 | Was Facebook the most over-hyped IPO of all time? It sure looks like it. Trading on Day #1 of FB was less than stellar – it closed at nearly unchanged.
If you watched the share price convulse last Friday, you may have noticed that it was able to hold the $38 level each time it traded there. Did you know why? Lead underwriter, Morgan Stanley, had to support it there. Will that happen forever? Of course not.
In fact, Reuters said the following on the topic…As the underwriter, Morgan Stanley (NYS:MS - News) stepped in to support Facebook's stock when it fell toward its $38 IPO price shortly after it opened, a source familiar with the matter told Reuters. The shares spent much of the last hour of Friday trading near that price, with onlookers watching to see if it would post a $37.99 price - which it did not.
But the bank will not support the stock indefinitely, analysts said, and once that firepower is gone, funds that received IPO stock looking for a bounce may decide to bail as well.
Lead underwriters in a stock essentially "short" the stock through what is known as an "over-allotment" of shares - they sell shares to the market that they do not own. If the stock has trouble, which Facebook did, the underwriter supports it by then buying more stock at the IPO price.
Had Morgan Stanley bought all of the shares traded around $38 in the final 20 minutes of the day, it would have spent nearly $2 billion. The "green shoe" overallotment, which can be used to support Facebook's stock, is 63 million shares. At $38 per share, that amounts to $2.4 billion in firepower.
…"A Herculean effort by the underwriters, I would call it," said Jeff Matthews of hedge fund firm Ram Partners. "How could it be a hot deal if all the usual mutual fund suspects already own some going into the IPO?" he added.
The classic move by an underwriter to stop an IPO from "breaking issue" worked, if only barely.
Given the technical issues that plagued Nasdaq, with the stock opening about 30 minutes late and delays in receiving order confirmations continuing throughout the session, it is also hard to know how much Friday's action reflected reality.
"You really don't know how that left people, whether there were sellers who put in limits that weren't executed," said Rick Meckler, president of investment firm LibertyView Capital Management, a hedge fund with $1.3 billion in assets.
"I don't know if people stepped away at some point because they just couldn't execute in a clear manner, and that Monday we will have some follow through of people that weren't executed and still need to sell."
Monday will certainly be interesting for FB in particular, but the market in general. Will there be a short covering pop now that FB is out of the way?
Trade well and follow the trend, not the so-called “experts.”
Behold the age of infinite moral hazard! On April 2nd, 2009 CONgress forced FASB to suspend rule 157 in favor of deceitful accounting for the TBTF banking mafia.
larrylevin@tradingadvantage.com
Trading Advantage
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Trading Signals from the Electronic (ES) mini-SP 500 - No “Secret” signals today.
- Algorithm positions (5)
- “Reading the Tape” positions (5)…combined Secret’s, Algo, & “Reading the Tape” total… -2.25
ES 1306.50 / 1294.00
POC... 1305.00
YM 12438 / 12360
NQ 2511.50 / 2484.50
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