monday, February 2, 2015

Saving In Denmark

For the past several years, most central banks have been engaged in currency wars in an effort to devalue that country's currency. The race to the bottom is an effort to increase exports and jump start domestic growth. Denmark is making an effort to avoid becoming the next victim of the currency wars. Recently, the country spent 100 billion kroner ($15 billion) in an attempt to weaken its currency. Now, Denmark has lowered its interest rate. You will pay .5 percent for deposits at the bank!