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