Cash They Can't Spend

Companies seem to have a lot of cash on hand recently. For example, Google has about $44 billion in cash and short-term investments and Apple has about $28 billion on its balance sheet. But the tech giant with perhaps the biggest cash horde is Microsoft, with about $63 billion in cash on its balance sheet. So why doesn't Microsoft spend some of this cash? One reason is that of the $63 billion in cash, $54 billion is held by the company's overseas subsidiaries. In order to spend this cash, Microsoft would need to repatriate it, resulting in taxes being paid on the overseas profits.

Twinkie Goes Stale?

According to the urban legend, a Twinkie never goes stale, but its parent has gone stale. Hostess, in the middle of bankruptcy filing, has asked the bankruptcy judge to force a new contract on one of its employees' unions. Hostess is in its second bankruptcy since 2004 and has argued that without a new labor contract it will be unable to continue operations. Fortunately for junk foodies, even if Hostess does not emerge from bankruptcy it is likely that most of the company's iconic brands such as Twinkies, Ding Dongs, and Cupcakes will be sold to another company.

Early Release for Lockups

Lockups, agreements that restrict the ability of insiders to sell stock in an IPO, have traditionally lasted for 180 days after the IPO. Recently, lockup provisions have been shortened for many IPOs. In fact, the lockup period for ExactTarget was only 7 days after the IPO. One reason may be an increase in fees for the underwriter. The lead IPO underwriter is almost always the underwriter on the secondary offering from the lockup shares if the secondary offering is less than 180 days from the IPO. After 180 days, the underwriter for the secondary offering is up for grabs.

I'll Take That Negative YTM Treasury

Recently the U.S. Treasury sold new bonds at a record low YTM of negative 1.286 percent over five years. The reason investors were willing to a take a negative YTM is that the bonds are TIPS. With TIPS, the government increases the par value each year by the inflation rate. Given that regular Treasuries with the same maturity had a YTM of .71 percent, buyers of the TIPS are expecting inflation to average about 2 percent over the next five years in order to break even. The expected break even inflation rate is 2.376 percent over 10 years and 2.39 percent over 30 years, all well below the average inflation rate of 3.1 percent since 1926.

Moody's May Downgrade U.S. Debt

In August 2011, S&P downgraded U.S. Treasury debt from its vaunted AAA credit rating. Over a year later, Moody's announced that it may also downgrade U.S. Treasury debt from its current Aaa rating. Moody's blamed the the possible downgrade on the "fiscal cliff". In January 2013, government spending cuts and tax increases are set to take place, which analysts believe may lead to another recession.

Chevrolet Volt: Bad Capital Budgeting

By most accounts, the Chevrolet Volt has been a dismal failure. Year-to-date, Chevrolet has sold just 13,500 Volts, well below the 40,000 cars that GM had projected for 2012. The car's $39,995 base price, along with long charge time, has not helped sales. Of course, reporting on the Volt's financial results can be as weak as the car's sales. For example, as the article notes, it currently costs GM between $75,000 and $88,000 to build each car, including development costs. GM spent between $1 billion and $1.2 billion in development and tooling costs, or just under $56,000 per car sold since the model's introduction. In any capital budgeting analysis, such calculation are meaningless for several reasons. One notable reason is the shaky analysis in the first line of the article that implies it isn't a good thing for GM to sell more Volts. The actual cost to build a Volt is estimated to be $20,000 to $32,000, so any sale above that variable cost increases the NPV of the project. One thing the article does point out is that the development of the of the Volt does provide technology that can be applied to future vehicles, a strategic option in green technology.

Profit Margin = Net Income / Sales?

When you are examining ratios, you must be careful that you know how that ratio is calculated. For example, the profit margin for private companies in 2012 has reached 9.1 percent over the past three months, about triple the profit margin in late 2009 and early 2010. You would think that everyone would calculate a ratio as basic as the profit margin in the same manner, but that isn't true. If you read the last paragraph carefully, you will find that the profit margin for private companies often excludes taxes and includes owner compensation in excess of market-rate salaries. In this case, we can't compare the profit margin for a private company and a public company even if they are in the same industry since the calculation of the profit margin is different.