Stocktake: Don’t be a pig on Twitter


Investors are feverishly speculating on Twitter’s impending stock market flotation, valuations of $10-20 billion (€7.4-€14.7 billion) being bandied about.

Whatever the price, the flotation will attract the usual hordes hoping to make a quick buck. Few do so.

Prior to Facebook’s flotation last year, we noted research from flotation expert Jay Ritter, whose studies confirmed new stocks subsequently “significantly underperform”, companies tending to be “grossly over-valued”. That was the case with Facebook, which halved within months and only recently reclaimed its flotation price.

Bulls point to LinkedIn, which has gone from $45 to $250 since 2011. However, this was no easy-money trade. Priced at $45, heavy demand saw the stock open for trading at $85. Retail investors ended up paying an average of $98 on the first day, although some bought in at $120. Within weeks, LinkedIn hit $60, and did not exceed $120 until last January, 20 months later.

As they say on Wall Street, bulls and bears make money but pigs get slaughtered.

Interest in Fed’s plans not tappering off yet
Stocks soared last Wednesday after the Federal Reserve said it was not tapering its bond-buying programme. Stunned investors had priced in a September taper, with many now predicting a December date. It may well be 2014.

BNP Paribas, which predicted Ben Bernanke’s move, said the odds are “tilting toward a January or March taper”. Bernanke said asset purchases could be reduced this year.

Larry Summers has pulled out of the race to succeed Bernanke, leaving the way clear for monetary dove Janet Yellen.

There may now be “less concern about handing over a complex policy to a new regime without taking a step toward normalisation”, BNP noted.

The Fed is showing it is not looking to taper at all costs, that the risks of tightening outweigh the risks of waiting.

Of course, Bernanke has long said tapering is not equivalent to interest rate tightening, but investors drove up rates anyway.

“Tapering may not be tightening in an academic paper,” noted Citigroup, “but if it looks like tightening and smells like tightening, the Fed may have decided to act directly to offset the tightening expectations, rather than try and argue the market out of its view that tapering was tightening.”

One social network used to measure another
Talking of LinkedIn, the stock’s heady valuation brings back memories of the dotcom bubble.

Valued at $28 billion (€20 billion), it trades on 22 times revenue, 120 times projected estimates and more than 700 times trailing earnings.

Seeing the chance to cash in, it recently announced a $1.2 billion stock offering, priced at $223.

Investors were unperturbed, however.

The stock went on to rise after a hugely oversubscribed offering.

Bizarrely, LinkedIn’s valuation is being us as a template for Twitter.

It trades on 22 times sales, Facebook trades on 17 times revenues, ergo Twitter’s price should be in a similar ballpark.

The mind boggles.

Light relief in sight for gold
Gold surged last week following the Federal Reserve’s tapering guidance, providing respite for battered investors. However, seasonal trends indicate the respite may prove temporary.

October has been gold’s worst month since 1980. The weakness has been consistent . Over the past three decades, October has ranked 10th, 11th and 10th of 12 relative to other months.

Seasonal trends can be flukes, but Ned Davis Research (NDR) indicates there may be a fundamental underpinning here.

About half of gold demand still comes from jewellery, and seasonal patterns influence demand. In India, many coupes schedule their weddings around the five-day Diwali festival, which usually takes place between mid-October and mid-November. NDR found gold tends to form a tradable bottom around the start of Diwali.

This year, Diwali begins on November 3rd, when gold traders may be lying in wait.

The difficulty of looking for bargains in rising markets
Some months back, value investor Seth Klarman of the Baupost Group reportedly considered returning cash to clients unless investment opportunities arose. They haven’t and he will return some money, according to Institutional Investor’s Alpha.

This is only the second time in Baupost’s 31 years that it has returned money. It first did so in 2010, only to raise cash again in 2011. Klarman, despite typically keeping one-third of assets in cash, has netted annualised returns of 20 per cent in the past three decades.

Earlier this year, he said the Federal Reserve’s “relentless interventions” were making investing “harder than it has been at any time in our three decades of existence”. He’s not likely to be cheering the news that tapering remains some way off.