Facebook stock dump unsettling

STOCKTAKE: A FORTNIGHT ago, we noted that Facebook was likely to face selling pressure as the lock-up on insider sales expired.

Nevertheless, the news that Peter Thiel, Facebook’s earliest institutional investor, dumped most of his stake was unexpected. Investors typically offload more gradually. Dumping the stock, especially after it had already halved, will unsettle investors.

History indicates a rebound is not near. Since 2001, there have been 50 flotations that have fallen by at least 50 per cent in their first six months, says finance professor Jay Ritter. On average, they fell by a further 2.9 per cent over the next six months.

Apple’s valuation driven by earnings

IN CONTRAST, Apple continues to fly high, last week becoming the most valuable company in history after its market cap surpassed $627 billion.

Past giants have not fared well. Microsoft, worth $619 billion in 1999, is worth $255 billion today. General Electric and Cisco, which were not far behind Microsoft in 1999, are worth $220 billion and $100 billion now, respectively. ExxonMobil, the most valuable company before Apple took over, remains shy of its 2007 high.

Past leaders sported sky-high valuations, however. Microsoft traded at over 80 times earnings in 1999. Apple trades at less than 13 times estimated earnings. Apple doubled in just 19 months, but earnings – not irrational exuberance – have driven gains.

Rally narrowing after S&P 500 high

THE S&P 500 hit a four-year high last week, but the rally is narrowing, notes Bespoke Investment Group. Back in April, when the index hit a new bull market high, 78 stocks – 15.6 per cent of the index – also hit individual highs. Last week, just 42 stocks hit new highs, or 8.4 per cent of the index. Market breadth is worth watching. Technical analyst Paul Desmond has found breadth deteriorates before markets top out, with an ever-dwindling number of large-cap stocks doing the heavy lifting. Desmond examined the 14 major market tops between 1929 and 2000; by the time indices peaked, just 5.98 per cent of stocks were also hitting new highs.

Trend followers to buy on weakness

FRANCE’S Cac-40 last week became the latest European index to trigger a so-called golden cross when its 50-day moving average crossed above its 200-day average. It follows similar moves by the FTSE 100, the Dax and the Stoxx Europe 600.

While investors were previously looking to sell on strength, trend followers may now be looking to buy on weakness, believing that they need to respect a change of market direction.

Despite gaining by 30 per cent in less than a month, trend followers will be less keen on Spain’s Ibex. Last week, the index stalled at its 200-day moving average, a juncture it has not traded above since July 2011.

Beware ‘Great quarter, guys’

US EARNINGS season is over, and the number of companies beating both earnings estimates and revenue estimates was the lowest since the bull market began in March 2009.

The Wall Street Journal’s Justin Lahart has come up with an original way of analysing earnings – he counted the number of times the phrase “great quarter, guys” cropped up in transcripts of earnings conference calls. It was said on 26 occasions in the last quarter, down from 34 in the previous quarter but higher than the 13 recorded two quarters ago.

Market strategist Cullen Roche reflected on when he used to trade earnings reports. “Great quarter, guys” was code for “upgrade coming your way!” he said. “So you’d hang on to the stock until the open, let the market buy the news and sell to move on looking for the next ‘great quarter, guys’.”

If the public only knew all the inner workings of the investment world, he added, “they’d probably barf all over themselves”.