by Dan Burrows | May 23, 2012 7:00 am
Facebook (NASDAQ:FB) and lead underwriter Morgan Stanley (NYSE:MS) should’ve checked the calendar. It ain’t 1999.
Lost amid the recriminations and finger-pointing over Facebook’s faceplant of an IPO is that it was simply the wrong stock at the wrong time. Flooding the market with a near-record issue of shares at an epic valuation when everyone is trading risk-off? What were they thinking?
Sure, glitches on the Nasdaq that delayed the open and left investors in the dark as to whether their trades went through must have spooked away some initial demand.
And if analysts at the underwriting investment banks really did cut estimates during the road show, as Reuters reports, well, of course that “freaked out” potential investors and damped demand, too.
Then there’s General Motors (NYSE:GM), which for some reason decided to drop a turd in Facebook’s punch bowl just days before the IPO. GM pulling its ad spend on the site because the darn things don’t work was hardly a vote of confidence in Facebook’s business model.
But have a look at the bigger picture, and an IPO of this size and kind was probably doomed to sputter. This was not the market — or heck, maybe even the era — in which to dump $16 billion in expensive new stock at a $104 billion valuation in an unproven company.
For one thing, the dumb money isn’t so dumb anymore. After being shellacked twice in little more than a decade, retail investors aren’t playing the market like it’s Powerball these days. Note that cash has flowed out of domestic stock mutual funds every month for 12 straight months, and it’s mostly going into bonds. The little guy has been burned, and he’s scared — more keen on the return of his principal than the return on his principal.
The big money is hinky, too. Surveys shows that portfolio managers remain underinvested in equities. Trading volume on the major exchanges is low, low, low, and what little does exist is driven predominantly by the machines.
Meanwhile, Greece is threatening to blow up the eurozone. Spain, the U.K., the Netherlands and a bunch of the rest of the continent are in recession. China, the engine of the global recovery, is slowing, as are emerging-market behemoths India and Brazil.
And here comes Facebook into this mess. It’s got decelerating top-line growth and a sky-high price-to-earnings ratio. It’s a risky, growth stock that decides to go public at a time when investors are scrambling like mad for safety.
Just look at the market backdrop: The Nasdaq Composite is off 8% from its most recent peak, turning positive over the last few sessions after dipping down into a technical correction. The U.S. dollar just ripped off a 14-day rally, its longest winning streak in decades. Meanwhile, the best performing sectors of the market over the last month have been the defensive ones — telecoms, utilities and consumer staples. Indeed, only telecoms are positive as a group over the trailing month.
But here’s the real kicker: When Facebook went public, we were all so wrapped up in the hype we failed to notice that the yield on the 10-year Treasury note notched an all-time low last week. In fact, the yield on the benchmark note has risen every week for nine straight weeks — the longest streak since 1998. Buy bonds!
That tells you everything you need to know about the mood of the market: It’s risk-off. And Facebook sold more than 420 million shares into this market at an initial valuation of 107 times trailing earnings.
No wonder the demand didn’t materialize: Investors are stampeding for safety. If they’re even looking at stocks, they’re probably looking at something like Verizon (NYSE:VZ). As long as the risk-off trade persists, Facebook can wait.
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