Bulls on the road & golden bears
Two contrasting thoughts this week…
2 months ago a fellow MHP blogger suggested savvy investors would do well to steer clear of Facebook as its market debut neared. With Morgan Stanley facing a subpoena for allegedly distributing a downgrade in their price target to clients immediately prior to the IPO, this appears sound advice for banks too. Either the Chinese wall was so well erected that the distribution of the research went unnoticed by the bank’s corporate financiers, or it was rendered entirely impotent by a concerted decision to publish the revised forecasts. Securities and Exchange Commission legislation is a morass of clauses and sub-clauses and not for consideration here: suffice to say, expect Morgan Stanley to have quite a reputational tussle on its hands.
So, with Morgan Stanley smarting, what of those savvy investors mentioned above? Much has been made of the inflation of a second tech bubble in recent months, as M&A and IPO activity in Silicon Valley stands firm amidst a flight of corporate capital towards balance sheet consolidation and safe assets. Facebook’s $1bn acquisition of Instagram exemplifies the TMT sector’s buccaneering image, and with the picture sharing site yet to generate revenue it is unsurprising that the deal continued to lead thoughts towards 2000 and overvalued dotcoms.
Indeed, the widely reported 13% fall in Facebook’s share price since its listing vindicates the opinion of many that the value of the shares upon flotation was optimistic, if not unrealistic. This is perhaps unsurprising given that there were 26 other banks behind the 5 bulge bracket lead advisers scrambling for the sort of fees not seen since 2006: one can imagine the target being bid inexorably upwards as the bullish Facebook circus toured its roadshow. As lead underwriter of the deal, Morgan Stanley has had to buy shares to prop up the price as investor sentiment that Facebook may not convert its users into revenue growth manifested itself in heavy selling. The continuing Eurozone conflagration is likely to propel the price lower still, as renewed fears see investors heading for German, British and UK government bonds. It is, however, an ill wind that blows no good, and hedge funds may be eyeing an opportunity to profit by shorting the stock. Should this happen, Facebook’s value would fall further and faster, echoing Groupon’s disastrous 2011 listing.
A golden umbrella to avoid the suds?
The bubble, then, seems much in evidence. Facebook plc’s tremulous start to its listed life highlights some of the malaise afflicting equities that have led to the vast appetite for gilts, treasuries, German bunds, and that stalwart of wealth storage, gold. Except that gold is losing its glow. The metal has fallen 20% from its peak of $1921 per troy oz in September, sliding into what is currently a bear market. Paradoxically, it is the very instability that encouraged the run to gold that is now largely driving the fall. Many investors have amassed such gains in their gold holdings that they are using their profits to cover losses elsewhere. To compound this spate of sales, as the Euro teeters so the dollar strengthens, buoyed by stronger economic data in the US: the greenback is becoming an attractive safe haven again, temporarily at least. However, it remains to be seen whether the possibility of further quantitative easing in the US and UK will increase gold’s lustre again as savers seek protection from inflation. More forebodingly, that teetering Euro may yet tumble, sending investors rushing back to shiny safety, so don’t sell those golden bears just yet.