A Digitized Athlete

Brooklyn Nets sixth man Spencer Dinwiddie signed a contract for $34 million over three years. Now, Dinwiddie hopes to digitize his contract into a digital token. The plan is to pay back investors principal plus interest from his future salary. For investors, an advantage is that the tokens will have little correlation with other financial assets. There are numerous examples of securitizing cash flow from future earnings, from Bowie bonds, physicians who sell part of the future revenue in their practice, to fledgling golfers, who get money from backers in exchange for future winnings. However, these assets are not without risk. In November 2015, Fantex pulled an IPO that planned to sell future earnings for running back Arian Foster. Foster retired from the NFL less than a year later after several injuries.

Century Bond Issues Increase

Interest rates continue to be at or near historic lows, which presents a unique opportunity for borrowers. And universities are beginning to realize the opportunity. Rutgers University announced that it would sell $330 million worth of 100-year bonds, and the University of Virginia recently sold 100-year bonds at a YTM of 3.23 percent. So far this year, $1.3 billion in century bonds have been issued. Corporate bond issuers Walt Disney and Coca-Cola have also issued century bonds. Demand for these bonds is being driven by low interest rates, causing investors to seek out yield in riskier investments.

Ford: A Fallen Angel

Moody's downgraded Ford's bonds to Ba1, into junk bond territory. The downgrade was due to lower operating margins, weak earnings, and lower cash flow creation. Some of the increased costs are due to Ford's restucturing plan, designed to improve performance in the future. S&P and Fitch did not downgrade Ford's debt to junk territory, indicating a split-rating in the company's bonds.

Oil And Gas Bankruptcies

As we discussed in the textbook, financial leverage is a double-edged sword, increasing shareholder returns in good times, but causing financial distress in downturns. Since companies in an industry tend to have similar leverage ratios, a wave of bankruptcies can occur in that industry. The high leverage in the oil and gas industry appears to be reaching a tipping point as 26 oil and gas producers have filed for bankruptcy this year, almost matching the 28 for all of 2018. There is still a way to go to match the 70 bankruptcy filings in 2016, which was caused by low oil and gas prices.

Germany's Negative Yield Bond Sale

With about $15 trillion in value worldwide, the amount of bonds outstanding with negative yields is astonishing. And a recent bond sale by the German government added to this number. Germany sold million worth of 30-year, zero coupon bond €824 million worth of these bonds that will pay back €795 million in 2050. The bonds originally had a YTM of negative .11 percent, but fell even further to negative .153 percent.

An ICO Bubble?

A couple of years ago, coins or tokens, were the new frontier of investing. Now, it appears that the fantastic returns offered in this investment were often only temporary, as are most fantastic returns. A recent Twitter post post notes that the median ICO return in U.S. dollars is negative 87 percent and continues to go lower. Although several ICOs have outperformed bitcoin, most have not. Of course, many of these ICOs were likely destined to be poor performers and sold by being hyped to uninformed investors. 

A Flight To Cash

We have discussed risk and return in the textbook, so by now you should have a grasp on the concept of financial risk. A recent article notes that ultra-wealthy individuals have been moving assets into cash or cash alternatives. In the first quarter of 2019, high-net worth individuals held nearly 28 percent of investable assets in cash. And while cash itself is desirable for liquidity and diversification, this number appears high. There is one sentence in particular we would like to point out:

“Yet perception of risk is an emotional thing.”

We can measure an asset’s total risk by standard deviation, or an asset’s market risk by beta. However we measure risk, it is unemotional. But there can be behavioral factors, such as the fear of risk, that can affect an individual’s decisions.  

As a final point, the article discusses a family that moved money into gold bars and buried them and implies this is moving assets into cash. While gold is a physical asset and often performs well in a bad economy, the volatility of gold prices can often be quite high.