Berkshire Shares Hit Record

What is the highest priced stock traded in the United States? It is the A-class stock of Warren Buffett's company Berkshire Hathaway (BRK-A). The shares recently touched a record high of over $300,000 per share. Does this mean it is the highest valued company? The answer is no, as that distinction belongs to Apple, with a market cap of $906 Billion (vs. Berkshire's $493 Billion). The main reason for this difference is that Buffet has not split Berkshire's stock. See related article here, Reuters.

GE Hits Fibonacci Support

Traders who rely on technicals often try to identify support (and resistance) levels for stocks. Such levels may be based on moving averages or historical lows (and highs), but another common approach is using Fibonacci numbers (i.e., the "golden ratio"). According to this process, a key support level is a 61.8% retracement from a high price, which GE is approaching. See article here, MarketWatch.

Understanding the VIX

The number of volatility linked investment products has grown significantly since the "great recession." Many of these products are linked to the VIX, or volatility index. Unfortunately, many investors have a limited understanding of what the VIX actually is. Fortunately, in a recent article, the WSJ attempted to provide a brief explanation.

Mutual Fund Performance Persistence

Do high performing mutual funds continue to perform well? This is one of the biggest questions among both investors and researchers. Recently, the WSJ (see article here) studied how funds with five-star Morningstar ratings perform in the years following their high ratings. The results suggest that performance does not persist.

European Derivatives Market

The European Securities and Markets Authority (ESMA) just reported that the European derivatives market has an outstanding notional value of over 450 million euros, representing 33 million open positions. See article here, Luxembourg Post.

Shorting Treasuries

Investors have been expecting interest rates to rise. While this has yet to take place, more traders are taking positions consistent with this view. Potential budget deficits and borrowing costs are also adding to the situation. In response, many investors have reduced their exposure to long-dated Treasuries, as their higher duration would cause a more negative reaction to any increase in rates. Beyond that, other traders have taken increased short positions to benefit from this potential move. See article here, Reuters.

PE and Inflation

When inflation (and therefore the overall interest rate) is low, the present value of future cash flows is higher. As such, there is an inverse relationship between inflation and PE multiples. As inflation rises, PE ratios fall (and vice versa). Historically, the average PE ratio has been equal to 20 minus the inflation rate. See article here, WSJ.

Flawed Risk Surveys?

Most risk tolerance surveys contain similar questions, but behavioral experts suggest such questions may not be measuring what is actually intended. See article here, WSJ.

Return of Subprime?

While it represents a small segment of the overall mortgage market, so-called "nonprime" mortgages are once again gaining popularity. Although they now have a different name (i.e., no longer subprime), the fundamentals (or lack thereof) are similar to those of prior cycles. The extent of their impact will be determined by the broadness of their reach and whether changed regulations will control their risk profile. See article here, Financial Times.

Illinois = Junk bonds?

The state of Illinois just had its bonds downgraded by two credit rating agencies, bringing it close to junk bond status. The downgrade further worsens a bad situation, as the lower rating will increase the interest rate the state has to pay on its widening debt. See article here, WSJ.

Puerto Rico Municipal Bond Bankruptcy

After entering court protection, Puerto Rico now represents the largest municipal bankruptcy ever -- $73 billion. This is much larger than the city of Detroit, which previously held the record at $9 billion. While municipal bonds generally carry lower interest rates due to tax advantages, high levels of default risk will offset this benefit and result in higher required yields. See article here, WSJ.

An Update on Levered ETFs

Levered ETFs are designed to track a particular benchmark, but in an exaggerated fashion. For example, the Pro Shares Ultra S&P500 (SS0) is a 2X fund, meaning its performance should be twice the level of the index. However, this performance only matches short term. In particular, since volatility reduces compounded returns, levered funds "lose" performance through time. In fact, some funds may actually produce a negative buy-and-hold return during even if the underlying benchmark was positive. Unfortunately, many retail investors are flocking to these funds without understanding their risks. (See article here, Reuters.) In recent events, the SEC just announced approval of a quadruple-leveraged ETF, which will further exaggerate the issues described above. (See article here, Reuters.)

Record Margin Levels

Margin debt rose to a record $528 billion in February. This is likely a sign of growing investor confidence, but some warn that it signals a market peak, as such high levels have often preceded steep market declines. See article here (WSJ).

Ban Dual-Class Shares?

Company founders have used dual-class share structures to retain voting control, even without a majority of the share ownership. Many tech companies have adopted such systems, with some being quite extreme. For example, Groupon founders own shares that provide them the equivalent of 150 votes per share, and Snap (parent of Snapchat) plans to go public and give common shareholders no voting rights. Money managers are beginning to band together in hopes of eliminating such structures. See article here, WSJ.

Dow 20,000

Following a post-election rally, the Dow has recently crossed 20,000. But, what does this really mean? Check out a recent article in the WSJ.

Voting Rights?

In recent years, tech companies in particular have widely used different share classes as a way for founders to retain voting control even after the firm goes public. In an extreme move, however, Snap Inc. is issuing public shares that actually carry zero votes, leaving all control with the founders. See article here, Morningstar.