Facebook Still Falling on Wall Street

I'm interested in economics mainly from a pschological or historical point of view, and I admit am not an investor of any kind, so from that perspective, it makes me a little proud of the prediction I made back in May when the Facebook IPO was about to be offered to the public:

In my opinion, and I'm not an economist but just an observer of human nature, this IPO may be happening just a little too late. Yes, there will be billionaires who build fortunes by selling out quickly, but some people - probably the small investors again, *sigh* - are going to lose a mint.

All my Posts about the Facebook IPO Here

What I discovered as the Facebook story unfolded was that the offering price of $38 was set way too high to begin with, and there was buyer's remorse right away due to problems with the Nasdaq (see Wall Street Journal video below). So there was a very small window of happiness with the stock which was mostly due to pre-IPO hype. Some buyers wanted to sell but were prohibited for 3 months. That period ended today and what happened ~ they sold off big time, so that Facebook's value fell to a new low.

From Reuters:

More than 270 million shares owned by early investors became available for trade on Thursday after a 3-month curb on sales ended. That's more than half the 421 million shares sold in its initial public offering on May 18.
. . . Analysts say Thursday's frenetic trading offers a taste of what may transpire in November, when many of the social network's employees get to cash in stock awards for the first time.
"An incredible amount, all the shares coming," said Steve Birenberg, president of Northlake Capital Management and portfolio manager for Entermedia Growth Partners, a hedge fund.
. . . The stock, which debuted at $38, fell as much as 7.1 percent to a all-time low of $19.69 before ending the day at $19.87.

Will employees really display a lack of brand loyalty and flood the market with shares in November? I think they probably will. None of it has played out in the market as promised, and the chance for making a killing is gone now. Most predictions for the economy are negative going into next year, so why hold a risky stock? It does worry me that it might happen close to the presidential election but that's unavoidable.

Facebook is still around and millions of people use it every day, but I still believe that it peaked a long time ago and isn't really the gold standard of social media anymore. I'll make another prediction just from my gut - Facebook will drift along sideways for the next couple of years, but probably won't rise above $25 a share again. If I'm wrong - if Facebook revamps with some fabulous new technology and becomes relevant again - I will be the first to admit that I was wrong. But I don't think I'm wrong. It might even fall lower or disappear entirely, but I won't go that far.

Wall Street: Knight of the Rogue Algorithm

Lost in the news because of the Romney Shambles tour and the London Olympics, a big thing happened on Wall Street this week - another "Flash Crash" caused by the technology that now runs the markets.

There have been several of these over the past few years, with real financial consequences including multiple lawsuits, including the Nasdaq crash the day the Facebook IPO was offered.

When Algorithms Go Bad . . .

From the New York Times

Traders on Wednesday said that a rogue algorithm repeatedly bought and sold millions of shares of companies like RadioShack, Best Buy, Bank of America and American Airlines, sending trading volume surging. While the trading firm involved blamed a “technology issue,” the company and regulators were still trying to understand what went wrong.

The debacle comes after the botched Facebook initial public offering on the Nasdaq exchange in May and the aborted effort in March by another exchange, BATS Global Markets, to bring its own stock public. The episodes, along with the flash crash of 2010 when the market lost trillions of dollars of value in minutes, have stoked suspicions that stocks are safe only for specialists, and sometimes not even for them.

“The machines have taken over, right?” said Patrick Healy, the chief executive of the Issuer Advisory Group, a capital markets consulting firm. “When events like this happen they just reaffirm that these aren’t investors, these are traders.”

The errant trades began hitting exchanges almost as soon as the opening bell rang and came from a single New Jersey broker that specializes in computer-driven trading, the Knight Capital Group. Shares of more than 100 companies, including big names like Alcoa, Citigroup and Ford suddenly spiked up or down. The New York Stock Exchange had most of the mistaken orders, but all of the nation’s exchanges executed trades for Knight and all agreed to cancel the trading in six stocks that had especially extreme movements.

Via ZDNet

Knight Capital Group this week botched a software upgrade that triggered erroneous New York Stock Exchange orders at market open Aug. 1. These orders resulted in a $440 million pre-tax loss. The problem? As of June 30, Knight had $364.8 million in cash and equivalents.
The company has until Monday night to find enough cash---via credit lines, cash infusions or an investor---to settle the trades.
In a statement, Knight Capital, which also lost $35.4 million related to the Facebook IPO in its second quarter, outlined the software glitch.

. . . Overall, about 150 stocks were affected as a wayward algorithm flooded them with buy and sell orders. Knight's software update was tied to a new NYSE trading platform.

. . . What's shocking about the Knight situation---as well as other algorithm and software issues with Wall Street systems---is that one screw-up can wipe out a company. Knight isn't some dinky player. Year-to-date Knight has traded $21.5 billion worth of stock a day on average as well as 3.3 billion trades a day.

Knight Capital called it a "technical problem," but it was way beyond that, and seemed to have no human oversight for many hours, which bothered many traders and market watchers.

From the LA Times:

. . . the debacle highlights concerns on Wall Street and in Washington about structural flaws in the U.S. financial system. Observers are worried that the reliance on computer-driven trading, where stocks are bo"ught and sold in the blink of an eye, could lead to a major equities meltdown.
"The ghosts in the machine have gotten out of control," said Larry Tabb, chief executive of Tabb Group, a financial research and advisory firm. "There are increasingly more problems and we haven't been able to get this right."

. . . Former Sen. Ted Kaufman, a vocal critic of high-frequency trading and how Wall Street has evolved, criticized Congress for denying the SEC adequate funding to do its job. He said post-"flash crash" regulations — even those that have yet to take effect — fail to address the larger structural problems on Wall Street.

What was once a duopoly of two major exchanges, the New York Stock Exchange and the Nasdaq, has evolved into more than a dozen separate trading platforms. There are also numerous "dark pools" where hedge funds and other large investors trade out of public view — what Kaufman likened to the Wild West.

"This is like a volcano that keeps sending out signals," said Kaufman, a Democrat from Delaware who is now teaching at Duke University's law school. Wall Street keeps sending out warnings like Knight's loss, he said, "and we're not doing anything about it."

Story from Forbes: Knight Unhorsed

Of course, who can forget May 18, 2012, when NASDAQ’s much heralded launch of the greatly anticipated Facebook initial public offering wound up in the toilet. After taking some time to first remove the ample amount of egg on their faces, the good folks at NASDAQ seemed to concede that they weren’t quite prepared for what many viewed as the single-most important IPO launch in that electronic market’s history. The Facebook IPO crash and burn is now attributed to some software glitches – whatever that truly means. The price of Facebook continues to drop as the talk of litigation against NASDAQ seems to rise.

As the piling-on of NASDAQ grew after the disastrous opening day, who can forget the no-holds-barred criticism of NASDAQ’s Facebook IPO performance by Knight Capital’s Chair and CEO Thomas Joyce ? It was only a few weeks ago, on May 21, 2012, when Joyce appeared on CNBC “Squawk On The Street” and slammed NASDAQ:

“First of all, I want to point out that this wasn’t in anyway, shape or form an industry failure. This is not a systemic issue. All of the financial services firms that were out there handling client flow handled it perfectly. This is not the first IPO that’s ever come down the pipe. They understand the process and handled it perfectly. The failure was Nasdaq’s. It was Nasdaq’s failure . . .
[T]his was a technology problem. This was like a server going down except on a massive scale and instead of stepping back and rebooting, they kept plowing ahead. . .

. . . It must be with some devilish joy that the folks at NASDAQ watch today’s unfolding developments as Knight itself experienced severe disruption of its ability to handle and transmit orders. A situation so severe that the company’s stock is down nearly 33%. We’re told, preliminarily, that there’s a software glitch that impacted order routing. Ah yes, the ever-popular high-tech scapegoat: the software glitch!

Economic News: Major Banks Downgraded as Stocks Fall

There is no good economic news. The only bright side is that people were too focused on the Supreme Court and the Sandusky Trial to let this bother them. *sigh* That is a sad state of affairs.
For the preoccupied, this is how it all unfolded over the past few days: Ben Bernanke, Head of the Federal Reserve, held a press conference on Wednesday in which he basically said our economy is going sideways and he's not going to do too much about it except keep the interest rates near zero. The Stock Market reacted today by going down . . . down . . . down. Then to top that off, Moodys announced late in the day that they were downgrading nearly every major bank In THE WORLD.

That can't be good.

About Bernanke, from Wall Street Journal:

During his press conference Wednesday, Federal Reserve Chairman Ben Bernanke said monetary policy had been helping the general public. In particular, borrowers are benefiting from extremely low interest rates.
. . . Policy makers hope cheap borrowing will spur businesses and consumers to finance big purchases to boost demand.
What tends to be glossed over is the flip side to the Fed’s zero-rate strategy: Savers are getting whacked. And while some portion of interest earned is left to accumulate in savings account, any loss of income is a drag on consumer spending and consumers’ sense of financial well-being.

Bernanke mainly said that the Fed would act more aggresively if things got worse, implying that the economy will certainly get worse. That was not the optimistic message that markets wanted to hear, according to Nasdaq:

"Growth in employment has slowed in recent months," the Fed said in its policy statement, adding that "household spending appears to be growing at a somewhat slower pace than earlier in the year" and that financial strains from overseas posed "significant downside risks to the economic outlook."
Investors were initially disappointed the Fed didn't take more aggressive action Wednesday. The Dow Jones Industrial Average finished the day down 12.94 points, or 0.1%, to 12824.39, after at one point dropping by nearly 100 points.

Bloomberg: Stocks Tumble Due to Global Slowdown

U.S. stocks tumbled, while commodities entered a bear market, after signals of a global slowdown in manufacturing added to disappointing housing and labor market data at the world’s largest economy.
Stocks from Hong Kong to London and Sao Paulo slumped on concern about a global slowdown. Data showed euro-area manufacturing shrank at the fastest pace in three years and a Chinese output gauge indicated contraction. More Americans than forecast filed claims for jobless benefits, manufacturing in the Philadelphia region shrank and sales of existing homes fell.
The reports came out a day after the Federal Reserve lowered its growth and employment estimates while signaling it may add to its record stimulus. The central bank yesterday extended its so-called Operation Twist program to replace short- term bonds with longer-term debt, disappointing some investors who expected more asset purchases. Former Fed Chairman Alan Greenspan today said the U.S. economy “looks very sluggish.”

Reuters: Moody's Downgrades 15 Banks

Financial markets have been bracing for the credit rating actions since February, when Moody's Investors Service said it had launched a review of 17 banks with global capital markets operations. These companies face diminished profitability and growth prospects due to difficult operating conditions, increased regulation and other factors, Moody's said.
. . . "The biggest surprise is the three-notch downgrade of Credit Suisse, which no one was looking for," said Mark Grant, managing director at Southwest Securities Inc. "In fact, it was Morgan Stanley that was supposed to be downgraded by that amount and Morgan received only two notches of cuts."
. . . Bank stocks fell on Thursday as investors prepared for an announcement, which leaked to the market as Moody's informed banks that it was coming, according to sources.
Morgan Stanley shares declined nearly 1.7 percent to $13.96 (8.94 pounds), while Bank of America shares fell nearly 4 percent to $7.82. The KBW Banks Index was down 2.3 percent.
But after suffering only a two-notch cut, instead of three as anticipated, Morgan Stanley shares rose about 3 percent in after-hours trade.

In addition to Morgan Stanley, downgraded by two notches were Barclays, BNP Paribas, Royal Bank of Canada, Citigroup, Goldman Sachs Group, JPMorgan Chase, Credit Agricole, Deutsche Bank, and UBS. Falling one notch were Bank of America, HSBC Holdings, Royal Bank of Scotland and Societe Generale.
Nomura and Macquarie were included in an original list of global banks, but have already been downgraded.

Facebook Sued - Morgan Gives Refunds - Refunds?!

Wow - things are getting more "Zucked Up" all the time!

From CNN

Facebook shareholders have filed a lawsuit against the social network, CEO Mark Zuckerberg and a number of banks, alleging that crucial information was concealed ahead of Facebook's IPO. The lawsuit, filed in the U.S. District Court in Manhattan on Wednesday morning, charges the defendants with failing to disclose in the critical days leading up to Friday's initial public offering "a severe and pronounced reduction."

Facebook defended themselves on Wednesday saying they "believe the lawsuit is without merit and will defend ourselves vigorously."

The report, and now the lawsuit, raises questions about whether Morgan Stanley, one of the underwriter companies that handled Facebook's IPO, or other banks knowingly offered certain investors privileged information that should have been made public. Other underwriters targeted by the lawsuit include Barclays Capital, Goldman Sachs, JPMorgan Chase and Merrill Lynch, a unit of Bank of America.

And Morgan Stanley Bank is adjusting prices for some investors in case they paid too much for Facebook stock! As the used-car-salesman father exclaimed in the movie Breaking Away: Refunds?!!! OMG.

WSJ Marketwatch has the story:

In a memo sent Wednesday to the nearly 17,200 financial advisers of its Morgan Stanley Smith Barney retail brokerage joint venture, the firm says "in order to ensure best execution, we expect there will be a number of price adjustments." The securities firm said, "the largest adjustments will be processed over the next several days and the remaining adjustments will be completed as quickly and as thoroughly as possible."

In the memo Wednesday, Morgan Stanley said "many of the remaining executions have been processed and are now appearing in clients' accounts," though the firm said a "very limited number of orders are pending" and it's still reviewing the appropriate action with its trading partners. Morgan Stanley didn't specify how many orders haven't been executed or how many are still pending.

Facebook Faceplant Causes Facepalm

I hate to say "I told you so," but the other day I wrote that I was underwhelmed by the Facebook IPO and thought it might fall apart quickly in spite of all the media hype and high-profile buyers such as Bono of U2.

And looks like I was right - headline after headline. I don't pretend to be an economist and have no money in the stock market and probably never will, but I think I can spot a trend. Facebook is not an up-and-coming commodity anymore. It's been around too long to have an IPO, and not everyone is as thrilled about Facebook as they were about Google.

Of course, no one out here in the 99% real world should feel sorry for these new billionaires. But there are problems with the fact that Facebook employees are stuck with the stock for many months and are barred from selling quickly while the price is still decent. And what about investment portfolios that included Facebook as a sure thing? We probably won't know until the bottom drops out.

WSJ: Facebook Slides Again

Facebook's stock was recently trading down 4.5%. The stock lost 11% on Monday as more investors and analysts began to question the size of the company's public debut, which initially valued the company at $104 billion. The company is now worth about $90 billion, based on Tuesday's stock price.

"Dreams of Riches"

Facebook Provides Cautionary Tale

"It was the casino effect a little bit here," said Steve Cordasco, a registered investment adviser with Philadelphia-based Cordasco Financial Network, which oversees about $700 million in assets. "It's good for the average investor to realize that you just don't know, that the experts just don't know."
Mr. Cordasco, who referred to Facebook's debut as a "face-plant," had advised one qualified investor who wanted to put a large amount in the stock not to buy on the first day of trading. The investor took his advice and bought Mr. Cordasco a beer on Friday as they watched Facebook lumber to its close.

 Bloomberg: Analysts Who Shunned Facebook Are Heroes

Analysts who broke away from the herd and told investors to avoid Facebook Inc. (FB), the biggest initial public offering ever by a technology company, are looking like heroes after the stock plunged.
While bulls forecast benefits as companies shift advertising to the Internet, Wieser said Facebook’s price is too high and the path to growth unclear. “There’s always a risk of buying into excessive hype, using rules of thumb for valuation that are divorced from fundamentals,” Wieser, a New York-based analyst at Pivotal, said in a telephone interview yesterday. “There are many things that really speak to the uncertainty investors should be incorporating when they’re thinking about Facebook.”

SFGATE: Facebook Hedge Funder Furious

We just got off the phone with a hedge fund manager who says his fund owns Facebook stock "in excess of a $100 million.
. . . His allegations/claims/opinions:
---->NASDAQ knew it systems were broken before the Facebook IPO, and instead of aborting the offering and facing huge embarrassment, it went ahead. Traders then lost hundreds of millions of dollars as they tried to buy and sell Facebook stock without getting confirmation that their trades had been executed.
---->NASDAQ made the problem worse on Monday. NASDAQ told traders who thought they had sold their Facebook stock on Friday – but had actually not – to fill out a form by noon. This form asked traders to list the price at which they thought they had sold their stock and they price at which they actually had. Problem was: Many of these traders had not yet actually sold their stock. Because the form required an actual selling price, many did, dumping tens of millions of shares of Facebook stock on the market, and sending the stock price plummeting.

The Facebook IPO ~ Boom or Bust?

Label me underwhelmed by all the hype surrounding the Facebook IPO which started trading Friday on the Nasdaq. Built up into the Holy Grail of IPOs by the media analyists, they had to back-peddle by Friday afternoon when the stock didn't live to expectations. Duh - even a lay-person like me could have predicted that. Sure, investors still made billions, but as we see with Morgan Stanley, wax on, wax off - they can turn around and lose billions, too. And the only reason the price stayed above $38 a share was that the "underwriters" (banks) propped them up by buying their own product. So the whole thing feels rather shaky, and I wonder how strong the selling will be on Monday?
From Wall Street Journal:

The stock had been widely predicted to soar on its first day. Instead, up until the closing moments of the trading session, Facebook's underwriters battled to keep the stock from slipping below its offering price of $38 a share. Such a stumble would have been a significant embarrassment, particularly for a prominent new issue like Facebook, the most heavily traded IPO of all time.
In the end, the bankers succeeded. When trading on Nasdaq ended at 4 p.m., the social network's stock was up just a hair, 0.6%, at $38.23. . . .
Facebook's price began falling almost immediately after shares began trading. It is unclear exactly when Morgan Stanley stepped in, but traders said that the price movements throughout the day, with the shares occasionally touching the IPO price but never crossing below it, suggested the firm was active throughout much of the session.

David Callahan of Demos points out in the following video that while Facebook is generating lots of money, it is not generating lots of jobs. The wealth from the FB IPO is going to be held by the 1% and not spread around to the 99%. Yes, the Henry Ford assembly-line days are gone, as Maria Bartiromo squeaks with mock-outrage, but that doesn't change the fact that billionaires could find ways to spread the wealth around more effectively (if they cared, and there's no evidence that Zuckerberg cares about society at all).

Visit msnbc.com for breaking news, world news, and news about the economy

I guess I'm cynical, but I see the IPO moment as the beginning of the end for FB. Rumor is that eventually Zuckerberg wants to charge people for business related pages and "extra security" that is sadly lacking now. As Netflix ticked off loyal users, so does Facebook, which touts security then nags people in a creepy way to share everything from phone numbers to geographical location. Zuckerberg apparently just wants to data-mine the world and then sell the details of our lives to the highest bidder. Plus, everyone knows that employers, schools, and even the police are using FB as a way to spy on people or play gotcha, so people constantly try to decide whether to keep pages open or close them down, and it's really not worth it.


In my opinion, and I'm not an economist but just an observer of human nature, this IPO may be happening just a little too late. Yes, there will be billionaires who build fortunes by selling out quickly, but some people - probably the small investors again, *sigh* - are going to lose a mint.

Talking Points Memo caught the Roller Coaster Feeling on Friday

JP Morgan Fall-Out Continues

WSJ: Inside JP Morgan's Blunder

On April 30, associates who were gathered in a conference room handed Mr. Dimon summaries and analyses of the losses. But there were no details about the trades themselves. "I want to see the positions!" he barked, throwing down the papers, according to attendees. "Now! I want to see everything!"
When Mr. Dimon saw the numbers, these people say, he couldn't breathe.
. . .Mr. Dimon publicly disclosed the losses in a conference call on May 10. Afterward, he told Mr. Lee: "Maybe I can sleep tonight," according to a person familiar with the conversation.
At home with his wife that evening, he confided to her: "I missed something bad."

Reuters: FBI to Probe Morgan Scandal

A separate source familiar with the FBI probe, opened by the agency's New York office, described it as preliminary. The probe was seen in some quarters as a necessary public step, given the ongoing debate in Washington about bank regulation, and one expert said it raised the level of concern around what happened.
"The FBI looks for evidence of crimes and goes after people who it alleges are criminals. They want to send people to jail. The SEC pursues all sorts of wrongdoing, imposes fines and is half as scary as the FBI," said Erik Gordon, a professor in the law and business schools at the University of Michigan.
The bank's trading losses have also drawn the attention of the U.S. Securities and Exchange Commission and the Federal Reserve, both of which have opened inquiries.

Bloomberg: Republican Lawmakers Off-Balance over Morgan

Some are seeking investigations, with Senator Mike Crapo of Wyoming among those calling on JP Morgan Chairman and Chief Executive Officer Jamie Dimon to testify, which he has agreed to do. Senator Richard Shelby, the Banking Committee’s top Republican, said the loss emphasizes the need for capital standards for banks tougher than what the overhaul requires. Senator Lamar Alexander of Tennessee says Congress has no business getting involved.
...As Republican lawmakers split over their response to the JPMorgan loss, Democrats are unified on their message: that the trading loss underscores the need for tougher regulation of banks.
“It’s one of those things that’s clear that they were betting like you would do at the crap table in Las Vegas and they bet the wrong way,” Senate Majority Leader Harry Reid, a Nevada Democrat, said of the company’s loss this week. “That’s fine if they did it with their own money, but the problem is, the way Wall Street’s been working, is that heads they win, tails we lose.”

CNN: Dimon Will Testify to Senate

The Senate Banking Committee on Monday announced hearings to look into the trading losses from a regulatory angle. At the time, lawmakers said they planned to question regulators, not JPMorgan officials.
But on Thursday, Johnson announced he intended to invite Dimon to speak some time after the two hearings with regulators, which are scheduled for May 22 and June 6. A Banking Committee spokesman said the hearing at which Dimon will testify has not yet been scheduled.
"I encourage all of my colleagues on the Banking Committee to participate in these three critically important and timely hearings, so we can all better understand the facts," Johnson said.

CNBC: Size Matters in a Low Rate World

...there is one aspect which does not surprise rivals, instead generating a weary sigh of recognition: The investment dilemma JPMorgan found itself in in recent years. Notably, it seems one key reason why the CIO office was engaging in funky derivatives trades was that the wider climate made it so difficult for any firm to produce safe returns without taking outlandish bets. And doing this in a “hedged” way has become doubly difficult if you are a behemoth with $360 billion of cash.
Part of the problem lies with the ultra-low interest rate climate. This week the 10-year Treasury yield fell yet again, as the euro zone’s woes intensified.