Mel's Blog

May 23, 2012 Market News

May 23rd, 2012 10:19 AM by Mel Samick

So, apparently Facebook went public last Friday. Facebook priced its initial public offering at $38 a share, giving the world's No. 1 online social network a $104 billion valuation in the third largest offering in U.S. history. I mean but really, how can you put a value on the ability to stalk others? The offering was more eagerly awaited than any in history, and most investors felt compelled to take a look at it. On the bullish side, Facebook's growth over the past 8 years has been nothing short of staggering. What started as a dorm room coding project has now grown into a service used by 1/8th of the world's population. The negatives are that the valuation is already very rich. Facebook's growth is decelerating, and its profit margins have probably peaked. Until growth reaccelerates, it's hard to see how the stock will sustain a major upward move. Some investors worry the company has not yet figured out a way to make money from the growing number of users who access Facebook on mobile devices.

Blue chips extended a streak of declines the likes of which hasn't been seen in almost 40 years, over concerns about the Euro zone and Facebook's lackluster debut. The Dow Jones Industrial Average suffered its 12th loss in 13 sessions, the worst 13-session performance since October 1974. All three benchmarks capped their biggest weekly percentage declines of the year. For the week, the Dow fell 3.5 percent, the S&P 500 declined 4.3 percent and the NASDAQ was down 5.3 percent. Facebook opened at $42.05, or 11 percent above its $38 initial-public-offering price, then fell closing up 23 cents. Normally a big decline would set up Wall Street for a technical rebound. But that may not be the case this week, even after the market posted its worst weekly loss for the year. With the corporate earnings season drawing to an end and recent U.S. economic data raising doubts about the pace of growth, the S&P 500, which is down 7.3 percent so far in May, could decline further this week as concerns about the financial health of Europe persist.

Last week, Greek politicians failed to form a coalition government during their final talks, pushing the Athens Composite Index plunging to a new 22-year low. European stocks also turned lower, to close at new 2012 lows.

The Greeks have lost their stomach for austerity and the rest of the Euro zone has lost its patience with Athens' broken promises. It is increasingly conceivable that Greece may leave the Euro zone, not just because of its own political dysfunction but also because the consequences of such an exit for the rest of the Europe and the global economy no longer seem quite so scary. Economists at a German bank recently estimated that a Greek exit would cost the German government about 100 billion Euros or about 3 percent of the nation's annual economic output. The Federal Reserve chairman, Ben S. Bernanke, has said repeatedly that problems in Greece would have little direct impact on the American financial system. Domestic banks have eliminated more than two-thirds of their investment in Greece over the last two years, paring their exposure to $5.8 billion at the end of 2011 from $18 billion at the end of 2009. In other devastating European news, dancers at the renowned Crazy Horse night club in Paris have gone on strike over unfair wages, forcing the cancellation of performances this week for the first time since the cabaret was established in 1951.

In domestic news, the percentage of homeowners delinquent on their mortgages in the first-quarter fell to the lowest level since the end of 2008, but the share of loans in the foreclosure process remains high as banks struggle to take back properties. At the end of March, about 11.8 percent of all loans were at least 30 days past due or in foreclosure, according to the report from the Mortgage Bankers Association. While the number is still high by historical standards, it has fallen at a steady clip over the past two years, down from 12.8 percent a year ago and 14.7 percent two years ago. Sales at U.S. retailers barely rose, 0.1 percent, in April, as the boost from an unseasonably warm winter faded, pointing to some loss of momentum in consumer spending early in the second quarter. That was the smallest gain since December when sales were flat. The Labor Department said last Tuesday that its Consumer Price Index was unchanged last month after rising 0.3 percent in March.

What is CPI? The Consumer Price Index is a measure of the average change over time in the prices paid by consumers for a market basket of consumer goods and services. CPI can specifically identify periods of inflation or deflation for consumers in their day-to-day living expenses. Because the CPI indicates price changes—both up and down—for the average consumer, the index is used as a way to adjust income payments for certain groups of people. For instance, more than 2 million U.S. workers are covered by collective bargaining agreements, which tie wages to the CPI. If the CPI goes up, so do their wages.

Mel Samick

Information provided by NYCB Capital Markets

Posted in:General
Posted by Mel Samick on May 23rd, 2012 10:19 AM

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