Week 8 - The Value of Time

Week of March 12, 2009

Although we didn't have class this week...we are talking about the time value of money and how that affects the present value of investments including stocks and bonds.

One common assumption is that stock prices adjust for what investors expect in the future for certain companies. And it can be calculated by taking the present value of all future dividend payments. In fact, you can even factor in a certain percentage of growth and assume that these dividend payments will continue into perpetuity. But what happens when the prices do not adjust appropriately? Net Flix is one such company. Investors had high hopes that Net Flix's product offering would appeal to consumers during a recession. It's much cheaper than going out to the movies, and more convenient than going to the local rental store. They also had high hopes for the streaming movies and the appeal it would hold for more technically savvy individuals. And finally, with the impending bankruptcy of Blockbuster, their biggest competitor, what could Net Flix possibly have to lose? Well, investors may have moved too soon to build this perfect storm environment into Net Flix's stock price. They have some new emerging competition to watch out for through Amazon.com, Disney and Hollywood Videos. The bubble is expected to burst at any time.
http://online.wsj.com/article/SB123776433980008861.html

From a bond perspective, GM is trying to restructure to stay afloat. But their bondholders are not confident in the proposal. They would like to swap the bonds for stock to leverage with more equity. However, their current state does not have bondholders wanting to own a share of the company. If they change for equity shares and then GM goes bankrupt, those shares are worthless. Again, GM wants some help from the government and are seeking a $16 billion loan call for the two-thirds swap. They have until March 31 to present the government with their restructure plan, and they need an additional $22 billion to keep things going. From what we discussed in class, it would take a lot of stock and promise of high returns for the GM Bondholders to accept that level of risk. I wouldn't do it...but who's going to buy the bond from me either way. It may be time for GM investors to get out while they still can.
http://online.wsj.com/article/SB123776653433809307.html

Week 7 - Funds are fun!

Week of March 5th, 2009

It's Pension Funds vs. Hedge Funds in Utah

When the economy was going good, fund managers took it upon themselves to charge high fees for the service. Utah Retirement System's Larry Powell is trying to have them spread these fees out over several years. It used to be the case that the fund named the fees, and the people paid it. Now they are realizing that they are going to have to negotiate. One interesting thing to consider is that these fee changes will only apply to the new funds. How will that affect how people like Larry Powell determine which funds are the better investment. He expects that the top performers will still have the advantage of dictating fees, but the new ones will definitely have to build customer relationships through negotiation.

This applies to our class discussion, because changing when and how fees are paid changes the value of a fund. $10,000 today is worth a lot more than $10,000 spread evenly over three years. It would be interesting to see if they factor in the time value of money into those fees. Which, essentially would not create any real savings for investors, but would make it easier to manages their cash flows. In my current situation, paying the fees off over time would be much more appealing, because I don't have the cash. However, if I did have the cash now, would I want to still pay fees right away when I could invest that extra cash and maybe make some returns greater than what I'd be paying. It's an interesting thought to consider.

http://online.wsj.com/article/SB123629796624746265.html

Week 6 - Keeps looking better

Week of February 26, 2009

Not even ratios can save us...

In class we discussed financial ratios. Essentially a ratio can help a person to understand any relationship between any two numbers. In fact, we even discussed making our own ratios. However, in the Wall Street Journal this week John Mauldin says that ratios are based on assumptions and in the current economic conditions, you cannot uses conventional assumptions. Most future rates are based on current numbers. However, financial uncertainty causes us to not be able to project appropriately into the future. So, essentially financial ratios are completely useless right now for valuation purposes. Pay particular attention to the comments left with this article.
http://online.wsj.com/article_email/SB123605688123316929-lMyQjAxMDI5MzA2MzAwNTM2Wj.html#articleTabs%3Darticle


Just continuing with the theme of gloom and doom...In this opinion piece in the Wall Street Journal today it is speculated that there is a 1 in 5 chance that our current economic situation will lead to a depression. Robert Barro studied many countries to formulate his conclusion, not just the United States. But remember there are always two sides to every percentage, so there's an 80% chance of avoiding a depression.
http://online.wsj.com/article/SB123612575524423967.html

This video advices us to never pick individual stocks, but rather invest in mutual funds. Is that really good advice considering all the bad press that Bernard Madoff is giving this traditional investment instrument. He also recommends that when diversfiying with bonds, your percentage invested in this instrument should correlate to your age...so it gets bigger as you get older and need those more stable returns.
http://online.wsj.com/video/a-guide-to-the-end-of-wall-street/07B2FEB7-21BA-4A31-9EED-404F2BB8C9AF.html