Tagged: Apple

Autocallable

It’s time we had The Talk.

Candid discussions can be uncomfortable. They broach subjects we prefer to avoid. But we can’t ignore the facts of life.

One such fact is Contingent Absolute Return Autocallable Optimization Securities. We’re more comfortable talking about diarrhea, right? Bring them up at a party and the crowd disperses. Try talking to your teenager about them and she’ll roll her eyes and turn up One Direction in her ear buds.

Why the public disdain? Look at the name. Need we say more? They’re wildly popular though with issuing banks including JP Morgan, UBS, Barclays, Morgan Stanley, RBC and others – just about anyone who offers “structured products.”

This particular version of structured product (“a financial instrument crafted by a brokerage to achieve a particular investment objective for clients ranging from short-term yield to long-term risk-mitigation” is how we’d describe them) achieved both infamy and scrutiny after Apple shares slumped in latter 2012. Big banks had sold hundreds of millions of dollars of Contingent Autocallable Securities paying a yield of about 10% and tied to the performance of Apple shares. Buyers got stuck with shares that had dropped 30% in value and lost principal to boot.

I’ll give you my simplest understanding of how these instruments work and why you should care from the IR chair. It’s a debt instrument and it’s unsecured. It tends to pay high interest, like 10% annualized in a basis-points world. Whether it pays out turns on two things: How long you hold it, and whether the underlying equity to which it’s paired declines below a trigger price.

There are two problems for IROs. First, because regulators consider it debt, if it “converts” there’s no equity trade. These things are not responsible for big percentages of volume so there’s no vortex looming in your share-counts. But still, decisions and strategies impacting shares are resulting from instruments you can’t track. (more…)

Losing Purchase

Say you were house-hunting in a hot real estate market. Would you Tweet: “I’m going to buy the house at 1342 57th Street, and I’m headed there right now.”

If you want a good deal, do you wave your hands and try to summon others to compete with you?

So why do companies announce stock repurchases?

Forget disclosure for the moment, or lowering shares outstanding to offset incentives. Sure, there’s a bit of the blue-light special. A repurchase wants attention in the sense that it signals “we think this is a great use of cash.” It blunts bad news: “Our margins were down this quarter – but guess what? The board said to buy $500 million of stock.” That’s a positive value action to forestall a negative value message.

In both cases, it’s also a marketwide Facebook post proclaiming that “we are about to spend money here.”

Let’s apply common sense now. Isn’t that antithetical to the wise deployment of shareholder resources? If you want a good deal, cut out the middlemen – don’t hail them from all over the globe to get between you and the thing you want to buy. (more…)