Wednesday, May 16, 2012

What's the story of the week - Greece or Facebook?

So far Greece seems to be winning out as concerns remain high that Greece could seriously be pondering an exit from the Euro.  Humor me for a moment while I review the implications of this -

* I think talk of a Greek exit form the Euro in the next month are premature but I think it is possible by September.

* The major impact of this move would be massive outflows of funds from the "next in line" countries like Italy and Spain.

We've seen this play out on a smaller scale in Greece where nearly 1/3rd of their deposits left the country over the last 2 1/2 years.  The fear for large investors in countries like Spain and Italy is that their Euros get converted into a local currency.  As more money flows out of a country the greater the likelihood the country will need a bailout, thus this becomes a self-fulfilling prophecy.  The markets are really oversold now and due for a bounce, but the news flow won't let the markets come up for air.

Okay, Facebook.  So, last week we heard demand was weak and the deal was faltering.  Now this week they've upped the price and increased the size of the deal.  What's the truth?  My hunch, having worked on various IPOs, is that they are both true.  I suspect large institutional demand (from mutual funds, pension funds) is weak.  However, I imagine that retail demand is off the charts and that is why they are increasing the size and price.  A higher proportion of retail investors tends to cause more volatility in the stock and will make this very interesting to watch.  Retail investors tend to buy what they know and they know they like Facebook.

My 2 cents - The company understands it's end users but it can't figure out how to sell to them.  GM pulling their Facebook campaign today is indicative of this problem.  At the end of the day people should view facebook as a media company like Viacom because that's what they do - sell ads.  Does that warrant being a hundred billion company overnight?  Maybe, but I'm most concerned with my own anecdotal observations - fewer and fewer people 18-40 are active on facebook.  It's become a haven for tweens and twetirees (my term for those boomers aged 50-60, not quite retired but counting the days).  I don't have any nationwide evidence to back me up but I've heard from many people that they are wary of Facebook and prefer to text because they have a (false) sense of privacy in the the texting world.  This is the kind of watershed event that can shift market sentiment overnight so we'll have to watch this IPO very carefully.

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