Wednesday, October 31, 2012

Is this the time to long Face book (FB)?

Since its IPO from May, Facebook almost dropped half of its IPO price. Lots of investors have the same question, is this the right time to long Facebook? Facebook is actually showing a recovering trend since its second quarter report comes out. Google plunged on Oct, 18th because of lousy numbers and it impacts FB as well, whose stock dropped more than 4.5%. After Facebook reported its third quarter report, which beat the consensus, Facebook surged to $24 then fall back to $22.

The company owns the biggest social networking in the world. Recently, Facebook has reached 1 billion users and 900 million monthly active users. The three types of Facebook customers are users, developers and advertisers. Users use the Facebook to communicate with their friends, family and share the daily news around them. The developers, who develop applications on the Facebook platform, reach the huge users base. The advertisers use Facebook to reach their potential customers based on different age, sex, geographic locations, race and so on.

Facebook generates revenue mainly from the advertising and payments & other fees. Advertising includes displaying any products on the Facebook website, mobile application, and any other third party affiliated website. Surprisingly, Mobile ad sales accounted for 14% of advertising revenue in the third quarter report, which is a key increase in the third quarter. The mobile Facebook page is very important for the next business cycle since recently the technology trend is focusing more on the mobile instead the PC because of the portability. Twitter, which is a main competitor of Facebook, has the advantage that you could use it any time. To address the concern for the increasing competition from Twitter, Facebook develop their mobile version of the application. This is very important because otherwise Facebook will lose a huge portion of active monthly users. People might not use computer everyday but they definitely use cell phone every day.



Three Months Ended September 30,


Nine Months Ended September 30,





%  change



%  change








Percentage of revenue








We could tell from the chart above that Facebook has dramatically increased its investment in R&D. That is part of the reason why Facebook reports a GAAP 0.02 loss for EPS. This number is dramatically high compared to last year because Facebook focus on the mobile page development, which would help Facebook in the future.

Also, Facebook records a really high tax provision this year due to the non-deductible compensation expense outside US, which would lead a higher tax cost this year. Zynga, a game developing company, is a key customer for Facebook and consisted of 7%, 9% of total revenue for the third quarter and the first nine months of total revenue, decreased from 12% in 2011.

Facebook is in the Computer Service industry and there is not a similar competitor in the market. Renren, the biggest social networking company in China, has no advantage at the non China region. It is hard to image that Facebook and Renren compete with each other in the near future because of the different market target locations. Twitter seems a really good template for Facebook. Unfortunately, Twitter is not public traded. LinkedIn, which operates the biggest professional network, is also slightly different from Facebook. Though a lot of computer service industry companies generate revenue from advertising, they have different end customers and products. Facebook doesn’t have a strong competitor in social networking.

By Ford Kong

Discussion Board 10/29/2012
Do you think it's a good idea to label China as currency manipulator? How Do the U.S. turn the situation in their favor

Monday, October 29, 2012

2012 Third Quarter GDP and Hurricane Sandy

by Tim Shoji, Chief Economic Analyst
According to last week’s release from the Bureau of Economic Analysis, real GDP increased at an annual rate of 2.0% in the third quarter.  This is a slight increase from the annual growth rate of the last quarter, 1.3%, but not enough of an increase for the news to have any noticeable effect on the market.  Nevertheless, in this state of the global economy where China faces a possible hard landing and the Sovereign Debt Crisis continues in Europe, any positive news—however small—is good news. 
As the East Coast braces itself for the impact of Hurricane Sandy, there will undoubtedly be pundits who will claim that the destruction caused by the storm and the ensuing rebuilding effort will jump start economic activity, thus boosting the GDP.  While this may be true, it will be incorrect to infer that such economic activity will contribute to wealth creation.  As the Broken Window Fallacy illustrates, society does not become more prosperous through destruction.  In other words, resources spent replacing blown rooftops and broken windows are also resources that can’t be spent on other capital investments.  In order to have true sustainable growth, we need to look toward innovation and not senseless destruction. 

So beware of snake oil salesman that touts the economic benefit of natural disasters!

Market Forecast Week 10/29/12

The U.S. markets broke the 23.6% Fibonacci support level which was mentioned in my previous post, following that down move the markets traded sideways for the rest of the week. The S&P 500 is actually testing the 38.2% Fibonacci level or 1401.1 support level, if the market breaks the 38.2% support level we will undoubtedly see the S&P drop by at least 25 point to test the next critical level of 50%. On the other hand if the market succeeds at not falling bellow that support level we could see the market make a run for new highs of the year. The graph bellow shows that in September the S&P was in a similar position and it did not break down bellow the 38.2% Fibonacci level, following this bullish move the market made a run up to reach new highs.

Even though we have some technical indicators that are showing possible reversal (i.e. Bollinger Bands; the S&P is trading at the lower Bollinger Band which is a sign of possible reversal for this week), the markets are in still bearish.

Some Momentum indicators that show bearish market condition:

Slow Stochastics: Markets are in oversold condition, the K line is bellow 20 and it will stay there until we see a reversal.
MACD: We have a bearish divergence bellow the 0 line which is a bearish signal.
RSI: Is still negative and it did not show much strength this week.

Finally I like to have a look at the simple regression line for the S&P to have a clear idea on the markets future movements. As we can see in the chart bellow the market have been trading bellow the regression line since October 19. I believe that a sudden move in either direction will be a clear indication for future movements.

Last week I gave two stock recommendation in order to profit from the forecasted market conditions, UVXY and XIV. Since the markets broke the 1431.7 support level, like I forecasted last week we saw a lot of volatility followed by that move to the downside. The UVXY went up from $27.78 to $33.42 which translates to 16.12% upside move in two trading days. For this reason I like to invest in volatility stocks when there is a lot of uncertainty in the markets. On the other hand, if again the markets succeed at not breaking key support levels XIV will be the way to go because the volatility in the markets would have settled down.

Amine Bensaid

Saturday, October 27, 2012

Stock Prices of Major Defense Contractors since 1990

Posted by Glenn Alpert
In an effort to better understand drivers behind the stock prices of major defense contractors, I undertook a study correlating their stock prices with major economic indicators.

IHS Jane's A&D Analyst Matthew Bell (09/2011)

In my research, I took the Defense budget, January IPI and M3 monthly data, military sales values, and wartime/peacetime status over the last 21 years, from 1990 – 2010. Over 21 observations of each of these data sets, I also recorded the historical stock price of 4 major diversified defense companies. 

These companies included Lockheed Martin, General Dynamics, Northrop Grumman, and Raytheon. Since 1990, Lockheed merged with Martin Marietta to become Lockheed Martin, and Northrop merged with Grumman to become Northrop Grumman. When searching for historical stock prices for these two companies, I was able to find records dating back to 1990, but I assume that the stock price which predates the mergers should reflect the stock price of the acquiring company.

I also chose to test the regression for years where the US was not considered to be at war; this would date from 1993 (conclusion of Gulf War 1) to 2001 (beginning of the global war on terror).

Stock Price = b0 + b1DEF + b2JIPI + b3JM3 + b4MS + b5W+ μ

The dependent variable represents the stock price of a given Defense company at the beginning of January for a given year.
DEF – Defense spending (yearly budget) – b1
JIPI – January Industrial Production Index for defense capital goods – b2
JM3 – January M3 Survey for new orders of defense capital goods – b3
MS – Military sales to foreign countries – b4
W – War – b5



There is not much change in the stock price during war or peace (although Tolstoy would be a good read). One could infer that GD makes more “support” equipment and maintenance services, rather products or services consumed or used exclusively during conflicts.

During wartime, [8.6(W)], Lockheed’s stock can be expected to rise significantly.
During peacetime, [-.593(DEF)], the government will contribute fewer dollars to Lockheed’s earnings (in other words, the government will buy less from Lockheed). U.S. Foreign Military Sales are key to Lockheed’s bottom line.


War [23.25(W)] has a massive impact on Northrop Grumman’s stock price. 
Northrop Grumman does not appear to run its own large scale manufacturing operations [-2.3(JIPI)]. During peacetime, Northrop Grumman concentrates more on Foreign Military Sales [.001(MS)] than wartime [.0005(MS)]. Another way of looking at this is that during a period of time where the US government is buying NG products, it shifts its business development efforts overseas.


War actually decreases demand for Raytheon products [-4.3(W)] (it would make more sense to build and install massive radar and satellite systems before you need them rather than in the middle of a conflict). Raytheon runs its own robust manufacturing operations [2.88(JIPI)].



There are some considerations to keep in mind regarding the results of these regressions. First of all, I highly suspect that the “Independent variables” are not completely independent of each other. The overlap would cause some distortion in the equation results.

Secondly, the stock price data was for the first recorded date in January of the given year, and the M3 and IPI data was end-of-month data for January. In retrospect, it may have been a good idea to use IPI and M3 data from December of the previous year, but the change should not be drastic, since manufacturing trends tend to increase or decrease gradually from month to month the majority of the time.

Thirdly, the Defense budget data calculated on a yearly basis, so this could skew the correlation. Monthly DoD spending data would add accuracy to the equations.

In addition, another idea for this project was to test the data for the recession years to see if there was a significant impact on the other variables. The data includes three recession years, but it would be difficult to test recession vs. non-recession years with only three data points (‘08, ‘09, and ’10). One would to leave out Defense spending from the equation, then just measure manufacturing data (stock price = Bo + IPI + M3)

This exercise provided additional insight into the stock price of US defense companies. While the data did provide some insight, we should remember that other factors affect stock prices, and this is reflected by R-squared figures ranging from the mid-50% to mid-90% range. Of course, further study is necessary.