Facebook Raises $16 Billion at IPO Price $38
May 17, 2012
Facebook Inc. set its final price at $38 a share, as the social network gets ready for its initial public offering on Friday. At $38 a share, Facebook is valued at $104 billion, the biggest-ever valuation by an American company at the time of its offering.
Facebook is set to raise $16 billion from its IPO, becoming third-largest public offering in the history of the United States, behind General Motors and Visa.
On Friday, Mark Zuckerberg, the founder, is set to ring the opening bell for the Nasdaq from Facebook’s headquarters in Menlo Park, Calif., surrounded by executives, engineers and other employees. Shares of Facebook, which will trade under the ticker FB, will start selling to the public later in the morning.
Facebook's final pricing comes amid recent financial disclosures that threw some cold water on the IPO. Last month, the company reported that its first-quarter sales fell 6% from the fourth quarter to $1.06 billion, while profit slumped 32% to $205 million over the same period.
Facebook remains one of the few firms among the recent crop of Internet start-ups making public debuts that is profitable. In 2011, Facebook posted a profit of $1 billion and $3.7 billion in sales, compared to a loss of $56,000 and $272 million in sales as recently as 2008.
At the offering price of $38, Facebook is set to trade at more than 100 times its earnings for the last 12 months. At that level, investors assume the company will be far more profitable than the rest of corporate America. The Standard & Poor’s 500-stock index trades at 14 times earnings. Facebook’s fans believe the rich valuation is warranted, given the company’s prospects for earnings.
Facebook enjoys the highest profile of the recent generation of Web firms, with an audience of more than 900 million users globally, which by itself would make it the third-most-populous nation in the world.
JPMorgan's appalling $2 billion loss
May 12, 2012
JPMorgan Chase CEO Jamie Dimon on Thursday revealed that the banking giant
lost a $2 billion due to a massive trade that went sour, and that the losses
could climb by another $1 billion in the coming days.
J.P. Morgan Chase & Co. told traders several months ago to make bets
aimed at shielding the bank from the market fallout of Europe’s deepening mess.
But instead of shrinking the risk, their complicated bets backfired into losses
of as much as $200 million a day in late April and early May, culminating in the
company’s announcement Thursday of more than $2 billion in losses.
The loss stemmed from a complex deal involving credit default swaps —
insurance-like contracts that essentially allow firms to bet on whether a given
asset will rise or fall. The credit default swaps have been described as weapons
of financial mass destruction. The complicated trading strategy involved
derivatives, financial instruments that derive their value from the prices of
securities and other assets. The bank most likely structured the trade in a way
that magnified losses.
Dimon attributed the loss to "errors, sloppiness, and bad judgment," and
asserted that "we will fix it and move on." But critics of the financial
industry say the loss is more than a mere error, and that JPMorgan is engaging
in precisely the type of risky behavior that brought the financial system
crashing down in the fall of 2008.
In 2010, Congress passed the so-called Volcker rule, part of the Dodd-Frank
Act, to prevent companies from using their own money to make bets using credit
default swaps. However, the Volcker rule has yet to be implemented, and banks
continue to lobby against it. Dimon led the charge in vehemently and loudly
opposing the Dodd-Frank Act, insisting that the near-meltdown of 2008 was a
perfect storm that would never happen again.
The trading losses reverberated Friday, as J.P. Morgan shares fell 9.3%, or
$3.78, to $36.96 in New York Stock Exchange composite trading at 4 p.m., erasing
$14.4 billion in stock-market value. It was the biggest decline since August,
and trading volume soared to its highest level since at least 1984.
How to Estimate Stocks' Fair Values
How do analysts arrive at fair value estimate for a stock, and how do they relate to the stocks rating? To determine a stock's fair value, analysts examine factors such as estimated future cash flow, competitive positioning, and even the degree of certainty the analyst has in making his or her evaluation.
Analysts typically track companies within specific sectors and revise their fair value estimates whenever information becomes available that affects their outlook for a stock. A new product launch, a merger or acquisition, or a major competitor abandoning a market are some examples that could cause an analyst to revise a company's fair value estimate up or down.
The process on how analysts arrive at a fair value estimate is outlined below.
The first thing the equity analyst does is examine the company's fundamentals: sales, revenue, expenses, and so on. These are gathered from financial statements, industry reports, discussions with company management, trade-show visits, and other sources.
Once the fundamental analysis is completed, the analyst proposes a rating of competitive advantage over its competitors for the stock. Analysts propose a moat rating of wide, narrow, or none for a company to determines that rating.
Next, the analyst looks at historical data, along with the company's competitive position and future prospects, to forecast future cash flow. All this data is applied to a proprietary discounted cash flow model to arrive at a fair value estimate for the stock. Due to the specific characteristics of certain industries, special models exist for valuing the industries. This fair value estimate represents what equity analysts believe the stock is currently worth.
Once the fair value estimate is established, the next step is to determine a level of confidence in the estimate, which can vary based on factors such as volatility within the company's industry, economic sensitivity, and other variables that could affect the stock's price in the future. The analyst assigns an fair value uncertainty rating to the stock, which helps determine the margin of safety (or cushion to account for multiple potential outcomes) analysts believe is necessary to recommend buying or selling it. The upper and lower bounds of this margin of safety are determined by a formula that is applied to all stocks based on their uncertainty ratings. A stock with a low uncertainty rating requires a relatively low margin of safety.
The last piece of the process is the rating for stocks, which reflects where a stock's current share price stands relative to fair value estimate. A stock with the highest rating is selling at a deep discount while a stock with the lowest rating is very overpriced. The rating thresholds are also the points at which the recommended Buying and Selling prices kick in. A stock's rating can change daily based on its closing price.
How Index Funds Are Weighted
Different index funds are weighted in a different way. Whatever type of index fund or funds you choose, make sure you understand the methodology, so you can stay away from an investment that doesn't behave the way you expected.
Representing nearly 15% of all mutual fund assets today, index funds have become an increasingly popular choice for investors. The first index fund, introduced by Vanguard in 1976, tracks the S&P 500, and today that index is by far the most popular one used, accounting for about 37% of all index fund assets.
The core premise behind index investing is that beating the market consistently over the long term through actively picking stocks that will outperform is extremely difficult. Instead, the most basic index funds seek to capture the market's performance itself in the belief that the investors who participate in it are fundamentally rational and also value stocks at or near their fair values.
In some cases, if an index is too broad or securities in it too illiquid for a fund to adequately track, the fund's manager might try to mimic the index's performance through a technique called representative sampling.
Although index funds seem to track anything and everything, there are a few primary ways of constructing them, from conventional market-cap weighting to alternative methods such as equal, fundamental, or price weighting.
Cap-Weighted Indexing
By far the most common method of indexing is through market-cap weighting, in which the amount of each stock held is proportionate to its market value, or capitalization. So if a stock's market cap makes up 5% of an index, it also makes up 5% of the fund's portfolio.
The method provides an accurate reflection of how the market looks, with greater emphasis on bigger companies (by cap weight) and less on smaller companies; as stocks grow, they naturally take on a larger percentage of the index without the fund needing to buy new shares, making this method cheaper and more tax-efficient than others.
In rising markets, the index might include a higher percentage of overpriced stocks. The method emphasizes the biggest companies, which might have less room to grow than the smaller companies that make up less of the index.
Equal-Weighted Indexing
All stocks are held in equal proportion regardless of market cap. So, for example, an equal-weighted S&P 500 fund would still include the same 500 stocks as the cap-weighted version, but in equal amounts--in this case each making up 0.2% of the index.
The method provides a greater tilt to midsized companies, which sometimes offer better returns than the largest companies.
By overweighting smaller companies, the index no longer accurately represents the market. The portfolio must be rebalanced periodically--typically quarterly--which creates transaction costs and means the index might fall out of equal-weighting for months at a time. Equal-weighted funds are generally more expensive than cap-weighted index funds.
Fundamental Indexing
Stocks are weighted based on a fundamental metric or metrics, such as dividend yield, earnings, book value, or a combination of factors.
The method can be used to provide a tilt to an index (toward value or income, for example) while generally avoiding the negative effects of stocks becoming overvalued by the market.
Fundamental indexing does not serve as a proxy for the market. It requires rebalancing that can add transaction costs, and funds that employ this method tend to be more expensive than cap-weighted index funds.
Price-Weighted Indexing
Stocks are weighted by the share price for each company in the index, with the Dow Jones Industrial Average the most famous example.
The method requires less trading than equal-weighted or fundamental indexing methods, which helps reduce costs.
The index can become skewed toward overpriced stocks and detached from market values.
Linsanity’s Economic Power
Knicks point guard Jeremy Lin’s star keeps glowing outside basketball court
March 20, 2012
JThe Linsanity – the excitement over the unheralded Lin – started in February 2012 when Lin unexpectedly led a winning streak by New York Knicks while being promoted to the starting lineup. The Linsanity influence resonates beyond basketball court. It penetrates stock market, sales, and marketing.
Jeremy Lin is a Harvard-educated, undrafted point guard for the New York Knicks who seemingly emerged from nowhere to become an international phenomenon. He became a fan favorite in early 2012 after scoring at least 20 points in five straight games, all of them Knicks victories. He is also the first N.B.A. player to have at least 20 points and 7 assists in each of his first four starts. New York Knicks had a 7–0 record after Lin started receiving major playing time, 6–0 with him starting.
Since Linsanity breakout game through Friday, Madison Square Garden Co., parent of the Knicks, had seen its shares advance 13% since early February, compared with a 4.4% increase of the S&P over the same period.
Since Feb. 4 breakout game, sales at online Knicks-linked stores — which carry about 50 Lin-related items — have surged forty fold, while sales at the arena are up 70%, according to management, with Lin-related gear accounting for about half of online sales and about a third of in-arena sales.
Lin’s jersey has been the league’s top seller for well over a month, catapulting sales of Knicks team gear to the top spot. The Knicks held a 39% peak market share of the $3 billion National Basketball Association (NBA) merchandise market in the week ended Feb. 25, when Lin merchandise reached stores nationwide. Though demand has slowed since then, the Knicks are still No. 1, at about 26.5% of the market.
Riding Linsanity wave, on Monday, March 19, car company Volvo signed Lin to a global brand endorsement contract, with a focus on China, the U.S. and Chinese-language markets in Asia.
On Wednesday, March 14, the Knicks signed a marketing partnership deal with Taiwan-based PC maker Acer, the second Taiwanese company to partner with the Knicks in the past month. As part of the contract, Acer will place advertisements near the Knicks’ bench.
In late February, the New York Knicks and Taiwan-based tire company Maxxis International agreed on a marketing sponsorship, the Knicks’ first to capitalize the global success of point-guard Jeremy Lin. The partnership, which will run through the rest of this National Basketball Association season, allows Maxxis to advertise through courtside signs and advertisements on the scoreboard.
Nike's short-term investment in Jeremy Lin is ready to pay some long-term dividends. Like a futures bet on a Wall Street stock, the athletic giant had the foresight to sign Lin to a minor deal when he entered the NBA in 2010. Nike extended its endorsement pact with Lin in late February to stop him from being stolen by rival athletic sponsors. Nike then launched “Linsanity” T-shirts for sale at its own stores and at Foot Locker Inc. locations. Nike hopes to double its sales in China to $4 billion annually by 2015.
At the time this article is published, New York Knicks just made it four straight easy victories by beating the Toronto Raptors 106-87 on Tuesday night with Lin scored 18 points, behind Amare Stoudemire with 22 points.
15 banks pass stress tests
March 14, 2012
The Federal Reserve said 15 of the 19 largest U.S. banks pass stress tests, or Comprehensive Capital and Analysis Review (CCAR), as they could maintain adequate capital levels even in a recession scenario in which they continue paying dividends and buy back stock. Four banks, including Citigroup, have more work to do and need more capital.
The stress tests results show that nearly three years of economic expansion have helped U.S. banks raise profits, rebuild capital, and increase liquidity after the collapse of Lehman Brothers Holdings Inc. in 2008 nearly toppled the financial system.
The Fed said an unemployment rate of 13 percent, a 50 percent drop in stock prices and a 21 percent decline in prices under the stress scenario would produce aggregate losses of $534 billion over nine quarters. Even with that blow, the 19 banks would see their tier one common capital ratio -- a measure of bank strength against loss -- fall to 6.3 percent in the fourth quarter of 2013 in the hypothetical scenario, above the 5 percent minimum the Fed required. The ratio was 10.1 percent in the third quarter of last year.
The Fed said the stress test was modeled on an extreme negative scenario and not its actual outlook for the economy. It was the first time the Fed had released a thorough test of the banks' financial health since the early days of the financial crisis. The Fed has conducted the stress tests each year since 2009. The Fed did not publicize the results of its tests in 2010 or 2011. After the first round of tests, in 2009, the Fed ordered 10 banks to raise a total of $75 billion. Bank of America Corp. alone was told to raise $34 billion.
Three banks - Ally Financial, Citigroup and SunTrust - would likely need new capital from either investors or the government in the Fed's adverse economic scenario.
A fourth financial firm, insurer Metlife, would likely be in need of assistance as well. A senior official at the Fed said all four of the banks would need to submit plans that would detail how they would increase their capital to make them less vulnerable in a downturn.
The Fed released the results two days earlier than planned after JPMorgan Chase sent out a press release late Tuesday saying it had passed the test. That prompted the Fed to move up the stress test announcement to after the closing bell Tuesday.
Bank stocks surged Tuesday before the Federal Reserve officially announced stress tests results. JPMorgan Chase sparked the rally by jumping the gun since the results of the Fed's stress tests were not due to be released until Thursday. JPMorgan Chase announced Tuesday it was raising its dividend and launching a new $15 billion stock repurchase plan and pointed out that the Fed had already completed the CCAR and "did not object" to the bank's plan.
The Fed didn’t order any of the banks that failed its test to raise specific sums. However, it won’t allow them to increase dividends or buy back shares, and it told them to submit plans within 30 days outlining how they plan to get stronger.
The banks that passed the stress tests celebrated with announcements of increased dividends and plans to buy back their own shares
Stanford Convicted in $7.1 Billion Ponzi Scheme
March 6, 2012
A federal jury on Tuesday, March 6, 2012, found R. Allen Stanford, the chairman of Stanford Financial Group, guilty of masterminding a $7.1 billion Ponzi scheme.
Mr. Stanford, 61 years old, made a dizzying climb from a small-town boyhood in Mexia, Texas, to the top of the financial firmament and became a billionaire. At the peak of his career, he owned banks and residences around the world, had high-placed contacts with the leaders of Libya and other nations, and was a particularly outsize presence in the Caribbean isle of Antigua, where he was knighted in 2006. Mr. Stanford valued other kinds of possessions, too, including a 120-foot yacht and a fleet of aircraft valued at more than $100 million.
In 2008, Mr. Stanford was the 205th richest American with a net worth of $2.2 billion, according to Forbes magazine. His holdings in Antigua, where he held a dual citizenship, included banks, airlines and the country's biggest newspaper. A cricket enthusiast, he rose to international prominence as a benefactor of the sport.
But Mr. Stanford's lavish lifestyle was built on funds he borrowed illegally from his investors, prosecutors said. In 2009, the U.S. government accused Mr. Stanford of swindling nearly 30,000 of investors in 113 countries for more than two decades by selling them certificates of deposit issued by the Stanford International Bank he controlled in the Caribbean island of Antigua, representing to clients that the money would be invested conservatively in stocks and bonds. Instead, he funneled the proceeds into risky real-estate assets and his own businesses, a luxurious lifestyle, a secret Swiss bank account and business deals that consistently lost money.
For the prosecution, the Stanford case was a Ponzi scheme in which he and five conspirators had given investors false financial statements indicating that the certificates of deposit were invested in conservative assets when $2 billion was actually lent to Mr. Stanford. All the while, auditors, along with the head of Antigua’s Financial Services Regulatory Commission, had received bribes to conceal the scheme and misinform the S.E.C., prosecutors said.
The estimated Mr. Stanford's $7.1 billion fraud was among the largest in history, but it was overshadowed by an even greater financial crime: the $17.3 billion Ponzi scheme orchestrated by financier Bernard Madoff, who pleaded guilty in 2009.
Mr. Stanford has been jailed since June 2009 because he was judged to be a flight risk. In prison, Mr. Stanford was beaten in September 2009 by a fellow inmate. Mr. Stanford complained of memory loss from the head trauma, and a court found that he was so addicted to his prescribed painkillers that he wasn't competent to stand trial. In December 2011, a judge found him competent and the trial commenced in January.
After a criminal case that dragged on for nearly three years, the jury on Tuesday, March 6, 2012, convicted Mr. Stanford on 13 of the 14 charges brought by prosecutors, including conspiracy to commit money laundering, fraud and obstructing investigators. He faces a maximum of 230 years in prison. Mr. Stanford's attorneys told reporters they would appeal but didn't specify on what grounds. Prosecutors declined to comment.
Map of European Debt Crisis
Debts Have Been Rising to Dangerously High in the Past Decade
February 28, 2012
In the past decade the debts of the European Union (E.U.) countries have been rising to dangerously high level causing the current Europe's debt crisis. Greece and Italy have had high levels of debt since 2000. Now Greece and Italy are not the only countries in Europe with credit and debt problem. More than a half of the E.U. countries carry debts exceed the European Commission limit, which is 60 percent of gross domestic product (G.D.P.).
The European Union is made up of 27 countries, with one of the chief goals being to create a single market and integrate economies through shared regulations. Overseeing the E.U. is the European Commission, based in Brussels. Within the European Union are 17 countries that use the Euro as a common currency. This collective group of countries which use the Euro is called Eurozone.
Greece’s debt problems are not new. The country had high levels of debt, which are measured by debt as percentage of G.D.P., even as it prepared to join the euro zone in 2000. Italy and Belgium, too, have long wrestled with large debt loads. The debt-to-G.D.P. ratios of Greece and Italy have been dangerously high, which are 109% and 103% respectively, since 2000.
Rising spending on the social safety net and other government programs has increased sharply over the last decade, pushing debt levels higher across the continent. Britain’s government spending as a percentage of G.D.P. hit a 10-year high in 2008. The debt-to-G.D.P. of Italy was 106% in 2005, while Greece was 100%.
Greece’s debt troubles are not unique. In 2011, fourteen of the 27 European Union countries face debts equal to more than 60 percent of their gross domestic product, the limit set by the European Commission.
In 2011 Greece, Italy, Portugal, and Ireland carry the highest debt burden with debt-to-G.D.P. ratio above 100%. These four countries are members of Eurozone.
The second highest debt level group with the ratio between 75% and 100% includes some of the region’s biggest economies, such as Britain, France, and Germany.
Source: The New York Times
