by Rick Ackerman and Elliott Morss
Rick Ackerman argues the bull run has ended and Elliott Morss gives some analysis he says indicates that is not necessarily so. Ackerman says the final straw for the three-year bull market is the behavior of the Facebook IPO, a possible moonshot rocket that failed even to get into orbit. He feels investor sentiment has changed.
Elliott Morss looks at slowly but steadily improving factors in the U.S. economy and feels the economic fundamentals still support the market. Morss feels the recent pullback is not headed for a bear market and the market should soon recover from an oversold correction.
Facebook’s IPO Plot Marks a Death Knell
by Rick Ackerman, Rick’s Picks
Observing Facebook’s price action on its IPO day (Thursday, 17 May 2012), one might have thought that fear, greed and stupidity had taken the day off. How could the over-hyped, socko-boffo stock of the year – of the decade – have failed to double within minutes of the opening bell? In fact, pumped to a $38 initial-offering price, FB shares achieved only a pathetic $45 on the opening bar before slithering back to $38 by day’s end. Even more dispiriting to those on the retail end of Thursday’s relatively unfrenzied buying was that, on day two, the stock collapsed to $33 in the early minutes of the session, there to languish for six grueling, armpit-staining hours. Retail suckers…er, buyers were bound to have been disappointed, and some, more than a little churlish about it, labeled the IPO a flop. Had the guys on Sand Hill road and their sleazy confederates on the Wall Street Midway simply overpriced the stock, as some suggested? Or was GM perhaps to blame for pulling its advertising from Facebook days before the Big Event because of poor results? Some observers even speculated that investors had finally wised up to the fact that companies with relatively modest revenues deserve relatively modest earnings multiples.
That last notion, that investors have finally wised up, is so absolutely outlandish that we were impelled to seek a better explanation. Since when has a price/earnings multiple of 108 ever deterred buyers salivating with greed from the certitude that a greater fool would take them out of the stock at even richer prices?
Why No Moon Shot?
Our take is that speculators failed to achieve the expected moon shot, not because they were at long last thinking rationally about the IPO market in general, and Facebook in particular, but because they were weighed down almost to the point of suffocation by a stock market in its sixth straight day of decline — and very possibly in the nascent stage of a bear market. If, as they say, timing is everything, then Facebook and all of the hucksters who reaped huge profits at the expense of retail buyers simply picked the wrong day. This could haunt them for years to come, since the skepticism evinced by the IPO is bound to mutate into lingering doubts about Facebook’s revenue model. Indeed, one might ask, how will the company ramp up advertising aggressively, exploiting a reported 900 billion pairs of eyeballs, without becoming an increasing annoyance to subscribers? More immediately, though, the fact that the IPO laid an egg is going to invite intensive scrutiny of the company’s quarterly earnings. It will come on the heels of an SEC filing by Facebook that said revenues and user growth are actually slowing. Considering all the hoopla and hubris that attended the public offering, it already feels like it’s destined to become the bell that rang to signal the end of the Mother of All Bear Rallies begun on Wall Street a little more than three years ago.
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The Current US Stock Market Collapse Makes No Sense
by Elliott Morss
Panic is more often than not ill-founded, based on an incorrect assessment of the future. The current malaise causing the S&P 500 to lose more than 9% since the beginning of April is a case in point.
Virtually every indicator suggests the US economy is recovering. Slowly, yes, and hirings are lagging, and the real estate cycle has not turned up. But still, there is progress.
We read daily about the Euro crisis and hear talk of contagion. Contagion is a scary word. What does it mean in the context of the Eurozone? Ever since questions were raised about Euro sovereign debt, I have said things are going to get a lot worse before they get better. I believe that before it is all over, Greece, Italy, Portugal and Spain will not be in a “zone” with Germany, the Netherlands, and Austria.
In what follows, I will look closely at these two areas of concern.
The US Economy
Table 1 provides data on US economic conditions. The US still has a large inventory of real estate to work off. Nevertheless, housing starts continue to trend upwards. Vehicle sales are up as are other retails sales, albeit slowly. Capacity utilization is about as high as it gets.
For the two ISM indicators, anything over 50% signifies growth, and they are both more than 50%. And finally, both the leading indicators and corporate profits are up.
But employment is only recovering slowly, a common occurrence coming out of a recession. Recognize that since March 2010, the US private sector has added 3.4 million jobs. That sounds pretty good, but we need another 3 million+ jobs to get back to full employment. And while the private sector is generating jobs, “austerity” has resulted in the loss of 459,000 government jobs, with most job losses coming from local governments. Not only is employment coming back slowly, but wages continue under pressure as US labor adjusts to be competitive globally.
What does this all mean? The US recovery has some momentum. It is coming back. Not very rapidly, and certain sectors, such as construction, have a long way to go. A sustained, albeit slow, recovery will continue.
The Euro Crisis
There is fear/panic here because nobody knows what will happen. I expect the worst – bank failures, higher unemployment, political uprisings and more riots in the streets. How can this all affect the US economy? We hear a lot about contagion – a scary sounding term. What does contagion mean in this context? Two things:
- Banking problems in Europe are not contained and spread to US banks, prompting the need for yet another bailout. The Fed can do this on its own by guaranteeing whatever foolish loans/investments the banks made. No need for Congress to get involved. With the recent practice the Fed has had, it can be expected to do a better job second time round.
- Slower growth in Euro-zone countries will reduce the demand for US products. But on this score, things just got much better. As evidenced by the recent G-8 meetings, there is growing support for the notion that growth rather than austerity will be the vehicle for solving the Euro-crisis. This is good news, just the opposite of what the strong Euro nations have been forcing on its weaker sisters. If such policies are enacted, Euro growth will be higher than it is currently projected to be. But on the concern that slower Euro-growth will reduce demand for US products, consider this: in 2010, about 10% of US exports go to Eurozone countries. That constitutes 1.2% of US GDP. A small downtick in that amount won’t matter much. For example, suppose the Euro demand for US goods falls by 1%. That would reduce US GDP by .012%. Globally, Euro imports are 6% of global GDP. So they slow down by 1%? The global economy will survive.
Conclusions and Investment Implications
I believe the fear gripping stock markets is due to unknowns. When I look carefully at the unknowns, I see the markets as oversold. Sure, the US recovery is fragile, but it is moving in the right direction. The Eurozone? A real disaster in the making. But contagion fears are way overblown.
Am I so sure of my conclusions to take just any investments chances? No, I am selective. I look for 4 to 6% returns in emerging market countries – WisdomTree Emerging Markets Local Debt (NYSE:ELD) and TCW Emerging Markets Income I (TGEIX). I also figure the US real estate market will recover sometime in the future, so a 4% return for now is reasonable – Fidelity Real Estate Income (FRIFX). And I recently added to my Brookfield Asset Management Inc. (NYSE:BAM) position.
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