First, an IPO price of $38 puts the value of the company at a little over $100 billion. A very large company by any standard. However, a company is worth what it earns. There is a relationship between earnings, the growth of earnings and the ultimate value of every public company. Facebook earned in 2011 one billion dollars. That means that their P/E is 100 at the IPO price. That is a steep price to pay when the market P/E is 15. Maybe it’s worth it if growth in earnings doubles over the next year. The problem with that is that sales revenue shrank 6% last quarter and it certainly does not give me any warm fuzzy feelings that earlier this week General Motors pulled their advertisement from Facebook saying it is not working.

Facebook is a great company but they still have to turn those millions upon millions of users into revenue generates for the company. and that revenue has to grow just as fast as new users utilize their system and that, at least so far, is not happening.

I am sure it will be a successful IPO launch and the stock price will rise but the facts tell me it is not going to be easy to maintain that lofty value.

Good Trading
Steve Peasley

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This morning the report of Industrial Production in April rebounded strongly from a poor showing in March. It was up 1.1% and was the strongest showing since December of 2010. Also, it was broadly based not confined to just one or two sectors.

Builder optimism rebounded as well. The Builder Sentiment Index rose to 24 which was the highest number since May of 2007. Still a reading over 50 is considered to be healthy. However, this morning a strong housing start report up 2.6% and strong revisions for March’s number reflected the better prospects of the construction industry.

The EU reported that overall they have not fallen into recession though many member countries have. That is because Germany, which represents 30% of the economic output for the entire Euro zone, surprised the experts with GDP growth in the second quarter of .5% instead of the .1% that was expected. That number with the size of Germany’s economy brought up the entire EU zone. There are some bright spots amongst the ruin of many economies of Europe and I note that those bright spots are all the countries that have practiced some fiscal discipline over the last many years or they are very small countries with little legacy of long term deficit spending.

Expect more of the same: improvement here in the U.S. and angst in Europe.

Good Trading
Steve Peasley

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Both China and India have started to move toward loosening their tight grip of money by lowering interest rates or allowing more lending. But current efforts are now seen as too weak and slow. More will be done now that the numbers for April are out showing a sharp decline in growth.

There is no doubt that what happens in the two most populated countries, one being the second largest economy in the world, will affect the U.S. It will add to uncertainty over the summer. At the same time stock markets will recognize efforts made by these two countries to reignite growth, thus stock prices will move up long before any benefit of their expansionary efforts are seen in their economies.

We are going see more volatility then we have seen in the first part of the year for stock prices. The volatility may not be a strong as it was last summer but that will depend on the economic numbers as they unfold over the months ahead.

Good Trading
Steve Peasley

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The weeks ahead are going to be full of angst over Europe. This week with radical elements being elected in France and Greece, markets around the world convulsed worrying about the two countries’ continued focus on reducing their debt. Surprisingly, the U.S. stock market seemed to be the place where calm trumped fear, though our market didn’t escape weakness. That calm was helped along by economic numbers reported this week showing continued slow growth with slight improvement in construction spending. We might even see construction adding to our GDP in 2012 for the first time in years.

Not all is clear sailing and certainly it should be expected that Europe will cause more problems, but there is nothing in any of the numbers that tells us that the U.S. will fall back into recession, unlike many parts of Europe. Also, if there were, the FED would be warming up their next QE program. It looks like China and other parts of Asia already have their QE out of the bullpen and on the playing field.

Good Trading
Steve Peasley

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