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.

Joe Biden's Moving Speech to Military Families

 

The picture above is from Chattanooga National Cemetery, where my father and mother are buried. My father was a WWII disabled veteran who served in France, Italy, Germany and Austria. He had shrapnel in his leg for which he received a purple heart, but he also contracted multiple sclerosis while training for Pacific duty at Fort Lewis. None of that made life easy for him, but if not for the military my parents would never have met.

Daddy was from Tennessee, Mama was from Kansas. They met when my father was stationed at Fort Dix and ended up on a weekend pass in Abilene. My mother, who had just graduated from high school, worked for the telephone company and it just happened to be their turn to serve coffee and doughnuts for the USO. She was a shy introvert and unsure what to do, so someone pointed to my father who was sitting looking very homesick, sunburned and sad. To her surprise, when she offered him some coffee, he looked up and gave her a dazzling smile and started talking like the extrovert he was. My mother told me she had never met anyone like him. When they got married, the Abilene newspaper called him a "hometown boy" - that's how my father could win people over. After the War, they made a life together in Tennessee, with six children and many grandchildren and great-grandchildren. I miss them both every day, but especially on Memorial Day.

My father was a lifelong Roosevelt Democrat, and so was my mother. I once asked my mother if she voted for Eisenhower in the 50s since he was from the same hometown, and she shook her head adamently - "No," she said, "We voted for Adelaide Stevenson, who was a great man." My father never thought Eisenhower did enough for the military veterans who fought under him, and knew it wasn't an accident that suddenly his military medical pension went through as soon as Kennedy was elected into office. Both my parents despised Nixon and Reagan and saw them as power-hungry because they ran for office so many times. I can only imagine what they would say about Mitt Romney! I think they would be amazed that Obama ever got elected, and I know they would be ready to vote for him again in November.

Their influence on my life is immeasurable. They were survivors of the Great Depression, World War II, and years of raising a large family on the shoestring of Veteran's benefits. But they knew what really mattered, and I like to think they would approve of this blog and the message I'm trying to send to the world. Like them, I don't intend to give up on anything I believe in to please anyone else.

This weekend we have an incredible gift - the speech of Vice President Joe Biden to the 18th Annual TAPPS National Military Survivor Seminar. I think this speech is one of the most moving testaments to the American people and to the American military we will ever have, because he made his own grief personal and shared it with the country. God Bless Him! Did I mention that my father's name was also Joe?

Economics Round-Up ~ The London Whale

Forbes: How JP Morgan Lost $17.5 million

According to the May 12th New York Times, JPMorgan decided to make a bet on a very obscure corner of the derivatives market. And due to the scale of JPMorgan’s trading, hedge funds figured out its identity and placed bets against the bank that are continuing to make profits for them at JPMorgan’s expense.

NPR Interview with Wall Street Journal's Zuckerman: Bruno Iskil Bears Some Blame for Morgan's Fall

GREGORY ZUCKERMAN:His name is Bruno Iksil. He's an interesting guy. He lives in Paris, but he commutes to London. Wears a lot of black. Informal dresser. He comes home, (unintelligible) from his home in Paris on Fridays, the rest of the week is in London. And he is one of a group - it's a group called the CIO group, and frankly, when I started reporting on this, analysts and investors didn't really know much about this group. And the more I uncovered it the more fascinating it became. They're a group that ostensibly hedges the positions of the banks. So the bank does all these loans and other kinds of things, and the group is charged with protecting and hedging the bank by doing various trades. But it also is charged with making money. So it does things that can potentially be risky at the same time.

New Statesman: JP Morgan Hedge-Bet Unbelievably Ineffective

The bank JPMorgan announced last night that it had lost $2bn in trading on credit derivitives, through what chief executive Jamie Dimon called "errors, sloppiness, and bad judgment" and a "bad strategy, badly executed and poorly monitored".
The loss was made by the bank's chief investment office, which is under the aegis of Bruno Iskil, who earned the nickname "London Whale" earlier this year following accusations that his oversized bets on credit derivatives, one said to be as large as $100bn, were skewing the market.

Guardian UK: London Whale Blows Hole in Bank's Value

A graduate in engineering from the École Centrale in Paris 20 years ago, Iksil had become so well known in the opaque $10tn market for credit default swaps – a complex type of insurance product – that he was nicknamed the "London Whale" and also known as Voldemort, after Harry Potter's nemesis.
Iksil is thought to be one of the highest-paid bankers in London and his New York-based boss, Ina Drew, whose pay has to be published, received $14m last year.
. . . Reports of Iksil's risky transactions surfaced in the US a month ago, but were dismissed by Dimon as "a complete tempest in a teapot". But in a hastily arranged conference call to investors on Thursday night he said: "The portfolio has proved to be riskier, more volatile and less effective as an economic hedge than we thought. There were many errors, sloppiness and bad judgment."

The Hill: Senator Corker (R-TN) Calls for Hearings on JP Morgan Chase

"I believe that we need to know the answers to the following questions: 1. Are we confident that taxpayers are fully protected from losses at major financial institutions?," Corker continues in the letter. "Were these bona fide hedging transactions, or were these poorly managed proprietary trades? And what, precisely, is the distinction?"

AP: World Stocks Lower on JP Morgan Loss

"This has permeated to the wider market as investors assess the possible systemic risk, adding another layer of caution to the fragile trading environment," said Jordan Lambert, a trader at Spreadex.
"When such shocks occur, it is wise to err on the side of caution and consider whether it is a possible 'tip of the iceberg' scenario, especially when one contemplates the interconnectedness of the banking system," he said.