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."

It's Bobby Bonilla (Edwin Diaz) Day!

The New York Mets famously deferred $5.9 million in salary payable to Bobby Bonilla in 2000, instead paying the former $1.2 million per year from 2011 through 2035. Now, the Amazing Mets are at it again. The team just signed a deal with relief pitcher Edwin Diaz that was announced as a five-year, $102 million contract. Under the terms of the contract, the team will defer $5.5 million per year in 2023, 2024, and 2025, then $5 million per year in 2026 and 2027. In exchange, the team will make annual payments to Diaz through 2042. To complicate matters, there is an option year for 2028 and if the team picks up the option, none of the salary is deferred. It appears that the Mets like really long-term payments!

Furniture Hedging

Although many people may not consider sports gambling as a hedge, a Houston furniture store owner successfully did just that. Jim McIngvale offered purchasers of more than $3,000 in furniture double their money back if the Houston Astros won the World Series. McIngvale has offered similar promotions on other sporting events in the past, but to date, none have worked out for customers. However, when the Astros won the World Series on Saturday, McIngvale was obligated to pay customers back. To hedge his risk, his first bet on the Astros was a $3 million bet in May at 10-to-1 odds. He added about $7 million more in bets over the summer at average odds of +750. Because the Astros won the World Series, he received $75 million from various sports books to offset the refunds payable to customers.

Buying An Annuity

While you now know that, in general, an annuity is an equal payment with a finite number of payments, how do annuities work in the "real world"? To give you an idea, check out Charles Schwab's annuity calculator. Notice, the website shows three different payment options. The first option, "For my lifetime (single life)", offers the highest payout per period. Using a mortality table for annuities, the insurance company estimates the number of payments on the expected life of the annuitant. If the annuitant outlives their expected life, payments are still made until their demise. However, if someone signs up for this type of annuity and dies immediately, no payments are made by the company. The second option, "For my lifetime and someone else's lifetime (joint life)", the number of payments are based on the expected number of payments based on the expected life of both individuals named in the contract. Again, if either party outlives their expected life, payments are still made until both parties pass away. Finally, "A set period of time (period certain)", the number of periods that payments will be made is fixed when the annuity is first issued. The interest rate used by annuity issuers in all cases is based of current market interest rates when the annuity is first issued.

Dollar Strengthens

Amid high inflation, rising interest rates, and a faltering stock market, one bright spot has been the performance of the U.S dollar. Since the beginning of the year, the dollar has risen 17 percent against the British pound, 25 percent against the Swedish krona and Japanese yen, and an astounding 40 percent against the Argentinean peso. Two currencies that have strengthened compared to the dollar are the Mexican peso and Brazilian real. 

EVs Raise Cash

EV makers Nikola and Lucid both announced secondary stock offerings today. As we mentioned in the textbook, SEOs often have a negative effect on stock prices, and these announcements were not exceptions. Nikola announced a $400 million stock offering, to be sold at the market price. The stock price dropped about 10 percent on the announcement. For Lucid, the company announced an $8 billion shelf offer to be sold over the next three years. In this case, the stock "only" dropped about 7 percent.

Chinese Companies Go Dark

"Going dark" typically means that a company delists its stock from an exchange. Today, three Chinese companies announced plans to go dark from the New York Stock Exchange. What is interesting is that the companies will still be listed on the Stock Exchange of Hong Kong. The reason for delisting from the NYSE is that American regulators have warned Chinese companies that they would be forced to leave U.S. exchanges unless they allowed regulators to see the records of the company auditors.   

Stock Repurchase Tax

The Senate recently passed the Inflation Reduction Act of 2022. Major components of the Act include spending on climate change, increased IRS spending, and measures to lower the cost of prescription drugs. In order to pass the Act, a last minute change to get the necessary votes was a 1 percent excise tax on stock repurchases. As we showed in the text, dividends and stock repurchases affect a company and investors in much the same way. The tax may push companies toward dividends, although since the new tax wouldn't take effect until 2023, analysts are expecting large repurchases to be completed by the end of 2022.

Unexpected Inflation

As we discussed in the textbook, stock prices move when unexpected news comes to light. Economists expected that inflation for July would be 8.7 percent, lower than June's 9.1 percent. Instead, it was announced today that July's inflation was "only" 8.5 percent. The stock market reacted dramatically as the S&P 500 jumped about 2 percent and both the Nasdaq and Russell 2000 jumped almost 3 percent. And for investors in Disney the news was even better: EPS was $1.09 compared to the $.96 estimate, and the subscriber addition was 14.4 million streamers versus the expected 10 million. With the combined market news and company news, Disney stock jumped about 7 percent.

Bobby Bonilla Day

Every July 1st is Bobby Bonilla Day! You may not be aware that the now retired slugger signed a contract with the New York Mets in 2000 that deferred his $5.9 million salary in exchange for about $1.2 million per year from 2011 through 2035 on July 1st. And while this is a great payday, Bobby Bo recently announced that he was auctioning off his copy of the famous contract. The package includes a baseball signed by Bonilla, a game-used bat, a Zoom call, breakfast and dinner with Bonilla, and attending a Mets game with the slugger. The starting bid is $10,000, so it looks like he will make even more money from the contract.

Inventory Spikes

During 2021, much of the talk concerning inventory surrounded shortages due to a variety of factors. In response, many companies increased production and orders to combat supply chain disruptions and increased consumer demand coming out of COVID-19 lockdowns. Now, it appears that companies have overshot demand as inventories have surged. For example, inventories for global manufacturing companies reached a record $1.87 trillion. As a result, inventory turnover for manufacturers increased to 81.1 days. And retailers are no different: Inventory for Macy's, Target, Walmart and other large retailers has increased from 17 to 45 percent compared to last year. This increased inventory is a boon for off-price retailers like Ross and TJ Maxx, which have a larger supply from big retailers offloading inventory. For many corporations, the excess inventory will likely negatively impact the bottom line. 

Bad Luck Investing

Hopefully you realize that the best time to invest is when stock prices are low and the worst time is when prices are high. But patience is a virtue and can have rewards. A recent article introduces Betty Badluck, who just happened to invest at the stock market tops during the past 35 years. So what happened to Betty? As you will see, while the returns were not fantastic, over time, the stock market has historically rebounded and she still has three times her investment in real terms. This is an important note on stock market history: While we can't predict the future, over the long-term, the stock market has historically provided positive returns.

TIE Increases

As we discussed in the textbook, in general, there is no absolute number that is best for a particular financial ratio. However, when the economy is bad or uncertain, it is better if leverage ratios are more conservative to help avoid financial distress. During the COVID lockdowns, this is exactly what happened to the times interest earned (TIE) ratio for most companies. The median TIE increased from 6.1X prior to the pandemic to 8.6X during the pandemic. This was true even for below investment grade companies, which showed an increase in the TIE from 2.8X to 4.1X. Given that the cost of borrowing is beginning to rise, this bodes well for companies.

SEC Sues Vale SA

In January 2019, the Brumadinho dam in Brazil collapsed, sending a mudflow that killed 270 people. The dam was built by Vale SA to hold tailings from a copper mine. Now, the SEC is suing Vale SA, stating that the company made false claims about the safety of the dam, obtained fraudulent stability certificates, and regularly misled investors through its ESG statements. The SEC does not require that companies file ESG statements, but the Climate and ESG Task Force of the SEC is tasked with identifying false or misleading claims. In other words, consistent with its other directives, the SEC is concerned about the truthfulness of statements and disclosures made by a company. 

Rivian Lockup To Expire

Electric car company Rivian went public on November 9, 2021, which means its lockup, scheduled for 180 days after the IPO, is scheduled to expire next week. A lockup prohibits early investors and corporate insiders from trading the company's stock prior to the lockup expiration. In this case, Ford and Amazon are two early investors with large stakes in Rivian, but nether has indicated whether it will sell Rivian shares. A stock price can often drop significantly after the lockup as large shareholders attempt to sell shares. However, Rivian is down about 70 percent from its IPO price, so a price drop after the lockup may not happen. For example, Meta Platforms and Uber both saw price increases after the lockup. As the article states, the market is forward looking, so the potential price drop may already factored into the stock price.

NPV Analysis

It is always interesting to see a real-world application of concepts you have learned in class. Recently, Voyageur Pharmaceuticals Ltd. released the results of its capital budgeting analysis of a barium sulfate project in British Columbia, Canada. Notice the company repeatedly refers to the project NPV, but also calculates the IRR and payback period. The report includes the key variable assumptions and the NPV per share. What we also find interesting is the sensitivity figure near the bottom of the article. The company shows the sensitivity of the project to changes in operating costs, revenue, and capital. It appears that the NPV of this project is most sensitive to changes in revenue.

Century Bonds Issued

With the threat of an increase in interest rates, it appears to be a good time for borrowers to lock on interest rates for a long time. TTUN is the latest to do so, issuing $1.2 billion worth of century bonds, that is bonds with a 100-year maturity, at a coupon rate of 4.45 percent. At the same time, TTUN issued $800 million of 30-year maturity bonds at 3.5 percent. Other Big Ten universities, including the University of Minnesota, Michigan State University, Rutgers University, and THE Ohio State University have issued century bonds in recent years.

Onshoring

Which automobile company exports the most cars from the U.S.? Most people would probably guess Ford or GM, but for the 8th straight year, BMW is the U.S. auto export leader. During 2021, BMW exported 257,876 cars valued at $10.1 billion from the company's plant in the U.S. Although many are concerned with the negative effects of offshoring manufacturing, there are also benefits to onshoring. 

BTCS Announces Bividend

Blockchain technology company BTCS became the first Nasdaq-listed company to announce a "bividend." The company will pay each shareholder the equivalent of 5 cents in bitcoin or cash, at the discretion of the shareholder. If you are not familiar with BTCS, the company has two full-time employees, a market capitalization of about $46 million, and hasn't shown a profit for the last four years. We should note that the market capitalization was based on yesterday's closing price as the company's stock has jumped about 50 percent so far today on the announcement!