As social media behemoth Facebook readied its initial public offering for one of the biggest share sales in US history, one prominent US investor and Facebook fan predicts only a short “relief rally” once the market digests the float.

As social media behemoth Facebook readied its initial public
offering for one of the biggest equity sales in US
history, one prominent US
investor, commentator and
Facebook fan predicts only a short “relief rally” once the market
digests a float of up to $16 billion.

Facebook is expected – according to media reports – to add
around 85 million shares to its IPO, floating a mammoth 442 million shares in
Friday’s sale.

That volume, coupled with sales of AIG stock by the US
Treasury recently, has weighed on a market that was previously benefiting from
a shrinking volume of shares, argues
Charles Biderman, chief executive of
TrimTabs, the institutional research firm.

The Facebook IPO has, for
the first time in many months, created the situation where the supply of stock will
outweigh demand, so it has helped to push prices down. Once the IPO is out of
the way there should be a “relief rally” although this is unlikely to last
long, he told Family Wealth Report.
 
“I have sold some stock to buy Facebook”, he said in a telephone interview from
San Francisco yesterday.
 
Between June 2011 and March this year, firms were buying up to $1.8 billion of
equities a day, set against money leaving equities – outflows from institutions
-- of around $800 million per day over the same period, meaning a net removal
of $1 billion per day. This shrinkage of free-floating stock has underpinned
the market, he said.

The weight of supply has
been a factor depressing prices, although the Greek debt debacle has also been
a force, Biderman said.

But while the shrinkage of
stock has – until recently – been a supportive factor, markets may struggle to
progress even after any Facebook-induced bounce, given economic uncertainties,
he said. By contrast, he remains a fan of gold, despite the odd recent wobble.
(Spot gold today traded around $1,536 per ounce; that contrasts with a record
high of more than $1,921 in 2011.)

Biderman’s comments about
how the volume of stock in a market can drive price levels carries echoes of
how, prior to 2008, equities were said to be supported by firms buying back
stock and engaging in leveraged buyouts. However, unlike that period before the
credit crunch, firms are now buying their own stock using hard cash.

Social media

The Facebook IPO is a
symbolic event, not just a financial market one, because social media is now a
significant part of how the wealth management industry interacts with clients,
the public, and industry peers. “Social media is now the business we [TrimTabs] are in,” Biderman continued.

“Facebook is unique; it’s one of a kind and it controls much of the social
media world now. I am glad there’s a lot of scepticism about the deal [IPO] in
the media. The reality is that once the firm becomes public it will be priced
according to its performance. So long as it does not screw up, they will be the
major social media play,” he said.

The IPO, Silicon Valley's largest, will
overtake the approximately $2 billion debut by Google in 2004 (source: Reuters). Facebook raised the target
price range to $34-$38 per share in response to strong demand, from $28-$35, Reuters,
citing a regulatory filing, said. That would value the company at $93-$104
billion, rivalling the market value of Amazon.com.

Gold

Away from the IPO,
TrimTabs’ Biderman remains bullish on gold, although the price of the yellow
metal has been dented as investors sold it to raise cash for the Facebook stock
sale.

The yellow metal is a worthy investment as it is a
safe haven both against the risks of deflation and inflation, and due to
emerging market demand, for example, he said.  
 
Biderman said he is due to start a retail product for individual investors,
with features such as a weekly video, transcript and description of his portfolio
changes and decision and revised list of holdings that people can follow. His
blog can be followed here.