Facebook and the Stock Market

For the past several weeks Facebook has been dominant in the financial press. What would be the initial price ($38), how many shares would be sold (422 M) and how high would it go the first day ($45)? Facebook was the talk of everyone who used it and therefore thought it would be a great stock to own! Often when an IPO is issued it goes up dramatically, not everyone gets to participate (meaning the small investor is left out) and it makes the early investors wealthy. So far none of these is the case with Facebook. The stock at this writing, late in the day on Friday, is back to where it started after having risen briefly in early trading. Just about everyone who wanted stock got it, including the small investor. The early birds in the IPO did not get wealthy the first day! This is also the first time in years that I had clients calling us up wanting to buy this stock. Why wouldn’t you want to own Facebook (or why would you want to own Facebook)? The dominant reason to own Facebook is that you like the product and you want to be a part of it! This is not a logical way to buy stocks; but it is not all that unusual either. When Facebook is analyzed on a fundamental basis it does not hold up. It has virtually no earnings relative to price. It was acknowledged during the filing of the IPO that the most prevalent use of Facebook is on smart phones and they have not figured out how to place advertising on this medium that will result in significant revenues. In the case of the basic system their biggest advertiser, General Motors, announced earlier this week they would no longer advertise on Facebook because it was resulting in no additional sales. The CFO of Facebook also indicated earlier in the week that a significant portion of the funds raised would go to attempting to find a way to get ad revenue on smart phones and there was no certainty of success. For now the syndicates that offered the IPO are doing their best (as they should) to support the price of the stock at its initial public offering price of $38. What will happen after the support period ends is anyone’s guess. My guess is that many individuals who wanted the stock bought it because it was a product they liked and they will keep the stock. Institutions that acquired shares did so in many cases because after the cooling off period of 60 days, Facebook will become part of the NASDAQ index. If you do any indexing you will need to own Facebook. The institutions, too, are unlikely to sell Facebook. It will be interesting to watch how Facebook does even as the S&P 500, which started the year at 1277, reached a high on April 2nd of 1419, and has now receded to 1293, or a drop of 9%, having lost almost all of the gains since the beginning of the year. We may be headed into Bear Market territory (loss of 20% from the high). Facebook has made it interesting during this past month. Anticipation can really be fun!
Ed

Trading Range Blahs!

From mid-April 2011 through October 2011, we saw the S&P 500 index decline by more than 19%. It then rebounded to reach a peak of 1419 on April 2nd, 2012. Since that time, we have seen a steady erosion of prices, demand and follow through in the market. As I am writing this, the S&P 500 stands at 1397, which is a 1.6% loss for April. The market’s day-to-day volatility makes this statistic meaningless. It’s the fundamental and technical factors gripping the market now that are more concerning. The economy is still moving forward, but at a considerably slower rate than anticipated. The rate of growth for the first quarter was expected to show a gain of 3.5% but came in at 2.2%. This is well under the fourth quarter rate in 2011. Corporate earnings have been mixed, with some big winners but many companies failing to meet earnings expectations. The good news is that consumer spending is up. The markets have been looking for help from the Federal Reserve to further stimulate the economy. It seems increasingly unlikely that the Federal Reserve will step up with any stimulus because the economy is growing, although at a slower pace. Europe’s economy is stalled, with England now in a double dip recession and Spain back in recession. On a technical basis, short term demand has expanded but long term demand is falling off. This means that a question exists about the intermediate and longer term outlook of the market’s uptrend. The increasing number of stocks selling below their 30 day moving average indicates that investor demand is now focused on fewer companies. The NYSE’s Operating Companies’ advance/decline line failed to confirm the April 2nd highs. That failure was the first divergence since March of 2009. With all of this information, it seems likely that the stock market is headed downward in the future. Although May traditionally produces the peak of the stock market, last year it happened in April. A lack of supply appears to be holding this market together. Bad news could change that in a hurry. As I stated in a previous blog, an average bull market lasts 39 months. This market will be 39 months old in June.

Looking at the Bull

Trying to determine the status of the stock market at any point in time is difficult at best. When the market continues to rise for a sustained period, we call it a “Bull” market, and when it declines for a period of time, it is considered a “Bear” market. The determining factors in most cases are the interval and rate of movement. On average most “Bull” markets last about 39 months. During a bull market, a correction of more than 10% usually occurs once. The question is whether we are still in a bull market or if it has ended, and are we now entering a new one. This is rather important because it can give us a much better idea of what to expect. The bull market that began in March of 2009 has had two corrections of more than 10% (16% and 19%). This has not happened since 1940. Two indications that the bull market had ended were noticeably absent. The April high should have been preceded by a falling advance-decline line of the NYSE Composite. It wasn’t. At that point there should also have been a persistent rise in selling pressure. Again, there wasn’t. A bear market is one defined as a drop of 20% or more from the high of the bull market. The drop from April to October of 2011 was 19.3% (close but not enough). In light of other considerations, it appears that we are 36 months into the same bull market which began in March of 2009. Because it has aged this long, events in the bull market are beginning to indicate that we are coming to the end. Two major examples are a greater selectivity of stocks being purchased, and larger stocks dominating the increase in values while small and medium stocks tend to see a deterioration in value. We are seeing both of these happening now. Looking at all of the above, it appears to me that we are coming to the end of this bull market. Ed Mallon

Inflation on the Rise?

A report released today indicated that inflation is "rising." The report seems to say that the cost of gasoline, in particular, is causing the problem. On closer examination, I wonder about the reality of the rate of inflation. At the end of last year, the annual rate of inflation was 3% for the 12 months ending in December. For the 12 months ending in January, it was 2.9%. To me, it appears that, while inflation is a potential concern, especially to the bond market, it is not out of control and will likely result in no changes to Federal Reserve policies. Still, it bears watching. Ed Mallon

FRB Action

For the past two days, the Federal Reserve Board has generated a great deal of anticipation over its next action. The Chairman of the FRB, Ben Bernanke, has indicated a willingness to be more open with the thoughts shared by the members and will give a longer-term idea of where short term interest rates will be headed. Yesterday, he gave a clear message that the FRB is planning on keeping interest rates low into 2014, and that it does not see inflation as being the problem it was in 2011. This information is important for planning on how to position fixed income investments for the future. A shift from very short term to higher paying intermediate term fixed investments is now likely, as there will be less fear of an upward shift in interest rates that would reduce the value of bonds. The result will also be likely to mean that corporations will be better able to plan capital expenditures that require financing. Both of these should benefit the economy over time. The stock market is responding favorably to this information, which will be good for corporations, business expansion and profits. Ed Mallon

2011: The Year of Going Nowhere!

2011 was a very volatile year for the stock markets. The high for the S&P 500 was 1370.58 and the low was 1074.77. That is a difference of more than 25% from high to low. This surely reminds us: buy low and sell high, not buy high and sell low. The year started out with the S&P at 1271.87 and, as I am writing this blog, it stands at about 1260, a slight reduction from the beginning of the year. If you had gone to sleep at the beginning of the year and just woke up, you’d think, “Not much happened in 2011.” For those of us who lived through it, we know this was not the case. With job creation looking better, plus consumer confidence rising, the overall economy of the U.S. looks relatively good going forward. Morningstar Inc. reported in August 2011 that since 12/31/26 thru 12/31/10 the economy had 60 up years, 12 with growth between 0% and 10%, and 48 with growth over 10%. During the same period, 24 were down years, with half of them between 0% and -10%. This appears to be one of those down years. Will 2012 be an up or a down year? I am hoping for an up year, but still am concerned about the situation in Europe. Have a Happy New Year! Ed Mallon

Santa Claus Rally

Each year we wait to see if we will have a “Santa Claus Rally” in the markets. If we have one, it’s usually an indicator that the coming year will be a good one. If we don’t get the Santa rally, the following year is usually flat or bad. Given the volatility of the current market, it is hard to tell at any one time whether we are having a rally, but let’s say Santa has shown up to lead the way into 2012! At the beginning of 2011, our expectation (as noted in “Outlook for 2011”) indicated a growth rate in GDP of 2.4% for the year and this appears to be the case. The first quarter GDP growth was 0.5%, second quarter 1.5%, third quarter 2.3% and fourth quarter is likely to be in the rage of 3+%. All in all, not too bad. Unemployment, which stood at 10% at the beginning of the year, is now down in the 8% range as we also predicted. Europe did indeed turn out badly¬¬–much worse than predicted. While the U. S. economy has been faring well, we are concerned about our national debt and the sovereign debt of European countries. The new year should be interesting, as I am sure politics will be part of the economic equation. I’d like to remind everyone that, if you are eligible to make a contribution to your IRA for 2011, do so before April 15th. On a final note for the year, I hope each of you has a happy and safe holiday and that the coming year will bring good health and happiness. Ed Mallon