Facebook Strikes A Discordant Note

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The big news today was Facebook’s tremendously hyped initial public offering.  It did not turn out as the underwriters had hoped.  First, NASDAQ could not open the stock at its scheduled 11AM first trade, which finally came about a half-hour later.  Large numbers of investors then could not get trade confirmations and did not know throughout the day whether they had purchased the stock or at what price.  While Facebook’s 573 million share trading volume was extremely active, the exchanges have dealt with greater volume than that in the past.

The stock came to market at $38 per share.  The first reported trade was at 42.05, about a 10% premium.  Twenty minutes later the stock had given up that gain and for another seven minutes it traded at or just above the 38 offering price.  The underwriters were forced to commit large amounts of capital to keep the stock from breaking below 38.  A second wave of buying pushed the price back to 42 in the early afternoon.  When it became apparent that the stock could not break through the morning highs, holders who were simply in it for the hoped-for initial pop began to bail out.  The price again fell back to 38 and traded there or a penny or two higher throughout the day’s last half-hour until a twenty-cent bounce in the final few minutes.  By the end of the day it appears that the underwriters had committed well over $1 billion to prevent Facebook from suffering an embarrassing drop below its offering price on its initial day as a public company.

In an environment in which stock market trading volume has fallen badly, Wall Street has been counting on an increase in investment banking to provide profits.  Today’s experience was an unexpected black eye, since most believed that at least Facebook would meet a friendly reception, even with a dearth of additional high quality product waiting to come to market.  Today’s reception will certainly give pause to others considering initial public offerings.

The weak general market action of the past three weeks also dampened the mood before the expected Facebook party.  Major indexes have dropped from 7% to 10% from their recent highs, and this week saw unrelenting pressure pushing prices down all five days.  Considerable technical damage was done, as expected support levels were broken.  Markets have continued their descent despite being considerably oversold on a short-term basis.

International news remains dreadful, and major international stock markets are universally down over the past twelve months, including our own.  Most distressing is that China, the supposed growth engine of the world, has seen its stock market decline to a point below where it was one, two, three, four and five years ago.  Something is clearly wrong.

Hope endures that central banks will again come to the rescue of the world’s equity markets.  Obviously, recent central bank largesse has had a limited effective life in the Eurozone.  Our Federal Reserve has very successfully kick-started stumbling equity prices over the past three years, but the law of diminishing returns appears to have set in.  The Fed’s recently expressed willingness to again provide rescue money has met with a noticeable lack of enthusiasm.  Should they continue Operation Twist or initiate QE3 and the markets not respond, what might governments do next?

At the very least, today’s market response to Facebook’s IPO should suggest that the public’s willingness to believe that government support will trump crumbling fundamentals may be waning.