Blog Posts by Henry Blodget

Follow The Daily Ticker on Facebook!

There is a lot of finger pointing going on about Facebook's initial public offering last Friday.

A lot of attention is being focused on the social media giant's Chief Financial Officer David Ebersman, who decided to increase the number of shares offered to investors by 25 percent days before the IPO. The Wall Street Journal writes, "That decision by the 41-year-old Facebook executive may have doomed any real chance the social-networking company had that its stock would jump on its first day of trading—a hallmark of successful IPOs."

As the Facebook IPO rapidly becomes a public-relations and legal nightmare for the company and its Wall Street underwriters, there are legitimate complaints to be made, but laying blame on the CFO is not one of them. (See: Facebook Fallout: Morgan Stanley May Face Legal Liability, Attorney Says)

Investors are really frustrated about three aspects of the IPO, which not long ago was being hyped as the deal of the century.

The first problem, a legitimate complaint, was that NASDAQ's computer systems failed on the morning of the deal. This led to many investors being unable to place or cancel stock orders or being left in the dark about whether their orders had been executed. This "glitch" may well have caused some investors to lose money.

Follow The Daily Ticker on Facebook!

And now comes some news about the Facebook (FB) IPO that buyers deserve to be outraged about.

Reuters' Alistair Barr is reporting that Facebook's lead underwriters, Morgan Stanley (MS), JP Morgan (JPM), and Goldman Sachs (GS) all cut their earnings forecasts for the company in the middle of the IPO roadshow.

This by itself is highly unusual (I've never seen it during 20 years in and around the tech IPO business).

But, just as important, news of the estimate cut was passed on only to a handful of big investor clients, not everyone else who was considering an investment in Facebook.

This is a huge problem, for one big reason:

• Selective dissemination. Earnings forecasts are material information, especially when they are prepared by analysts who have had privileged access to company management. As lead underwriters on the IPO, these analysts would have had much better information about the company than anyone else. So the fact that these analysts suddenly all cut their earnings forecasts at the same time, during the roadshow, and then this information was not passed on to the broader public, is a huge problem.

Any investor considering an investment in Facebook would consider an estimate cut from the underwriters' analysts "material information."

What's more, it's likely that news of these estimate cuts dampened interest in the IPO among those who heard about them. (Reuters reported exactly this--that some institutions were "freaked out" by the estimate cuts, as anyone would have been.)

In other words, during the marketing of the Facebook IPO, investors who did not hear about these underwriter estimate cuts were placed at a meaningful and unfair information disadvantage. They did not know what a lot of other investors knew, and they suffered for it.

Selective dissemination of this sort could be a direct violation of securities laws. Irrespective of its legality, it is also grossly unfair. The SEC should investigate this immediately.

We first heard rumblings about this last week, and we were so startled that we assumed the reports were wrong. Then, over the weekend, when Reuters reported the basic story again, we said that if it was true, Facebook IPO buyers deserved to be "mad as hell" about it. And now Reuters has the details, and they sound as bad as we had feared.

There are a couple of possibilities for what happened.

Facebook (FB) traded sharply lower this morning, crashing through Friday's IPO price.

And this unleashed a new round of criticism and disappointment among investors who apparently thought they would get a lot of free money from Facebook just for participating.

There are two specific complaints about the IPO.

The first, that NASDAQ blew the offering and hurt investors when its systems failed to confirm trades, is a perfectly reasonable complaint. Investors deserve to know immediately when their trades are executed. And the fact that NASDAQ's system choked is a major embarrassment for the exchange. (See: Trading Glitches at Nasdaq Mar Facebook IPO)

The second complaint appears to be that investors didn't get as much free money on the IPO as they thought they would.

This complaint deserves much less (no) sympathy.

Why?

Because buying an IPO in expectation of a "pop" is speculating. And speculation has downside risk in addition to potential gains. And anyone who chooses to speculate should understand that.

On Thursday, Facebook priced its IPO at $38.

Follow The Daily Ticker on Facebook!

Last week's JP Morgan blowup has now put any lingering questions to rest:

Wall Street banks simply cannot be trusted to manage the massive risks they are taking.

After the financial crisis, when most of the world's banks were revealed to have been run by reckless gamblers, a couple of institutions stood above the fray.

JP Morgan was one of them.

The idiocy of a handful of gamblers should not be construed as a problem with the system as a whole, institutions like JP Morgan said.

Well-run banks should be trusted not to be so colossally reckless and stupid. Well-run banks should be allowed to manage their own risks. Well-run banks should not be hammered with strait-jacket regulations that would stymie their marvelous money-making innovation. Well-run banks should be free to look after themselves, like responsible adults.

The banking lobbying engine rushed this message to Washington and threw money around. And the bankers quickly persuaded Congress

Follow The Daily Ticker on Facebook!

Facebook's (FB) IPO should finally price this week (the target date is Friday). The offering is already more eagerly awaited than any in history, and most investors feel compelled to take a look at it.

With this in mind, here are the basic bull and bear cases.

On the bull side, Facebook's growth over the past 8 years has been nothing short of staggering. What started as a dorm-room coding project has now grown into a service used by 1/8th of the world's population. If Facebook's user growth continues, and there's no reason to think that it won't, Facebook will probably have 2-3 billion users in a few years.

The business is also off to an excellent start. Facebook only began focusing in earnest on the business side three years ago, and it has now amassed $4 billion of revenue and $1 billion of profit. The company's operating margin is extraordinary--50%--because it doesn't have any content production costs (the users do all the work). Given how

Follow The Daily Ticker on Facebook!

Last fall, some U.S. economic data began to come in weak, and the stock market sold off. This prompted many economists and analysts to begin talking about the possibility of a new recession.

One analyst, however--Lakshman Achuthan of the Economic Cycle Research Institute--did not just talk about the possibility of one.

He said, definitively, that the U.S. was "tipping back into recession. And there's nothing that policy makers can do to head it off."

Well, the U.S. economy did not tip back into recession. In fact, the data started coming in better-than-expected again, and the country experienced modest growth in Q4 and Q1.

ECRI's forecasting model often antagonizes observers because it's a "black box": ECRI refuses to say what data points it includes in its leading indicators. So when the U.S. did not go into recession, Lakshman Achuthan was once again pressed for details about what went into his definitive recession call--and he was often upbraided when he refused to say.

Follow The Daily Ticker on Facebook!

Pretty much anything is legal in Nevada, so it's no surprise that the state has become the first in the nation to issue a license to Google (GOOG)to operate its self-driving cars.

These cars, you will recall, have been under development for years.

And now they have passed a battery of tests set forth by Nevada, including:

• Combined driving time of 10,000 miles
• Submission of a description of the self-driving technology
• Submission of safety plan
• Submission of plan for hiring and training drivers (who are supposed to be unnecessary)
• If the cars pass these tests, the operators are given fancy red license plates. And then they're free to self-drive.

So are self-driving cars for everyone just around the corner?

Unlikely. But they don't seem nearly as far-fetched now as they did a couple of years ago.

We've long since gotten used to the idea that computers can fly our planes, take our photos, and manage our communications, and at some point, we'll probably

Apple's (AAPL) stock has pulled back sharply in recent weeks, falling ~10% from a high of $645 to $570.

This is in part due to the spectacular moonshot the stock enjoyed during the fall and winter, when it blasted from $400 to nearly $650. Apple's stock has often sold off after moves like this, and the current pullback may be just more of that behavior.

But, still, a change in trend like Apple's may indicate a fundamental concern. And these fundamental problems often start small and grow in importance over time, dragging the stock down with them.

So it's worth thinking about what investors might be worried about.

There are still a couple of catalysts that could drive Apple's stock higher this year, namely the launch of the iPhone 5 and the expected debut of the full-fledged Apple TV in the fall. But analysts have begun backing away from the expected launch date of the TV in recent weeks, which may be having some impact.

And there's the broader and more profound concern that, by 2013,