Rogue Trader Cat Bonds

In the textbook, we discussed cat bonds. Cat bonds, which are often issued by insurers or reinsurers, have a trigger based on natural catastrophes. Credit Suisse is taking the concept of a cat bond even further. The company has approached investors about a cat bond like issue that has a trigger that would cover operational losses due to events such as rogue trading or cybercrime. A major drawback is that quantifying the costs of cybercrime is a difficult process. If the Credit Suisse operational risk cat bond succeeds, we will likely see more of these bonds in the future.

Atlanta Braves (Stock) Sinks

The Atlanta Braves have the worst record in the National League so far this year, and the tracking stock has mirrored the team's on field performance. Liberty Media, the owner of the Braves, issued tracking stock on Monday that tracks Liberty Media's Braves ownership. Tracking stock is stock that is intended to track the performance of a particular unit of the company. Tracking stock generally has no voting rights, but is often used to track the performance of specific units of the company and may occur ahead of a public offering. The Braves tracking stock was a sinker ball as the stock dropped 40 percent on the first day of trading, then about 10 percent the next day.

The Stock Market Wins Again

The first quarter of 2016 was the worst on record for large cap mutual funds as fewer than 1 in 5 beat the stock market. Growth funds performed particularly poorly, as only 6 percent beat the S&P 500. About 20 percent of value funds and 29 percent of core funds beat the S&P 500. Small cap fund managers performed better, with 80 percent beating their benchmark.

Private Company Valuation

With a public company, the price per share is easy to obtain by looking at the stock market. For private companies, stock prices are more difficult. Although you can price a private company using multiples or free cash flow techniques, the valuation of private companies by mutual funds shows how much disagreement exists. For example, cloud-based storage company Dropbox is valued at $9.40 per share by T. Rowe Price, while Hartford Financial Services Group has a value of $15.20 per share. The valuations on database software company are even wider, ranging from $8.06 to $18.55. As Jeff Grabow, head of the valuation practice at EY states, “Valuation is as much an art as it is a science.”

Bond Yield Spreads Increase

The yield spread spread between investment grade corporate bonds and non-investment grade, or high-yield bonds, is often viewed as a risk premium on credit risk. So far this year, this yield spread has increased, signalling an increased cost to credit risk. For the first quarter, $454 billion on new investment grade corporate debt was issued, an increase from the $446 billion sold in the first quarter of 2015. However, high-yield issuance was only $36 billion, down dramatically from last year's $86 billion. While low interest rates have garnered much of the attention in the press, non-investment grade bond yields have increased. For example, Western Digital recently sold $3.35 billion in bonds at a 10.5 percent coupon. The credit rating on the bond's was BB+, just one notch below investment grade.

First Quarter Returns

The S&P 500 finished up about .8 percent for the first quarter, but what were the best and worst performers? Among all assets, gold and the Bovespa (Brazilian stock market) performed the best, with both up about 15 percent for the quarter, while silver prices increased about 11 percent. Among the losers were DJStoxx 600 Banks (European banks), the FTSE MIB (Italian stocks), and the Chinese yuan renminbi.