Facebook’s epic fail

Maybe the dumb money wasn’t so dumb this time.

The stock market did turn out to be a voting machine on Facebook on Friday (to quote Warren Buffett and Benjamin Graham), and the vote was thumbs-down on flapdoodle.

Market pros will be debating the lessons to be drawn from the disastrous first-day trading in Facebook’s initial public offering. But one lesson is that when given enough information, investors can find their way through fogbanks of hype.

When a stock offering is as closely followed as Facebook’s, it’s much more likely that the shares will be fully valued than that they’ll harbor hidden treasure. Facebook went public at $38 a share, and after a day of epically heavy trading, closed at $38.23, for a gain of 0.61%. Not quite the huge pop market mavens were predicting.

The expected pattern is that public investors — “dumb money” in Wall Street regard — react more to hype than to fundamentals. That’s why savvy Wall Street traders take it as a bearish signal when small investors pile into a stock or the stock market.

This time the expected frenzy didn’t materialize. What accounts for the disappointing showing? A few things come to mind. Among the downsides of becoming a public company is that your dirty laundry gets a public airing. In the run-up to the IPO, Facebook’s linens were out on the clothesline for all to see.

There was broad coverage of the company’s slowing growth, and its difficulty in placing advertising on mobile devices, through which more than half its users access the website. It didn’t help that General Motors announced just days before the offering date that it was withdrawing all its paid advertising from Facebook out of doubts that the site is an effective advertising medium.

Wall Street prognosticators dismissed some negative leading indicators for the Facebook IPO, including news that institutional insiders such as Goldman Sachs had increased the number of shares they would sell into the IPO, and that allocations of shares to brokerages to push to their clients were also increased at the last minute. Normally, these are signs that interest is lagging, but many on the street figured that the public excitement would prevail.

Facebook may yet be overpriced. Morgan Stanley and its fellow underwriters of the IPO undoubtedly spent millions of dollars, maybe hundreds of millions, propping up the stock Friday so it wouldn’t fall below the $38 offering price, as that would have been a huge embarrassment. No one knows how long they’d continue to do so.

Additionally, in about a week the shares become eligible for short-selling, which could place more pressure on the price. A few months from now, insiders prohibited from selling their own share will have the green light, and millions more shares will enter the marketplace. The question in coming weeks may no longer be how high Facebook can soar, but how low can it go?

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