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.

Volkswagen Clawback

Volkswagen's Dieselgate scandal has been ongoing for the past five years. Recently, former CEO Martin Winterkorn has agreed to pay the company €11.2 million ($13.7 million) in a clawback. Although Winterkorn was not found to be responsible for the development of the defeat device, he was in a meeting when the defeat device was discussed. In his role as CEO, he breached his duties by not investigating the defeat device and its possible use. Additionally, former Audi CEO Rupert Stadler agreed to a clawback of  €4.1 million ($5 million) for failing to investigate whether engines developed by Audi were rigged to cheat emissions tests. 

The Market Beats Robots!

A recent article highlights a retirement issue, "lost" 401k accounts. It is estimated that 24 million accounts containing $1.35 trillion in assets have been left in 401k accounts when someone leaves an employer. And while these can be claimed easily, we want to make sure that you don't forget about a retirement account. You can often leave a 401k account with an old employer if you like the options and costs available, but you can also roll over the account tax-free into an IRA. We did want to point out one sentence in the article:

Those robo accounts have returned almost 9% annually over the past three years, while popular S&P 500 ETFs have seen annualized returns of nearly 14% over the past 10 years.

Over the past three years, it is even worse for robo advisors as the S&P 500 has returned about 18 percent over that period. One important caveat is that robo advisors likely have a more diversified portfolio, including bonds and money market accounts. This would reduce the risk of robo advisor accounts, but, as you see, can also reduce the return.

 

China Cracks Down on IPOs

The IPO market has been hot this year, with more than 200 offerings raising over $70 billion. Of these IPOs, 30 were Chines companies, making 248 U.S. exchange listed China-based companies totaling $2.1 trillion in market value. Now, new rules by the Chinese government may slow Chinese domiciled companies listing on U.S. exchanges. The Chinese State Council stated that it would update the rules for "the overseas listing system for domestic enterprises"and tighten restrictions on cross-border data flows and security. China has already launched an investigation into ride-hailing app Didi. And Nasdaq-listed Weibo has announced plans to go private. 

Bond Ratings Jump

In early 2020, COVID-19 lockdowns slowed the economy and resulted in a record dollar amount of debt being downgraded. By the end of the year, the default rate on corporate bond reached 6.8 percent. Now, with the economy recovering, corporations are becoming healthy and a record $127.9 billion worth of debt was upgraded in May 2021. In early June, a record $340 billion had been upgraded over the previous 10 weeks. And in even better news, Moody's projects the default rate will fall percent to 1.7 percent by December.