Saturday, October 31, 2015
Yesterday, the Securities and Exchange Commission approved Title III of the 2012 Jumpstart Our Business Startups Act (JOBS Act). Title II of the JOBS Act, which was approved in in 2013, allowed accredited investors to in startups. The approval of Title III allows anyone to invest in startups, small businesses, and real estate through crowdfunding. The total amount of investment in such ventures is limited to 5 or 10 percent of the investors annual income, which provides protection to small investors from themselves. But, it does allow small investors into startups, which can provide very high returns. However, before you make these investments, remember the lessons from Chapters 10 and 11: The only way to increase your return is to increase the level of risk you take.
In a recent interview, Nobel Laureate Robert Schiller discusses how companies can mislead consumers and how the media latches on to smalls stories. His comments are based on human behavior, which is the basis for behavioral finance. His last comments are a very interesting take on investing: "We don't know the probabilities of future events. Still, you have to take action and so you do it on gut feeling. That's the world we live in. There's so much disagreement about investing, and it's because nobody really knows." Interestingly, although we greatly respect Dr. Schiller, he is still guilty of making his own market predictions.
Thursday, October 22, 2015
Caterpillar Inc., announced lower quarterly profits and that it expected sales in 2016 to decrease 5 percent, the company's 4th consecutive yearly sales decline. On this announcement of seemingly bad news, the stock was up as much as 5.7 percent on the day. So why was the stock price up today? The news in the announcement today was consistent with the company's warning last month.
Wednesday, October 21, 2015
Back in March, we posted about negative interest rates in Europe. And while recent speculation has centered on the Federal Reserve increasing interest rates, at least one member of the Fed has pushed for negative interest rates. Narayana Kocherlakota, president of the Minneapolis Fed, has advocated for the Federal Reserve implementing negative interest rates in the U.S. Although Kocherlakota is a non-voting member of the Fed, he has been joined by other Fed officials arguing for negative interest rates. An extra mattress for your savings account is looking more appealing.
Ferrari stock was strong off the line on its IPO. The company's stock, which was priced at $52 in the IPO opened at $60, a 15.4 percent price jump, before closing at $55, a 9.5 percent price increase. The company raised $893 million in its IPO, which could increase to $982 million if the Green Shoe option is exercised.
Friday, October 16, 2015
S&P companies have announced about $600 billion in stock buybacks this year. A major reason for the high level of buybacks is the low interest rate. The dividend payout ratio for blue chip companies is about 3 percent, but the same company can borrow at about 2.2 percent. This means that it is actually cheaper to buy back stock with borrowed money as this will save the company .8 percent per year. Of course, there is a widespread belief that the Federal Reserve will raise interest rates soon, which will lessen the appeal of buybacks funded with new borrowing.
Tuesday, October 13, 2015
Often, we get asked by students for examples of unsystematic, or firm specific, risks. We are sure that you have heard about Dieselgate, or Volkswagen's deliberate programming of emissions devices in its diesel vehicles to fool emissions tests. Dieselgate is a perfect example of unsystematic risk as it affects only Volkswagen, although it appears that other auto makers may face unsystematic risks as well as several other manufacturers may have similarly created programming to cheat emissions tests. If you think about Volkswagen's actions and the risk, the news will likely greatly affect VW's sales as some consumers will avoid the company's vehicles. And while these consumers will be forced to look elsewhere, the sheer number of alternative manufacturers means that it is unlikely any particular manufacturer will receive a huge spike in new customers.
Activist investor Nelson Peltz, who has a one percent stake in General Electric through Trian Fund Management has outlined plans that he feels GE should follow to behave like a cash cow, not a growth company. For example, Peltz wants GE to get rid of its finance division, add debt to buy back stock, and cut costs. What is interesting is that GE has recently sold its appliance division for $3.3 billion, sold its vehicle-fleets assets business for $6.9 billion, sold its health finance unit for $9 billion, and today sold GE Capital, with $32 billion in assets, to Wells Fargo. In fact, since April 2015, GE has sold $126 billion of the $200 billion it plans to divest. It sounds like Peltz is suggesting GE do what it said it was going to do.