Market Overview

by Kaichun Siu & Jin Zeng

On last Thursday 4/17/2014, just a little before the stock market closing for a long three day weekend, we saw a raise in the S&P 500 Index for a fourth straight session. But Thursday also marks the disappointing earnings reports from technology blue chips weighted on the Dow Jones Industrial Average, so the changes in the major three indexes are that S&P 500 index got added 2.54 points, or 0.1% to 1864.85 points, NASDAQ added 9.29 points, or 0.2% to 4095.52 points, which both The S&P 500 and NASDAQ benchmarked every day this week,  and lastly, The Dow Jones Industrial Average fell 16.31 points, or 0.1% to 16408.54 points before the three day long weekend. Over the past week, The S&P 500 has gained 2.7%, which caused a return in the buying’s in the technology and biotechnology shares after the selloff that occurred just the week before leading to a two month low for The S&P 500 index. The fourth straight winning session for The S&P 500 results in buyers beginning to stabilize in securing these sectors the past week, both NASDAQ Biotechnology and NASDAQ Internet Index saw a gain at 3.1% and 3.9% on Thursday. As we are looking closer to the quarterly earnings and revenue reports, many companies have already reported their quarterly earnings, the traders are expecting that trading activities are going to die down heading up to the three day weekend but many companies exceeded analyst’s forecast. Gordan Charlop, who leads the New York Exchange floor trading operations at brokerage Rosenblatt Securities pointed that the corporate earnings and revenue reports is the main indicator on how the recent share price moves, he mentioned that the market is acting on how it should be, we are beginning to see that investors and buyers are reacting base on the earning news which shows sign of a healthy and growing market. Netflix, one of the big winners on Thursday, in early stock movers, Netflix managed to rallied up 7.9% in pre-market trading after the video streaming company reported their earning report. Netflix is forecast to report sales of 1.27 billion dollars which is a huge increase from last year’s 1.02 billion dollars. Netflix share prices more than double from last year at $345.74 but behind by more than 24% during its peak on March 6^th at $458. However, the key point to take notice here is that the investor sentiment is solely base on new streaming video subscribers, which Netflix reported to have 33.4 million U.S video subscribers from the fourth quarter of 2013, and reported to added 2.25 million new domestic video subscribers. Interestingly, Netflix on Monday said that they’re planning on increasing the price of subscription by a dollar or two by the end of July of 2014. Last time we saw an increase in price of subscription was in July of 2011 when Netflix boosted their online and DVD rental mail package from $10 to $16. And just September of 2011, Netflix decided to separate the DVD rental package service from online video only company which caused a hit on the Netflix stock share prices from $300 in July of 2011 to just $60 by the end of 2011. Netflix currently plans on offering unlimited streaming movies and TV episodes for $7.99/Month, it would be interesting to see the future of Netflix with Amazon’s competition which are battling with original and exclusive content which continues to be one of the main issue for Netflix and the future in content acquisition cost remains to have a bearing on Netflix future outlook. 

Stock Splits

By Brendan Nagle & Martin Dize

Market Report

The major stock averages closed higher Tuesday (April 15, 2014) in a session that experienced notable ups and downs. The Dow was alternately up about 100 points and then down 110, before regaining its equilibrium to push higher in late afternoon trading. There was speculation that this volatility was due to news reports of Russian troop movement in the Ukraine. However, by the end of Tuesday the Dow Jones Industrial Average rose 89 points, the NASDAQ moved up 11 points, and the S&P 500 was up about 12 points. Wednesday (April 16, 2014) benchmarks ended higher, primarily boosted by encouraging industrial production data and better than expected Chinese economic data. Yahoo’s higher revenues also contributed to the bullish mood. Fed Chairwoman Janet Yellen’s speech in New York was another positive factor that led to steady gains throughout the day.

Stock Splits

All publicly traded companies have a set number of shares that are outstanding on the stock market. A Stock Split is the decision by the company's board of directors to increase the number of shares that are outstanding by issuing more shares to current shareholders. For example, in a 2 for 1 stock split, every shareholder with one stock is given an additional share. So, if a company had 10 million shares outstanding before the split, it will have 20 million shares outstanding after a 2 for 1 split. After a split, the stock price will be reduced since the number of shares outstanding has increased

Companies will issue stock splits for a variety of reasons. The first reason is psychology. As the price of a stock gets higher and higher, some investors may feel the price is too high for them to buy, or small investors may feel it is unaffordable. Splitting the stock brings the share price down to a more "attractive" level. The effect here is purely psychological. The actual value of the stock doesn't change one bit, but the lower stock price may affect the way the stock is perceived and therefore entice new investors. The split also gives existing shareholders the feeling that they suddenly have more shares than they did before, and of course, if the price rises, they have more stock to trade. Other reasons for splitting a stock is to increase a stock's liquidity and aid in financial acquisitions.

Google and Under Armour Split

Recently two predominate companies announced they were going to split their shares, these companies were Google (Goog) and Under Armour (UA). Both of these companies are trailblazers in their respective areas and are growing at stable rates. However, the motivations for the stock splits of these two companies were wildly different.

Firstly Google announced that they were going split their stock for the first time, a 2:1 stock split, as of January 30 2014. This split was not what is termed a “traditional split” where a company simply doubles the existing amount of outstanding shares and halves the price of each share. Google’s board of directors announced, in what was termed a “founders move”, that they would be creating a new class of share when the split takes effect. Google before the split had two types of stock Class-A and Class-B.

Class-A shares were publically traded and came attached with the right to cast a single vote. Class-B, “founders shares”, were issued to the founders of Google and its initial investors when the company went public. Class-B shares hold value equal to that of Class-A shares. Class-B shares also have attached 10 votes per share. Google decided that in order to protect the future interest of the company and its founders that a new class of share should be created. Class-C shares were issued after the split on April 1 2014. Class-C shares hold no voting rights whatsoever. The creation of a new class of publically traded share required Google to create a new ticker. GOOGL in the new ticker and tracks the value of the Class-A shares. Class C shares are tracked under the historical ticker GOOG and to reflect the lack of voting rights GOOG is going to trade at a lower price than its counter part, though the stocks are likely to move in concert.

This move protects Google’s founders voting majority and allows the company to broker deal with the new Class-C stock. Prior to the split, when making transactions with other companies, Google had to either pay in cash or Class-A shares. Doing so could alter the board voting rights. The Class-C share can now be trading like cash without the risk of altering the voting power of the founders.

News of the split and creation of the Class-C shares was not received well by annalists. Annalist perceived the move to be a risk prevention maneuver by the company’s founders and not a more traditional reason for splitting.

Sportswear wunderkind Under Armour in contrast is splitting for the second time in as many years. Since UA’s last split in early 2013 Under Armour has grown 160%. The split of UA is a traditional 2:1 split where stockholders as of April 16 2014 are going to find that they have twice as many shares of UA stock at half the price. CEO and founder Kevin Plank announced the split as of March 17 2014, after which the share price of the stock hit an all time high of 128.80. UA split does not create a new class of shares, Plank and his brother hold nearly of the voting rights in the company. This split is about lowing the price of the stock in order to broaden the diversity of the companies share holders.

Market Report and High Frequency Trading

Last week, March 31-April 4, all three of the major indexes fell; NASDAQ -2.6%, DOW -1%, S&P 500 -1%. Much of the decline took place the afternoon of April 4, when investors rushed for the exits. Stocks such as Facebook(-4.6%), Priceline(-4.79%), Amazon(-3.18%), LinkedIn(-6.29%), and Tesla(-5.84%) all fell dramatically as questions about future prospects arose. In addition Bio-tech and Healthcare stocks all fell and the technology sector fell -0.5% with Microsoft, IBM, and Oracle all experiencing losses of some degree.

The much anticipated job report was also released last week, revealing that for the month of March 192,000 jobs were created, which was less than expected. However this is unlikely to influence the Federal Reserve to adjust its policy of slowly drawing down the economic stimulants. It was also revealed that the unemployment rate has held steady at 6.7%.

This week in the market has been very significant as the Federal Open Market Committee’s minutes from their March meeting were released, revealing a more dovish stance that expected. In response U.S. Stocks rebound from the past week with all three major indexes reaching session highs; NASDAQ +1.72%, DOW +1.11%, S&P 500 +1.09%. The Chief Investment Strategist at ING U.S. Investment Managements, had two major takeaways; 1. Rates will stay low and 2. When they do rise, it will be a slow process. Other notable takeaways from the minutes are that Real GDP has been lower than previously projected, partly due to the unusually harsh winter and downward surprises in the unemployment rate.

The NASDAQ bio-tech index (+3.6%) and the Global X social media index (+2.9%) were most responsive to the release of the minutes. Especially Facebook, which shot up +7.3% yesterday. Facebook was aided not only by the minutes but a JP Morgan Analyst who pointed out that the social media giant was still very early on in the monetization of its huge 1.2 billion person user base.

Now that we’ve summed up the recent news in the market we can begin addressing a major issue that has been coming up recently.

High Frequency Trading (HFT) is a type of algorithmic trading that uses highly sophisticated technology and advanced algorithms to trade large quantities of securities in a fraction of a second. Recently both the FBI and the SEC have opened up investigations into this trading technique which controls more than half of the $23 trillion dollar U.S. Market. In response to this HFT leaders have made connections with lobbyists in Washington D.C. in order to protect their interests. Lobbyist have managed to convince the investigative bodies to take a wait-and-see approach to the investigation, giving HFT leaders a chance to prove their worth. The debate on the legality of HFT was spurred by the recently released book “Flash Boys” by financial journalist Michael Lewis, in which he accused the stock market of being rigged by stock exchanges, banks, and HFTs.

The big issue with HFT is the idea of front-running. Front-running is when a stockbroker executes and order on a security of their own account before processing pending large orders from their customers. In doing this, the broker gets in at a low price, and upon executing a large trade the price of the stock shoots up and they are able to get out making a quick easy profit while the average investor ends up paying more or getting crowded out.

Charles Schwab has described this form of front-running as a “cancer undermining confidence in the free enterprise system.” In addition Bloomberg Businessweek stated pointed out that while high frequency trading has little effect on “mom and pop investors” it has a huge effect on individuals who have invested in large pension funds and retirement funds. That is, you average person’s investments in their futures is being diminished because HFT are driving the prices up.

Front-running by individual brokers and asset managers is illegal, but not all types of front running is. The most common example of front running is when a traders buys shares of stocks just before large orders are processed driving the price up. This information can be obtained legally by monitoring bids and asks on the market and the investing transactions of institutional investors like hedge funds. This is something that anyone can do if they so choose.

High Frequency Trading has its positives in that it keeps volume up and can help drive the price to its equilibrium but is it really worth it when the majority of the population is getting crowded out of the opportunity to make big gains?

Below Is a Link to the 60 Minutes video on Front-Running and High Frequency Trading.

https://www.youtube.com/watch?v=BweADB78tBY