An Unsystematic Risk

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.

Control Of GE

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.

A Major Cover Up

It seems that cover ups are everywhere today, even in capital budgeting. Today, Playboy announced that it would no longer publish pictures of nude women. The company, which had a peak circulation of 5.6 million in 1975, has seen its circulation drop to 800,000. A company spokesman stated that with so much free porn available that nudity has become passe. As a result, the company exercised its option to alter the format of the magazine. 

Bond Prices Relatively Unchanged

Bond prices were in both positive and negative territory today, with the yield of two-year Treasuries settling up 8 basis points, the highest level in four and a half years. Bond traders are uncertain of the direction of interest rates leading into the Federal Reserve meetings this week. So will the Fed raise interest rates this week? Yes, No, No, Yes.  

Correlation With Apple

A recent article discusses the correlation that various stocks have with Apple and some of the stocks are surprising. For example, industrial products manufacturer Illinois Tool Works (ITW) has the highest correlation at .61. Payment technology firm Fiserv and Honeywell have the next highest correlations with Apple. Facebook and Texas Instruments also have high correlations with Apple, which is expected since Facebook is a tech stock and Texas Instruments is a major supplier to Apple. By now, we hope you understand how important correlation is to diversification, but, as with most numbers, we need to apply economic rationale to the numbers. There is no reason that ITW and Fiserv should have such high correlations with Apple, and in the future, these correlations will likely fall. Remember, what we really want is the correlations going forward, not correlations in the past. As Eric Chemi, the author of the article, states in the accompanying video: "That's where the data can get you and I think people need to be careful to not get trapped in these types of numbers."

Macy's Options

When a company makes an announcement, most people do not consider that many of these announcements are in fact real options. For example, yesterday Macy's made two separate announcements that are both real options. First, the company announced that it would close 35-40 underperforming stores, the option to abandon. Next, the company announced that it would open Best Buy outlets in 10 of its stores. While this is a small capital budgeting decision, it is an option to expand as Macy's and Best Buy both hope the combination is successful, in which case more Macy's will feature a Best Buy outlet.

VIX Volatility

The VIX, which measures the volatility of the S&P 500, has recently had an increased volatility, reaching levels not seen since the financial crisis of 2008. The level of the VIX is still in the area that generally occurs when the economy is in a recession. A JPMorgan analyst argued that the increased volatility was the result of price-insensitive traders who had "trend following strategies (CTAs), risk parity portfolios, and volatility managed strategies", all of which served to increase market volatility.