5 Weekend Thoughts: The Market Rallies, Facebook Sells Off, and What About the Fed?

the number 5, abstract number 5, fiveBy Alex Salomon
What a week!! It was another roller coaster on Wall Street, swinging from down and flashing sell signals to up, up and… up. Starting with the financial markets, here are my five thoughts for the week.

1.  I have touched on the concept of real-time information for investors before and my first thought of the week deals with Twitter and similar real-time blogging tools. If you are an investor and if you use Twitter or similar sources of information, this week was a blessing to consider cleaning up some of the sources you follow. Let me explain: this week saw 3 important reports, (1) Apple (AAPL) reported earnings (that missed, badly, yielding losses to common stock holders); (2) Facebook (FB) reported earnings (yielding a see-saw move from +3.5% to -15%; (3) the stock market went from tenuously bullish to decidedly bearish to squeezingly bullish again.

So why is this week a blessing for cleaning up my “follows” and sources of information? Well, after thinking about the week, I decided to go on a hunt and un-follow any of the following offenders: traders who were bragging about being short Apple AFTER the report; traders on Friday who claimed they were bulls and positioned for a squeeze since Wednesday (AFTER the squeeze); and for good measure, anyone bragging about not having had any loss yet in trading Facebook (at any point).

In short, I followed about 180 people and trimmed that to 140.

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On the other hand, I have gained huge respect for the few winners; those who went short Apple BEFORE the earnings; who were still resolved in bullishness on Wednesday night or BEFORE; and those who have owned up to mis-trading Facebook at least once.

This week was definitely a test and it helped me sort through my information log.

2.  Speaking of Facebook, I have owned the stock since its IPO day (at $39.80), adding again recently to dollar cost average lower. But, before it is collectively buried, let us gently remember that Apple was technically “broken” more than once before its run, that Google was once hated and referred to as “just an ad company,” that Amazon was never going to turn a profit, and that, on the other hand, housing prices would go up forever and that Citigroup was a steal at $500.

There are no certain deaths or successes in business. For this reason, it is still premature to bury Facebook (the company), yet clear that Facebook (the stock) has acted poorly and caused many financial aches. To be certain, my position in Facebook is small enough that it could go to $0 and I would be OK… so we are not talking about an emotional connection here. But for a company this large, this ground-breaking, still projected to make over $4B in annual sales, to be buried as a fad or future bankruptcy only wakes up the contrarian investor in me.

3.  If you have been reading this weekly column, then you have come to know Mr. Draghi. Otherwise, it is time to meet the most important man in Europe currently: Mario Draghi, President of the European Central Bank. I have covered a lot of ground about “Super Mario” and believe that he holds the keys to solving the EU crisis. On Thursday, he came out guns blazing and pretty much boxed himself into a corner by saying that he would do whatever is necessary to protect the Euro and the Eurozone.

As a quick roadmap, a temporary but strong solution to the current woes could involve any of the following measures: coordinated Central Bank efforts; Spain & Italy officially asking for the EU’s help and protection (thereby officially mutualizing risks and debts) and yielding Spanish & Italian bond purchases by the ECB, maybe even by the US Fed; QE3 or reflation (aka “natural, bull market QE”) in the States (that would help Europe); strong measures in China; and finally, tax hikes in Japan alleviating its currently obscene 200% GDP to debt ratio.

It is early, and some/many of these measures may not happen, but if Draghi signaled the start of a serious move, we could be enjoying a period of welcomed euphoria after months and months of gloom and doom.

4.  Seeing both sides, in the backdrop of pure Real Politik, it is worth noting that euphoria and better financial days are the bane for Mitt Romney’s campaign, which needs to feed on more gloom so he can become an economic savior. It is pure Real Politik and very cynical, but it is important to see both sides. And speaking of “gloom and doom”, I am very keenly aware of the flip side of the “Draghi trade:” if he fails to deliver, if he cannot move past strong opposition to more stimuli, then we will likely see a strong, durable free fall for world economies, stock markets and most classes of assets. That flip side scenario is grim; there are no winners in pure deflation. And make no mistake: if Draghi cannot act and assist Spain and Italy, then France will fall next, then maybe Germany. And the EU may drag the rest of the world into a true financial crisis that would make 2008 feel like it was a walk in the park.

I am often reminded that my generation has not yet experienced the hardships and fears of 1929, 1939, the sixties, 1973, and 1987… And I would like to keep it that way, thank you very much!!

5.  I will wrap up the week with something slightly more philosophical: the whole concept of whether Draghi and the Central Bankers will indeed intervene or not tends to stir passionate discussions on “Free Markets” and how the markets are no longer “free.” I read and follow heated debates on how we should live in a world with “Freer Markets” but I cannot help wondering whether we have ever experienced a time of “Freer” markets? I could probably write an entire column about this, but I am somewhat perplexed by the view from the “Anti-Interventionists.” At least since LTCM and 1997-1998, we have had Central Bankers help the markets right the course at each crisis. But then even before that, haven’t we always experienced some interventionism, whether materialized by wars, embargoes, trade policies, government policies, diplomatic stances and rifts? It is an open question, but I just cannot let go of the fact that “Anti-Inventionists” talk about something akin to an Eden, a promised land but I am not sure we ever experienced it. Maybe in the Far West 150 years ago?

Have a good week, stay nimble, and don’t let the dogma bite!


Twitter:  @alex__salomon   @seeitmarket     Facebook:  See It Market

Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of his employer or any other person or entity.

Position in Apple (AAPL) and Facebook (FB) at the time of publication.