This past week, there were two stock market topics that were widely discussed. One was company-specific to a degree, but the action that made the topic fodder among the investment community, talking heads and pundits was one that bears watching no matter what company you may be invested in. The other is far more reaching in terms of the overall market mentality and has many speculating that hopium is fueling the stock market near term. For those wondering what hopium is, it’s the combination of hope and opium and is used to convey the addictive nature of hoping that something may happen.
The first was the unloading of Facebook shares by board member Peter Thiel. While not a household name, Mr. Thiel was one of the founders of eBay’s PayPal payment service as well as a founder of hedge fund Clarium Capital Management and venture capital firm the Founders Fund. In May, Mr. Thiel owned 44 million Facebook shares, and over the past three months he liquidated 89 percent of his Facebook holdings. Keep in mind that Facebook went public only 14 weeks ago and that Mr. Thiel is a board member.
What alarmed many was that he sold roughly 80 percent Aug. 17 in one fell swoop. The issue that has many tongues wagging is that it fuels the thought that something may be seriously wrong with Facebook if a longtime director suddenly sold out his position and did so in size. There is a class of investors who watch insider buying and selling activity as an indicator as to whether they should be buying or selling shares of that company. As I have said many times, there is no silver-bullet indicator, but generally speaking, if insiders are dumping shares, I tend to shy away from that company as an investment opportunity.
Given the post-initial public offering, or IPO, performance of Facebook’s shares, some will argue that Mr. Thiel was cutting his losses. That begs the question as to his lack of confidence about whether Facebook management can deliver in the coming months and whether the shares can move higher after having fallen more than 45 percent since the IPO. For those sniffing around Facebook shares near $20, Mr. Thiel’s sale has raised another specter of doubt. As I have said many times, the market abhors uncertainty and odds are that Facebook shares will be under scrutiny for a while longer.
IPOs of companies are tricky things and, generally speaking, I back away from investing in them for a variety of reasons. Lack of an operating track record and the eventual lockup expirations associated with the offering are two reasons. With Facebook, I have been concerned about what the shift toward mobile means to its business. Regardless of Mr. Thiel’s sale, my concern remains.
The second chin-wagging event was Wednesday’s release of the minutes from the Federal Reserve’s July 31 and Aug. 1 policy meeting. Contained in those minutes was the following language: “Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.”
Looking at Wednesday’s stock price chart on the S&P 500, the market interpreted the Fed’s words as an indication that it is likely to ease further and do so before too long. Factor in surveys highlighting cuts to second-half 2012 economic growth forecasts, and it’s easy to see why hopium is giving traders rose-colored glasses.
While unemployment has trended higher in the past few months, what may limit the scale and scope of any additional Fed easing are economic data over the past few weeks that suggest the economy is not falling off a cliff.
Is the U.S. economy robust?
Not at all, but that doesn’t mean conditions warrant action on par with past quantitative-easing measures. To the extent that trader expectations are looking for another full-fledged third round of bond buying by the Fed, they could be setting themselves up for disappointment. This means, however, that between now and the Fed’s Sept. 12-13 meeting, any and all economic data received will be under intense scrutiny.
Chris Versace is editor of the PowerTrend Brief and PowerTrend Profits newsletters. Visit them at ChrisVersace.com or follow him on twitter @chrisjversace. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.