When Facebook was listed earlier this year, we suggested the stock would be trading around 1o USD before any serious investor would feel the urge to start buying. Having dropped close to 50% from the IPO price, Facebook is surely making investors nervous. The stock has speculative weak hands stuck with stocks they don’t want. Rinsing out those will take longer than many anticipate. After disappointing many last weeks, Facebook continued the free fall today. From Bloomberg.
“There were obviously some people who didn’t want to sell on the first day in anticipation that you would see some stabilization and the stock price sort of return a little bit,” saidMark Harding, an analyst at JMP Securities LLC who has a market outperform rating on the stock and doesn’t own it. “Perhaps they’re disappointed by the lack of a recovery, and maybe now they’re using the opportunity to perhaps pare back.”
But perhaps possibly much more disturbing facts regarding Facebook’s ads is this article “sotfly” suggesting the ads business could be a scam.
The cult of equity is dying. Like a once bright green aspen turning to subtle shades of yellow then red in the Colorado fall, investors’ impressions of “stocks for the long run” or any run have mellowed as well. I “tweeted” last month that the souring attitude might be a generational thing: “Boomers can’t take risk. Gen X and Y believe in Facebook but not its stock. Gen Z has no money.” True enough, but my tweetering 95-character message still didn’t answer the question as to where the love or the aspen-like green went, and why it seemed to disappear so quickly. Several generations were weaned and in fact grew wealthier believing that pieces of paper representing “shares” of future profits were something more than a conditional IOU that came with risk. Hadn’t history confirmed it? Jeremy Siegel’s rather ill-timed book affirming the equity cult, published in the late 1990s, allowed for brief cyclical bear markets, but showered scorn on any heretic willing to question the inevitability of a decade-long period of upside stock market performance compared to the alternatives. Now in 2012, however, an investor can periodically compare the return of stocks for the past 10, 20 and 30 years, and find that long-term Treasury bonds have been the higher returning and obviously “safer” investment than a diversified portfolio of equities. In turn it would show that higher risk is usually, but not always, rewarded with excess return.
As central banks continue dictating the Markets, Hussman of Hussman funds shares his views.
The enthusiasm of investors about central-bank interventions has reached a pitch that is already well-reflected in market prices, and a level of confidence that with little doubt, investors will ultimately regret. In the face of this enthusiasm, one almost wonders why nations across the world and throughout recorded history have ever had to deal with economic recessions or fluctuations in the financial markets. The current, widely-embraced message is that there is no such thing as an economic problem, and no such thing as risk. Bernanke, Draghi and other central bankers have finally figured it out, and now, as a result, economic recessions and market downturns never have to happen again. They just won’t allow it, printing more money will solve everything, and that’s all that any of us need to understand. And if it doesn’t solve everything, they can just keep doing more until it works, because there is no consequence to doing so, and all historical evidence to the contrary can finally, thankfully, be ignored. How could anyone ever have believed, at any point in history, that economics was any more complicated than that?
Unfortunately, the full force of economic history suggests a different narrative. Up to a certain point, which seems to be about 100-120% debt-to-GDP, countries can pull themselves from the brink of sovereign crisis through a combination of austerity (spending reductions), restructuring (putting insolvent financial institutions into receivership and altering the terms of unworkable private and public debt), and monetization (relief of government debt through the permanent creation of currency). Austerity generally reduces economic growth (and corporate profits) in a way that delivers less debt reduction benefit than expected, restructuring is often stimulative to growth because good new capital no longer has to subsidize old misallocations, but is politically contentious, and monetization of bad debt produces clear but often quite delayed inflationary pressures. None of these choices is simple.
With Draghi and Europe stealing the show of almost all relevant news, let’s not forget the giant China. The property market in China is undergoing rather big changes. Below is more on the subject by Patrick Chovanec.
In the preceding posts, I examined the first two out of five basic theories that might explain the latest bump in China’s property sales numbers, and whether they portend a genuine turn-around in the nation’s real estate market:
- Lower Prices are Bringing Buyers Back
- Looser Restrictions are Unleashing Pent-Up Demand
- Optimistic Buyers are Misreading the Market
- Government Intervention is Boosting the Numbers
- Developers are Fudging Numbers to Stay Afloat
Now I’ll turn my attention to the third:
3. Optimistic buyers are misreading the market.
Guest post by Marc Chandler of Marctomarket.
We have received many questions on what shadow banking really is. Here is one of the easiest explanations, courtesy Azizonomics.
Meet James. James bought a house. It cost him $150,000, of which $30,000 had come from his own savings, leaving him with a $120,000 30-year fixed-rate mortgage from the WTF Bank, with a final cost (after 30 years of interest) of $200,000. Now, up until the ’80s, a mortgage was just a mortgage. Banks would lend the funds and profit from interest as the mortgage is paid back.
Not so today. James’s $200,000 mortgage was packaged up with 1,000 other mortgages into a £180 million MBS, (mortgage backed security), and sold for an immediate gain by WTF Bank to Privet Asset Management, a hedge fund. Privet then placed this MBS with Sacks of Gold, an investment bank, in return for a $18 billion short-term collateralised (“hypothecated”) loan. Two days later Sacks of Gold faced a margin call, and so re-hypothecated this collateral for another short-term collateralised $18 billion loan with J.P. Morecocaine, another investment bank. Three weeks later, a huge stock market crash resulted in a liquidity panic, resulting in more margin calls, more forced selling, which left Privet Asset Management — who had already lost a lot of money betting stocks would go up — completely insolvent.
Guest post by Peter Tchir.
The one source of sellers that is missing, is the correlation desk. With that gone, you miss the leverage of some “less than smart” bank selling $100 million of mezz protection that turns into $1 billion of the sketchiest names out there, but the situation on bank hedging is interesting. Need to get through ECB this week, and some realistic quantification of LIBOR liebility, but CDS seems set to outperform stocks and bonds.
Is IG18 going to zero?
Probably not, but I think we could see an “eclipse” this week where IG18 trades lower than HY18. That has often been a sign of continued bullishness (though it failed in March) and I think IG could set new tights for the year.
I don’t particularly like U.S. equities here. I don’t like the ETF’s or liquid bonds. I like less liquid bonds as the liquidity premium is too high right now. I continue to think that High Yield High Beta CDS can be Highly Rewarding as we sent out on July 13th. But I’m becoming more convinced that IG CDS can perform extremely well here.
Before explaining my rationale, it is worth looking at this chart.
Could the Euro mess be saved by simply pushing CTRL ALT DELETE, rebooting the Economy and then cushioning the fall? Der Spiegel shares some of Wagenknecht’s left wing ideas.
If there is one thing that has seemed to characterize the euro crisis, it is the lack of alternatives. The common currency bailout fund, for example, had to be vastly enlarged to prevent financial markets from plunging the common currency zone into chaos. Spain had to be given billions in aid to prevent its banks from collapsing and making the situation even worse. The list of instances in which European leaders have made moves they’ve called mandatory is long.