PowerTrend Brief: Facebook, the Fed and A Dash of “Hopium”

This past week there were two stock market topics that were widely discussed. One was company-specific to a degree but the action that made the topic fodder among the investment community, talking heads and pundits was one that bears watching, no matter what company you may be invested in. The other is far more reaching in terms of the overall market mentality and has many speculating that hopium is fueling the stock market, near-term. For those wondering what hopium is, it’s the contraction of hope and opium and is used to convey the addictive nature of hoping that something might happen.

The first was the unloading of Facebook shares by Board member Peter Thiel. While not a household name, Thiel was one of the founders of eBay’s PayPal payment service, as well as a founder of hedge fund Clarium Capital Management and venture capital firm The Founders Fund. Back in May, Thiel owned 44 million Facebook shares and over the last three months he liquidated 89 percent of his Facebook holdings. Keep in mind that Facebook only went public 15 or so weeks ago and that Thiel is a Board member.

What alarmed many was that he sold roughly 80 percent last Friday in one fell swoop. The issue that has many tongues wagging is that it fuels the thought that something may be seriously wrong with Facebook if a long-time director suddenly sold out his position in sizeable amounts. There is a class of investors that watch insider buying and selling activity as an indicator as to whether or not they should be buying or selling shares of that company. As I have said many times, there is no silver bullet indicator, but generally speaking if insiders are dumping shares I tend to shy away from that company as an investment opportunity.

Given the post-IPO performance of Facebook’s shares, some will argue that Thiel was cutting his losses. That begs the question as to his lack of confidence about whether or not Facebook management can deliver in the coming months, and if the shares can move higher after having fallen more than 45 percent since the IPO. For those sniffing around Facebook shares near $20, Thiel’s sale has raised another specter of doubt. As I have said many times, the market abhors uncertainty and odds are that Facebook shares will be under scrutiny for a while longer.

Initial public offerings (IPO) of companies are tricky things and generally speaking I back away from investing in them for a variety of reasons. Lack of an operating track record and the eventual lock up expirations associated with the offering are two reasons. With Facebook I have been concerned about what the shift toward mobile means to their business. Regardless of Thiel’s sale, my concern remains.

The second chin wagging event was Wednesday’s release of the minutes from the Federal Reserve’s July 31-August 1 policy meeting. Contained in those minutes was the following language: “Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.”

Looking at Wednesday’s stock price chart on the S&P 500, the market interpreted the Fed’s words as an indication that it is soon likely to ease further. Factor in economic surveys which highlight recent cuts to economic growth forecasts and its easy to see why hopium is giving traders rose colored glasses.

While unemployment has trended higher in the last few months, what may limit the scale and scope of any additional Fed easing is economic data over the last few weeks that suggests the economy is not falling off a cliff.

Is the U.S. economy. robust?

Not at all, but that doesn’t mean conditions warrant action on par with past quantitative easing measures. To the extent trader expectations are looking for another full fledged QE3, they could be setting themselves up for disappointment. This means, however, that between now and the Fed’s next meeting on September 12-13 any and all economic data received will be under intense scrutiny.
Sincerely,

Chris Versace
Editor, PowerTrend Brief

This Week Ahead

As I noted above, any and all economic data between now and the Fed’s next policy meeting on September 12-13 will be examined with a fine tooth comb. While the last week of the summer tends to be a quiet one, the need to scrutinize each and every economic data point will put the Fed’s Beige Book and July factory order data under the microscope. July Personal Income and Spending data and several confidence surveys out this week will provide the latest snapshot on the financial health and mindset of the consumer. In terms of corporate earnings, we have several to key into this week, but with roughly one month left in the current quarter we will soon be bracing for any potential earnings shortfall announcements.

Here’s a more in-depth listing of what economic data and corporate reports are coming this week:

Monday, Aug. 27
Suntech Power Holdings (STP)

Tuesday, Aug. 28
Case-Shiller 20-city Index (June)
Consumer Confidence (August)
Bank of Montreal (BMO.TO)
Brown Shoe Co. (BWS)
Dycom Industries Inc. (DY)
Imperial Holdings Inc. (IFT)

Wednesday, Aug. 29
MBA Mortgage% Index (Weekly)
GDP Second Estimate (2Q 2012)
Pending Home Sales (July)
Fed’s Beige Book (August)
Collective Brands (PSS)
Culp Inc. (CFI)
Delta Apparel (DLA)
H.J. Heinz Co. (HNZ)
Joy Global (JOY)
TiVo Inc. (TIVO)
Zale Corp. (ZLC)

Thursday, Aug. 30
Initial and Continuing Jobless Claims (Weekly)
Personal Income & Spending (July)
Esterline Technologies Corp. (ESL)
OmniVision Technologies (OVTI)
SAIC Inc. (SAI)

Friday, Aug. 31
Chicago Purchasing Managers’ Index (August)
Michigan Sentiment Index – Final (August)
Factory Orders (July)
Cubic Corp. (CUB)

Upcoming Appearance

• Listen for my weekly appearance each Monday on Amercia’s Morning News to talk about the economy, the stock market, stocks and more.

• On Saturday September 9, I’ll be giving a presentation to the Baltimore Chapter of the American Association of Individual Investors on current trends in technology.