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.