May 25, 2012 – 2:57 PM ET | Last Updated: May 25, 2012 3:14 PM ET
Reuters/Facebook/Handout
Facebook IPO fiasco deepens investors’ fear of stock market - Individual buyers’ willingness to venture into stocks was undercut by difficulties in executing trades on the first day of trading on May 18, Facebook’s subsequent decline and questions over whether the firm and underwriters selectively disclosed material, nonpublic information.
Facebook Inc.’s initial public offering, plagued by trading errors and a 16% drop in the share price, will push more individual investors out of a stock market they already distrust after the financial crisis.
“This is clearly the latest in a long string of events that is eviscerating the confidence investors have in the market,” said Andrew Stoltmann, a Chicago attorney who represents retail investors. “The perception is Wall Street jiggered this IPO so the underwriters made money, Facebook executives made money and the small investor got left holding the bag.”
Individual buyers’ willingness to venture into stocks was undercut by difficulties in executing trades on the first day of trading on May 18, Facebook’s subsequent decline and questions over whether the firm and underwriters selectively disclosed material, nonpublic information.
“If you have a lot of angry people out there, they’re going to express their anger in different ways,” said Steve Sosnick, equity risk manager for Timber Hill LLC, the market- making unit of Greenwich, Connecticut-based Interactive Brokers Group Inc. “One of them may be with their feet.”
Some retail investors still haven’t moved off the sidelines after pulling out of the market during the 2008-09 financial crisis. The Standard & Poor’s 500 Index has made no progress in more than a decade, currently trading at levels first seen in 1999 following two bear markets that wiped out about 50% from the index. The May 6, 2010, rout known as the flash crash erased US$862-billion in less than 20 minutes, undermining confidence in the structure of equity markets.
Fund Redemptions
Investors have withdrawn money from mutual funds that invest in U.S. stocks for five straight years as of December, according to the Investment Company Institute, a Washington- based trade group. U.S. households held about US$8.1-trillion in corporate equities at the end of 2011, about 16% less than the US$9.6-trillion they held in 2007, according to Federal Reserve data released in March.
Increased volatility, high correlation among stocks and the flash crash are among a “whole basket-load of things” that have caused retail investors to be skeptical for several years, said Ron Sloan, who oversees about US$11-billion as chief investment officer of the U.S. core equity team for Atlanta- based fund manager Invesco Ltd. “This is just the icing on the cake.”
Lowered Estimates
Patricia Arroyo, 53, a psychologist and executive coach in Boston who manages her own investments, said, “What shakes my investor confidence more than the glitches is to see all the institutional investors, insiders and favored clients get all the advantages in these situations.”
After Facebook said on May 9 that growth in advertising had failed to keep up with user gains, analysts at some banks underwriting the deal cut their earnings estimates, said people familiar with the process. The new estimates were relayed to institutional investors.
http://business.financialpost.com
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