Twitter-based Investment Decisions

http://www.businessinsider.com/new-hedge-fund-uses-twitter-to-pick-stocks-2010-12

Summary: A new hedge fund will be using 'sentiment analysis' of Twitter, a real-time social networking communication tool, to predict changes in the stock market. By using software that they have developed, they say that they have already been able to successfully predict profitable trades.

It's very interesting that someone is finally using Twitter to make financial decisions. As technologies like Twitter allow for faster and faster communication, they become more useful in financial decision-making. This is because changes in public mood are made public (to those with the ability to analyze it) faster than the effect of those changes on the market.

I'd like to know how long changes in twitter-temperament take to become reflected in market prices, as well as if these predictions have only been valuable for specific sectors of the market (I would predict consumer technology as the most accurately predicted sector, as a result of the type of people who I think use Twitter). It would also be cool to see what other chartable data the Twitter-mood can be correlated to.

Transocean (RIG)

Transocean LTD (RIG) is a Switzerland based oil drilling company. They owned the oil rig that exploded in the Gulf of Mexico under the control of British Petroleum (BP). Unfortunately for Transocean, the explosion caused a plague of bad publicity and hefty legal fees. These costs have been present on the company’s financial statements causing total profit margin to decrease severally. With a cease in offshore oil drilling in the Gulf of Mexico, a few of Transocean’s rigs were no longer in operation. This essentially affected total revenue. Taking a further look into the company, one can see, despite the disaster, they are still an industry leader. Pre-explosion, Transocean was steadily valued at $90/per stock range, after news of the oil spill, stocks plunged to $41.88 in June. Since the company hit rock bottom, stock prices have risen steadily towards the pre-disaster stock price. I believe the trend will continue and even possibly surpass the company’s previous price highs. Several factors that will lead to the continued growth of this company are as follows; as legal matters with the BP disaster wind down, the company can focus more on business operations with fewer distractions. This has already begun to occur; the company has purchased new rigs that boast technological advancements in safety and ease of drilling. The Rig cost $195 million and is scheduled to finish construction in one year. With future expectations of greater total revenue, increased oil drilling demand, and increased profit margin, this company is quite attractive for our team, Yo Investments. Although there can be a further hit on the stock in the short-run, I believe that the company can hit towards same price (pre-explosion) in the long-run. The graph above illustrates this company is on the right track.

Dell negoiating

http://www.marketwatch.com/story/dell-negotiating-possible-compellent-deal-2010-12-09

In this article it talks about how Dell is trying the emerge with Compellent. But they are negotiating a deal so in a way they can make a profit. This is because Dell is making money but in different departments of dell. So in my opinion i think dell should emerge because for the pass couple of months dell has been in a decline phase but since compellent is a big company they will make a big profit. As well, Wells Fargo is trying to emerge with them too.

China surplus

http://www.marketwatch.com/story/china-november-trade-surplus-narrows-to-229-bln-2010-12-09

I found this article very interesting. This is because we all know that china is one of the biggest country that is very wealth and is advanced in many ways. The monthly trade surplus stood at $22.9 billion, shrinking from $27.1 billion in October, although it was higher than the $22.3 billion surplus expected by Dow Jones Newswires survey of economists. So China surplus has been shrink very much.

A Chinese Goldmine for Investors

http://www.dailyfinance.com/story/investing/china-youku-ipo-stock-soars/19753829/

Youku is the Chinese "youtube" and recently decided to go public. Youku is probably the most popular video site in China, and still has huge prospects for growth. A more innovative site like Youku is predicted to rapidly grow, as China "catches up to the times". Because it has been public for just 2 days, specific figures are still hard to determine. Though from the specifics that can be determined, Youku is looking like a goldmine for investors. Revenues are high, clocking in at a whopping $35.1 Million in their last nine months, and are planning to reach 50 million for the year. They have reported, 203 million different monthly visitors to their site. Obviously as a company, this is impressive. This isn't a value stock, shares will be trading at over 70 times revenues, which is high, but it is a very impressive growth company. The IPO was originally $12.80, and quickly rose to $25.57 on its first day. After day one it was at just about $32 dollars, and now just hit $42.50. This growth is outrageous, almost never seen before.

So the more "macro" question is, was this growth due to the location of the company (china), and if so, will foreign companies grow at a faster rate then their American counterparts.

I personally love this site, and recommend it for watching tv shows, so when I heard it was going public I was interested. We saw it at the $26 and were going to invest, but as you may know, the trading site is down. (Which really stinks!) As was brought up in the seminar, when a stock has doubled, it is probably time to pull out. It would be rough to maintain such a steep growth, if any, so we will probably no longer invest.

GM Stock

This Thursday (11/18/2010) GM returns to the market. After emerging from a government-organized bankruptcy (16 months ago), trying to improve their finances, and venturing into new products (like electric cars) GM feels like it is ready to once again be on top. According to the article, GM execs are trying to play up their bright spots, including: "a better lineup of cars and trucks, potential for global growth and a new cost structure that enables the company to make money even when the economy dips." However, the company has not fully "healed." The government is still heavily involved. In fact, the stock offering will only reduce the government's stake in GM from 61 percent to 43 percent. It can take years before the government has completely left GM. As the article says, "For shareholders, that means GM may not always put investors first. Political priorities may trump their demands. Some worry GM will spend too much time and use too many resources working on small cars or electric cars and not enough on profitable vehicle lines like trucks and SUVs." Plus, GM has made it known that it does not have full control over its finances. Its accounting procedures aren't where they should be. For instance, GM has included $30.2 billion in goodwill as an asset. Goodwill is an intangible asset and is not something that could be sold. It is also larger than other GM assets, like property ($18.1 billion) and cash ($26.8 billion).

With all of these issues (plus some more if you read both articles), logically GM does not seem like a good buy. However, logic doesn't always win out when it comes to the market. Plus, foreign investors seem very interested in GM. Chinese automaker SAIC, GM's partner in China, is finalizing plans to buy about a 1 percent stake. Also, funds which manage the finances of royal families and some nations, could invest $1 billion in GM. Overall, there seems to be quite a bit of risk in investing, but who knows, this might be something everyone overlooks, and then it just explodes (it has happened before). So, what are your thoughts; is GM something to take a careful look at or stay away from?

Sources:

http://www.chicagotribune.com/news/local/wire/chi-ap-us-gmipo-redflags,0,6379264.story?page=1

http://www.google.com/hostednews/ap/article/ALeqM5h3slmxJfh-ehG_A3Nf2276IQ0zzw?docId=acefdb2929504ccea71b2f692baff461

Seasonal Trading

With Holiday season kicking in, my partners and I decided to diversify our holdings. It was pretty evident that a colder time period (fall/winter) will drive coffee sales up. Though the idea started off with a simple hot chocolate at Caribou Coffee, I bought Caribou/Starbucks stock almost immediately after. The idea turned out to be a good one. Caribou Coffee has been going nowhere but up, and we sold Starbucks after making a slight profit. We are now looking to diversify to sub sectors for the Holiday sales. I personally, am looking into investing into big retailers that generally have a big impact on sales and have a positive outlook for the 2010 winter.

One stock we have had trouble with was VF Corporation, or as we nicknamed it 'The North Face Stock'. It had been in a downward spiral since we bought, assuming it would go up as the cold approached.

Do you have any ideas for stocks that will generally do better in the winter? It could be coffee, winter clothing, toy manufacturer/sellers, etc.

Run Up in Gold vs. Run Up in Oil

The distinct uptrend in gold has gotten a significant amount of attention lately. When trying to analyze this movement, the surge in oil prices from a short while back seems to be a quite good point of comparison. I believe that the run up in gold has many of the same key drivers that the run up in oil did. I wrote these two pieces about two years back, during the surge in oil prices from about $30 a barrel to about $150/barrel:

http://enlightenedeconomist.blogspot.com/2008/05/real-cause-of-oil-pressure.html

http://enlightenedeconomist.blogspot.com/2008/06/real-cause-of-oil-pressure-pt-2.html

(Right click and open in new tab or window)

After reading these articles, do you think there is a valid comparison between the current uptrend in gold and the former uptrend in oil? Whether you agree or disagree, how does your conclusion affect your investment strategy?

(It may be helpful to discuss this with your teammates and post an answer as a team.)

10 Signs The U.S. Is Losing Its Influence In The Western Hemisphere

In this article Gus Lubin provides the stark reality behind why the US won't be the leader in the Western Hemisphere forever. Brazil is the first nation expected to pass the US. They produce over four times as much iron ore as the US, export twice as much beef as the US, are an important part of BRIC (Brazil, Russia, China, and India-all emerging markets with high potential), and are on good terms with Iran.

Besides Brazil, countries like Mexico, Chile, Canada, and Venezuela are also candidates to pass the US. The world's richest man is a Mexican. Chile produces 300% more copper than the US (which used to lead the world in this category). Canada and Venezuela are expected to pass the US in oil production in the coming decade. Finally, Canada, Mexico, and Brazil invest a greater share of their GDP in green energy.

Overall, this article paints a dreary picture of what is to come. The US, a world leader for many years, might soon relinquish its power even in the Western Hemisphere. Will this come to fruition? The facts are there. What does everyone else think?

High Frequency Trading

I am unclear about the recently publicized concept of high frequency trading, as to what it is, it's impact and what you may think of this method.

Stocks edge higher on expectations of Fed move

http://finance.yahoo.com/news/Dow-closes-above-11000-for-apf-3699233512.html?x=0

Business writer, Stephen Bernard talks about how the Dow Jones finished above 11,000. The Federal Reserve want the economy to get back on track. Since more people became unemployed, it gave the Fed "the window of opportunity to take action."


In this link, the Fed's want to get the economy back on track by:

"The Fed's goal, if it starts buying bonds again, would be to drive interest rates down further from their already low levels and spark borrowing and spending. Lower rates could also eventually drive investors into riskier assets like stocks or into currencies in countries with more attractive interest rates."


This goal of the Fed's seems to be realistic because if the interest rates keep on decreasing than the chances of starting the spending and borrowing will increase. There is potential in their goal because the Fed's motive could be appealing the the public. A problem that could occur is that if the investor actually does get stocks and has a huge risk that he could lose it all.


What does everyone think about the Fed's goal? Do you feel that it is the right thing to do?

A Cautious Generation Doesn't Want to Risk Investing

http://money.cnn.com/2010/09/07/markets/young_investors_risk_appetite/index.htm?eref=aol

In this article, CNN explores the new trend of younger investors. Now those in their 20 and 30s are unwilling to take risks in the stock market. Some have seen the stock market dive unpredictably and ruin people's invested money. So the question arises, as less and less people are willing to invest and take the risks in the stock market, how will that effect the market?

I think that younger investors totally have reasons to fear investing, and with the randomness of the economy, especially in our lifetime, there are obvious reasons to be skeptic. Personally, I am unsure if when I am old enough to spend some of my money on investments, if I won't just invest in safer mutual funds. 

I think that this will have a direct on the condition and growth of the current and future economy. I can see this causing the economy to stay low because of the lack of new investments. I can also see a more stable economy (for better or for worse) as a result.

Planning Your Team's Strategy

Not sure where to start? Consider the following ideas:

• Think of companies with whom you are familiar with their products/services.
• You may be very happy with your iPod - you would then check to see if Apple is listed on the NYSE or NASD. You can find this information on the "Investor Relations" page of the company's website. Sometimes you have to look a little harder, in the case of Apple, you have to click Media Info at the bottom and then there is a link to "Investor Information". On that page it tells you that the "ticker symbol" is AAPL and that it is listed on the NASDAQ. (Alternatively, you could go to Yahoo! Finance and type in "Apple" in the field next to the "Get Quotes" button check the drop down list before you click anything and you will see Apple (AAPL) come up on the list.)
• Some companies are wholly owned subsidiaries of public companies. This means that the company you like may not be public, but it is owned by a public company. Do your research on the parent company, and if you like all of their brands then you may want to invest.
• You play golf for instance, you might be happy with your Titleist golf clubs so you go to Titleist's website. At the bottom you see "NYSE: FO". Clicking that will bring you to their parent company, Fortune Brands, website. Titleist is not public so you cannot buy their stock, but Fortune Brands is. So if you like all of their brands; spirits, home security, and golf equipment companies, you would buy stock in Fortune Brands.
• Think of types of industries that seem to be doing well right now, or are poised to start doing well, and check the companies in that industry to see if there is one you like.
• We will go over this in greater detail at the second seminar.
• Decide if you want stable, mature companies that grow slowly but issue a dividend, or younger, faster growing companies that reinvest all their profits to maximize growth (and share price), or a blend of both.
• Maybe you have seen a company in the news that is getting its stock price destroyed because of bad publicity but you think that its underlying business is strong and now the stock is undervalued.
• Remember the first seminar; how do you know if a stock is undervalued?
• A good way to start is by comparing it with its peers on a P/E basis (maybe PEG)

Most importantly, talk about what you are thinking with your teammates on your Team Blog! We are monitoring each of your blogs and will step in to guide you when necessary. We will also pick out common questions/themes and write articles on this blog to address them for everyone. We know that this is new to most of you, so the biggest thing we are looking for is that you are collaboratively thinking things through before you do them!

"Unconventional Wisdom"? Stocks Supposedly Better Returns than Mutual Funds

http://online.wsj.com/article/SB10001424052748703465504575528630383122288.html

Market editor Dave Kansas describes a new emerging trend in long term investments. He is encouraging the market watchers to put their money toward dividend-returning stocks instead of the traditional mutual funds and government bonds. Now, I don't have any of my own money in any of those three investments (though I think my parents have a mutual fund and a few savings bonds) and I don't pretend to have a full understanding on any of them, but this new idea seems completely contradictory to everything the world has told us so far. We have been told frequently that mutual funds and savings bonds are the "safer" way to go if you are to put your money in a long term investment. Now Mr. Kansas appears with advice telling us to put all our long-term investments into the volatile stock market. I'm just a bit skeptical...

The only moderately convincing point I found in his argument was the fact that inflation adds reward to dividends, while strangling returns from interest in bonds and mutual funds. But what I find shady is the fact that he never describes the sheer risk you could place yourself in by following his dividend-milking program. He suggests setting stakes in five companies that return generous dividends and allowing these returns to pour in. It seems like such an easy plan, and the fact that it supposedly returns more than bonds or mutual funds makes the plan seem all the more attractive.

But what about the risk, Mr. Kansas? Nearly all the dividend stocks he suggests in his article are some of the biggest news-makers in America: McDonald's, Microsoft, Exxon Mobile, Coca-Cola, and more. I for one would be incredibly reluctant to put my money in any of the aforementioned companies (maybe Coca-Cola because I like an adequate supply of high fructose corn syrup in my digestive tract, but that's beside the point). All it takes is one issue leading to bad publicity, and any of the companies could come close to tanking. BP? Enron? No one could have foreseen Wall Street's darlings under such heavy media fire, and the stock market could barely withstand the hits either. In that respect, could anyone be so prepared as to put their investments in a pure dividend plan? I consider that a gamble beyond reasonability. To me, following the plan for dividend returns is akin to putting your money right in the hands of controversial media figures, and in a long-term investment, you're bound to run into trouble sooner or later.

Very interesting strategy...

http://www.cnbc.com/id/38738810?slide=1

It's a slideshow - make sure to read the text to the right of each slide. Please comment with your thoughts!

Mergers and Acquisitions

What happens to participating companies stock prices after a merger or acquisition? In most cases when a company announces a “bid” to purchase another company (target company), the stock price of the purchasing company will fall, and the stock price of the target company will rise. There are several reasons for this as stated below:

1. The purchasing company will need to pay a premium for the target company in order for the board of directors and majority stake owners to agree to the deal.

2. The purchasing company will also have to pay a premium in order to out bid any other potential buyers.

3. Market sentiment. A large percentage of mergers and acquisitions do not turn out as hoped. Research analyst and institutional investors (or minority interest share holders) may not feel that the acquisition will be profitable in the long run for the acquirer.

4. Arbitrage positions. Since investors know that the stock price of the acquiring company usually falls, and the price of the target company usually rises, they will buy stock in the target company and sell stock (short the stock) in the acquiring company to create a risk free profit (also know as arbitrage). This will result in more volatile changes in the stock prices.

For the reasons above being able to predict possible mergers or acquisitions can be very profitable.

Example:

On August 16, 2010 Dell announced a bid to acquire a company named 3Par, for $1.15 billion ($18/share). On August 13, 2010 (Friday) the stock price of 3Par closed at $9.65. On Monday morning before the market opened, Dell announced its bid to acquire 3Par for $18/share, causing the stock price to surge 86.5% to $18. On August 23, 2010 Hewlett-Packard came into the picture announcing a $1.6 billion or $24/share bid for 3par causing another surge in the stock price, increasing from $18 to $26/share on August 23, 2010. The bidding continued with Dell coming out with a $27/share and finally H-P announcing a $2 billion or $30/share bid that finally closed the deal. Looking at the chart below, you can identify the dates that each bid came out and the approximate amount of the bids by analyzing the increase in stock price.

Now lets see how this altered the stock prices of Dell and HP. From the charts below, during the period of bidding, both HP and Dell contained decreases in stock prices, even though these fluctuations were not as significant as with 3Par.

As shown from the above example, mergers and acquisitions can significantly change a company’s stock price. This is why many institutional traders try to predict possible transactions, such as the above, in order to take advantage of the huge price movements.

What to Consider When Buying a Stock

When an investor chooses a stock to buy, endless reasons as to why that investment should be made can be argued. But simply put, if an investor likes a company due to its profitability ratios, ability to grow, wide economic-moat, product(s), and great management, you have to ask yourself the following:

- Will you let headlines on the economy, politics, and regulation pressure you to sell what may be a shrewd investment?

Nowadays, a company can announce an increase in its dividend or say that they expect to be even more profitable in the months ahead (all companies forecast growth, profit, expenses, etc…), yet the company can be losing you money! It seems as if investors care more about employment data and “fiscal policy” (look it up) than what the actual management team of the company you are invested in has to say!

Look at the banks – it is arguably hard to make money in the financial sector due to new regulations from Washington D.C. and an unclear picture of what this industry will look like going forward.

Then you have Netflix (ticker: NFLX). This company has been up and up and up. Its business model, management team, and growth prospects are really keeping the engine fueled! When people choose to invest in this company, they are not thinking of employment data, new regulations, or interest rates.

Just remember, a company you are invested in may be profitable or have a great product, yet broader themes can bully it around. Will you be patient and hold - maybe even buy more, look at more data when analyzing the company, or let some political headline scare you out of what could be a great company? That is up to you to decide.

Broader economic data can be found at: http://bls.gov/

Tech M&A

http://www.marketwatch.com/story/merger-mania-engulfs-tech-industry-2010-09-30

As the article linked above exemplifies, M&A is read-into far too deeply and misconstrued by many. The linked piece begins as follows:

"Deal wave indicates that natural growth may be limited. To those of us who watch the technology business, it seems like money is burning a hole in the pockets of large high-tech companies."

In this super low interest rate environment, money really is burning a hole in the pockets of any company that is holding a large amount of cash on their balance sheet in terms of relative returns/opportunity cost. If a company has excess cash on hand that can fully fund an accretive acquisition (meaning one that will have a net benefit to the acquiring company's EPS), it would be ridiculous not to do so! (Not to mention completely irresponsible from the fiduciary standpoint of that company's board.)

Assuming a company is already dedicating necessary resources to R&D/CapEx, as is especially the case with tech firms, acquisition activity is in no way indicative of "natural" (organic) growth prospects. Leave it to the over-thinking under-informed financial media to always present a baseless negative spin on a positive story.

IPO backlog

http://www.nytimes.com/2010/09/07/business/07ipo.html?scp=6&sq=&st=nyt

The backlog of IPOs is a negative for the stock market in the near term, as a potential surge in supply of any commodity will serve as a weight on the price of that commodity. Offsetting the increased supply of stock from IPOs, however, is the harder-to-quantify reduction in supply of stocks that occurs when companies repurchase their own stock. We know that companies are very actively buying back shares, but it is difficult to know to what extent. Certainly, with lots of cash, limited investment opportunities and depressed stock prices, stock repurchases make a lot of sense. I believe that even a small rise in demand for equities (there is a huge amount of money parked in fixed income securities, and even gold, that will eventually find its way back into the stock market), we will see a quick and substantial rise in stock prices, and the backlog of IPOs should be absorbed quite easily. As for when that rise in demand will begin, it's anybody's guess; however, I would bet that, in the next three months, we will see investors starting to come back into the stock market. Watch equity mutual fund flows for signs of this return!

Welcome to the EMC Blog!

Check back on September 30th when the first articles will be posted by FKI's founders, university finance professors, and additional finance professionals. Student participants of the EMC will have access to post comments, and their own articles, on October 1st. The blog is viewable by anyone, but if you are a finance professional, professor, or anyone with relevant credentials and would like to participate in the discussion send us an email at info@financialknowledgeinitiative.org and we will consider your request. Throughout the duration of the EMC, this interactive blog will be constantly brimming with financial conversation so check back regularly!