Showing posts with label Stock Market. Show all posts
Showing posts with label Stock Market. Show all posts

Wednesday, July 25, 2012

Correlations Among Facebook and Zynga

See previous related post: Facebook: Two Months Since IPO

After the market closed Wednesday, Zynga (NASDAQ: ZNGA) delivered a disappointing Q2 earnings report and outlook. Revenue was $332.5 million, short of the $343.1 million predicted by analysts. Profit was 1 cent a share, short of the 6-cent average estimate. Furthermore, Zynga cites that due to "delays in launching new games, a faster decline in existing web games due in part to a more challenging environment on the Facebook web platform, and reduced expectations for Draw Something," 2012 bookings will be around $1.15 billion to $1.225 billion, short of the projection from April of $1.43 billion to $1.5 billion. In the after hours, shares of Zynga have fallen by over 38%, but it wasn't the only one negatively affected by this news. Facebook saw its shares dip over 7% in the after hours.

The link between Zynga and Facebook (NASDAQ: FB)  is evident in the latter's mention in Zynga's report today. Just how correlated have the stock movements of the two companies been? How about their correlations to LinkedIn (NYSE: LNKD)? Historical prices, since Facebook's IPO in mid-May, were compiled from Google Finance, and the daily changes were documented:

Date  Zynga Facebook LinkedIn Boeing
25-Jul 3.25% 3.13% -0.78% 2.78%
24-Jul -3.34% -1.04% -1.16% -1.21%
23-Jul 6.04% -0.03% -1.94% -1.33%
20-Jul 5.26% -0.83% -2.20% -1.30%
19-Jul -1.08% -0.38% 3.86% 1.31%
18-Jul 0.66% 3.63% 0.74% 1.07%
17-Jul -5.18% -0.53% 0.61% 0.19%
16-Jul -1.43% -8.07% -2.25% -0.73%
13-Jul -2.39% -0.29% 0.91% 2.51%
12-Jul 1.41% -0.52% 3.52% 0.27%
11-Jul -1.20% -1.59% 1.56% -2.32%
10-Jul -4.39% -2.18% -3.35% -1.09%
9-Jul -2.24% 1.39% -5.40% 0.46%
6-Jul -1.47% 0.83% 0.57% -1.01%
5-Jul 0.74% 0.87% -0.28% 0.23%
3-Jul -2.88% 1.40% 0.85% 1.49%
2-Jul 2.21% -1.06% 1.28% -1.51%
29-Jun 1.12% -0.83% 3.44% 3.80%
28-Jun -4.44% -2.70% -2.31% -0.40%
27-Jun -2.26% -2.63% -1.17% 1.33%
26-Jun -4.95% 3.24% 3.27% -0.17%
25-Jun 1.00% -3.00% -3.56% -1.26%
22-Jun 4.90% 3.80% 4.56% 0.83%
21-Jun -2.89% 0.76% -2.93% -2.25%
20-Jun -1.34% -0.97% -0.07% 0.12%
19-Jun 3.29% 1.59% 0.17% 1.42%
18-Jun 3.96% 4.67% 3.09% -0.13%
15-Jun 10.76% 6.08% 3.78% 0.19%
14-Jun -0.40% 3.74% 2.89% -0.29%
13-Jun 1.20% -0.47% 1.13% -0.72%
12-Jun -10.27% 1.48% 0.18% 3.52%
11-Jun -8.26% -0.37% -2.05% 0.24%
8-Jun 0.33% 3.00% 2.26% -0.01%
7-Jun -2.11% -1.86% 1.13% 1.35%
6-Jun 7.50% 3.63% 0.09% 2.13%
5-Jun 0.35% -3.83% 2.10% 0.12%
4-Jun -4.99% -2.96% -0.46% 0.39%
1-Jun -3.99% -6.35% -4.78% -3.40%
31-May 6.64% 5.00% -2.07% 0.32%
30-May -3.61% -2.25% -1.81% -1.43%
29-May -7.87% -9.62% 1.44% 0.57%
25-May -2.79% -3.39% -0.28% -1.95%
24-May -3.82% 3.22% -4.60% -0.25%
23-May 3.97% 3.23% 2.20% 0.13%
22-May -4.09% -8.90% 4.64% -0.42%
21-May -0.98% -10.99% -2.20% 3.80%
18-May -13.42% 0.61% -5.65% -0.83%

As a control group, Boeing (NYSE: BA) was also selected to represent a company from the vastly different sector of industrial. The correlations among these vectors were calculated using the =CORREL() Excel function, as the results are as follows:
  • ZNGA / FB: 0.41262114
  • ZNGA / LNKD: 0.327412705
  • FB / LNKD: 0.187973772
  • ZNGA / BA: 0.067813629
  • FB / BA: 0.112054524
  • LNKD / BA: 0.285873686
Among these results, Facebook and Zynga did have the highest correlation, greater than either one's to LinkedIn. At the same time, Boeing had the highest correlation to LinkedIn, compared to either Zynga or Facebook. Given the high correlation between Zynga and Facebook, the latter of which is due to deliver its first earnings report as a public company on Thursday, it looks like Zynga, right after its disappointing report, has a good immediate chance to rebound back up or dip further.

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Saturday, July 14, 2012

Distribution of S&P 500 Constituent Market Cap

The S&P 500 index, according to Standard and Poor's website, "remains a leading indicator of U.S. equities, reflecting the risk and return characteristics of the broader large cap universe on an on-going basis." Presently, companies with market cap over $4 billion are considered. But given the 500 companies, what exactly is the distribution of their market cap like?

The short response is enormously positive skew. The data used for this analysis was as of June 28, 2012, factoring in the recent inclusion of Monster Beverage Corp. (NASDAQ: MNST) over Sara Lee Corp. (NYSE: SLE). As a note of interest, after the trading day of June 29th, Progress Energy (NYSE: PGN) was removed from the index, while Seagate Technology (NASDAQ: STX) was added, but this transition had not been factored into the data for this analysis.

The 500 companies totaled over $12.89 trillion in market capitalization. However, the top 10 companies comprised over 20% of that figure, led by Apple, Exxon Mobil, and Microsoft at $554B, $398B, and $255B, respectively. The average market cap of the 500 companies was over $25.7 billion, while the median figure was only around $12 billion, giving a skew value of over 5.48. In fact, the average value of $25.7 billion fits into the 77.7% percentile. Further remarkable is that even while taking the logarithm of all of the market cap values, the skew is still positive at 0.668.

Here is the summary table of these 500 market cap values, along with the box-and-whisker plot of the logarithm of the values:

Max: $544,206,062,500.00
95% P-tile: $91,226,411,328.12
75% P-tile: $23,949,059,570.31
Median: $11,998,596,191.41
25% P-tile: $6,461,437,377.93
5% P-tile: $2,973,694,091.80
Min: $1,301,555,053.71
Sum: $12,892,289,301,269.50
Average: $25,784,578,602.54
P-tile of Avg: 77.70%
Stdev: $46,745,814,552.27
Skew: 5.484828298
Skew of Log: 0.668860873
Top 10: 20.93%

The market values were obtained through Bloomberg on June 29th.
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Tuesday, June 26, 2012

Quick Summary on Options

Options are the most common forms of derivative, financial instruments that derive their values from those of other assets. Call options give the bearers the ability to buy an asset for a specified price, called the exercise or strike price, on or before the expiration date. Put options, on the other hand, give bearers the ability to sell an asset for a specified price on or before the expiration date. For a call option, here are the possible outcomes:
  • If exercise price = current stock price, the option is "at the money" call.
  • If exercise price > current stock price, the option is "out of the money" call.
  • If exercise price < current stock price, the option is "in the money" call, as the bearer can purchase the stock at the lower exercise price and sell at the higher current stock price.
Buyers of call options are betting that the stock price will be higher than the exercise price by the expiration date. The seller, or writer, or the call option bets that the stock price will fall below the exercise price. For put options, it's the opposite. Those who buy put options bet that the stock price will fall, so profit can be made by buying the security at the lower price and selling at the higher exercise price. On the other hand, writers of put options bet that the stock price will increase.

Numerous factors go into how options are priced. If the price of the underlying security increases, so will the price of call options given a fixed exercise price. This is because there will be a greater range such that the option will be "in the money." By similar arguments, the lower the exercise price, the higher the value and price of the option. The results are opposite for put options in these cases. However, if volatility of the underlying security increases, so will the value of both call and put options. This is because the downside loss is fixed; bearers of options do not need to buy or purchase the asset if the price is unfavorable. Potential upside, on the other hand, increases the value of the option. Similarly, time to expiration increases the value of both options. Finally, rising interest rates depress the present value of exercise price and makes the call option more valuable. Dividends depress the expected capital gain of stocks and the value of the call option.
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1% Up and 1% Down ≠ 0% Cumulative Effect

Suppose the indices are up 1% one day, and down 1% the next. Is the cumulative effect 0%? What if they were down 1% and then up 1%? It turns out that in both cases, the cumulative effect is not 0%, but rather negative. To understand this in the most simple manner, realize that 1% of 1.01 (after 1% gain) is more than 1% of 0.99 (after 1% loss). Therefore, the 1% loss is greater than 1% gain. And due to the communicative property of multiplication, it doesn't matter whether up or down occurred first.

 The cumulative effect is 1.01*0.99 = 0.9999, not 1. To truly offset an 1% loss, the gain required would only be 1/0.99-1 = 1.010101%, which is above 1%. This residual decreases as the magnitude of the gain and loss becomes smaller. Let x be the same magnitude for the gain and loss, so x=0.01 in the case above: (1+x)*(1-x) = 1-x^2. Compared to the unchanged initiate value of 1, the difference is simply x^2. So when the gain and loss is 10%, the end result is 1% lower. When the gain and loss are 1%, or 0.01, as was the case above, the end result is 0.0001 deviated, and the cumulative effect of 1.01*0.99 = 0.9999 confirms that.

 While 0.9999 may not seem much different from 1, the effects can easily add up. Supposed that the portfolio repeatedly bounced up and down 1% each day for the entire calendar year. Given 250 trading days, so 125 of such cycles, an $100 portfolio will only be worth $100*0.9999^125 = $98.76 after the year, corresponding to 1.24% loss. And because the magnitude-residual relationship is quadratic as observed above, the effects multiply quickly: given 2% back-and-forth for a year, the same $100 portfolio would only be worth $100*0.9996^125 = $95.12, or 4.88% loss.
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Sunday, May 13, 2012

Dow Jones and S&P 500 Daily Change Correlations

Do the daily fluctuations in one stock index align well with the change observed in another index? For this exercise, let's take the Dow Jones and S&P 500 index for April 2012. For each index, after extracting the closing numbers for each day, the daily percentage change was computed, summarized below:

Date Dow %Δ S&P %Δ
30-Apr-12 -0.11% -0.39%
27-Apr-12 0.18% 0.24%
26-Apr-12 0.87% 0.67%
25-Apr-12 0.69% 1.36%
24-Apr-12 0.58% 0.37%
23-Apr-12 -0.78% -0.84%
20-Apr-12 0.50% 0.12%
19-Apr-12 -0.53% -0.59%
18-Apr-12 -0.63% -0.41%
17-Apr-12 1.50% 1.55%
16-Apr-12 0.56% -0.05%
13-Apr-12 -1.05% -1.25%
12-Apr-12 1.41% 1.38%
11-Apr-12 0.70% 0.74%
10-Apr-12 -1.65% -1.71%
9-Apr-12 -1.00% -1.14%
5-Apr-12 -0.11% -0.06%
4-Apr-12 -0.95% -1.02%
3-Apr-12 -0.49% -0.40%
2-Apr-12 0.40% 0.75%



Average 0.004% -0.034%
Stand Dev 0.008693038 0.009248878

When the pairs of daily % changes are plotted, there exists almost an 1:1 relationship, with a strong correlation:


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Wednesday, April 11, 2012

Alcoa Inc (NYSE: AA)

Alcoa, the manufacturer of aluminum products, is the first company in the Dow to announce quarterly results. Late Tuesday, Alcoa announced net income of $94 million for Q1-2012, or 9 cents per share, which is actually down 69% from Q1-2011; but it is up from the $-191 million incurred from Q4-2011. More importantly, the results were ahead of analysts' estimates of 4-cent loss per share. As of now, shares of Alcoa have climbed 7.74% to 10.04. Also notable is the climb in most of the US and European stock indexes. The S&P 500 finally stopped a five-day slide, triggered by lackluster March job reports and high borrowing costs in Spain and Italy, that saw its index fall 4.3%.

During the first quarter this year, Alcoa announced the closure of  plants in the United States, Spain, and Italy, cutting over 500,000 tons of aluminum capacity. This cutback came after aluminum prices are down 23% on the London Metal Exchange in the past 12 months, averaging $2,219 a ton. Meanwhile, Alcoa is engaging in billion-dollar venture in Saudi Arabia, which it says will be the "world’s most efficient integrated aluminum production plant." Finally, Alcoa is boosting 2012 aerospace sales forecast by 3 percentage points, and projecting that the US automobile sales will grow 7 to 12%. Its view on the global market also remains optimistic, as it "reaffirms global aluminum demand growth projection of 7% and a global aluminum supply deficit."

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Monday, April 9, 2012

Jobs Report and Progress in Relation to Population Growth

Stocks in the United States are falling today, on the first trading day since the Labor Department announced Friday that employers added 120,000 jobs in March. That's only half of the 240,000 added in February, and way below the expected estimate of around 200,000. The unemployment rate did fall to 8.2%, but that's mainly attributed to decreasing labor force. The CNN report states that "job growth of around 120,000 is just about enough to keep up with population growth." Given the average rate of population growth in the United States, what exactly is the amount of job growth over month just to keep the same employment rate?

From the US Census Bureau data from 2000 to 2010, we can calculate the average monthly population growth rate. Then taking the current US population, we can estimate the monthly population increase:
  • 308,745,538 = 281,421,906*(1+r)^120
  • r = 7.724e-4
  • Δpopulation = 313,332,804*7.724e-4 = 242018.258
Now we need figures on the labor force:
  • 142,034K employed in March 2012
  • 142,034K / 313,332,804 = 45.33% of population employed
At last, Δpopulation * (% of population employed) = 242018.258 * 45.33% = 109,706.876. This means that nearly 110,000 jobs need to be added each month just to accommodate the rising population and keep the unemployment rate steady. Given this number, it's plausible to claim that the jobs added in March barely offset the population increase.

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Tuesday, January 3, 2012

2011 Stock Index Trends

On Tuesday, the first day of market activity in the new year, US stocks climbed. Dow, NASDAQ, and S&P 500 all posted around or above 1.50% gain. This comes off 2011 that saw little change, particularly the S&P 500, which ended the year at 1257.60, just 4 ticks below the year's opening mark. Dow increased 5.5% for the year. All three indexes saw a tumultuous 2011. Roughly speaking, stocks rose for the first half of the year, with early July reaching or tying the apex for the year. End of July marked the beginning of downfall, followed by months of extreme volatility and eventual gradual increase to the starting level.

One can note the coincidence of major world events to several strong movements or trends in the indexes. Immediately after the March earthquake and tsunami in Japan, stocks fell with the fear of disruption in the global economy. The S&P 500 reached a nadir of 1279.20 on March 18th, over 60 points lower than the mark a month earlier. The tumble began at the end of July, as slow economic growth coincided with political gridlock in Washington over the debt deal. Unemployment for June was at 9.2%, while US economy grew only at an annual rate of 1.3% in Q2. After S&P downgraded the credit standing of US on August 5th, the indexes dropped over 6%. From August to November, the Dow swung an average of 269 points a day, reflecting the high volatility as the US watched the troubling developments of Europe and saw the unemployment numbers drop to 8.6% in November.

While the US stock market saw little to no growth in 2011 overall, the situation is much worse through rest of the world. Nearly all other countries saw indexes down, with a global (excluding US) average of -14%. But within, various sectors performed drastically different. Leading the sectors within S&P were utilities, consumer staples, and healthcare. McDonald's led the Dow with 31% gain, while financial groups saw biggest decrease.

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Monday, December 26, 2011

Performances of Defensive Stocks from Pre-Crisis to 2011

Defensive stocks are those that perform well during a period of economic slowdown. They generally do not outperform the market during periods of rapid economic growth, and thus serve as low-risk securities. A MSN article from May 2010 lists 14 "safe stocks to stock up on." Of the 14, three are currently listed on the Dow Jones Industrial Average. They include Johnson and Johnson (NYSE: JNJ), which is involved in health care products, Proctor and Gamble (NYSE: PG), which focuses on consumer packaged goods, and Wal-Mart (NYSE: WMT). The historical performances of these stocks from mid-2008 to present were retrieved and analyzed. For comparison, similar data were retrieved for two companies not part of the Dow: Google (NYSE: GOOG) and Caterpillar (NYSE: CAT), and the Dow Jones Index itself. The results are as follows:

Name High Low Decrease Current Increase
JNJ 72.22 46.60 35.47% 65.98 41.59%
PG 73.15 44.18 39.60% 66.67 50.91%
WMT 63.17 46.42 26.52% 59.99 29.23%
GOOG 685.33 257.44 62.44% 633.14 145.94%
CAT 115.41 22.17 80.79% 92.25 316.10%
DJI 13058.20 6626.94 49.25% 12294.00 85.52%

Indeed, as the figure shows, during the financial crisis of late 2008 and early 2009, the percentage decrease from the highest closing trades to the lowest closing trades was the greatest for Google and Caterpillar, which are not defensive stocks. Then came the Dow index, which featured a mix of defensive and non-defensive stocks. Finally, the three defensive stocks saw the smallest decrease during those economic downturn times. On the reverse, as the economy has been recovering over the past 2+ years and stock prices have been increasing again, the three defensive stocks saw the smallest percentage gain, while Google and Caterpillar both saw enormous gains, with the Dow motley in the middle.

All this goes to say is that defensive stocks have low risk and variance. In good times, they return less than the others, but in bad times, they don't lose as much as the others. Wal-Mart's low variance is exemplified in an even more profound way by realizing that its post-crisis trough was hit on February 2009; however, that price of 46.24 was actually higher than that during January 2008, and wasn't far off from the prices during much of 2006 and 2007, when the economy was growing strongly. Defensive stocks usually cover common products, used whether the economy is growing or shrinking. Think of the sectors the defensive stocks here cover: healthcare, consumer package, and retail, all of which are rather basic necessities and face relatively inelastic demand. In all, coming together in a group of ideas are: defensive stocks, common goods, necessities, inelastic demand, low risk, low variance, low returns, and low losses. Whether these are better than other stocks will ultimately depend on the state of being of the macroeconomics.

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Thursday, December 1, 2011

Stock Market Recap

On Wednesday, the Dow increased by 490 points, the largest increase since March 2009, when the Dow hit its low point during the financial crisis. When the index closing at 12045.68 for the month, it showed an 0.8% increase in the month of November, and up 4% for the year. Three key developments led to the tremendous growth observed.

First, banks around the globe announced a coordinated plan to make US dollar funding cheaper for European banks. The announcement was well received in European markets, where the German index DAX jumped nearly 5%. However, this move "did not address the fundamental financial problems threatening the survival of the European currency union." Instead, it seemed more of a temporary move extend more time to Europe to plan its efforts on the preservation of the euro. Governor of Japan's central bank was quoted in saying that "the European sovereign debt problem will not be solved only with liquidity." Instead, what actions taken as crisis response will be crucial.

In other developments that contributed to the rise in markets on Wednesday, China indicated that it would loosen monetary policy by lowering the reserve ratio by 0.5% for banks, thereby enabling the increases in banks' lending activities. Lastly, private-business hiring increased by over 200,000 in November, well ahead of economic forecasts in the largest monthly gain this year.

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Friday, November 11, 2011

Improvement in Markets

In a week that saw tumultuous variations in the stock markets given the events in Europe, stocks closed the week with more optimistic outlooks, with the Dow closing at 12,133.82. It was helped by the news in Italy that the Senate approved budget measures. This package of austerity measures, which was demanded by the European Union, will go into vote in the lower house, and ultimately trigger the resignation of Prime Minister Silvio Berlusconi, who announced on Tuesday that he will step down after new economic measures are passed. The passage also lowered the Italian bond yields, which had climbed to record levels earlier this week.

Meanwhile in the United States, aside from bank shares climbing in response to the events in Italy, stocks for Walt Disney rose 6.7%, citing advertising gains and higher ticket prices for increased profit. These developments come one day after the Labor Department announced that the number of people applied for unemployment claims fell to a seasonally adjusted 390,000 last week, the lowest levels since April. While this is an encouraging signs, it's still not at a level to sustain job gains. The outlook in Europe continues to worry Americans, as the debt crisis could push Europe into a recession and hurt American exports.

So while the stocks closed the week on a high note, caution is still needed to claim true progression, as this week's events show the high volatility in the markets in response to global developments.

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Wednesday, November 2, 2011

Stock Market Recap

On Wednesday, the Dow gained 178.08 points, after losing 573 points over the two previous days over the closure of MF Global and situation in Greece. MF Global, a global financial derivatives broker, filed for Chapter 11 Bankruptcy after making a massive leveraged bet on European debt. In Greece, Prime Minister George Papandreou put a referendum over a debt bailout for the nation, which took months for European countries to broker. If voters reject the referendum, a default could result from Greek debt, leading to massive losses for banks holding Greek bonds. Papandreou is scheduled to meet with G20 leaders on Thursday and Friday.

Meanwhile in the United States, private hiring increased by 110,000 in October, surpassing economic expectations. This report comes in days after the news that consumer spending increased by 0.6% in September, while income only increased by 0.1%. These signs of improved confidence were encouraging and aim to allay fears that the United States is on the verge of another recession. Most of the jobs added in October were from the service sector, and investors hope for similarly optimistic news for Friday's broader employment report.

Despite Monday's drop, Dow posted 9.6% gain in October, the best one-month performance since 2002. However, the significant drop over Monday and Tuesday still illustrates the vulnerability and volatility of the market given the circumstances in Europe.

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