Facebook went public on Friday. After months of build up, there were some issues with trading, and finally, no big pop in stock price. This has led some media pundits to conclude that Facebook’s IPO was a flop. But was it really?

Facebook IPO Trading

Facebook’s IPO was not necessarily typical. However, there was little typical about it before it even began. There was the sheer size of the offering, making the Facebook IPO one of the largest of all time. Then, there was the intense media interest, which, believe it or not, is not typical of initial public offerings.

The idea that Facebook’s IPO was a flop revolves around the concept that its stock price did not rise on its first day of trading. Indeed, there was ample evidence that Facebook’s underwriters were forced to step in and prop up the share price to keep it above the $38 offering price. Whether this is a flop or not depends on whose shoes you are in, and how much you care about what normally happens.

Facebook IPO Pricing

In the days leading up to the IPO, there was some concern that the price for Facebook stock was too high. After all, the top of the trading range gave the company a valuation nearly 100 times its earnings. By that measure, it was one of the priciest stocks around. Typically, a 100 times earnings valuation requires enormous growth potential. While Facebook certainly has growth potential, there aren’t many analysts out there looking for earnings to triple by next year, which would be the kind of growth that usually commands 100x pricing.

However, there was enough demand (or someone thought there was enough demand) to raise the IPO range, and to eventually price the initial shares at $38.

Here is where it gets complicated.

Read here about if Credit Karma is a scam or not.

Facebook, the company, and the Facebook investors who were raising cash by selling the shares they owned of the private company are the only people who “sell” at the $38 IPO price. These are the offering shares. As a result, the money the company makes is equal to the number of shares it sells times the IPO price.

In other words, no matter how high the stock price goes after the first trade, the company itself will get no more money. So, if the shares went to $40+ (they did for a while), the company still just got $38 per share.

The fact that Facebook shares did not go up from the IPO price suggests that Facebook, itself, got every single penny it could from its IPO. That makes Facebook a big WINNER in this IPO.

The underwriters are paid by the company issuing the IPO. This payment is a percentage of the IPO amount. It also had nothing to do with the share price after the market opens. In this respect, the underwriters are like the house in Vegas. They win no matter what happens to the stock price.

Who Got Burned By Facebook IPO

So, if Facebook and its investors did just fine with the IPO, who is complaining?

Most IPOs are not so popular. In fact, most IPOs happen without any fanfare. They are filled by institutional buyers and large clients who buy the stocks based on the fact that the underwriters (the Wall Street bankers) deliberately attempt to price the initial public offering at a slight discount to the actual value of the stock. In other words, Morgan Stanley, for example, would price an IPO at $25 per share if it though the company was actually worth $30 per share.

The reason this happens is that otherwise there would be no motivation for anyone to ever buy an IPO. After all, you can buy the same shares seconds later on the open market. The only reason to buy into an IPO is the possibility that those trades that come seconds later do so at a profitable price for those who took IPO stock.

The people buying into the Facebook IPO were, of course, hoping for this initial increase in share price, often referred to as a pop. It never really happened. These IPO buyers are the ones feeling burned right now, because they got nothing for buying into the Facebook IPO.

In fact, the underwriters had to buy shares on Friday in order to keep the price above $38 per share. This is to prevent a first day loss, which might be embarrassing and make it look like they mispriced the IPO in the first place. In this respect, the underwriters lost a little bit, but it was mostly egg on the face and not any real loss.

Keeping the stock price above the IPO price is only the underwriter’s job for the first day of trading, so it is no surprise that Facebook stock dropped on Monday without the artificial support.

Why Did Wall Street Mess Up the Facebook IPO?

Again, Facebook is not upset about its IPO. In fact, it has to be pretty pleased that it got as much money as possible out of its IPO. There is a good argument to be made that this whole thing might be Facebook’s “fault.”

Remember that Wall Street firms were tripping over themselves to get a piece of this IPO. Also remember that several reports said that Facebook got rock bottom fees from the bankers involved in its IPO. Is it too big of a stretch to think that they may have had some say in the pricing as well. Perhaps the company was not willing to take the standard “pop discount” and instead insisted on pricing its stock much closer to the actual demand.

Either way, Facebook is now a publicly traded company. Where the stock goes from here is up to future investors, not the IPO players.

Related posts:

1. Facebook IPO 2012
2. Facebook Valuation Estimates Billions Wrong?

Facebook Flop or Not? originally published at Personal Finance Blog - FinanceGourmet.com

After years of speculation, rumor and guesses as to whether Facebook stock is a good investment at all, the company has finally announced plans to go public. Facebook will trade on the NASDAQ under the ticker symbol FB following its IPO. Like many other technology IPOs of late, this offering will leave CEO and founder Mark Zuckerberg in iron-fisted control of the company. He’ll control approximately 57 percent of the voting power in the company after it goes public, leaving shareholder lawsuits as the only chance for investor control.

The company indicated and initial public offering range of $28 to $35 per share. This would value the company somewhere between $77 billion and $96 billion dollars, which is close to many technology pundit’s wishes of a $100 billion valuation. Regardless, of where within that range it prices, Facebook will be the internet IPO ever. With a $100 billion valuation, Facebook would be close in market value to long established technology companies such as Amazon and Cisco.

The IPO would raise something in the $11 to $13 billion dollar range, although the company will only get half of that. Investors in the company are cashing in a big pot of chips in order to lock in gains for their own investments and for their venture capital funds. That isn’t necessarily a bad sign, but an investor who thinks that there is a lot of upside left in Facebook’s stock price wouldn’t be so eager to sell at the beginning. However, many of the investors were early stage investors in the company who made very risky bets that have already paid off much more than can be usually be expected. No one can blame them for wanting to take some money off of the table.

Employees would face a lock-up period of around 180 days during which time they would be prohibited from selling their shares that they have earned over the years.

Although there is less concern that Facebook will end up trading underwater quickly and staying there like recent IPOs from Zynga and Groupon, there is some concern about Facebook’s lofty valuation. At the high end of the range, Facebook will trade at 99 times earnings, a multiple higher than virtually all of the S&P 500 companies according to Bloomberg.

Still, there is so much buzz around this IPO that there is little doubt investors will both swarm it under and take the shares higher in the short term. The question remains if Facebook stock will be a good investment for long-term investors. For the average investor, this trade is a gamble, but one many are willing to take. Time will tell if this is the next great thing in corporate America, or another AOL that looked like it couldn’t fail, until every realized that it couldn’t succeed.

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Facebook IPO 2012 originally published at Personal Finance Blog - FinanceGourmet.com

This past week featured the earnings release of several major technology companies, coming closely on the heels of major earnings announcements from other tech companies, including Google and Apple.

IBM Earnings

First up, IBM reported revenue of $24.7 billion leading to earnings of $2.78 per share. The consensus estimates from analysts were a bit higher for revenue, but a bit lower for earnings per share. The company did raise its full-year earnings guidance, but it wasn’t enough. Investor reaction wasn’t pretty with shares dropping 2.4 percent the following day, and continuing down. The technology giant closed on Tuesday before reporting earnings at 207.31 and closed Friday at just 199.55. IBM’s results have also been blamed for the general downward direction of the markets for the end of the week.

Still, IBM has a long history of boosting its share prices, primarily by buying back enormous amount of stock each year.

Intel Earnings

Intel’s earnings didn’t make investors any happier. The stock has had a pretty good run-up as of late, so anything other than a gangbusters quarter was likely to lead to a poor reaction. Intel shares got it. The stock closed before earnings on Tuesday at 28.48, but finished the week at 27.60.

The company reported revenue for the first quarter of $12.9 billion and net income of $2.74 billion. Earnings per share were 53 cents.

Microsoft Earnings

Microsoft reported earnings on Thursday. Unlike Intel and IBM, the software giant’s earnings news did not disappoint investors. Rather, the stock rallied more than five percent on Friday.

The company reported third-quarter results (of its fiscal year) of $17.4 billion in sales and a $5.1 billion, or 60 cents per share, profit. Although 60 cents is slightly lower than last year’s 61 cents a share profit, that number included a one-time tax benefit to the company’s bottom line.

The big news out of Redmond was that personal computer sales rose last year. Many technology pundits have been forecasting a decline to the rise of personal computing devices like tablets and smartphones. That data translated into a four percent increase in Windows sales ahead of next year’s release of Windows 8, which, once again, is considered a make or break product for the company.

It wasn’t all good news. The company reported lower sales in its entertainment business, which consists primarily of its Xbox gaming system. The aging platform is reaching saturation, where pretty much anyone who wants to have a current Xbox system already has one. Since the company isn’t expected to release an update to the system in the near future, this is an area where weakness will likely continue.

EMC Earnings

EMC is the world’s largest maker of corporate data storage equipment, and the owner of VMware. It’s earnings, therefore, show specific insight into how big business technology spending is going.

The company earned 37 cents per share on revenue of $5.1 billion, an increase of 11 percent. The company attributes much of that gain to continuing demand for cloud computing. However, the company’s outlook for the future disappointed investors who dropped the stock down four percent on Friday.

eBay Earnings

On Wednesday, eBay reported quarterly revenue of $3.3 billion, and a profit of $725 million or 55 cents per share.

The company, which also owns popular payment service PayPal, foretasted similar profits for next quarter.

Unlike the others, eBay’s earnings impressed investors who pushed the stock price from a Wednesday close of $35.87 to a close on Friday of $40.29.

Tech Forecast for 2012

The outlook for technology stocks for 2012 looks mixed right now. If the economy manages to maintain its slight upward growth, it looks like the tech bellwethers will be in good position to capture the upside. However, if economic growth fizzles, it looks like customers and business will have no problem quickly retrenching and quashing tech spending for the remainder of 2012.

If you are going to be investing in tech during 2012, keep a sharp eye on the economic indicators going forward. The industry does not have the momentum to rise in the face of an overall decline in the economy for the remainder of the year.

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Tech Earnings Week originally published at Personal Finance Blog - FinanceGourmet.com

Albert Einstein once said that the most powerful force in the universe was compound interest. What most people don’t understand is that, while powerful, compound interest needs a lot of time to work.

Unfortunately, when most people start looking for financial planner, or stock broker, or just researching how to invest on their own, they start with unrealistic expectations of how rich investing can make them. The most important thing to remember is that it takes money to make money, even in investing.

If you aren’t starting with a million dollars, you won’t be making a million dollars any time soon.

How Fast Can Investing Make Me Rich?

When a lot of people start investing, they start with something like their 401k plan or other retirement plan. Usually, they contribute a small part of their paycheck each month. Over time, the money adds up nicely, but not to the extend that makes anyone excited. After saving up some money outside of a retirement account they start thinking about online trading, or investing in something that grows faster. Not to put too fine of a point on it, they want to get rich fast.

Unfortunately, that isn’t really how investing works. If you don’t already have a lot of money, investing isn’t going to make you a lot of money, no matter how well you do.

Let’s say that you have $10,000 to invest. You can risk it all and invest in the riskiest investment strategy out there. Now, let’s say that I’m the best investor in the entire world. I’m so good that I earn you 50 percent return every year, with no fees or expenses. In other words, this is completely unrealistic.

There is no one who can do this. Not Warren Buffet, not the best mutual fund, not the best hedge fund, not even Bernie Maddoff’s ponzi scheme. No one. In fact, if you start talking about a 50 percent annual return with any financial professional anywhere, they will start talking you down, because 50 percent is utterly unrealistic.

But if you could earn 50 percent return per year, how fast could investing $10,000 make you rich?

Let’s see what happens if you earn 50% on your money every year.

• Start Investing: $10,000
• After 1 year: $15,000
• After 2 years: $22,500
• After 3 years: $33,750
• After 4 years: $50,625
• After 5 years: $75,937
• After 6 years: $113,906
• After 7 years: $170,859
• After 8 years: $256,289
• After 9 years: $384,433
• After 10 years: $576,650

After a DECADE, you finally have half a million dollars.Now, at this point, compound interest really does start to work. Of course, you had to have a few hundred thousand dollars before it gets impressive, and remember we’re talking about very unrealistic returns here.

Not really what you were expecting is it?

What about the more standard 10 percent return?

How Much Can You Really Earn Investing?

There are just as many people out there who will tell you that a 10 percent annual return is unrealistic as there are who will tell you that a 10 percent annual return over time is completely realistic. It is important to remember that no matter which one it is, they are talking about average annual return, but for the sake of simplicity, how much would you have after 10 years at 10 percent?

• Starting with $10,000: $25,937
• Starting with $25,000: $65,843
• Starting with $50,000: $129,687
• Starting with $100,000: $259,374
• Starting with $250,000: $648,435

I don’t know about you, but until you get to $250K, those numbers don’t seem very impressive.

But, look what happens after 20 years:

• Starting with $10,000: $67,275
• Starting with $25,000: $168,187
• Starting with $50,000: $336,375
• Starting with $100,000: $672,750
• Starting with $250,000: $1,681875

Those numbers are a little more impressive. But, it took TWO DECADES to get there.

What it all adds up to, is that investing is slow. All of those people out there who are billionaires didn’t get rich by investing $25K or even $100K. They got rich by running companies and businesses. Even then, it usually took decades.

As far as those who got rich “by investing”, they got rich by investing millions and billions of dollars. Even Warren Buffet didn’t get rich investing his own money. He went out in the beginning and got people to invest millions of dollars with him. If he started with just $250,000, and somehow had the exact same track record, he’d have millions of dollars by now, but not billions.

When you start investing, be sure you understand the reality of expectations. Do some quick math to see how much money you would have, even if you doubled your money every year, and then realize that isn’t going to happen. But, if the 100% return numbers aren’t impressing you, you can be pretty sure that you won’t be impressed by what happens at 8 percent or even 10 percent either.

It takes a sizable starting investment to end up with a million dollars before decades have gone by. Always remember, compound interest is very powerful, but it is also very slow.

Related posts:

1. Get Rich Not So Quick in Real Estate
2. Should I Pay Off My Mortgage Instead of Investing

Get Rich Investing? originally published at Personal Finance Blog - FinanceGourmet.com

Apple (AAPL) announced that after years of building up a massive pile of cash with its record earnings that it will begin to return some of that money to shareholders. Apple will pay a quarterly dividend of $2.65 per share starting in July. It will also repurchase up to $10 billion in stock over the next three years.

So, what does this Apple announcement mean for the stock and for the company?

Apple Dividend

At first blush, Apple’s announced quarterly dividend seems very large. But, how much is Apple’s dividend? It works out to $10.60 per year. That’s higher than most companies pay out in dividends. However, remember that Apple’s stock price is much higher than most companies. The stock currently trades around $600 per share. That makes the dividend approximately 1.8 percent, which, while respectable, is nothing to write home about.

Why did Apple announce a dividend now?

There are several reasons that Apple has finally decided to start paying a quarterly dividend after refusing to do so for years. First, and foremost, is that Steve Jobs is no longer around. Apple’s iconic CEO had the street cred to tell people, “No dividend,” no matter how high the companies cash balance got without getting anything other than minor push back. Although new CEO, Tim Cook, gets to claim some of that credibility as Apple’s CEO, the truth is that he is not Steve Jobs, and the larger Apple’s cash horde got, the more people would wonder whether he was doing the right things with it.

Second, Apple’s cash pile had grown very close to the psychologically important level of $100 billion. Although there is little real world difference between $99 billion and $101 billion, there is a big difference in people’s minds. Building up a cash account of greater than $100 billion would only raise more questions about what that much money could possibly be used for and when, if, such a huge transaction (or series of transactions) occurred, would they actually be worth the price.

Finally, Apple is growing up. As THE growth company of the 21st century, Apple raced ahead of former tech superstars to become the most valuable company in the world by market capitalization. It’s hard to make the claim that growth will continue to come forever when you are already so big. By moving now, while there are no questions about Apple’s state, the company establishes a sizable dividend as the normal course of business. Waiting until growth stagnated would have sent the message that the dividend came because the company ran out of room to grow. Paying a dividend also opens the company up to investment from mutual funds and other institutional investors who require dividends to allow an investment. This means Apple no longer relies on only growth investors for its stock price.

Apple’s Share Buyback

Apple’s share repurchase announcement makes much less sense. The company’s stock trades at an all-time high, making it difficult to suggest the stock is undervalued.

I’ve questioned the size of IBM share buybacks in the past, which seem designed more to allow executives an easier time of hitting financial targets than improving shareholder value. It seems odd that Apple would need to be doing such things with everything going right. However, it is possible that the directors and executives at Apple see the writing on the wall. By announcing the share buy  back now, they avoid the scrutiny of using such share repurchases to meet those all important per-share metrics that bonuses are tied to.

Ironically, the stated reason for Apple’s buyback is the most concerning. The company says that it is repurchasing stock to avoid dilution caused by future stock grants to employees and executives. $10 billion worth of stock grants in the next three years? That seems incredibly generous.

For now, there is really no downside from an investor’s point of view. Apple shares are still priced well based on projected earnings. Also, it appears that even with the new dividends and share repurchase, Apple will still be adding to it’s reduced cash pile as new earnings and profits roll in.

Overall, this is good for Apple stock, especially if the company continues to focus on dividends and not so much on share repurchases.

Related posts:

1. Apple Stock Good Investment or Passing Fad
2. Apple Stock Price Tied to Steve Jobs

Apple Stock Paying Dividends originally published at Personal Finance Blog - FinanceGourmet.com

PIMCO is synonymous in the investing industry with bond mutual funds. More specifically, PIMCO is synonymous with Bill Gross and the PIMCO Total Return fund, which is the world’s biggest, and one of the best, bond mutual funds. However, PIMCO actually offers a full range of investment products, including equity mutual funds.

As Reuters reports, PIMCO actually managed to win the best large company equities award from the Lipper Fund Awards. I’m not sure whether to mock Reuters for repeatedly using Pimco, when everyone knows it’s PIMCO, or if there is an AP Style rule I’m missing. Either way, the bond mutual fund giant won the award last year as well, marking two straight years at the top.

Before you load all your money up into PIMCO StockPlus TotalReturn or PIMCO StockPlus Short Strategy fund, it is interesting to note that PIMCO’s funds of this nature aren’t very traditional. Rather than owning shares of publicly traded U.S. companies, these funds have a lot of investments in various derivatives and contracts. This allows PIMCO to profit from moves of a macro nature rather than being right about specific companies.

There is an advantage to this form of investing. For example, if your analysis says that the banking sector should rise, you might by shares in several major U.S. bank stocks. But, even if you are correct about the sector moving up, your gains can all be undone by one of your investments taking due to unrelated events such as a lawsuit or government action. By investing in securities and contracts that represent the overall sector, you can still be right, no matter which stocks conspire to make you look wrong.

PIMCO Total Return ETF

Although it didn’t win any awards, PIMCO does have another interesting offering called the PIMCO Total Return ETF. Like all exchange traded funds, this ETF trades like a stock that can be bought and sold anytime during the trading day. That allows investors to use stop-loss and limit orders.

Unlike ETFs tied to an index, this one is managed for “attractive risk-adjusted returns” by holding a portfolio of high grade intermediate bonds. The ETF is actively managed so it does behave like a mutual fund when it comes to returns.

The PIMCO Total Return ETF just started on March 1, 2012 and has a ticker symbol of TRXT. Should be interesting to keep an eye on this one over what promise to be at least a couple of volatile years in the markets.

Related posts:

1. PIMCO Total Return Bond Fund Cuts U.S. Government Holdings
2. Mutual Funds – Know What You Are Buying

PIMCO Equity Funds Win Again originally published at Personal Finance Blog - FinanceGourmet.com

As always, the mainstream media perked up about the stock market and investing world when the Dow Jones Industrial Average passed the made-f0r-headlines 13,000 level. The guys that write news story headlines love round numbers, maybe because everyone else does too. But, just like our infatuation with round number birthdays, such as turning 40, there is no real difference between Dow 12,956 and Dow 13,000, just like there is no real difference between being 39 and being 40 years old.

Is Dow 13,000 Meaningful?

The 13,000 number is purely psychological, but it does provide an opportunity to take a look at how the stock market and the economy are doing lately.

First, and foremost, most storied correctly noted that this is the first time the Dow has managed to gain the 13 K level since 2008. That is significant for two reasons. One, 2008 basically marks the beginning of the stock market crash caused by the bursting of the housing bubble and the subsequent financial crisis, all of which triggered what has become known as The Great Recession. Two, it means that maybe some investors should be seeing a recovery in their portfolios.

It is tempting to draw the conclusion that this means the market is back and fully recovered. However, that would be jumping the gun. While the stock market is a leading indicator, it’s pricing is currently based on pretty much everything going right in the near future. In other words, this level is precariously balanced between the Greek debt crisis lessening, the U.S. economy continuing to improve, and Washington D.C. not ruining the whole thing in a rash of election year politics.

Lost Decade Lost?

Perhaps more significant than the mental importance of a round number like 13,000 or what it means relative to 2008, is what this level is starting to represent in the bigger context.

Over the last few years, investment product marketers, particularly annuities, have made a lot of hay out of what is called, “The Lost Decade.”

The lost decade refers to the concept that if you invested some money 10 years ago, you have the same or less money than when you started. Of course, to them, the solution is an investment product with a guaranteed rate of return such as a variable annuity or equity-index annuity.

We’ll leave that discussion for another day, but let’s take a look at where we are with the recent market improvement.

The week of March 4, 2002 saw the Dow close at 10,572.49, significantly less than the market’s current 13,000 level. Now, that is hardly an eye popping return for the last 10 years, but it starts to throw cold water on that argument, particularly if the market continues to improve.

The other thing to notice is how quickly this whole thing happened. From that 13,000 of 2008 to under 7,000 in 2009 took less than a year. That scared a lot of people and many of them pulled their money out of the stock market or stopped putting money into their 401k plans or IRAs. Unfortunately, as history has shown time and again, that was exactly the wrong move.

From the 6,600 level in March, 2009 the market made a wrenching set of moves up and down shaking confidence even further. But, given the benefit of hindsight, the market essentially climbed right up from that low to over 10,000 by the beginning of 2010. 2011 started around 11,500 and now, in 2012, we are talking about 13,000.

However, there has been no “all clear.” No one says the economy is out of the woods. It is only recently that unemployment has started to come down and that other economic statistics have started to go up. In other words, if you have been waiting for things to get better or more stable before you moved back into the market, you are already too late. This is why most people never get the 10 percent historical return in the stock market. When you pull out when things are low, chances are you don’t get back in until they have already recovered.

What will the next 10 years bring? I don’t know, and neither does anyone else. What I do know is that if you maintain the proper asset allocation, rebalance  your portfolio annually, and stay invested, you’ll be richer than you are today.

Related posts:

1. 2011 Stock Market Update Q3
2. Stock Market 4th Quarter Turn Around

Dow 13,000 What Does It Mean? originally published at Personal Finance Blog - FinanceGourmet.com

Just a quick update today:

The stock markets ticked up today on a little bit more good economic news. Following recent good labor market news and the Fed holding interest rates at zero, comes statistics showing last weeks jobless claims were at a 3 1/2 year low.

Also, several large companies reported good results.

Furthermore, two regional business surveys from the Federal Reserve showed better than expected growth for December.

Finally, the general business conditions index for New York was higher again showing an increase in both new orders and hiring. That’s yet more good news for the job market.

We’ll have new articles about end of year tax strategies, financial planning for those in extreme circumstances, and more in the coming days.

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Market Up on Good Economic News originally published at Personal Finance Blog - FinanceGourmet.com

IBM must really hate the idea of paying a big dividend. Every year, it seems, IBM authorizes billions of more dollars for share buybacks while increasing its dividend by the smallest amount possible. Then, the company goes on to crow about how it has returned "… over $109 billion since 2008 to our shareholders through share repurchases and dividends."

Anyone want to guess how much went to share repurchases and how much went to dividends? If you are thinking 50/50, you aren’t even close.

As The Register points out, the share buybacks are a lot more beneficial for IBM executives hoping to keep the earnings per share, or EPS, growing at the proper rate to "earn" their bonuses than they are for shareholders looking to increase the value of their holdings.

Of course, there is nothing illegal or even unethical about IBM’s giant share buybacks, but it does raise the question, "Can’t IBM come up with anything better to spend its money on than its own stock?" If not, shouldn’t shareholders just get a check instead of the world’s biggest pile of treasury stock?

The company authorized an additional $7 billion dollars to buy its own stock this time around while authoring 75 cents per share for its dividend. In other words, the company will spend $7 billion to buy stock and $900 million paying the "owners" of the company, its shareholders.

On an annual basis, that is $3.6 billion for dividends and $7 billion to buy more of its own stock. As a shareholder, that probably isn’t the split you hope for.

Why Do Companies Buy Back Stock?

Companies buy back stock for two reasons. The first reason is that companies often award stock options to their executives and board members. That stock has to come from somewhere. By buying shares, IBM can then turn around and give those shares to its execs and board members.

The second reason to buy back your own company shares is that you believe that your company’s stock is a good value. IBM clearly ALWAYS believes its stock is a good value, since it has way more shares repurchased than it needs to pay out generous stock options.

Of course, the real reason IBM repurchases so many of its own shares is that it allows the company to massage its financials on a per share basis.

For example, if a company has 1 millions shares outstanding and earns $1 million, then it has an EPS, or earnings per share of $1.

If that same company were to buyback 100,000 shares, then there are only 900,000 shares outstanding. The same $1 million of earnings then becomes $1.11 per share. This is 10 percent growth in EPS, even if it is just an accounting trick that happens on paper.

Giant share repurchases theoretically also increase the value of the remaining shares of stock since some of the supply has been removed from the market. However, the stock market has a funny way of deciding what the right price is for a company’s stock all by itself.

It does work. IBM’s stock price has risen steadily over the past few years. How much of that rise comes from real company performance and how much of it comes from the company spending every extra penny to prop up its own stock is for its investors to decide.

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IBM Boosts Share Buyback Again originally published at Personal Finance Blog - FinanceGourmet.com

Sometimes it seems like the stock market is just messing with people. After seemingly running off of a cliff to end the third quarter of 2011, the market has recently staged a rally. Take a look at a chart for the Dow Jones Industrial Average and you’ll see a low point on October 3, 2011. It’s almost like the market wanted to make sure that your third quarter statements looked bad before any sort of upward movement.

Of course, there is a long way to go until the end of the year and pressing economic matters like the debt crisis in Europe, the joint budget cutting committee and an unemployment rate that won’t go down are still to be resolved.

For the time being, non-day trading investors should remember that short-term movements in the stock market are notoriously difficult to predict.

End of Year Portfolio Rebalancing

Many experts recommend rebalancing your long-term portfolios like retirement accounts (IRAs, 401k, and other retirement plans) once a year. Traditionally, many people do it near the end of the year. If you haven’t rebalanced your portfolio since last year, it’s a good time to start thinking about doing it soon.

Related posts:

1. 2011 Stock Market Update Q3
2. Stock Market 2011 Results

Stock Market 4th Quarter Turn Around originally published at Personal Finance Blog - FinanceGourmet.com