Why Is Facebook Splitting Its Stock?
Posted by Eddy Elfenbein on October 1st, 2010 at 4:03 pm

The news today is that Facebook is splitting its (privately held) stock 5-to-1. Felix Salmon wonders why:

If Facebook stock was trading at thousands of dollars per share, the split might still make sense — if you’re handing out stock or stock options to relatively junior employees, for instance, a single extra share can make a substantial difference. But it’s not: the highest reported figure for Facebook stock is just $76 per share. A 5-for-1 split would bring that down to just $15 per share: there seems to be no particular reason to have a share price that low.

It’s possible that the $76 figure is wrong by an order of magnitude or so: that might explain the split. But absent that explanation, I can’t think of any good reason for this split, unless an IPO is much more imminent than anybody currently thinks. Can you?

I wouldn’t be so quick to dismiss pressure from junior employees about the share price. When you deal with investing at the retail level, price level is perhaps the strongest cognitive bias there is.

People just don’t like buying stocks over $70 per share no matter what the quality is. The average retail investor just loves to find stocks in the teens. I know it makes no sense, but I’ve seen it again and again.

One of the reasons Microsoft went public, and Bill Gates was in no hurry, was that junior-level employees were becoming rich on paper but there was no place for them to sell their shares. The point is that even non-public companies can come under pressure about their share price.

My advice is to never worry about the nominal price of a stock. Pay far more attention to the company’s business and financial ratios.

The S&P 500 Total Return Index
Posted by Eddy Elfenbein on October 1st, 2010 at 1:37 pm

Here’s a look at how the S&P 500 has performed since 1970 with dividends included:

The total return index is up 3.89% this year. Over the last 10 years, it’s down 4.23%.

If you had invested $100 in the market each month since 1970, you’d have about $640,000 today.

ISM Drops (!) to 54.4
Posted by Eddy Elfenbein on October 1st, 2010 at 10:56 am

The market got slightly rattled this morning on the news that the ISM Index dropped from 56.3 to 54.4.

I need to point out that this doesn’t mean the economy contracted last month. Any ISM reading over 50 means the economy is expanding. Today’s ISM report is good news.

Bloomberg has a rundown of the other ISM indexes:

The ISM’s U.S. new orders measure declined to 51.1 from 53.1, while the production index dropped to 56.5 from 59.9.

The employment gauge fell to 56.5 in September, the lowest in six months, from 60.4, and the index of export orders dropped to 54.5, the lowest this year.

The measure of orders waiting to be filled fell to 46.5 from 51.5 and the index of prices paid jumped to 70.5 from 61.5.

The inventory index increased to 55.6 in September, the highest since July 1984. A figure higher than 50 means manufacturers increased stockpiles.

The other good news is that the Commerce Department said that consumer spending rose by 0.4% in August which matches the increase for July. Income, however, did a little better, rising 0.5% compared with a 0.2% rise in July.

Morning News: October 1, 2010
Posted by Eddy Elfenbein on October 1st, 2010 at 7:46 am

Options Offer Clues to Earnings and Beyond

Bernanke: Disagreements at Fed Don’t Bother Me

Wall Street Futures Signal Higher Open for Stocks 

European Shares Gain on China Data; Repsol Up

Foreclosures Slow as Document Flaws Emerge

European Manufacturing Cools, Unemployment Stays at High

White House Slashes US Bailout Cost Estimate

BMW to Recall 350,000 Luxury Cars

The Forever Recession…My Two Cents

Projection Much?
Posted by Eddy Elfenbein on September 30th, 2010 at 11:07 pm

Bernanke was at a townhall meeting today:

Bernanke took a jab at the media when asked about its role in Americans’ flagging confidence in the economy.

He said teachers, students and others should be a “little skeptical” about what the media report. The media tend to “make good times too hot and bad times too cold,” Bernanke said. That’s why it is so critical to get information from a variety of sources, he said.

Funny; that’s what many people say of you.

Crossing Wall Street Buy List Third-Quarter Summary
Posted by Eddy Elfenbein on September 30th, 2010 at 4:43 pm

September and the third quarter are over. This was the best September for stocks in 71 years.

Our Buy List is up 5.23% for the year compared with 2.34% for the S&P 500. Including dividends, the Buy List is up 6.54% compared with 3.89% for the S&P 500. The “beta” for the Buy List is 0.9738.

Here’s a look at how the 20 stocks on the Buy List have done in descending order:

Notice that it’s all our healthcare stocks crowded at the bottom.

World War I Finally Ends
Posted by Eddy Elfenbein on September 30th, 2010 at 2:29 pm

This Sunday Germany will pay off the final installment of its World War I reparations.

At the end of the First World War, the belligerents got together in Paris for a Peace Conference and subsequently signed the Treaty of Versailles in 1919. The French pushed hard to squeeze Germany for all they had—and then some. The Germans had to accept guilt for the war and had to cough up 226 billion Reichmarks in reparations. The U.S. never got any money since the U.S. Senate shot down the treaty which meant we didn’t join the League of Nations either.

The countries that did get reparations already owed us so much, though, that we got money indirectly. The reparations figure was later cut back to 132 billion Reichmarks which is about $438 billion in today’s money. The Germans were allowed to pay off the debt with commodities like coal. They even gave up the trademark for aspirin which is why it’s spelled in lowercase today. The plan was to have Germany pay off all the reparations by 1988.

The problem was that Germany couldn’t pay off that much and by paying it off the debt was actually hurting its ability to recover. John Maynard Keynes thought the terms were so over-the-top that he resigned from the British Treasury. On top of that, right-wing nationalist parties were making hay of the Treaty’s harshness. They even started the myth that Germany had been “sold out” by Communists or Socialists or Jewish bankers.

Once the Great Depression started, everyone could see that the reparations could never be repaid. The Germans were so far behind on their repayments that it was turning into a joke. Hoover declared a moratorium. Then in the summer of 1932, Germany, Britain and France got together in Lausanne to agree to cancel the reparations. The U.S. didn’t go along. Interestingly, it was during the Lausanne Conference that the U.S. stock market reached its ultimate mega-bottom of 41.22 on July 8, 1932.

Once Hitler came to power, he stopped payments all together. After Germany was reunified, they promised to pay off their reparations by the 20th anniversary of reunification which is this Sunday.

Michael Douglas got `whacked` in the stock market crash
Posted by Eddy Elfenbein on September 30th, 2010 at 11:55 am

Uh oh.

Michael Douglas has admitted facing another crisis alongside his cancer battle – getting ‘whacked’ and losing almost half his money in the financial crash.

The actor insists his tumour is ‘shrinking’ and refuses to even consider the prospect of not beating the cancer he is currently fighting.

And he revealed he plans to take a year off to take wife Catherine Zeta Jones and their children around the world.

But he also admitted to another crisis he recently faced when his dabbling in the stock exchange had a devastating effect on his wealth.

‘I lost 35 to 40 per cent of my net worth,’ Douglas says of the most recent stock exchange crisis that inspired his latest Wall Street movie. ‘I got whacked big-time – it was serious.’

He admits that he had no idea what to do when the crash was happening.

‘I was the classic deer in the headlights,’ he said.

‘I didn’t know what to do with the advice I was getting. There were a couple of huge drops and it kept on going, and by the time you woke up the next day, people were down anywhere up to 60 percent of their net worth.

‘I knew a lot of people who lost everything.’

RIP: Q3
Posted by Eddy Elfenbein on September 30th, 2010 at 11:05 am

Today is the final day of the third quarter. Maybe it’s just me, but it seems like the third quarter has been going on since 1974.

The good news is that the government revised the GDP growth number higher for the second quarter to 1.7% from 1.6%. As I said before, don’t be too impressed since this is for a time period that began six months ago and ended three months ago. When the original report came out in July, it said that GDP had grown by 2.4%.

Overall, GDP continues to be dragged down by a widening trade deficit between the United States and foreign exporters, said Mark Vitner, senior economist with Wells Fargo.

But the report did contain a small sign of hope for the recovery, he said: spending by both consumers and businesses was up significantly from the prior quarter, and investments in new equipment and software alone were up nearly 25%.

“When you look into the details of the report, consumer spending and business investment actually ticked up,” Vitner said. “They’re not off the charts, but they are posting very solid gains. So in some ways the economy looks a bit firmer.”

The Dow is now up for the year. Of the previous 68 years when the Dow was up after three quarters, it continued to rise 71% of the time and ended the year in the black 94% of those years.

Our Buy List is having another market-beating day. I’m very happy to see that NICK has been as high as $9.60 per share today. The stock is up about four-fold from its low point two years ago.

Morning News: September 30, 2010
Posted by Eddy Elfenbein on September 30th, 2010 at 7:32 am

China Says U.S. Yuan Legislation Will Hurt World Economy

European Stocks Fall on Irish Banking Woes

AIG to Sell Japan Life Units to U.S. Pru for $4.2 billion

Nearly One in Four Second-Quarter Home Sales a Foreclosure

Thursday Look Ahead: Stocks Set to Close Out Best Quarter in a Year and Best September in 70 Years

BofA Quant: 21 Dividend Growth Stocks We Like

Did Peter Thiel Make The Single Best Investment In History?

Metal Plaque Commemorating the Opening of the Canary Wharf Offices by Gordon Brown on 5th April 2004

Guy on CNBC Says Farmers Are Driving Porsches in Peoria

Going Beyond the Statistics: A Look at the $PHYS Premium