Facebook IPO Under Investigation

The Facebook IPO was a flop with too many shares being issued at too high a price. The underwriter, Morgan Stanley is under investigation for allegedly providing inside information to some of its clients, enabling them to dispose of their holdings in the overvalued stock and make large profits. 

The inefficiency of the banking system has been widely criticised in the press and this scandal adds to the long list of complaints. Investors only recently expressed their outrage at Bob Diamonds excessive multi-million pay package at Barclays and the banks have continued to hold back on lending to small businesses despite benefitting from cheap loans provided by the ECB. 

The Facebook fiasco sums up the inefficiency of the stock market. Most ordinary people can clearly see that the Company is likely to be overvalued at 65 times its current earnings. Facebook’s revenues are too small in comparison to its market capitalisation to the point where it will be extremely unlikely that investors will receive sufficient dividends to generate a reasonable return on their investment. Facebook already has 900 million users and is already at the mature stage of its life cycle meaning that further growth will not be easy to come by. Few users click on the adverts on the website and several large companies including General Motors have withdrawn their advertising campaigns due to concerns over the low conversion rates via this medium. 

Given that most people with any basic knowledge of the markets understood that Facebook is likely to be overvalued, the question is who invested in the IPO in the first place? We believe bailed out banks and people who are not investing their own money to be the most likely investors. Readers would be advised to review their pension funds to establish whether they have invested in Facebook and suffered the immediate 13% write down in their investment following the IPO.

Government Begins to Focus on Growth Rather than Austerity

Last month’s statistics indicate that the UK recession is considerably worse than expected. The construction industry in particular, has slowed down significantly. The continued recession in the UK combined with the uncertainty over the Eurozone crisis has led to a government rethink. Both David Cameron and EU officials are beginning to place emphasis on “growth” rather than “austerity” which is simply not working. 

However, the proposals to generate growth are less clear. In our view, the economy requires real growth in order to recover which must be substantiated by increased output and employment. To date, “growth” has taken place in the form of issuing more debt in order to raise government spending in both the UK and Europe. In February 2012, the ECB provided cheap loans to the tune of 530 Billion Euros to European Banks in order to stimulate the economy. This has not generated the expected levels of growth as the Banks have effectively used the cheap finance in order to cover their losses in the Eurozone and have not reinvested their capital in the form of loans to EU businesses. 

Despite failing to promote growth in the UK, the UK government and the Bank of England have managed the economy reasonably well. Emphasis on cutting the deficit and controlling inflation is paramount and has helped to restore confidence in the UK as the place to do business. The UK has retained its AAA credit rating and continues to be seen as a stable economy for overseas investors, particularly those looking to withdraw their funds from the Eurozone. The next step is growth, because at present, there is a common feeling that the UK economy is going nowhere fast.

Continued Fears Over Greek Default

The European and Global Markets dipped last week over the growing prospect of a disorderly Greek default. The prospect of Greece’s exit from the Euro is now being openly discussed and savers are continuing to withdraw their cash from the stricken country. The growing uncertainty over the Eurozone has led to the significant increase in the value of the Pound against the Euro up to 1.25. 

Leaders of the G8 summit met last week to discuss the Greek crisis and are now beginning to place greater emphasis on growth rather than merely focussing on austerity. Quite simply, there will be no prospect of a Greece repaying its debts unless measures are put in place to stimulate growth. The fact that it has taken this long for the EU leaders to recognise this is concerning to say the least. This adds to the poor record of the EU policymakers in handling the Euro crisis and sends a negative signal to the market. 

The widespread panic over the Eurozone suggests it is too little too late to save Greece as the rest of the Eurozone have lost patience with the nation’s ability to meet its austerity targets. It would be sensible to start planning for a return to the Drachma which will enable the Greeks to lower price and increase competitiveness. The ramifications for the rest of Europe are unclear. A disorderly default could result in the collapse of the banking system. The gold price has slumped and the Euro has weakened for the time being. The markets are also putting upward pressure on bond yields which will have a negative effect on Spain and Italy which are struggling to finance their debt.