Munis Go Green

The issuance of green muni bonds is a small part of the overall muni bond market, but the segment is growing. In 2012, $2 billion of green munis were issued, but that grew to $234 billion in 2020 and a projected $375 billion in 2021. Although green corporate bonds can be used for a variety of investments, green muni bonds are often used to fund clean power, water, and sewage systems. Green muni performance compared to regular muni bond is not clear as green bonds outperformed prior to 2019, but underperformed by a large margin in 2020. As with any muni bond, green muni bonds are a source of tax-free income.  

Fidelity Goes Behavioral

Fidelity Investments recently hired Gilbert Haddad to head the company's decision science area. The data gathered from the new initiative is "..really like applying behavioral finance and behavioral science to understand” what the portfolio managers and analysts are good at or not. The data will also be used to "help them understand their own biases" in the investments made by the manager to help them avoid bad behavioral decisions.

Chinese Companies Face Delisting

China has recently asserted more control over private companies in that country. Now, the SEC is threatening to not approve new company listings for companies based in China and possibly delist currently listed NYSE and Nasdaq companies based in China. Most Chinese companies do give direct ownership, but often use the variable interest entity structure (VIE). In a VIE, a shell company is created in a foreign jurisdiction like the Cayman Islands. The shell company has a claim on the profits and assets of the parent company, although whether the claim is enforceable is debatable. As a result, the investment is more like an investment in a company in the Cayman Islands. Since the SEC requires full and fair disclosure, the SEC feels this unusual corporate structure should come with more warnings.

Identifying A Ponzi Scheme

If you are not familiar with a Ponzi scheme, it is generally a fraud in which early investors are paid out from contributions made by later investors. The Ponzi scheme usually ends when new investments dry up. A recent article on CFO.com highlights how to avoid a Ponzi scheme. We would like to make sure you read one particular concept, that is, "high returns with little or no risk." As we discuss extensively in the textbook, the only way to a higher return is with increased risk. Although we would all like higher returns with little or no risk, centuries of investment history show that such an investment is not possible. If it were, investors would flock to that investment, driving the return down.

SEC Backs Nasdaq's Diversity Requirement

Back in December, the Nasdaq approved a diversity requirement for the boards of companies listed on that exchange. Every company must have at least one female board member and one from an underrepresented minority. If a company fails to do so, it must explain in writing why it does not. Now, the SEC has approved the new policy. The NYSE has an Advisory Board aimed at connecting diverse candidates with open board positions, although there is no specific diversity requirement.

Adidas Kicks Out Reebok

In 2006, Adidas purchased Reebok for about $3.8 billion. The goal was to increase the company's presence in the sneaker market to better compete with Nike. In the past several years, Adidas' sales have grown, while Reebok's sales have been poor. As a result, Adidas has agreed to sell Reebok to Authentic Brands Group for about $2.5 billion, abandoning its investment in Reebok.

Working Capital Hit

The COVID-19 economic downturn affected many areas of business, including working capital management. A recent survey by the Hackett Group highlights some of the effects. For example, for the largest 1,000 publicly traded U.S. companies, the receivables period increased 1.5 days, the payables period increased 4.4 days, and the inventory period increased 4 days. The interview with Craig Bailey of the Hackett Group is an interesting read as to how the economic turmoil affected business.

Negative Amortization

In the textbook, we discussed how a loan is normally amortized, with a portion of each payment going toward the interest accrued during the period and the remainder paying down principal. A recent article highlights the dangers of negative amortization, that is when the interest paid each period is less than the interest accrued during that period. One student graduated in 2010 with $50,000 in debt. Because his payments each month did not cover interest, his balance is now $110,000. One study cited in the article finds that 25 percent of student loans in 2009 had a higher balance in 2019 because of negative amortization. Although the article attributes part of the problem to high interest rates (relative to current interest rates), we should note that a fixed interest rate also guarantees that the interest rate won't rise. In other words, the optimum choice of fixed versus variable rate is generally only knowable in hindsight. The real issue is granting a negative amortization loan. Of course, the only negative amortization lender we know of is Uncle Sam.

GE's Stock Price Jump

If you own shares of GE, you may have noticed that the share price jumped 700 percent in one day! The reason is that GE underwent a 1-for-8 reverse stock split. As a result, the stock price increased from $12.95 to about $104. CEO Larry Culp stated that the split was undertaken to be more comparable to its peers. Typically, a reverse stock split is done after poor stock performance. However, GE's stock has increased by about 20 percent so far this year. However, as we note in the textbook and the article notes, stock spits really don't amount to much more than keeping a stock price in a familiar range.