Facebook shares began trading publicly this past month. The Initial Public Offering (IPO) of Facebook was the most exciting and over-hyped IPO in a long time… maybe ever. Everyone wanted in on it because everyone was sure the stock price would do nothing but go up after the first minute of trading. The media absolutely loved it. On the morning of the IPO, I was at home watching CNBC as I was getting ready for the office and I think every third word uttered was “Facebook.” Investors everywhere were getting whipped into a “Facebook frenzy.”
We received more calls from clients regarding the Facebook IPO than we have ever received about any stock. Clients who NEVER call us about ANYTHING called about the Facebook IPO. And I had to tell each caller, “No, we are not going to get any shares of Facebook for our clients. We are not even going to try to get shares. We don’t even WANT any shares.”
It was difficult to know exactly what to say when asked if we were able to get shares of Facebook during the IPO. Should I have lied and said that the deal was so hot we were unable to obtain any shares? Should I have feigned ignorance and said, “What IPO?” Or should I have said, “This over-hyped offering stinks so bad, it resembles nothing close to the word ‘investing.’”
Regarding the first option, I’m not positive it would have been a lie because we never inquired as to the availability of shares from any of the brokers with whom we do business. I NEVER intended to participate in this fiasco. So it might have been true that we could not obtain shares… except it would have been a little misleading to omit the fact that we had never made an attempt.
Regarding the second option, I truly attempted to maintain ignorance of the IPO. For the weeks leading up to the IPO, I attempted to know as little about it as possible. I WANTED to know nothing about it… what day it was going to occur, what the offering price would be… NOTHING! I knew long ago that I would have no way of determining what shares of Facebook SHOULD be worth. So if I had no reliable method for determining a theoretical value for Facebook, why would I want to buy shares of Facebook? I was also pretty confident that the original owners of Facebook knew more about Facebook’s value than I did… so if they were so anxious to get rid of their shares, why should I be anxious to buy them?
Regarding the third option… the Facebook frenzy reminded me of the tech stock bubble in 2000 and the real estate bubble in 2006. When you want to “invest” in something for the sole purpose of selling it to someone else the next day at a higher price, you are not “investing.” You are just participating in “herd mania speculation.”
(True story: during the tech bubble, we had a client call us one day with a “hot tip.” He wanted to own 1,000 shares of a certain tech stock right away. Although it went against our investment principles, we acquiesced and assisted him with the purchase. Less than one week later, he called back frantically to inform us that he had purchased the wrong stock. He had purchased 1,000 shares of “Broadcom” but his hot tip had been “Broadcast dot com” [I may have those names backward]. While we were assisting him with the purchase of the correct “hot tip,” he asked what the price of Broadcom was, since he had purchased it less than a week earlier. We informed him it was up $60 per share. That’s right… he made $60,000 in less than a week after buying the wrong stock! That’s just crazy!)
A lot of people made money buying tech stocks in 2000 and real estate in 2006… and a lot of people got financially riddled because they were caught holding the bag at the end of both bubbles. Many of those caught holding the bag were the same people who had made big profits… they just couldn’t leave the party as long as the band was still playing… like our guy who bought Broadcast dot com.
We did not know what the price of Facebook would do after its IPO. For all we knew, the stock price might have shot up to $80 per share. There have been IPOs in the past year that have behaved much better and made investors happier. That didn’t matter to us. We are interested in “investing,” not speculating… even though it makes for good conversation at cocktail parties.
On May 18th, shares of Facebook were sold to investors on the IPO at $38 per share. At the end of May, they were trading at $29.60 per share, down 22%… and retail investors are not happy. (On the first day of June it declined more… now down 27% since the IPO.) Many investors feel they were taken advantage of. Give me a break. Many of these same people are greedy investors who thought they had a “sure thing” that they could sell to someone else. It seems that no matter how many times Wall Street provides bad experiences for greedy investors, they seem to keep coming back for more.
Wall Street is rife with predators. At Boyer & Corporon Wealth Management, we understand the predators of Wall Street. They don’t bother us because we have learned how to steer clear of them. A healthy dose of cynicism has vastly increased our likelihood of avoiding investment Trojan Horses. Years of getting our noses bloodied qualify us as professional guardians of our clients’ investments. We have already made many stupid mistakes in our careers and, in the process, have become “investment cyborgs,” less susceptible to emotion or feeling when investing. (OK, it’s very difficult to completely become an investment cyborg, but that is our goal every day. Emotional investing is doomed investing.)
So when a hot IPO like Facebook comes along, we don’t get excited. Sometimes the IPO turns out to be a good one and the price goes up, but we don’t care that we missed it because we are investors, not speculators.
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There was significant good news this past month – the price of a barrel of oil declined from $104 to below $87, over 16% in one month (and another $3+ on the first day of June). It has already translated into lower prices at the pump and I expect a further drop in the price of gasoline, giving consumers money to spend elsewhere. It doesn’t matter whether consumers use the savings to pay down debt or buy goods. It’s like getting a tax refund without increasing the budget deficit.
Oil isn’t the only commodity declining in price. After all the fears of runaway inflation, the past twelve months have resulted in some significant declines:
Copper -19%
Sugar -16%
Corn -24%
Cotton -55%
Cocoa -30%
Wheat -17%
So you can put your immediate inflation fears away. This is what happens in a “de-leveraging” economy. When consumers are more focused on paying down debt instead of buying “things,” the prices of commodities that go into making those “things” decline. Over a year ago, the prices of commodities increased dramatically but we did not view it as a trend that would continue.
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Global investors are officially scared… scared to the point that they are putting their money into a virtual mattress. 30-year U.S. Treasury bonds ended May with a yield of 2.64%. Think about this… investors are willing to accept an annual interest rate of 2.64% BEFORE inflation and BEFORE taxes. After taxes and inflation, this computes to an annual LOSS of about 1% every year for 30 years… and that assumes inflation doesn’t rise for 30 years. How stupid is that, you ask? Well, it’s probably very stupid, but humans tend to do stupid things when they are fearful. It appears that many investors are so anxious, they would rather guarantee themselves an annual loss of at least 1% over a 30-year period rather than face a possible much larger loss in the immediate future. Apparently losing it slowly over the next 30 years seems less painful than losing a whole lot right now.
(Speaking of stupid things we do because we are fearful… every time I stay in a hotel with more than 13 floors, I notice that the number 13 is missing from the elevator buttons. The floor right above the 12th floor is called 14… apparently because so many Americans are superstitious about the number 13. How dumb is that? Don’t they know that the 14th floor is now the 13th floor? And if there is a Lobby floor, don’t they know that the 12th floor is now the 13th floor? Somehow eliminating the “13” button has helped countless hotel guests avoid disaster.)
So which is dumber, buying a taxable bond for 30 years earning 2.64% or deleting the “13” button from hotel elevators? The answer is… deleting the “13” button is dumber. At least that’s the correct answer for one day, because if you bought that 30-year U.S. Treasury bond on the last day of May, you could have sold it the next day for a profit. One day later, investors poured so much more money into 30-year Treasury Bonds and the price went up so much that they are now priced to yield 2.52%. So if you thought it was stupid to invest for 30 years at 2.64%, what do you think about 30 years at 2.52%?
As long as global investors continue to stuff money into this virtual mattress, you will continue to see prices go up and yields decline. We do stupid things when we are scared.
Most fear today stems from the usual suspects (Portugal, Italy, Ireland, Greece and Spain). Europe continues to be the dog and markets all over the world continue to be the dog’s tail. The fear today seems almost as dire as the fear in 2008. The difference is in 2008 the multiple financial crises seemed to happen rather quickly and suddenly and we all feared we might be facing financial Armageddon in short order. Today events are unfolding slowly and deliberately over a longer period of time, creating anxiety, nightmares and nervous tics along the way. 2008 was a really nasty tornado that blew through neighborhoods causing massive damage. 2012 seems to be more like a hurricane that is still far off the coast… and we’re not sure if it is going to hit us or not… but if it does hit us, it’s going to destroy the entire city, Katrina-style.
Forget for a moment that I live in Kansas and have never and will never see a hurricane. For the record… I just turned 58 last month, have lived in Kansas my entire life and have yet to see a tornado. And I’m one of those guys who stands out in the middle of the street with a camera when there is a tornado watch. But because of that stupid movie, people think that tornadoes in Kansas are as common as Wall Street investment scams. No matter where I go in the country, when someone discovers I’m from Kansas, they cannot resist the urge to make a Wizard of Oz reference. Like “you know you’re not in Kansas anymore” or “how’s Toto?” If I had a nickel for every stupid Oz reference I’ve heard, I could buy Facebook. So if you ever meet someone from Kansas and you want to say something “original”? RESIST THE URGE to ask about Dorothy! All of us who hail from Kansas will agree… it’s not even remotely original.
If you want one barometer that will help you know whether to worry about the direction and size of the financial hurricane… watch the 10-year Spanish bond interest rate. If you see it above 7%, get in your car and start heading out of town.
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If you have been reading my Investment Commentary for several years, you know that, since the summer of 2007, I have been counting “For Sale” signs as I ride my bicycle through several neighborhoods near my house. It’s about a 4-mile ride through three different housing developments of differing sizes and market values. I started counting in 2007 because I had read enough data to make me nervous about the housing market… and I was curious how a looming housing bubble might manifest itself in my community.
In the summer of 2007, during my ride, I counted 7 homes for sale. Two years later, I counted 26 homes. About this time last year, it dipped to 11 and now there are 14 homes for sale. Interestingly enough, that pattern almost follows the national foreclosure pattern. (I realize this may be total coincidence and there may be no correlation at all.) Although I don’t have totals for every month throughout the five year period, if I did, the graph probably would look similar to the one below.
This graph, which I have included in my Commentary several times, shows the number of national monthly home foreclosure filings. In 2006, the number of new foreclosure filings began to slowly increase. In the early summer of 2007, there were about 150,000 new filings per month. That number peaked in 2009/2010 at over 350,000 new foreclosures per month. In April of this year, there were 189,000 new foreclosure filings… an improvement but still more than double the monthly rate prior to the housing crisis.
Every now and then I hear someone announce the housing crisis is over and prices have hit bottom. That may be true in a few isolated areas, but nationally there remains a lot of mortgage damage yet to be repaired. It’s coming though.
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Finally, the stock market took a brutal tumble in May. The S&P 500 lost 6% but is still up 5.15% for the calendar year. After the jobs numbers were released June 1st and it was announced unemployment increased to 8.2%, the S&P 500 lost another 2.46%. (If you were invested in the S&P 500 since 12/31/99, you have earned less than 1% per year… and that includes dividends.)
At Boyer & Corporon Wealth Management, we feel it will continue to be a brutal economic summer. Greece, Spain and Italy will not leave the headlines until they have convinced YOU to put YOUR money into a virtual mattress. We say “resist the urge.” Stock prices are starting to look attractive. Corporate balance sheets look good and dividend yields are increasing with the lower stock prices. Give us much more of a sell-off and you will find us increasing our equity exposure.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.