PG&E: A Fallen Angel

Yesterday, we posted about the possibility of PG&E filing for bankruptcy due to potential liability for the November 2018 California wildfire. Today, PG&E bondholders got bad news as S&P dropped the company's bond rating from BBB- to B, firmly in the junk bond category. The downgrade was attributed political and regulatory pressure, as well as the potential liabilities from the wildfire. S&P stated that the bond rating could be further lowered if PG&E did not articulate steps to preserve credit quality.

Happy Birthday To The TCJA!

One year after the passage of the TCJA of 2017 and analysis of the effects of new tax code has begun. For example, capital investment by S&P 500 companies increased by 8.9 percent in 2018, the highest growth rate in seven years. And Deloitte estimates that the new tax code will increase real GDP by .7 percent per year over the next 10 years. While the boost may not be as high as proponents had hoped, it is important to remember that several provisions of the TCJA, such as the Global Intangible Low Taxed Income, the Base Erosion and Anti-Abuse Act, and the limitation business interest expense, actually increased taxes.

GE's Loss Of Goodwill

General Electric just announced a $22 billion write-off related to the company's 2015 acquisition of the power grid business from Alston SA. The Alstom purchase was made for $10.1 billion, so GE wrote off more than twice the original purchase price. What makes this is write off unique is that GE is writing off previously unrecognized intangible assets. This means that previously misvalued or unrecognized intangible assets were not recognized in accounting for the acquisition.

PG&E Bankruptcy?

In early November, the deadliest wildfire in California history broke out. And while the exact cause has not been determined, the California Department of Forestry and Fire Protection is investigating power lines operated by PG&E as a possible cause. PG&E was previously blamed for a fire that occurred in 2017 and had to issue bonds to pay for claims from that fire even though the state has not issued a report on the cause of that fire. In the textbook, we mentioned that at one point, Continental Airlines filed bankruptcy in order to reduce labor costs. Now, there is a possibility that PG&E may use the bankruptcy process to seek relief from possible financial claims arising from the 2018 fire.

Buffett Bets On Interest Rates

Famed investor Warren Buffett has made a bet  on interest rates. Recently, Berkshire Hathaway issued 30-year fixed rate bonds to pay for existing bonds that were maturing. And while this is a common practice for many companies, what made this interesting is the the maturing bonds were floating rate coupons. Floating rate bonds benefit the a company when interest rates are falling since the coupon payments will decline, while increasing the coupon payments when interest rates are increasing. While no statement on the reason behind exchanging fixed rate bonds floating rate bonds was made by the company, it could be an indication that Mr. Buffett believes that an increase in interest rates is more likely than a decrease.

The Benefits Of Diversification

We have discussed how diversification works and shown examples, but what about how it works in your portfolio? A recent article in Money discusses how much you should have invested in stocks depending on your age. And while we don't want to take a position in this, we would like to point out the "Finding the Right Mix" figure shown in the article. As you can see, in general, the range of possible returns declines as you increase the percentage of bonds in a portfolio. This is the decline in volatility that is also exhibited in the lower standard deviation from adding bonds to a stock portfolio. 

Spotify's Reverse IPO

Spotify went public on April 3, 2018 in a direct listing. Bypassing the traditional underwriting process, Spotify basically said that its stock could now be publicly traded. Because Spotify did a direct listing, the company raised no additional money from outside investors. And Spotify could have sold shares on the market without worrying about the underpricing that often occurs in an IPO. Now, about seven months later, Spotify just announced a $1 billion share buyback. The stock has fallen about $8 billion since it went public and the buyback is a signal of management’s confidence in the stock. More interestingly, it also means that Spotify has never raised public capital and is using the stock market only as a means to return capital to investors. As this article points out, because of the new reliance on private investors, we could possibly see a day when a company undertakes an IPO for the purpose of initiating a buyback.