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.