High Yield Bond Rates Fall

Through February 10, more than $13 billion of debt with a rating of CCC or lower has been issued, twice the previous record pace at this point in the year. But what is surprising is that the average YTM for the ICE BofA High Yield Index is only 3.97 percent. While this represents a 2.77 percent risk premium over current U.S. Treasury rates, only three years ago the 10-year Treasury yielded 3.23 percent. The current low, or even negative, yields for safe investments has investors chasing riskier investments to increase returns. Another reason for the low yields on junk bonds seems to be that investors believe the COVID-19 slowdown is temporary and the economy will recover quickly as vaccines are more widely distributed.

GM's Electric Option

A recent Wall Street Journal article discusses GM's managerial option to abandon gas-powered automobile manufacturing and convert to an all-EV product line. In order to achieve this end, GM plans to spend $27 billion by the middle of the decade to convert its plants to manufacture 30 EV models, as well as develop driverless vehicles. Currently, EV vehicles generate only 2 percent of GM's sales and no profits. Because the manufacturing process is so different, GM plans to gut plants, basically revamping everything inside the outer walls. GM's plan is to manufacture only EV vehicles by 2035, a massive change in the company's manufacturing capabilities.

Bitcoin Passes $1 Trillion

This week, the market capitalization of bitcoin topped $1 trillion for the first time. The popular cryptocurrency reached an all-time high of $56,399.99, an increase of 70 percent over the past month. So, what is the future for bitcoin? At this point, analysts are split, with some saying it could reach $200,000 and others arguing that the cryptocurrency is overvalued. One thing is certain: Bitcoin is expanding to mainstream investors, including Tesla, Mastercard, and BNY Mellon. Of course, with this more widespread acceptance, bitcoin's price has become more cyclical, meaning that it is less useful as a diversification asset.

A Short Squeeze

A short sale occurs when an investor sells a stock they don’t own to hopefully buy it back later at a reduced price. Recently, Gamestop and AMC have seen a short squeeze. When you short a stock, if the stock price increases, you must make a margin deposit, that is, make an additional deposit of cash into your account, or repurchase the stock and take the loss. In a short squeeze, a group of investors buy the stock, forcing short sellers to make more deposits or take a loss. In the past two weeks, Gamestop has gained about 1,800 percent, which in our opinion, means the stock is in a bubble.

Monte Carlo In Retirement

In the textbook, we discussed the use of a Monte Carlo simulation in capital budgeting. A common application of a Monte Carlo simulation is using it to determine the probability a retirement portfolio will last for the duration of an individual's life. However, as the article notes, it may be difficult for the average investor to understand "the odds of success" or recognize the difference between a 50 percent probability of success and a 70 percent probability of success. One point the article makes that we would like to reiterate is that flawed inputs can cause erroneous outputs. In other words, like any other model, the end result is only as accurate as the inputs. 

Buyback Increase

During the COVID-19 lockdowns, corporate cash flows dropped dramatically, which led to a decline in both dividends and stock buybacks. Now, companies are beginning to discuss an increase in buybacks. Buybacks in the fourth quarter of 2020 were $116 billion, up from $102 billion in the third quarter. For 2021, buybacks are expected to reach $651 billion, a big jump from 2020's $505 billion.

COVID-19 Bankruptcies

As we mentioned in the textbook, financial leverage is a double edged sword. With the COVID-19 lockdowns, the economy slowed dramatically and the effect on highly leveraged companies was immediate. During 2020, 244 U.S. companies with liabilities over $50 million filed for bankruptcy. This was a 70 percent increase from 2019, and the most since 2009's 293 filings. In what may be more telling, during 2019, 62 percent of companies reported being a net investor. However, by the fall of 2020, only 52 percent of companies reported being a net investor.