Archives for May 2012

The Facebook Fiasco… A Guide of How NOT to IPO

Here is the latest Street$marts with a detailed article on the bust that is Facebook.$marts20120525.pdf

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CNBC’s Closing Bell TODAY at 4:10pm

I am going to be on with Maria and Bill at 4:10pm today discussing ethics versus business on Wall Street in the face of Facebook’s epic bust.  Now that should make for interesting conversation!

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Facebook, Facebook, Facebook

Is the world so boring a place that unless we can beat a story stock to death, there is nothing else to report?  Have we forgotten about the need to create jobs in the private sector? 

First it was Apple; then it was JP Morgan; and now it’s Facebook.  Thankfully, the IPO is over, Mark Zuckerberg is now worth $19B and the markets have created thousands of new paper millionaires.  It also means that in a few weeks, the buzz about Facebook should die down. 

For full disclosure, I am not an IPO investor and never have been.  I think there is too much risk and too much volatility.  For every huge success, there are dozens, hundreds or even thousands of busts.  Sure, folks can point to Apple, Microsoft and Google, but in each case, by waiting and possibly paying a higher price, you could have reduced risk and volatility, and more importantly, gave yourself better odds at winning by making sure the company wasn’t the latest flash in the pan, like At, Krispy Kreme and Boston Chicken.

All huge IPOs seem like can’t misses.  Is Facebook a good investment?  A good company?  Over the long-term, I have no idea at this point.  Time will tell.  But what we do know in the short-term is that insiders sold an awful lot of stock at a rich valuation that was increased over the past month with the likelihood of much more over the coming months and years.  The word “greed” enters into my mind!

Right now, Facebook dominates the social media space.  Zuckerberg built a monster as a private company.  That has all changed.  He and the company will now be in the public spotlight like no freshly public company has ever been. The pressure from Wall Street, the media and investors is going to be enormous.  

Here is an article I was quoted in over the weekend about the IPO.

Fast forward a few days to May 21, we now see that the IPO is basically a bust in my opinion.  The underwriters, led by Morgan Stanley, had to commit millions of dollars of their own money on Friday to support the IPO price of $38.  The NASDAQ completely bungled the most high profile IPO since Google, if not ever, with system problems on Friday.  And today, Monday, with a very strong technology market, Facebook closed down more than 10%.  I imagine investors are shellshocked, dumdfounded and pretty angry overall.  Anything but this was expected.  To have the stock close below the offering price at all, let alone on day two is beyond unbelievable!

How happy are the institutions who bought at $38 on Friday?  Given the litigous nature of our country, I have a feeling that we will be seeing some class action lawsuits on the way.

As always, Caveat Emptor!

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STILL Targeting JP Morgan?

It’s really amazing how the media latches on to a story.  Not long ago, Apple was all the rage. Positive story after positive story.  As you know, I took the very unpopular other side of that equation publicly.  And they trashed me all over the place.  Funny how that chatter has really quieted down!

Now we have JP Morgan in the very unenviable position of being at the other end of that spectrum.  Negative story after negative story.  The media just feeds on it!  Once again, I am taking the unpopular side and saying that the JP Morgan news is totally overblown and much ado about very little. 

I will take Jamie Dimon over every single banker not only in the US but around the world.  He took control, owned up to the problem and heads rolled.  Citibank, are you listening and watching?  Bank of America, hello, anybody home?

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JP Morgan, The Next Recession and The Wave of New Jobs

I did an interview with FOX Business on Friday where I offered my comments on the overblown mess at JP Morgan, which is the story of the day/week.  I also opined that the next recession in the US will likely be seen in 2013 or 2014.  I was somewhat surpised that the anchor thought that was so outrageous.  Except for the 1990s, we typically see one or two recessions per decade with one being more severe than the other when there are two.  Given that the last one ended in 2009 according to the folks who keep the data, by 2013 or 2014, we will be due for another. 

While I certainly don’t want to see another recession or navigate through another bear market, they are a fact of capitalism.  The key is what kind of shape the consumer and corporate America are in right before it hits.  I would argue that we are in a better position to weather the storm than at any similar period during the modern investing era.  And guess what happens on the other side of the next recession???


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Is JP Morgan as Dumb as the Rest?

 As you will read below, I don’t think this is the beginning of another leg in the financial crisis, nor do I think we will see more of this from JPM or other banks.  When you trade and invest, you don’t always win and sometimes the losses can be large, especially if people make some pretty stupid decisions en masse. This is Jamie Dimon’s first real black eye since taking the helm at JPM years ago.

My takeaways are that Jamie Dimon will not let this happen again on his watch and this just gives proponents of Dodd-Frank more ammunition for regulation.

NEW YORK – Big bets gone wrong aren’t supposed to happen at best-of-breed banks like JPMorgan Chase, which is headed by Jamie Dimon, one of Wall Street‘s most respected and successful bankers with a reputation for managing risk well. But it did.

  • JPMorgan Chase's headquarters in New York City.By Spencer Platt, Getty ImagesJPMorgan Chase’s headquarters in New York City.

By Spencer Platt, Getty Images

JPMorgan Chase’s headquarters in New York City.

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The CEO, who steered the financial giant safely through the 2008-09 financial crisis, came clean in a conference call with investors after the market closed Thursday and acknowledged that the bank has suffered a $2 billion trading loss, mostly occurring in the past six weeks.

News of the unexpected loss, which will result in an estimated second-quarter loss of about $800 million for that segment of its business, resulted from what Dimon says was a “flawed” and “sloppy” derivatives trade executed by the bank’s chief investment office, whose job it is to manage or hedge the bank’s own risk. The division had been expected to show a profit of $200 million.

“This portfolio,” the bank said in a regulatory filing Thursday, “has proven to be riskier, more volatile and less effective as an economic hedge as the firm previously believed.”

In a conference call with investors, Dimon described the trade as “poorly executed and poorly monitored.”

Shares of JPMorgan (JPM), which closed up 10 cents to $40.74, fell nearly $7 in after-hours trading.

The news packed a not-so-pleasant public relations punch, causing a hit to the firm’s credibility and reputation.

“It is one of the largest, safest and best-managed banks out there,” says Michael Farr, president of money management firm Farr Miller & Washington and a JPMorgan shareholder. “Part of me now says if it can happen there it can happen anywhere. This is the kind of surprise investors don’t like.”

The admission of the huge loss, which was paritally offset by gains from sales of other securities, could put a dent in investor trust in markets and the financial sector.

“It sure does not inspire confidence,” says David Kotok, chief investment officer at Cumberland Advisors. “JPMorgan is the darling of the banks. It has jilted its lover.”

Adds Paul Schatz, president of Heritage Capital: “The story wouldn’t be so bad if it was any other bank but Jamie’s. He set the standard, post-crisis, and now an awful lot of investors are going to question his risk management and if this is the first cockroach.”

The controversial loss comes at a time when the government is trying to rein in risks at banks via more regulation and tighter controls.

Indeed, it shines a brighter spotlight on the so-called Volcker rule, which forbids banks to use their own cash to bet on the market. The rule, which was part of the Dodd-Frank legislation passed in the summer of 2010 but which has yet to go into effect, has been aggressively attacked by banks.

But the trading mishap at JPMorgan will give Volcker rule backers more ammunition in pushing for tougher sanctions on banks’ risk taking, says Farr.

“The Volcker rule will have more support as a result,” he says.

In the conference call, Dimon admitted as much, noting that the bad trading loss “plays right into the hands of a whole bunch of pundits out there.”

The latest trading mishap on Wall Street sends a message that banks are still taking too much risk, says Gary Kaltbaum, president of Kaltbaum Associates.

“It opens back up the fact that these banks are still (using their own cash) for trading and that there are still trillions of dollars in derivatives that no one knows the downside,” he says.

If there is a silver lining, it is that it is not likely the “beginning of a crisis or contagion,” says Schatz. “It’s (just) one event that involved some pretty stupid decisions.”

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FOX Business

I am going to be on FOX Business this Friday, May 11, at 1:20pm discussing some short-term paths for the stock market as well as some interesting long-term scenarios.

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Once Again, It’s About Europe

Socialist candidate Francois Hollande won the election in France, throwing the Eurozone into a tizzy as Germany no longer has a fiscally conservative partner in France.  This is going to get very interesting as we have Germany favoring austerity and a more hard line fiscal path, while France will look to curb the expense cuts, raise taxes and possibly increase spending. 

Markets cratered overnight, especially in Asia, but by the time the US opened, losses were more muted.  And by 4pm, all of the major indices were green except for the Dow.  Remember, it’s not so much what the news is as much as how the market reacts.  Frankly, I was a little surprised that our market took the news so well.  That could  be setting the US up for a bounce.  Closing below today’s low, 12,970 in the Dow, should set the wheels in motion for more selling with the major indices declining to new lows for the second quarter. 

Longer-term, this should be positive news for gold and US treasury bonds, but let’s let the market tell us over the coming weeks and months.  I still think gold sees a significant low this quarter that could launch a major rally.

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The Most Unloved Investment

Last Wednesday, I participated in an interesting discussion on CNBC’s Closing Bell regarding what I consider to be the most “unloved” investment.  Most continue to scratch their heads as to why they haven’t cratered with the trillions of the dollars our Fed has created over the past few years.  But there are bigger stories at play. 

For years, most have thought that inflation would really kick into high gear, but that certainly hasn’t happened.  You may have seen it at the pump or at the grocery store, but those are considered “transitional” and easily cured with higher prices.  Think about it.  The higher the price goes for a certain good, the more likely we are to cut back and/or find a substitute.  I am a big chicken eater,  but if the price of chicken doubled, tripled or quadrupled, guess what, I would find something else to eat like turkey.

That may be all well and good for chicken, but what about heating my house with oil?  Aren’t I stuck? After crude oil skyrocketed to $147 in 2008, alternatives really started to sprout up.  Americans dramatically cut back on miles driven and oil used at home.  They also started purchasing wood burning and pellet stoves, solar panels and geo-thermal systems.  In most cases, there are always ways!

Anyway, I digress.  Since 2007, I have believed that our biggest enemy would  be and is deflation, not inflation.  During the credit crisis, trillions and trillions were “vaporized”. Remember all those alphabet soup products that banks were inundated with?  CMOs, CLOs, CDOs, SIVs.  The ones that were AA and AAA but really were junk?  Think of all that money that went away!  Although the Fed has created trillions, it hasn’t come close to replacing the money that was lost. 

Wages are a component of inflation and wage growth has been essentially non existent.  And the elephant in the room, housing?  That’s the largest component of inflation and it would be very tough to argue that housing prices are and have been on the rise.  So in my opinion, we are in need of a little, controllable inflation. 

So I think I uncovered a good future topic.  Enjoy the video.

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Stocks at Inflection Point

Here is the article based on my interview with CNBC’s European Closing Bell from May 1.

The 2012 bull market still has further to run, according to Paul Schatz, president of Heritage Capital, an independent investment banking and advisory firm. Instead of a major selloff, Schatz believes that the equity markets will only peak later on in the year, or early in 2013. But he’s undecided about whether this will incorporate a “sell in May and go away” mantra.

Fuse | Getty Images

“We see two possible paths. One is that the major indices go right back to new 2012 highs in May and then race to all-time highs in the third quarter or early fourth quarter,” he told European Closing Bell. “The other scenario is that stocks use May to pull back and take out the April lows before bottoming and then heading to new 2012 highs in the third quarter.”

Schatz’s reasoning is that the huge amount of central bank liquidity in the system is only going to get bigger.

“The Fed remains, and there’s still a torrent of liquidity in the system,” he said. “The ECB is just warming up. They have printing presses for trillions and trillions of stimulus for the rest of the decade.”

Schatz also downplayed the effect of the euro zone debt crisis on the equity markets. “It’ll be hard-pressed to say that Spain being in a recession[cnbc explains] is going to end this bull market.”

Even though Schatz is bullish in equities, his company still has a sizeable position in U.S. Treasuries.

“The U.S. fiscal house may not be in good shape, but on a relative basis, it’s better than most of Europe and Japan and there remains a sizeable bid under the market from the Fed and foreign governments,” said Schatz.

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