TIME facebook

Here’s How Facebook Doubled Its IPO Price

Facebook Holds f8 Developers Conference
Facebook CEO Mark Zuckerberg delivers the opening kenote at the Facebook f8 conference on April 30, 2014 in San Francisco, California. Justin Sullivan—Getty Images

Facebook's stock doubled its IPO price by midday Thursday

Facebook suffered a cruel summer back in 2012. The social network raised its IPO price just before going public in May 2012, but technical glitches during early trading caused mass investor confusion. Nasdaq eventually paid a $10 million fine over the debacle, and Wall Street showed no mercy to the social network in the ensuing months. Facebook’s stock cratered, diving from $38 to below $18 before the following autumn.

Two years later, the sun’s shining bright on the tech giant. Facebook beat analysts’ expectations yet again in its latest quarterly earnings report, generating revenue of $2.9 billion and earnings per share of 42 cents. That sent the company’s stock soaring above $76 during midday trading Thursday, doubling its IPO price of $38. That’s also more than quadruple the social network’s all-time low close of $17.73.

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Facebook’s massive turnaround has everything to do with mobile. When the company went public, its revenue was almost completely tied to desktop ads–exactly the kind of business investors in the mobile era don’t like. With more than half a billion people already accessing Facebook on mobile, the company had to prove that it could successfully transition its business. CEO Mark Zuckerberg set a laser-like focus on mobile strategy, and he forced his executive clique to do the same.

The dedication has paid off. Facebook now generates more than two-thirds of its total ad revenue on mobile and has more than a billion mobile monthly active users. Overall ad prices jumped 123 percent year-over-year, partially because mobile ads placed directly in users’ News Feeds are more valuable than ads on the right rail of the site served to desktop users.

But what really has Wall Street salivating is the fact that Facebook has plenty of mobile monetization moves left to make. New auto-playing video ads in users’ News Feeds could help the company lure marketers from television. Instagram introduced ads last year that are being positioned as an attractive option for brand marketers. The company is also likely to figure out ways to make money off its messaging goliaths Messenger and recently-acquired WhatsApp.

Overall, it’s clear that Facebook has solved its mobile conundrum, and Wall Street is rewarding it handsomely. With its share of the overall mobile advertising market quickly increasing, the company may soon to be able to challenge Google to be at the top of the totem pole of mobile.

TIME Economy

Murdoch’s Bid for Time Warner May Signal a Coming Crash

The media mogul has a habit of buying at the top of the market.

What do Rupert Murdoch’s $80 billion bid for Time Warner and Fed chair Janet Yellen’s mid-year report to Congress yesterday have in common? Both may well be signals of a market top.

Let’s start with the news Wednesday: Murdoch has a track record of making bids that mark the end of bull runs. As Peter Atwater, a behavioral economist who runs the firm Financial Insyghts, pointed out to me, Murdoch’s $5.3 billion acquisition of Chris Craft in 2000, his $5.6 billion acquisition of Dow Jones in 2007, and his $12 billion bid for the portion of BSkyB that he didn’t own back in 2011 all coincided with market peaks. Shortly after all these deals, stocks fell.

Likewise, Janet Yellen’s speech Tuesday on the state of the U.S. economy, in which she said she thought technology stocks (including biotech and social media in particular) were overvalued, was an important signal that valuations are stretched, and we may be in for a fall. Yellen tends to worry less about bubbles than some other economists, so when she starts to fret — and especially when she says so publicly — that’s telling.

It’s no wonder that all this is happening now. With more than $4 trillion of Fed money sloshing around in the markets, and jobs numbers looking better, there’s a vigorous central banker debate going on about how soon to raise interest rates (which inevitably dampens market sentiment). Likewise, it’s worth noting that the last five major merger manias in financial history happened at the peak of markets, and ended with a big drop in equities. That happens not only because companies have a lot of money to play with at the top of a market, but also because they have in many cases exhausted growth strategies, and mergers are an easy way to get a further quick-hit boost in stocks (see my column on that topic here). Mergers are often presented as the beginning of a corporate growth streak — more often than not, they signal the end.

TIME wall street

Wall Street Killed the Cupcake

Store Operations At Crumbs, Largest U.S. Retailer Of Cupcakes
JB Reed—Bloomberg/Getty Images

The Crumbs cupcake shop in my neighborhood just shut down. It’s a sad day for the entire sugar industry: Crumbs, a once-growing collection of shops with visions of becoming a national bakery chain, abruptly folded its 65-store operation in 12 states, putting hundreds of people out of work. The company had been delisted from NASDAQ last week, its stock trading for pennies from a high near $14. Sales were falling, Crumbs was losing money and unlikely to become profitable anytime soon. As of its last quarterly filing, the company had just $300,000 in cash on hand, and its liabilities included $244,000 in gift cards outstanding. Hope you didn’t own any of them. Crumbs lost $5 million in its last quarter.

Was Crumbs a victim of Americans turning toward eating healthier, especially among children, as the First Lady has encouraged? Fat chance. We are as plump and pleased as ever, and our appetite for donuts, cronuts, deep-fried Oreos and Baconators will not be reposing anytime soon. Long live junk food, if maybe not us.

But you could see this one crumbing long before it happened. Crumbs made good cupcakes—one of those sweet bombs could keep an 8-year old wired for about three days—but its failure isn’t so much about the product so much as the way Wall Street works to bake new companies. The recipe almost guarantees trouble in the future for many firms. Crumbs joins the long list of once hot food franchises that couldn’t resist the smell of growth and ultimately had difficulty managing it: David’s Cookies, Krispy Kreme, Einstein Bagels, World Coffee, just to name a few. They can survive, but generally after massive restructuring. Crumbs ran out of time and money.

The pattern is similar: a good product or idea becomes increasingly popular, and investors get moon-eyed about the prospects. At the same time, other operators and investors will swear to you that there’s plenty of room for more than one brand—or that if there isn’t much room, their concept is superior.

In the mid-90s, it was the humble bagel’s turn for the national spotlight. The players included Bruegger’s Bagel Bakery, Einstein Bros. Bagels, Chesapeake Bagel Bakery, Manhattan Bagel, Noah’s New York Bagels, Big Apple Bagels and the Great American Bagel among others. Several of them went public, which funded overexpansion. They dreamed big. “What happened to the pizza in the ’40s and ’50s is happening to the bagel today,” said the ceo of Manhattan Bagel at the time. “Soon there will be bagel shops on every street corner.” Except in Manhattan, where there are no Manhattan Bagel shops. Einstein, Noah, Chesapeake and Manhattan would eventually become part of one company, as the craze subsided and the industry consolidated. Then it was doughnuts. Krispy Kreme also got creamed by massive overexpansion funded by its very popular IPO. Even in the U.S., we can only eat so many doughnuts.

Cupcakes are now repeating the pattern, with predictable results. In the cupcake game, Crumbs competitors include Magnolia Bakery, Sprinkles, and any number of hipster-preneurs in major cities not to mention the likes of Duncan Donuts and Starbucks, which flanked the cupcake shops with offerings of their own. If cupcakes were that hard to make, your mom wouldn’t have churned them out on demand.

Why isn’t there more caution? Because that’s not Wall Street’s real concern. The investment industry’s mission is to throw money at enough startups—from cupcakes to social media—and hope to land on a winner. Failure is built in, the only question being who is going to take the losses. A lot of time it’s overeager shareholders who pile in these stocks because all they see is unlimited growth. In food, the best case scenario is Starbucks, whose original store still operates on Pike Street in Seattle along with thousands of others around the world. An IPO allowed Starbucks to enjoy rapid growth and made a lot of investors rich. But part of Starbucks strategy was to be capitalized enough to blow other rivals out of the water by grabbing the best locations. That left everyone else to scramble to remain competitive—and why there’s really no No. 2 in premium coffee.

Fortunately, the U.S. is not going to run out of cupcakes anytime soon. This is basically a mom and pop business that is still best run by mom and pop. Cupcakes may have had their run for now, but investors are always going to be hungry to find the next new food style to fund. And grilled cheese is waiting in the (chicken) wings.

MONEY Hit Peak Performance

The Stock Market Correction That Nobody Noticed

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Jason Hindley

All-time highs for the S&P 500 are masking soft spots on this peachy market. Here's how to keep your portfolio safe from decay.

From a certain angle the stock market sure looks sweet. Both the S&P 500 index and the Dow Jones industrial average are setting new record highs seemingly on a daily basis. The number of winning stocks also continues to swamp the losers, historically a sign of strength for equities. Yet if you look at the market from a slightly different vantage point, you’ll start to see blemishes. During one stretch from early March to mid-May, for instance, the Russell 2000 index of small-company stocks slid more than 9%, while the fastest-growing companies in that part of the market slumped nearly 13%. Plus, among the worst performers were last year’s biggest darlings: biotech and social media stocks. “We’re in a stealth correction,” says Craig Johnson, managing director at Piper Jaffray. He thinks the damage could bleed into blue chips as well. Why? In the past, when small stocks significantly lagged large-caps, there’s been a broad selloff—with typical losses of 12% for the S&P 500. Plus, a pullback is overdue. A stock market correction—defined as a loss of 10% to 20%—occurs on average every 26 months, according to InvesTech Research. We’re now at month 32 and counting. Markets like this can be tricky because it’s difficult to tell how much defense to play. For instance, while Johnson cautions of the possibility of a near-term slide in the broad market, he expects the S&P 500 to end this year 8% above its early June level. History offers you clues to the key dos and don’ts: Don’t assume a correction will lead to a bear Small-stock weakness led to major pullbacks for the broad market in 2011, 1999, 1998, 1997, 1996, and 1994. None of those years, though, witnessed full-fledged bear markets, defined as a 20% or more decline in stock prices. “The case for the bull market to continue remains surprisingly firm, given how far we are in this expansion,” says James Stack, president of InvesTech Research. Among positive economic signs: rising consumer confidence and manufacturing, combined with a still-stimulative Federal Reserve. Do seek a smoother ride The market has been about as steady as it’s been since before the global financial crisis. So what’s the point of tilting toward low-volatility stocks, shares of companies that bounce up and down less than the broad market? Well, AllianceBernstein took a look at global stock performance since 1989, comparing the broad market against the slice of stocks with below-average rockiness. In months when the broad market lost value, “low vol” outpaced the rest of the market 83% of the time. This strategy has been popular lately, so the stocks aren’t all cheap. Go with low-cost ETFs with portfolios sporting relatively attractive valuations, such as PowerShares S&P 500 Low Volatility (SPLV) and iShares MSCI All Country World Minimum Volatility (ACWV). Don’t buy the small-cap dip While small-company stocks have been beaten down, they remain expensive. Small-cap shares have historically traded at about the same price/earnings ratio as the S&P 500, based on five years of median profits. Today they’re 35% more expensive. Also, when blue chips falter, small-caps tend to fall more. “This late in the bull, I’d be taking profits in small-caps and focusing more on large-cap stocks, which represent better value,” says Doug Ramsey, chief investment officer of the Leuthold Group. Do focus on late-stage winners “I don’t know if we’re in the seventh inning, the eighth, or the ninth,” says Ramsey. “But I do know it’s one of those—and late stages of bulls are different.” In the final 12 months of past bull markets, for instance, energy, tech, and health care stocks have typically thrived (see chart). For exposure to these sectors, InvesTech recommends Conoco­Phillips (COP), Qualcomm (QCOM), and Express Scripts (ESRX). If you prefer a mutual fund, Money 50 pick Primecap Odyssey Growth (POGRX) has 70% of its stock portfolio invested in health care and technology, double the S&P’s exposure. Sound Shore (SSHfX), another MONEY 50 pick, also has a bigger-than-average exposure to these three key areas. What if this isn’t the bull’s final year? No problem: Over the past three years, Sound Shore has delivered 115% of the S&P 500’s gains in periods when the market is up, according to Morningstar. So either way, you win.

MONEY

One Reason Today’s Jobs News Isn’t Great for Your Money

Crowd of commuters walking in midtown New York
Mitchell Funk—Getty Images

Great jobs numbers have stock investors cheering. But what about bonds?

We’re heading into the 4th of July weekend with reasons to be cheerful. The jobs report from the Bureau of Labor Statistics came in surprisingly strong. Unemployment is down to 6.1%, the lowest level since before the financial crisis. And employers reported adding 288,000 new jobs, considerably more than the roughly 212,000 economists had forecasted, according to a Reuters survey.

At the same time, the stock market continued it’s rally. After the report the Dow climbed past 17,000 for the first time. So the story here — more jobs, stronger economy, good news for investors — is clear, right?

Well, actually, that’s if you care only about the stock market. The bond market had a different reaction this morning: Yields on Treasuries ticked up, which means that their prices fell. And while most of us consider bonds the ho-hum, steady part of our portfolios, they stand to take a big hit if employment continues to come back more quickly than expected.

The reason? In the upside-down world on bond investing, a really strong and sustained recovery means the Fed is more likely to raise interest rates — and rising interest rates cause bonds to fall in value. In this case, the potential slide could be worse because bonds gained in value this year as investors bet that the status quo of low interest rates would hold.

Of course, the jobs report wasn’t perfect. There are still plenty of signs of economic slack. Wage growth is still slow. And then there’s this:

fredgraph

Remember, the unemployment rate only captures people who say they are still looking for work. The graph above shows that the number people either working or trying to work is historically low. That partly reflects demographic changes, but also a large number of people so discouraged in their job searches they’ve stopped looking. Numbers like these are one reason Janet Yellen and the Fed may continue to hold rates low despite the better numbers.

Still, after a long period of low rates and strong returns for bonds, people who run mutual funds are worried that many investors are unprepared for rising interest rates. Speaking yesterday, before the jobs numbers came out, T. Rowe Price chief economist Alan Levenson noted that the risk of losses on long-maturity bonds is unusually high. “I don’t know that retail investors are aware, as they’ve ridden this bond market down to lower yields, that the duration of their assets and vulnerability to capital losses is extraordinary by historical standards,” he said.

How big a loss are we talking about? An exchange-traded fund owning long-maturity bonds has a “duration” of about 14 years, which roughly translates to a 14% capital loss should rates rise a full percentage point. A more typical fund used as a core bond holding, the Vanguard Total Bond Market Fund, has a duration of 5.6, so would face roughly a 5.6% decline in a one-point rate spike.

This doesn’t mean investors should be running away from bonds. Rates could stay low for a long time. And compared to stocks, bonds are still likely to be less volatile, especially in the lower-duration bonds you might have in a short- or intermediate-term bond fund. But today’s happy job news is reminder that the era of strong bond returns is likely coming to a close.

MONEY

What Do Wall Street’s “Dark Pools” Mean for Regular Investors?

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New York's AG wants to know what's going on beneath the surface. iStock

What you need to know about the latest allegation against another big investment bank

Yesterday New York Attorney General Eric Schneiderman announced a civil lawsuit accusing the investment bank Barclays of fraud related to its operation of a “dark pool” for stock trades. What does it mean for regular investors? Here’s what you need to know:

What are dark pools?

They’re essentially private electronic stock trading markets, separate from the main public stock exchanges. Many are run by investment banks. They’re called “dark” because, unlike on public exchanges, buy and sell orders are invisible to other traders.

Are they as sinister as the name suggests?

Actually, the pitch for dark pools is that they are supposed to make trading less costly. When a big investor, like a mutual fund, tries to buy or sell stock on a public exchange, other traders on the market may see that trade and try to move ahead of it. That means the fund will end up paying a little more for a stock it’s buying, or get a little less for a stock it’s selling. By cloaking such orders, a dark pool is supposed to keep other traders from taking advantage of the fund’s moves.

So what is the New York AG saying Barclays did wrong?

Scheiderman says Barclays’ dark pool exposed investors to the very kind of front-running trades they wanted to get away from. Although the bank’s marketing materials said it would protect dark pool participants against “predatory traders,” the New York AG says Barclays didn’t do enough to remove such traders from its pool. In fact, the complaint alleges that Barclays sought the business of some of those traders, and provided them with “detailed information regarding the structure and composition of its dark pool” that may have given them an edge.

High-frequency traders, which use computer programs to make programmatic trades in fractions of second, were allowed to trade in the pool for virtually nothing, the complaint says. High-frequency traders can use their speed advantage to get ahead of other trades.

In a statement, Barclays has responded by saying it is co-operating with the AG and federal Securities and Exchange Commission.

Anything else?

Yes. The AG alleges that because Barclays was eager to grow its dark pool business, its brokerage routinely routed client orders through its own dark pool regardless of whether it was the best place to execute a given trade.

So how might any of this affect me?

The kind of predatory trading Schneiderman is talking about isn’t a serious concern if you are buying 100 shares of Apple. As the complaint notes, it’s the big institutional investors whom aggressive, fast traders are going after. But those big institutions may include mutual funds and pensions funds, which you do have stake in.

TIME stocks

Stocks Hit Record Highs

Dow Jones Industrial Average Approaches 17,000 Milestone
Traders work on the floor of the New York Stock Exchange (NYSE) on June 20, 2014 in New York City. Spencer Platt—Getty Images

The records cap a week of growth

Stock markets again hit record highs Friday, with the Dow Jones Industrial Average nearing 17,000 points and the S&P 500 above 1,960. Both indexes were up more than 1% in trading for the week.

Friday marked the third day in a row that the S&P 500 hit an all-time high, following gains earlier in the week. The index is up more than 6% this year. The Dow is up more than 2%.

The 17,000-mark would be an historic milestone for the Dow, which has seen a steady rise since it hit a 6,600 point nadir during the financial crisis.

TIME Companies

A Quarter of Mergers Involve Insider Trading

Greed is good, and apparently prevalent.

+ READ ARTICLE

A study by New York University and McGill University found that as much as 25% of corporate mergers involve some insider trading.

And there’s no chance that the illegal trades are just happy accidents either. The authors of the study say “the probability of the unusual volume in the sample arising out of chance” is approximately “three in a trillion.”

The study reviewed merger and acquisition trades from 1996 to 2012. It found that despite one quarter of them involving illegal trades, only 5% of the 1,859 ended in litigation. The data come even as U.S. Attorney’s Office for the Southern District of New York has been trying to crack down on insider trading in the hedge fund industry.

MONEY stocks

Why Investors Never, Ever See the Crash Coming

portrait of yellow crash test dummy

When stock prices keep rising, investors start to expect even higher returns. And that kind of irrational thinking often leads to a very predictable result.

With the S&P 500 having set another record on Friday, many market watchers worry that stocks are overpriced and headed for a fall. You might think such talk would slowly tamp down investor enthusiasm. In fact, there’s evidence that the opposite is more often true: The higher prices go, the more market players — amateur and professional alike — expect them to rise.

Why? To answer that, it helps to understand the worriers’ case. Much of the discussion is focused on the Shiller P/E ratio. Named for Nobel Prize winning economist and Irrational Exuberance author Robert Shiller, the ratio measures the price of stocks relative to the average of the past 10 years earnings. When the Shiller P/E is high, returns over the following decade tend to stink. The Shiller P/E isn’t much of a short-term market timing tool — the number can remain high for years — but the long term correlation looks pretty convincing.

SOURCE: Robert Shiller

Right now, the Shiller P/E is around 26. Look at the chart above and you’ll see that buyers at that price scratched out moderate returns at best. The number isn’t screaming “crash,” but it hardly makes stocks look like a bargain, either.

The lesson here ought to be obvious enough. If you pay a lot for something, you stand to earn less on it. You’ll profit more—or lose less—on a house you buy for $100,000 than you would on the same house at $140,000. To see more clearly how that works with stocks, just flip the P/E ratio of 25 over (that is, divide the E by the P) and you’ll see that earnings are in theory paying investors a “yield” of 3.8%. In 2009, when the Shiller P/E was as low as 15, the earnings yield was 6%.

So what are investors thinking when they pay high prices for stocks? Don’t they know they are likely to get lower returns?

A lot of economists assume that, yes, buyers do know that. And that they are fine with it. Perhaps attitudes toward risk have changed, they figure. One day people thought they needed to earn, say, five percentage points above the return on bonds to justify the risk of owning stocks. But maybe now two or three or four points will do just fine. That’s not such an odd idea. As economist John Cochrane explains (citing Eugene Fama, who shared the Nobel with Shiller), risk appetites could go up, quite rationally, when the economy is strong. He writes: “Is it not plausible that people say ‘yeah, stocks aren’t paying a lot more than bonds. But what else can I do with the money? My business is going well. I can take the risk now.'”

By this way of thinking, back in 2000, when the Shiller P/E hit 40, the “expected return” required was low. But on Planet You, Me and Everyone You’ve Ever Talked With About Stocks, the late-1990s-to-2000 bull market was a time when people expected enormous returns. Many investors were thinking that settling for less than 15% returns was for chumps!

A recently published article by Robin Greenwood and Andrei Shleifer of Harvard, “Expectations of Returns and Expected Returns,” looks at the evidence from multiple surveys of investors and concludes that they do indeed expect higher returns when prices are already high. (The authors measured stock prices differently than Shiller, but the idea is roughly the same.) And why is this? Because, the authors suggest, investors are simply projecting recent gains forward into the future.

And it’s not just your day-trading brother-in-law who does this kind of naive extrapolation of the past into the future. Greenwood and Shleifer write: “A substantial share of investors, including individuals, CFOs, and professional investors hold extrapolative expectations about returns. When stock prices are high, and when they have been rising, investors are optimistic about future market returns.”

If some market participants are irrational, then why aren’t smarter traders coming in to take advantage of that, and in the process pushing prices back down? In another paper, the economists and two other coauthors suggest that “rational” traders figure out that others are overreacting to the trend, and so they decide to ride the wave for a while.

Until when? Maybe until the economic news turns bad — at which point investors might overreact in the other direction. Good luck timing those turns. (Read: Don’t try.) As economist and blogger Noah Smith points out, Greenwood and Shleifer’s work doesn’t help you time the market. But it does add up to a good case for lowering your own expectations.

 

TIME Companies

IBM Chief Says Better Times Lie Ahead

The sign at the IBM facility near Boulder, Colarado
The sign at the IBM facility near Boulder, Colo. Rick Wilking—Reuters

Virginia M. Rometty says embracing new technologies like cloud computing can help reinvigorate the U.S. tech giant. Having jettisoned less profitable aspects of the business, the firm of more than 400,000 employees is turning to new fields

The head of IBM says the company is poised for growth, putting an end to years of stagnant stock prices and flagging competitiveness.

CEO Virginia M. Rometty, 56, said during an interview with the New York Times that things had long been “rocky” for IBM, but that a clear vision was now at hand for pursuing fresh avenues.

“We are transforming this company for the next decade,” she said. “That is not a one-year job, not when you’re a hundred-billion-dollar company.”

Having jettisoned less profitable aspects of the business, the firm of more than 400,000 employees is turning to new fields — cloud computing, says Rometty, is one example that can become an exciting venture for IBM.

“I feel very good about the direction and how we’ve crystallized it,” she added. “We are making progress, and we just need to keep moving with speed.”

[NYT]

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