Facebook: Buyers Beware

We have stayed away from commenting on the Facebook deal since before the company went public. We cautioned people about buying the stock that we did not see the value, nor do we today. We even made a comparison to the Time Warner deal. Like always, there was a mad rush by the public to “get in,” and that was not the play. The play was not to play the stock at all. Until yesterday, Mark Zuckerberg had made no public appearances since Facebook’s public offering. It seems like he would have a lot to say, but considering that the stock made a high on the opening day at $45.00 (May 18) and made its low at $17.55 on Sept. 4, having lost over 50% of its value, he has not had much to say. Many are questioning whether the Facebook IPO was a failure and say the only success Facebook had was that they could raise $19bil. It’s not a pretty story.

Many of the traders we talk to on the floor say they are not surprised. Most said they took a pass on buying the stock, while others said they bought puts or wanted to. We understand there are going to be good and bad times for buying stocks, but the rules have changed. The public buys into all the hype and with the lack of investment ideas they go flying into Facebook and get faced. Part of this has to do with the investing environment and the other part is where Facebook fits and in what space. It’s a nice social media outlet, but it’s never going to be a Google.  Like Twitter, neither has really changed the way people live, and if you’re ever on a big NY bank trading desk, they don’t have Twitter on, they have Bloomberg. So where does Facebook fit? As we learned in 2001 after Time Warner, the world’s largest media and entertainment company, was bought out by America Online (AOL) in a megamerger for $165bil, the largest business combination at the time. But after the 2002 dot-com bubble, only one year later the combined company was only valued at $99bil. Like the Facebook deal, everyone that bought into it lost large amounts of money.

Other bad deals include Quaker Oats and Snapple Beverage. After 27 months of running the company and paying $1.7bil, Quaker Oats sold Snapple to a holding company for $300mil or a loss of $1.6mil for each day the company owned Snapple. Sprint and Nextel Communications was a boondoggle too.  In 2005 Sprint bought a majority stake in Nextel in a $35bil stock purchase. Bad customer service by Sprint and an exodus of top employees at Nextel led to a downturn in customers. Nextel ended up being too big and too different to succeed with Sprint. Sprint eventually undertook cost-cutting measures and started to lay off people. In 2008 Sprint wrote off  a one-time $30bil charge due to impairment to goodwill and the stock went to junk status. We are not out to say that all stock offerings will end up like Facebook, but we do think it’s prudent to take extra precautions when jumping into a new IPO. While the companies that make up the IPO may be fully convinced that “their deal is the one,” we all know that’s not how it works in the new world investment order.

MrTopStep Closing Print Video: http://www.mrtopstep.com/videos/

Our view:
Remember the old saying “money makes the world go round”? Well, that is what’s happening. As the Fed and the ECB start to crank up the printing presses, the markets won’t go down. It is highly likely that the S&P has a clear shot to 1445. With buy stops all over the place above 1438.80 up to 1444.50, we think those stops are dead meat. We have some numbers to get past and if they go well it should happen early on. You have two choices: sell the early rally and buy the dip, or just make it easy on yourself and buy the dips. As always, keep an eye on the 10-handle rule and please protect yourself with buy and sell stops.

• It’s 6:00 a.m. and the ESU is.7.25 handles at 1437.67, crude is up 55 cents at 97.72 and the EC is trading 1.2927, up 66 ticks.
• In Asia 10 of 11 markets closed higher (Shanghai Comp. +0.28%, Hang Seng +1.10%).
• In Europe 11 out of 12 markets are trading higher (CAC +0.65%, DAX +0.75%).
• Today’s headline: “Futures, Euro Gain As Court Allows ESM; Spanish Bonds Climb”
• Economic calendar:  Today: Weekly mortgage apps, import & export prices, wholesale trade, oil inventories, 10-yr note auction, crop outlook report, Apple iPhone 5 event, FOMC meeting begins. THURSDAY: Jobless claims, PPI, 30-yr bond auction, FOMC mtg announcement, FOMC forecasts, Bernanke press conference and earnings from Pier 1 Imports. FRIDAY: CPI, retail sales, industrial production, consumer sentiment, business inventories.

• VOLUME: 1.43mil ESU and 24k SPU traded
• SPREADS: 17k SPU/Z spreads traded
• FAIR VALUE: S&P +5.50, NASDAQ  +13.00

Tuesday’s S&P 500 futures wrap-up:
The dollar slumped Tuesday after Moody’s Investors Service agency said the U.S. could lose its triple A debt rating if next year’s budget negotiations do not produce a downward trend in the country’s debt to gross domestic product ratio. Ya think? We call that trigger happy and just warming up for Eurozone and the imminent court / election news, as well as the FOMC decision on Thursday. In reaction to Moody’s, the DXY got hit while the treasuries sold off and the bulls rallied the equities in hopium response of more QE to come from Bernanke on Thursday as Moody’s added even more grease to the spin. The German Constitutional Court ruling on the ESM is expected tonight, early Wednesday morning at 3:00am CST. The decision is important as it could derail Draghi’s plan.  Also, Howzabout the JP Morgan report that the iPhone 5 could add 25 to 50 bps to the GDP which created a buzz as to how much impact the pending QE would have on the GDP/economy. How about stimulating a job or even better a few million?

Midmorning observation: Treasury “flash crash” coming? High-frequency trading now accounts for roughly 40% to 50% of the daily volume in Treasuries, compared to a “negligible amount” just five years ago, according to research firm Tabb Group. Some of the biggest players in high-frequency trading, DRW Holdings, Sun Trading, Virtu Financial, Hudson River Trading, Jump Trading and GSA Capital Partners, have all been expanding their reach to Treasuries, according to numerous trading sources- CNN

“We’re not interested in a continued debate about a Greek exit,” Hans-Peter Keitel, president of the Federation of German Industry (BDI), which represents many of the country’s largest corporations, told Spiegel Online in an interview.

Tuesday started with 337k ESU and  SPU traded on Globex, trading range 1421.50 – 1432.50 / Monday’s range 1438.00 – 1426.00, settled 1426.40 down 11.8 handles. Today’s RTH’s gapped 3 handles higher opening at 1429.80 – 1429.50 marking the early low and traded up to 1431.50, 1434.00 followed by 1434.30 at 8:56CT. William is a MrTopStep contributor, prognosticator of the Elliott Wave Theory. William’s pre-market market email was/is shared with the chat room and he re-posted this as a reminder when the spoos were sitting on 1433 area. william_blount (09:31:37): FOCB (fish or cut bait) here holding 1432.75 — next level if held = Mike_V aka @princetontrader (08:51:23): ES: 1435.75 x 1425.50 vol window. william_blount (excerpt of his pre-market email) (09:32:29): over head look for 1432.75 spot where the (ystrdy) p.m. was broken and tested for a permission to be leave at 3:16ET as the MUST BE CONVERTED BY BULLS if we are going to take out 1437 before completing this move from 1394.8.”  Following some sideways trade, 1435.70 traded at 10:02 and 1437.20 at 10:35 followed by sideways to lower holding 1433.50 area before firming through the mid day. The SPU continues to trade sideways to higher going into 1:30CT. Total volume is low as traders await the pending news; only 1.15mil ESU trade. After trading around the 1435.00 area for almost 2 hours the SPU sold off to the 1432.50 area, double bottomed, rallied up to 1433.50 and then sold off to 1431.70 going into 2:30. After a push back up near the 1433.00 area the SPU sold back off under 1432.00 just as the 2:45 closing imbalance showed 22 of the DOW 30 for sale and the broader market showed sell only $40mil. On the 3:00 cash close the SPU traded 1433.10 and went on to settle at 1430.60 on the 3:15 futures close, up 4.2 handle on the day.