Stocktake

Compiled by PRONSIAS O'MAHONY

No sympathy for Facebook investors

SOME FACEBOOK investors are suing the company following its disastrous flotation. Not only did the stock tank in its aftermath, there were severe trading hitches and allegations of questionable banking behaviour.

Still, it’s hard to sympathise. This column warned months ago that Facebook was outrageously pricey – the most expensive major IPO of the last 40 years – and such concerns were widely aired. The Wall Street Journal headlined with negative Facebook stories in the three days leading up to the IPO. “In Facebook IPO, Frenzy, Skepticism”; “GM Says Facebook Ads Don’t Pay Off”; “Facebook Insiders Boost Plans to Cash Out in IPO”.

Look at Facebook revenues: up 154 per cent from 2009 to 2010, 88 per cent from 2010 to 2011, and 45 per cent from the first quarter of 2011 to the same period in 2012. First quarter revenues fell 6 per cent in the most recent quarter. See the trend?

It’s alleged some information may have been withheld from small investors, but there was enough reason to be wary. Investors who got burned weren’t interested though – they were just looking for a first-day pop, some quick and easy money. Please, no tears.

FT headline not a contrarian signal

LAST week’s Financial Times’ headline proclaiming “the death of equities” caught contrarians’ attention. The same headline was infamously used by BusinessWeek in 1979, not long before the greatest bull market in history began, and sensational covers have a long and ignoble tradition of unwittingly calling market tops and bottoms.

Still, it’s difficult to see how the secular bear market that began in 2000 is nearing an end. Yes, European equities are cheaper than their historical average and should deliver decent long-term returns. In the US, however, the SP 500’s cyclically adjusted price-earnings ratio is roughly 25 per cent above its long-term average. Secular bull markets begin when PEs bottom out after years of undervaluation, but the SP has been above its long-term norm for almost all of the last decade.

The cyclical rally that began in March 2009 may yet have room to run, but a secular bull market is another thing. The FT headline shouldn’t be seen as another contrarian turning point.

Short-term rally on the cards

A LONG-TERM low may not have been put in but commentators are wondering if an intermediate bottom is near.

Citigroup’s Robert Buckland noted last week that the firm’s proprietary panic/euphoria model is in panic mode, something that tends to augur well for future returns.

The American Association of Individual Investors (AAII), meanwhile, recently recorded its lowest level of bullishness since August 2010, and AAII polls have historically proved to be a fine “dumb money” indicator.

Options put/call ratios denote a buy signal “that has proven profitable at every downside inflection point since 1994”, says equity strategist Jeffrey Saut.

Still, the Vix, or fear index, is nowhere near levels ordinarily seen at bottoms.

The conditions for a short-term rally may well be in place, but whether any such rally will prove to be sustainable or merely a brief technical bounce remains uncertain.

Company directors increasingly bullish

ONE CRUMB of comfort for equity bulls is the increased bullishness of company directors. The sell-to-buy ratio is currently at 1.63:1, notes the Vickers Weekly Insider Report. Lower readings are regarded as bullish, and the latest reading is well below historically average levels (between 2:1 and 2.5:1).

It’s the most bullish reading since November, just prior to a double-digit market surge. In March, not long before markets topped, the ratio got as high as 6.56:1 – its highest reading since April 2011, when the markets were about to undergo a summer swoon.