Don't Buy the Open - Facebook in Final Plunge

George Brooks  |

Investor’s first read - Brooksie’s edge before the open
Friday, August 31, 2012 9:17 a.m.
DJIA: 13,000.71
S&P 500: 1399.48
Nasdaq Comp.: 3048.71
Russell 2000: 808.64

Fed Chief, Ben S. Bernanke will deliver his annual message on monetary policy at 10 a.m. E.T. today. Investors are hoping they get guidance regarding QE3.

I think they will have to read between the lines, because an announcement will more than likely come when the FOMC meets September 12 – 13.

With many economic indicators reflecting softness, investors only naturally want reassurance the Fed will step in to head off another recession.

Also at 10a.m. will be the report for July Factory Orders. A Bloomberg survey of 60 economists concludes these orders rose 2% in July up from a decline of 0.5% in June. That news may offset the Chicago PMI report 15 minutes earlier where estimates are for a slight drop in August to 53.2 from 53.7 in July occurred.

The unknown here is the Consumer Sentiment report which comes at 9:55a.m..


Corporate bond sales in August topped a record $237 billion. With yields dropping to 3.72%. What will happen to the value of these bonds when interest rates rebound?

Depends on the maturity. If the bond holder can wait until maturity to cash out the value will be the same. But the purchasing power of the proceeds may not be, depending on the rate of inflation in the interim. In fact, the inflation rate over the years may wipe out the return on the bonds, especially since the coupon rate was so low when purchased.

If the bond holder cannot wait until maturity, he may take a huge hit, since the value of the bond drops as interest rates rise.
Seems to me investors are as sure that interest rates will never rise as they have been in the past that stocks would never decline. That is the kind of stuff that marks a top.

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Granted, global economies are struggling to avert a recession, and the U.S. government enjoys borrowing at historically low interest rates, but this too shall pass. Once recovery is underway, interest rates will rise along with economic recoveries and inflation.

TODAY: Resistance is now DJIA 13,122 (S&P 500: 1412). Look for a rally failure if Bernanke doesn’t deliver QE3 encouragement.
FACEBOOK (FB) at $19.09:

Last week was the week I said FB would hit its low, with a target of $16.88. While it posted an all-time low of $18.75, it held above that UNTIL this morning when it plunged in trading before the open as eMarketer (former FB bull) cut its earnings and revenue estimates for the year.

This looks like the final plunge when any big investor with a long-term outlook will consider buying though at lower prices, the kind a panicky selling climax produces. That can happen today or Tuesday within the first half hour of trading.

I picked $16.88 as the low, based on technical considerations.

Emotions are running high on this one, it can of course go lower if investors simply DUMP indiscriminately. Volume can exceed 300 million shares at the bottom.

Some buyers will nibble on the way down, big buyers may look for “blocks” to pick up a position.

I don’t own, nor have I ever owned FB. Generally, I don’t recommend or comment on individual stocks. I started covering FB technically after its IPO because I felt at $34 it was very vulnerable in face of all the misunderstanding and hype. At some point, I will drop coverage. I would like to see readers through the full cycle, from the $34 where I picked it up as “going lower” down to a bottom.

George Brooks

The writer of Investor’s first read, George Brooks, is not registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.

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