Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

Finance Theory Sheds A Light On Stock Prices

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Asking what to expect from stocks may seem like a silly question.  After all, it depends on whose expectations we are talking about.  I am be bullish on stocks while you are bearish.  Although that is true, there is a finance theory answer that looks at the question from the standpoint of the overall market, not any particular investor.  That is a good place to start.

According to finance theory, stocks are priced so that they offer investors a fair rate of return for holding them.  For the market as a whole, say the S&P 500 index, decades of research has led to the conclusion that a fair risk-adjusted return is approximately equal to the risk-free rate, taken to be the yield on 10-year U.S. Treasury bonds, plus 5.5 percentage points.  Currently, the yield on 10-year Treasury bonds is 0.75%, so the theory implies that a fair expected return on the market index is 6.25%.  For individuals stocks, or sectors of the market, it may be somewhat more or less depending upon the risk of the specific investment.

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Wirecard Tanks

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The company’s auditor, Ernst & Young GmbH, reportedly informed it that there was “no sufficient audit evidence so far of cash balances on trust accounts.” According to The Wall Street Journal, the amount of cash that was missing amounts to approximately 25% of the value of Wirecard’s balance sheet.

“There are indications that spurious balance confirmations had been provided from the side of the trustee respectively of the trustee’s account holding banks to the auditor in order to deceive the auditor and create a wrong perception of such cash balances or the holding of the accounts for to the benefit of Wirecard group companies,” Wirecard said in a statement.

It also said it is working with EY to clarify the matter of the missing money. The company also said that the delay in its auditor signing off on its accounts could mean that its loans amounting to about €2 billion could be called in early.

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Hertz Something for Nothing

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In the nearly four months since the Covid-19 outbreak reached the United States the market has experienced an historic crash and equally historic recovery.  Last week the S&P 500 closed within 5% of it’s pre-Covid-19 high and the NASDAQ reached a new all time high.  The market’s bounce has largely been driven by big tech, including stocks included in the Cornell Capital Group Quarantine Index which has dramatically outperformed the market.  While tech has outperformed, companies in the travel sector, many of which are included in the CCG Anti Quarantine Index, have largely missed out on much of the market recovery.  One member of the CCG Anti Quarantine Index, Hertz Car Rental, has filed for bankruptcy.  Typically, bankruptcy is the end of the line for equity investors but for Hertz Global Holdings Inc (NYSE:HTZ) bankruptcy was the beginning of new chapter in the Hertz story.

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Fannie Mae

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When Fannie Mae and Freddie Mac are released from conservatorship, they will hold an offering to allow investors to buy more stock. However, some believe that as the companies stand now, investors wouldn’t buy shares of the government-sponsored enterprises.

In a report dated Thursday, analyst Dick Bove of Odeon Capital explained what former Fannie Mae Chief Financial Officer Timothy Howard said about the GSEs’ business models on a conference call this week. Bove said he continues to question why anyone would buy Fannie Mae or Freddie Mac stock. He also wonders “who would become so enamored with these companies that they might place hundreds of billions of dollars into them.”

Bove and Howard argue that as things stand with Fannie’s and Freddie’s business models, it may not be able to make money in their stocks at this point. Bove said the answer to this question isn’t tied up to the lawsuits or whether the government will see things as investors see them.

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Euronav Underperformer

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The author may have a short position in Euronav

Euronav NV is the world’s largest listed tanker company. While the analysts’ bias is overwhelmingly positive we observe negative factors across its book and income-power components. We are agnostic on the tanker market however the company’s balance of risks deserves attention. 

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