Valuing Twitter's IPO

Twitter recently announced (via a tweet) that they would be going public. While valuation is difficult in general, it is particularly problematic for an IPO. Read a good summary article here, Yahoo!.

The Dow Shuffle

While it is viewed as a major stock market barometer, the Dow Jones Industrial Average only follows 30 companies, and every so often the set of companies changes. The recent shuffle eliminated Alcoa, Bank of America, and HP, while adding Goldman Sachs, Visa, and Nike. The primary reason was the low prices of the eliminated companies. While most indexes are value weighted, the Dow is price weighted, meaning lower priced stocks exert little influence. This is also the reason why Apple will likely not be added -- with its "high" stock price. See a good summary here, Wall Street Journal. Read a good Q & A here, Yahoo! Finance.

Jumbo Mortgages and Securitization

After a home buyer secures a loan from a bank (i.e., a mortgage), the bank often securitizes the loans, which means they package them for sale to investors. This process is much easier if the loans are backed by Fannie and Freddie, the government sponsored mortgage agencies. Fannie and Freddie, however, will only back loans below certain values -- the so-called jumbo loans. This amount has generally been capped at $417,000 (although higher in certain high-cost areas). Regulators plan to lower these caps, which means jumbo loans may be harder to come by since it will be more difficult to securitize such loans. See article here, LA Times.

Preferred Stock

Preferred stock, also called perpetual stock, is considered a type of hybrid security. It has characteristics of debt, the primary of which is a fixed dividend. However, it also has similarities to equity, in that it is equity, so the dividend is not guaranteed. So, it has higher risk than comparable bonds, but less risk (and less upside) than common stock. Moreover, the price of preferred stock is primarily responsive to changes in interest rates (i.e., like a bond). See related article here, Wall Street Journal.