Season's greetings from the EdgePoint team!
Same ETF’s, different name
The below table illustrates the impact of index ETFs on valuations of three slow-growth/no-growth companies. The three companies comprise a significant portion of many ETFs marketed under a range of ETF categories. The companies in charge of structuring the ETFs simultaneously defined the three companies as value, growth, high-dividend, and low-volatility stocks. It is inconceivable that anyone of these stocks can be included in all four categories, suggesting that there is a fundamental flaw underlying these ETF methodologies.
Stats from the bond desk
BB bonds yielded just 3.51% on Monday, the lowest on record and just 164 basis points more than U.S. Treasuries. To put those figures further in perspective the safe AA index yielded 3.58% just over 13 months ago. Source: Bloomberg LP.
From Almost Daily Grant - Wednesday, December 18, 2019
Newly issued leveraged loans have come to market with an average debt load of 5.5 times EBITDA this year, compared to just under 5 times in 2007. But after accounting for issuer-friendly adjustments such as add-backs (i.e. applying for credit today from hypothetical future cost savings), debt from new issues rises to near 7 times EBITDA, up from just over 5 times in 2007.
What does a junk bond even mean anymore?
The difference between BBB-rated and BB-rated U.S. corporate bond spreads has collapsed as investors chase yield in the highest-rated junk bonds. The differential between the best junk and worst investment-grade debt hit 38 basis points on Monday, the lowest since Bloomberg records began in 1994.
The global search for yield continues to draw investors to the U.S. corporate bond market, particularly the safest slice of high-yield, which has outperformed lower-rated bonds this year.
The millennial urban lifestyle is about to get more expensive
If you wake up on a Casper mattress, work out with a Peloton before breakfast, Uber to your desk at a WeWork, order DoorDash for lunch, take a Lyft home, and get dinner through Postmates, you’ve interacted with seven companies that will collectively lose nearly $14 billion this year. If you use Lime scooters to bop around the city, download Wag to walk your dog, and sign up for Blue Apron to make a meal, that’s three more brands that have never recorded a dime in earnings and have seen their valuations fall by more than 50%.
The idea that companies like these don’t make a profit might come as a shock to the many people who spend a fair amount of their take-home pay each month on ride-hailing, shared office space, or meal delivery.
There is a simple explanation for why they’re not making money. The answer, for finance people, has to do with something called “unit economics.” Normal people should think of it like this: Am I getting ripped off by these companies, or am I ripping them off? In many cases, the answer is the latter.