● There have been some big economic headlines out this week. Like yesterday’s US non-farm payrolls report, which showed more jobs being created – and shorter dole queues – than expected.
But while that’s important for stock markets, the biggest piece of investor frenzy was caused by talk about one company’s trading debut. Again in the States, Facebook said it would list it’s shares this year.
There’s no doubt it will be a big success, says John Stepek in Thursday’s Money Morning. But “I still won’t be buying in”.
There are lots of reasons why a Facebook IPO will succeed. Google and Apple have proved that “big flashy tech stocks” can deliver for investors. Facebook is a big name, so it attracts a lot of interest. “The US Securities and Exchange Commission’s website almost crashed yesterday as it was overwhelmed by traffic. This listing has been a long time coming, and lots of people want to get in on it.”
Even the fact that founder Mark Zuckerberg and his close allies will retain control of the company with almost 60% of shares isn’t necessarily a bad thing, says John.
After all, “this is what you get with visionary technology companies. Google has the same sort of structure. And I’d rather buy stock in a company led by a highly committed, heavily invested founder who cares about his creation, than one that’s been hijacked by employees who only care about their next pay packet (yes, I’m talking about the banking sector)”.
● So why won’t John buy in? “Because investing is not about taking monumental punts on companies which you only vaguely understand. It’s about forming a clear understanding of the risks and rewards involved in buying a company, then deciding whether there is enough potential reward to make taking the risk worthwhile.” And for John, Facebook doesn’t fit those criteria.
Facebook is already looking very expensive. Private stakes have already swapped hands among the Silicone Valley investment fraternity and that’s pushed up the price. For Facebook to match Google’s post-IPO returns it would have to become the world’s first $700bn company.
“If you buy Facebook for the long run, you’re betting on its ability to make an awful lot more money than it already does, in order to justify its valuation. Given that there are a lot of well-established tech stocks that already make plenty of money, and sport a much lower valuation – such as Microsoft (US: MSFT), or even Apple (US: AAPL) – I don’t see that the risk / reward balance here is attractive.”
Indeed, my colleague Phil Oakley thinks Apple looks far more inviting for investors: Forget Amazon – buy Apple shares instead.
● Tensions between Argentina and Britain continued to rise this week over the Falklands. The Argentines have gotten the hump about Britain sending the Duke of Cambridge and HMS Dauntless to the Islands, while Britain maintains that both were sent as part of a routine deployment.
The real reason that Argentine President Cristina Fernandez de Kirchner is angry is oil, says Tom Bulford in Tuesday’s Penny Sleuth newsletter. She “must be spitting blood. Having done everything she can think of to warn people off the Falklands, investors have taken absolutely no notice”.
“In December, Kirchner rallied South American nations to impose a ban on ships bearing the Falklands flag. And she’s urged Argentine fishermen to catch the shoals of young illex squid that otherwise make their way to Falkland waters where, older and fatter, they provide the islanders with a large part of their national income.
“None of these tactics have put off investors chasing the Falklands oil story”, notes Tom. Indeed, shares in the five quoted Falklands explorers have risen by as much as 68% by the start of this year. Meanwhile, Falklands Island Holdings (FKL), a general holding company that acts as a bellwether for investor sentiment about the Islands, has risen by 32%.
One explorer reckons it’s found 1.3bn barrels of oil. That’s a significant find in itself. But it also gives hope that there’s even more oil in the region. That’s why larger oil companies have flown to the Falklands in recent weeks says Tom. They’re keen to get their hands on the reserves and they’re not worried about the politics. After all, most new oil projects these days are found in challenging areas.
“Big oil companies need to go to wherever the oil is because it sure isn’t going to travel to meet them. So their preferred strategy is to diversify risk through having several projects in different parts of the world.”
A new deepwater rig has just arrived at the Islands. If it finds the monster oil fields that many people believe exist, then the political tensions will increase. As will the share prices.
“The moment of truth is coming”, says Tom. He was one of the first to pick up on the investment potential of the Falkland’s oil and is always scouting for exciting small-cap opportunities. You can sign up to his free twice-weekly email here.
● Blockbuster IPOs and Falklands oil stories are welcome distractions from the ongoing eurozone saga. This week, the IMF did its bit to keep Europe’s problems in the news by threatening that it could drag the world into depression and even war!
Scary stuff. But Paul Hill, author of the Precision Guided Investments newsletter, is far more sanguine, saying that “from an investment perspective, I don’t think we need to be quite so theatrical”.
“Just look around you. Confidence is improving. Last Friday, America reported that Q4 GDP had expanded at an annualised pace of 2.8%. But that’s not all. Inflation in the UK is falling (CPI now at 4.2%), and output would be picking up if it wasn’t for the eurozone’s austerity measures. Sure, Chinese growth has slowed to 8.9%, but there is no sign of a hard landing. And with the euro weakening as well, this should slowly feed through into better prospects for the region’s exporters”.
“Plus with the Bank of England and the Federal Reserve both promising to keep interest rates at record low levels until 2014, there’s plenty of scope for more monetary juice.”
Of course there are risks, says Paul, but these are being overstated at the moment. And that creates opportunities for brave investors. “With this in mind over the next month, I plan to build up our list of undervalued targets. When or if the correction occurs, we have a shopping list of deeply under-valued companies ready and waiting.”
Paul pulled off a similar move in August, when the FTSE 100 dropped through the 5,000 barrier. It wouldn’t be fair on Paul’s investors to reveal what’s on his watch list this time but if you are interested find out more here.
● On her blog Merryn Somerset Webb has been railing against the money printers: Why ‘free money for everyone’ wouldn‘t help anyone.
Recently, there have been calls for ‘proper’ money printing, which would involve giving money directly to high street shoppers. Merryn is not a fan. “It might give GDP a little short-term consumption-based blip as people move spending forward, although even that is only a given if people would normally have spent less than the full value of the voucher”.
“It is also unlikely in a deleveraging economy (such as ours) that it would even increase total consumption over a full year: people worried about the future are likely to use the voucher to bring forward spending – offsetting it by bringing down future spending.”
The other reason Merryn isn’t a fan is because she’s seen it before. “The Japanese tried this in 1999 when I was living in Tokyo (the same year they lowered the target interest rate to zero). The government printed and posted 31 million shopping coupons worth ¥20,000 each to families with children and to the elderly. The coupons had to be used within six months and could only be used in each recipient’s local community.”
The result? Nothing much. Studies found that there was no effect on the consumption of non-durable goods or on services, and a very small positive effect on the consumption of durable goods.
But while the rewards are small, the risks are considerable, says Merryn. “Money is about confidence. Mostly, people have confidence in sterling (be that right or wrong). But if they actually see money or money equivalents being printed and dumped on their doorsteps, how happy will they feel about the value of the money they already hold?” Rising inflation is very likely to follow.
● It seems money printing is an important issue for many of you. Merryn’s blog soon picked up lots of comments. ’Boris MacDonut’ argues that inflation would benefit some people: “Surely free money for everyone would create a bit of inflation and be good for those with debts”. But ‘Segedunum’ counters that while inflation is generally good for people with debts, “runaway inflation is not good for anyone because if you have more of something each individual something is naturally worth less. It will also kill savers and people will drop their currency for anything of any remote intrinsic value”.
It’s an interesting debate. So if you haven’t read the blog yet, Why ‘free money for everyone’ wouldn‘t help anyone.
● Regular readers of Money Morning and MoneyWeek magazine will know that we like defensive stocks. Put simply, we think the economy is in for a tough few years and defensive stocks are the ones most suited to do well in this difficult period.
But how do you spot a good defensive stock? This week MoneyWeek deputy editor, Tim Bennett answers that question in his latest video tutorial: What are defensive stocks? Definitely worth a watch if you agree with us that defensives are still the place to be.
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Have a great weekend!
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• Tim Bennett
• James McKeigue
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