Financial Market Fears Overwhelm Facebook IPO Optimism

2012-05-18 22:55:00 John Kicklighter, Chief Strategist

The volatility surrounding initial public offerings (IPO) is notorious; but when large companies come into the market, there is often a draw of fresh capital to get a piece of the action. Attracting new investors into the market is an especially appealing consideration now. Since the 2008 financial crisis, there has been evidence that suggests that retail level investors have not contributed significantly to strong recovery in US equities. The chart below tallies domestic net capital flow in to / out of equity mutual funds measured by Investment Company Institute (ICI).

Financial_Market_Fears_Overwhelm_Facebook_IPO_Optimism_body_Picture_5.png, Financial Market Fears Overwhelm Facebook IPO Optimism

Source: Investment Company Institute

Given the sell off so far this month, Facebook’s IPO presents a bright light for lost traders to find their way back – assuming they want to be drawn back in. With a listing price of $38/share, the company opened high and subsequently slid. As shares were worked in after the 11:00 AM EST initial trade, the stock showed the expected, exaggerated swings and even encouraged a boost in volatility for fell tech firm Apple. However, as we can see in the chart below, the highly publicized event couldn’t shake loose of the malaise of the broader market.

Financial_Market_Fears_Overwhelm_Facebook_IPO_Optimism_body_Picture_6.png, Financial Market Fears Overwhelm Facebook IPO Optimism

Source: FXCM Marketscope and Bloomberg

Instead of the Facebook IPO tipping the balance back into the battered bulls’ favor by catalyzing a reversal from an ‘over-extended’ position and drawing new capital into the market, the pessimism of the broader market pulled the stock into its own wake. Through Friday’s close, the S&P 500 is down six consecutive days (the longest bear run since November 25) and has fallen 10 of the past 13 trading days. This is turning into a serious reversal without the ‘flash’ momentum that can quickly snuff a move out.

Financial_Market_Fears_Overwhelm_Facebook_IPO_Optimism_body_Picture_7.png, Financial Market Fears Overwhelm Facebook IPO Optimism

Source: FXCM Marketscope

If a headline event like the United States’ third largest IPO can’t rouse enough interest for at least a stall, there is clearly something more fundamentally pressing for the markets to concern themselves with. What could that be?

As stated above, the market recovery since the first half of 2009 has developed through dubious support. With a concerning lack of retail market participation (the bulk of speculative interest under normal conditions), brokers, institutions, hedge funds and governments / central banks (via stimulus) have to do the heavy lifting. Yet, this cumulative interest only stretches so far. Without greater interest from the broader investing community, the climb peters out as the backdrop starts to cloud. Among the concerns that are growing in prominence are the downturn in growth forecasts, expectations of a reduced stimulus safety net, rising correlations across various asset classes (making it difficult to diversify away risk) and a radiating financial crisis in the Eurozone.

In the chart below, we can see the progress in the deteriorating financial conditions for the region just through this month alone. At this pace, the situation is clearly deteriorating more rapidly. As we have seen with the spread of the US-born, sub-prime troubles back in 2008; the transmission of fear and financial retrenchment can have crippling consequences.

Date	Event	Key points
6-May	French Presidential	Socialist François Hollande elected;
	Election - 2nd Round	reiterates vow to renegotiate EU fiscal pact
	Greek Parliamentary	Fails to yield workable coalition;
	Election	anti-bailout parties stronger
	El Mundo newspaperreports	Reports Spain planning 30 billion Euro issue in June
	Spain to issue hispanobonos	Hispanobonos conceptually similar to Euro-bonds
		Bonds backed by Spain, proceeds flow to regional gov'ts
		Gov't neither confirms nor denies report
9-May	Spain nationalizes Bankia	Gov't converts preferred shares into
	(4th largest Spanish bank)	common voting shares, increases stake to 45 pct
11-May	Spanish gov't announces	Measures include:
	new banking sector	30 billion Euros additional loan-loss provisions
	measures	Transfer of repossessed property to special entities
		FROB loans with 10-pct interest rate
		Audits and valuation of bank loan portfolios
14-May	Moody's downgrades	Banks downgraded include UniCredit, Intesa Sanpaolo
	26 Italian banks	Moody's cites Italian recession, tight funding markets
15-May	Greek President Papoulias	Papoulias: depositors withdrew 700 million Euros on May 14
	speaks of deposit withdrawals	Cites conversation with head of central bank
16-May	El Mundo newspaper	Citing Bankia Chairman, El Mundo reports more than
	reports run on Bankia	1 billion Euros of deposit withdrawals since May 9
		nationalization
		Spanish Economy Ministry denies report
	ECB suspends loans to some	ECB cites undercapitalization, negative equity
	Greek banks	Affected institutions to rely on Greek central bank
		Access to standard refi ops to resume after recapitalization
17-May	Fitch downgrades Greece	Greece cut from B- to CCC
		Cites inconclusive election, "material" risk of Euro exit
		Fitch imposes country ceiling (effective rating cap) of B-
	Moody's downgrades	Banks downgraded include Santander, BBVA
	16 Spanish banks	Moody's cites weak Spanish economy, non-perf assets
	Spanish regional gov'ts commit	Spanish gov't approves fiscal adjustments of regional gov'ts
	to budget cuts	totalling 18.3 billion Euros

In tracking the intensity and breadth of selling pressure, a good read can be found through tracking the relative performance between the S&P 500 and EURUSD. The benchmark equity index is a reflection of the investing interests of a heavily-biased, long-only crowd. Given the heights the stock benchmarks have in particular scaled (with help from stimulus), a reversal can prove lasting.

For contrast, EURUSD follows the primary catalyst for this particular global correction. The European sovereign and banking-level crisis is clearly reflected in the world’s second most liquid currency – especially when paired against the top reserve and safe haven currency, the US dollar. With the bounce from EURUSD and follow through decline for the S&P 500 through Friday’s close, we could see a fundamental pressure relief for Monday or evidence that selling pressure is now self-generating for the capital markets.