Stocktake

Ignore hype over Facebook flotation

HISTORY suggests investors should ignore the Facebook flotation hype.

Back in 1995, a study by finance professor Jay Ritter found stocks “significantly underperform” in the years following their flotation, with companies typically “grossly over-valued”. His recently updated version, examining the 1970-2010 period, confirms IPOs have continued to underperform.

Why? The one-day pop. Morningstar examined the seven biggest technology IPOs of the last year and found the stocks jumped by an average of 47 per cent on the first day of trading, before quickly falling back.

Data provider SigFig notes that while LinkedIn was priced at $45 when it floated last year, retail investors ended up paying an average of $98 on the first day of trading. Facebook is also very dear. Ritter’s IPO data since 1975 shows the highest price-to-sales ratio of any major company had been 8.9. Facebook’s ratio – 24 – is almost three times higher.

Fear factor a lot worse in Europe

EUROPEAN woes have hit stocks worldwide, with global indices plunging in value by roughly $3 trillion (€2.36 trillion) in May.

While US indices are oversold, the fear factor is nothing like it is in Europe. The Vix, the so-called fear indicator, has risen to just 24, not much above its historical average of 20. Between 1998 and 2002, the Vix averaged 25, while market crises typically peak with a reading in the high 40s.

By early May, the divergence between European and US volatility had hit record levels and it remains extremely wide – Europe’s VStoxx hit 36 last week, 50 per cent higher than the US gauge.

Flight from risk in May confirmed

MERRILL Lynch’s latest monthly survey of global fund managers confirms the flight from risk in May. A net 35 per cent are taking fewer than normal risks, up from 21 per cent a month earlier. A net 49 per cent believe the euro is the currency most likely to depreciate over the next year, up from 32 per cent in April, while 23 per cent of investors say global fiscal policy is “too restrictive”.

More than two-thirds now expect a “negative surprise” from Greece in 2012, up from 48 per cent in April.

Gold officially in a bear market

GOLD is often seen as a safe haven, but the current bout of risk aversion triggered declines in 11 out of 13 trading sessions. It is now in an official bear market, having fallen by more than 21 per cent from last September’s peak.

Gold also breached its 300-day moving average, which acted as support on 11 out of 12 occasions over the past decade. The World Gold Council’s quarterly report shows global demand fell 5 per cent over the last year.

Gold has not yet traded below its September and December lows, where there is technical support, notes Commerzbank commodity strategist Eugen Weinberg. Gold ETFs are not recording serious outflows, he says, indicating more speculative investors are being shaken out of their positions. George Soros appears to agree. The billionaire almost quadrupled his gold investment in the first quarter.

Short-seller silence good for Herbalife

SHARES in US nutrition firm Herbalife rose by 17 per cent last Wednesday. Why? The sound of silence. A fortnight earlier, short-seller David Einhorn asked company management some tricky questions.

Einhorn, whose hedge fund has beaten the market 13 years in a row, is famous for nailing suspect companies. Herbalife promptly tanked, losing almost $3 billion in market value.

Last week, Einhorn made a presentation at a conference. Short-selling of the stock had soared in anticipation of an Einhorn evisceration. However, he never mentioned Herbalife and the stock soared. Words can move markets, but who knew silence could prove so powerful?