Corporate Debt and the Fallout from Rising Rates

The potential for and timing of an interest rate hike is the source of endless speculation and presents several layers of potential fallout for highly leveraged companies, according to Validea CEO John Reese. In a recent article for The Globe and Mail, he discusses the various factors at play. A wall of maturities: Rising rates could jolt the bond market. Jeffrey Gundlach of DoubleLine has said that “hundreds of billions” of corporate and high-yield bonds will be coming due around 2019 and, in the face of higher rates, “bond holders and the companies who have depended on low rates could […]

The Weakest Link in Today’s Market

Expending more than you take in works for a diet, but it doesn’t for the stock market. That’s the upshot of a recent Wall Street Journal article by Steven Russolillo, who writes that today’s ultra-low interest rate market is allowing share prices to “stay higher for longer than under more normal circumstances.” What could “end this game” he argues, is the amount of cash companies are paying out to investors–which is now exceeding the earnings taken in. Russolillo quotes New York University finance professor Aswath Damodaran, who believes this to be a significant risk. Damodaran says that “S&P 500 companies […]

Key Pillar of the Market – Share Buybacks – Could be at Risk

Rock-bottom interest rates allow the market to stay higher for longer than it would otherwise, writes Steven Russolillo in this week’s Wall Street Journal. One factor that could end the party, however, is the amount of cash companies are paying out to investors. Not surprisingly, robust dividend payments and buybacks are big draws for investor dollars. However, the article quotes New York University professor Aswath Damodaran as saying, “This is the weakest link in the market. He says, “the inability of companies to sustain large cash payouts to investors will cause the next downturn.” During the first two quarters of […]

Investing Internationally: Countries or Companies?

The topic of global investing through allocating country risk was addressed in a recent CFA Institute interview with NYU finance professor Aswath Damodaran. While the goal of this approach is to minimize risk through maximizing diversified country exposure, Damodaran believes that much of it is misguided. “Here’s the strange thing: You don’t even have to leave your domestic market if you’re an American or a European to get country risk exposure.” He asserts that, by just using the S&P 500 companies, an investor could get exposed to “pretty much every market in the world.” According to Damodaran, investors often make the […]

Margin of Safety: How Misconceptions Could Hurt You

NYU finance professor Aswath Damodaran focuses on myths associated with the concept of “margin of safety” (MOS) in a recent post on his Musings on Markets blog. MOS is thought of as a tool for value investors to protect themselves against uncertainty. Ben Graham brought the term into value investing and Seth Klarman has argued that investors gain the margin of safety by “buying at a significant discount to underlying business value and giving preference to tangible assets over intangibles.” Damodaran lays out the purported benefits of maintaining an MOS, then cautions against being misled by associated myths, as summarized […]