MarketView for May 18

Summary 

 

The major equity indexes were lower again on Friday after a sloppy debut by Facebook soured expectations that a spectacular open for the most-anticipated stock sale in years would brighten the mood in what has been a gloomy month for equity markets. Nonetheless, shares of Facebook were volatile in the busiest day ever for a trading debut. After early gains of more than 10 percent, Facebook shares fell back to the $38 issue price, ending up just 0.6 percent at $38.23. However, it was still the Nasdaq's most actively traded stock with more than 566 million shares traded.

 

After delays in the scheduled start of Facebook trading raised anxiety levels among traders and onlookers outside Nasdaq's headquarters, the stock opened at $42.05, compared with an initial public offering price of $38 a share. It rose as high as $45 before pulling back.

 

Investors were left in the dark about whether their buy and sell orders on Facebook went through as the Nasdaq did not tell broker/dealers whether opening trades had been executed. Nasdaq did not disseminate execution data until 1:50 p.m.

 

The S&P 500 fell for a sixth straight day and recorded its worst week since November on growing concerns that global growth will suffer from the euro zone's problems and signs of a slowing U.S. recovery.

 

Down 7.3 percent so far in May, the S&P 500 index is now below 1,300, seen as a key support level, for the first time since mid-January. One key reason is that much of the Street is remains cautious as leaders of the Group of Eight nations meet to discuss the euro zone debt crisis. The leaders of the world's major industrial economies convene near Washington this weekend. They will confront the continuing crisis in the euro zone, including the increasing likelihood of a Greek departure from the bloc.

 

For the week, the Dow has chalked up a loss of 3.5 percent, the S&P 500 4.3 percent and the Nasdaq 5.3 percent.

 

Shares of companies in the online social media sphere also fell. LinkedIn was down 5.7 percent to close at $99.02 and Groupon was down6.7 percent to close at $11.70. Zynga slid 13.4 percent to $7.16 after being halted twice during the session.

 

Shares of biotech companies also stumbled, weighed down by a 10.9 percent drop in Sequenom to $4.25 after the company said insurer Coventry Health Care terminated an agreement to provide coverage for a prenatal test for Down syndrome.

 

Shares of Foot Locker rose 8.3 percent to $30.33 after the athletic footwear retailer posted higher-than-expected quarterly results.

 

Winnebago was up 1.8 percent to $8.66 after receiving an unsolicited buyout offer from North Street Capital LP, the investment firm of racing car enthusiast Alex Mascioli, valuing Winnebago at $321.5 million.

 

Volume was heavy with about 8.8 billion shares changing hands on the three major equity exchanges, a number that was well above the daily average of 6.83 billion shares.

 

Facebook IPO Sloppy

 

For a company that is dramatically upending business strategies and social relationships around the world, Facebook had a surprisingly modest debut on the Nasdaq on Friday as a sky-high valuation and trading glitches capped the stock's rise. In late trading, Facebook shares were only a few cents above the company's initial public offering price of $38, after opening 11 percent higher, rapidly heading south to touch their initial price and then rebounding by several dollars.

 

Facebook had priced its IPO at the top end of its target range and increased the size of the offering, becoming the first domestic company to go public with a valuation greater than $100 billion.

 

Facebook founder and Chief Executive Mark Zuckerberg, 28, who retains voting control of the company and whose personal net worth is now about $20 billion, marked the moment at the company's Silicon Valley campus by symbolically ringing the opening bell for stock trading on Friday morning.

 

Wearing his trademark black hoodie, Zuckerberg hugged and high-fived Sheryl Sandberg, Facebook's chief operating officer, who is credited with bringing crucial business discipline to a company founded in a Harvard dorm room eight years ago.

 

The area outside Facebook's offices was packed with throngs of photographers, more than a dozen television trucks, and a TV news helicopter hovering overhead.

 

Outside of Nasdaq headquarters in New York, crowds also gathered, even as exchange officials struggled to sort out technical problems related to the huge volume of orders, which delayed the start of trading in the stock by 45 minutes and left investors guessing for more than two hours about whether their buy and sell orders had actually been executed. Facebook set a new trading volume record for market debuts, with over 515 million shares changing hands.

 

Assuming the underwriters exercise a greenshoe option as expected, Facebook's IPO is set to raise $18 billion, the second-largest amount in U.S. history, and by far the largest ever for a U.S. Internet company. The shares attracted interest from investors of all stripes, reflecting the social network's extraordinary growth and deep store of information about its 900 million users.

 

The IPO minted thousands of new paper millionaires among Facebook's 3,500 employees -- and a handful of billionaires among its founders and early investors.

 

But the stock debut took place in a weak market, and traders said the smaller-than-expected first-day pop reflected the very aggressive pricing of the offering and a last-minute, near 25 percent increase in the number of shares being sold. Predictions of first-day gains had ranged from 10 percent to 50 percent.

 

Market participants said that in the final run-up to the IPO, much of the demand was from retail investors rather than institutions. When the stock fell to $38 on Friday morning, traders say the IPO's lead underwriter Morgan Stanley stepped in to prevent the price from slipping below the IPO level.

 

From Facebook's perspective, a small increase in the stock shows it was priced perfectly for Zuckerberg and early investors, who pocketed maximum gains and left little of the easy money on the table.

 

Facebook faces many challenges as it takes its place beside Google, Apple and Amazon.com Inc as one of the giant public companies defining the next-generation Internet economy. Google in particular views Facebook as a mortal threat and is moving aggressively to integrate social networking features across its products.

 

At the same time, scores of young companies are building new products and services, in some cases on top of the Facebook platform and in some cases in competition with it, and attracting huge amounts of investment capital.

 

A handful of such so-called Web 2.0 companies, including Zynga Inc, LinkedIn Corp, Yelp Inc and Groupon Inc, have already gone public, and others have been acquired by the industry giants.

 

In a sign of the volatile nature of highly valued Internet stocks, all these shares fell on Friday in sympathy with Facebook's weaker-than-expected debut. In particular, social gaming company Zynga, which relies on heavily on Facebook and also provides more than 10 percent of Facebook's revenues, fell by more than 14 percent.

 

In an indication of the land grab now under way in the Internet world, Facebook in April acquired Instagram, a tiny photo-sharing company with lots of users but no revenue, for $1 billion. A Facebook rival, social scrap-booking site Pinterest, raised money earlier this week at a valuation of $1.5 billion in a sign that venture capitalists and other private investors still see enormous potential in Web 2.0 companies.

 

Facebook's formidable assets include 900 million users around the world, many of whom spend hours a day on the site and share enormous amounts of personal information. That in turn enables Facebook to target its advertising to peoples' specific interests, and many analysts believe the huge store of personal information gives Facebook an advantage that Google and other cannot match.

 

Facebook posted $3.7 billion in revenue in 2011 and $1 billion in profit. Analysts say the company has untapped opportunities in mobile computing, and potentially other Internet services such as email and search. Zuckerberg, though unproven as a public company CEO, is widely admired as a product visionary who has done a masterful job in continually improving the Facebook experience.

 

Skeptics, though, note that only a small percentage of Facebook users respond to advertising on the site. Google retains a big advantage in that regard, because advertising related to specific Internet searches is by nature far more relevant and thus more valuable.

 

In a sign of the challenges ahead for Facebook, the nation's third-largest advertiser, General Motors, said last week that it was canceling its paid advertising on the site. However, in Silicon Valley the conventional wisdom is that Facebook and its social media brethren will be an increasingly important force in the business world for many years to come.

 

Already, the influx of wealth arising from Facebook's extraordinary growth has helped drive a mini-boom in San Francisco Bay Area real estate, and income tax revenues related to the IPO will cut the state of California's budget deficit by an estimated $2 billion.

 

EU Preparing for the Worst

 

European officials are working on contingency plans in case Greece bombs out of the euro zone, the EU's trade commissioner said on Friday, as European share prices tumbled and Germany warned of continuing financial turmoil.

 

German Finance Minister Wolfgang Schaeuble, one of Greece's harsher critics, said market unrest fuelled by the euro zone debt crisis could last another year or two. "Regarding the crisis of confidence in the euro ... in 12 to 24 months we will see a calming of the financial markets," he said.

 

Germany seemed to be increasing pressure on Athens when Greece's government spokesman said that Chancellor Angela Merkel raised the idea of Greece holding a referendum on its eurozone membership -- something Berlin promptly denied.

 

European shares hit their lowest level since December, depressed by the prospect of a Greek euro exit spreading a wave of contagion in the currency bloc which could engulf much larger economies such as Spain's.

 

Policymakers insist they want Greece to remain in the euro zone but European Union trade commissioner Karel De Gucht said the European Commission and the European Central Bank were working on scenarios in case it has to leave.

 

"A year and a half ago there maybe was a risk of a domino effect," De Gucht told Belgium's Dutch-language newspaper De Standaard.

 

"But today there are in the European Central Bank, as well as in the Commission, services working on emergency scenarios if Greece shouldn't make it. A Greek exit does not mean the end of the euro, as some claim."

 

Speculation about such planning has been rife, but de Gucht's comments, which were confirmed, appeared to be the first time an EU official has acknowledged the existence of contingencies being drawn up.

 

A German finance ministry spokeswoman, asked about plans for a possible Greek exit, said without elaborating: "The German government naturally has the responsibility to its citizens to be prepared for any eventuality."

 

Confusion increased when Greek government spokesman Dimitris Tsiodras said that Merkel raised with the Greek president the idea of Greece holding a referendum on its euro zone membership next month, together with national elections.

 

Tsiodras's statements evoked memories of a bitter row between Athens and the EU last year, when Greece's then Prime Minister George Papandreou proposed a referendum on the country's bailout deal -- an idea the EU vehemently rejected, helping accelerate the downfall of Papandreou's government.

 

World shares slid and German borrowing costs hit record lows as uncertainty about Greece's future in the euro zone and a deepening Spanish banking crisis bolstered safe-haven assets. Investors were rattled by a ratings downgrade of 16 Spanish banks by Moody's Investors Service, although the move had been expected.

 

Sentiment has soured to such an extent that an opinion poll showing Greeks are returning to establishment parties which support the country's bailout had little impact. If they vote that way in June 17 elections, Greece's place in the euro zone would look more secure and the threat of contagion to countries such as Spain would diminish.

 

The poll, the first conducted since talks to form a government collapsed and a new election was called, showed the conservative New Democracy party in first place, several points ahead of the radical leftist SYRIZA which has pledged to tear up its 130 billion euro bailout program.

 

"It's up to Greek politicians to explain the reality to their people and not make false promises," Schaeuble told France's Europe 1 radio. "We want Greece to stay in the euro but meet its commitments and that's a decision that's up to the Greeks."

 

The greatest fear for European leaders is that a Greek meltdown, which would surely follow the stoppage of its bailout funds, triggers a domino effect among the currency bloc's weaker members. Even aside from the contagion threat, they have huge problems of their own.

 

Spanish banks' bad loans rose in March to their highest level in 18 years, figures from the Bank of Spain showed on Friday, underscoring the problems facing the government as it attempts to clean up the sector. The Bank of Spain said bad loans rose to 8.37 percent of the banks' outstanding loans, the highest since August 1994 and up from 8.3 percent in February.

 

Banks beset by bad property loans which could deteriorate further, along with overspending in indebted regions, are the two largest risks for Spain's public finances. Investors believe Spain needs to aggressively address these two issues to avoid a bailout and pushed Spanish borrowing costs to euro-era highs this week.

 

The fact the euro zone crisis is moving back into an acute phase will place it center stage at a weekend summit of leaders of the G8 top industrialized nations. President Barack Obama, the G8 host, has urged European leaders repeatedly to do more to stimulate growth, fearing contagion from the euro crisis that could hurt the U.S. economy and his chances of re-election in November.

 

New French President Francois Hollande is pressing for measures to boost growth rather than cut debt, Britain's David Cameron has become increasingly vocal in demanding Europe acts more decisively, Canada's Stephen Harper has been a frequent critic, and of the euro zone G8 members, Italian premier Mario Monti was calling for pro-growth policies before Hollande was.

 

That could leave Germany's Angela Merkel, who insists debt-cutting programs cannot be diluted, cutting a lonely figure.