Author: Ivanhoff

It has been a good month for the Social Web. Facebook ($FB) finally cleared new all-time highs and now even the gamblers who blindly sent buy-at-market orders on the day of its IPO are above the watermark. LinkedIn ($LNKD) raised a billion dollars in a secondary offering and its stock did not even blink. In fact, it is still trading near all-time highs. Twitter filed for an IPO, which probably explains the buzz around all other social web stocks.

We live in a fast world. Twitter has made it even faster. It started as a side company project and in a few short years, it became the most powerful media company in the world. Founded in 2006, raised its first money in the summer of 2007 – 3 million on a valuation of 17 million. In 2009, Twitter’s CEO Dick Costolo said that VCs value Twitter at 1 billion and he was laughed at. Who is laughing now? Initial projections are for a $14 Billion IPO. It is expected to reach revenues of more than half a billion dollars for 2013, but it is not profitable yet. In a counter-intuitive way, this is good news. Yelp was not profitable either when it IPO-ed. It means that it is relatively early in its growth cycle – not in terms of users acquisition, but in terms of monetizing those users.

Why is Twitter Going Public Now? At the top of my head, there are four distinct reasons:

1) The market is ready. You don’t go public when you have to, but when you can. Investment bankers are confident in the current ability of the market to absorb supply from big IPOs, especially in the social web field, which has never been so hot.
2) Twitter cannot get much higher valuation in the private market
3) VCs are pushing for an exit. The moment you take venture money, you have to start planning for an exit and for billion dollar companies, an Initial Public Offering is basically the only viable exit strategy.
4) Twitter needs money to compete for strategic acquisitions. Last year, they wanted to buy Instagram and were ready to pay 700M, but Facebook outbid them with $1 Billion.

Now, they will have the road trips, where Twitter management will try to convince a bunch of old men to invest your pension money into the new media shares. One thing is for sure, Dick Costolo won’t be wearing a hoody on those presentations. I don’t think he will have any troubles convincing the institutions.

How Will Twitter’s IPO affect you as an investor?

The rule of thumb is to stay away from any IPO that is widely publicized and massively expected. If your mom, who never cares about stocks, calls you and asks you if it is a good idea buy Twitter’s IPO, then you should definitely not buy.

The first six months to one year after an IPO are usually a period of ownership transfer – from insiders to mutual funds, hedge funds and retail investors. They are also a period of elevated volatility and trendless grinding. Historically, most big market winners, have started their ascent about a year after their IPOs. Yelp, Tesla and LinkedIn are good recent examples. There have been exclusions to the rule, but rare.

August was a challenging month for all asset classes. The escalation of turmoil in the Middle East added to the noise. All major indexes declined close to 2% last week. The ST50 index shed 0.81% for the week, because most momentum leaders consolidated through time rather than through price.

A new month is due after the long weekend. It is almost fashionable to be bearish in September. The three main arguments are tapering, the possibility of a war in the Middle East, which could further boost the price of oil and the infamous chart showing the record levels of margin.

The topic about tapering has been chewed since May. Its potential negative impact on assets is well known. Capital markets tend to over-discount identified risks. At this point, even my grandmother has heard of tapering. The only people that think it will have a sustainable negative impact on stocks are journalists, whose job is to earn eyeballs and pageviews, not manage money.

If there is a war in Middle East, it will likely last a couple weeks. Its potential impact on oil prices has already been discounted, maybe over-discounted.

Regarding the margins at record levels chart – it has been used as a bearish argument during the entire 2013 and has not mattered at all. At some point, it will.

Investors have been extremely reactive to slight market changes. A few down days in a row and sentiment turns bearish. A few up days in a row and sentiment turns bullish. Such frequent change of mind is typical for range-bound, choppy markets. There are two explanation of this phenomenon:
1) overinvested (on margin) market participants are afraid that leverage could kill them if the market declines further
2) underinvested market participants are afraid that if the market makes new highs, they will be left behind and under-perform again, which means they are likely to lose clients.

The whole situation has made technicals extremely important. Lower prices are likely to lead to more selling, margin covering and even lower prices. Higher prices are likely to lead to more buying, chasing and even higher prices.

The distribution days are piling in. Staying below their declining 20dmas, the indexes look vulnerable to further downside. Bearish setups have been extremely unreliable this year, but there is place and time for every strategy to work. Investing and trading are all about conditional thinking. If $SPY loses $163, it is likely to test $160, then $155.

The market environment remains challenging. Breakouts lead to 4-5% moves and then fizzle quickly. Most leading stocks are either breaking down and testing their rising 50 and 100dmas or consolidating through time in best case scenario.

$DDD attempted to break out last week, but the gravity of the market kept it at bay. The whole 3D industry has shown relative strength throughout the month of August. If history is a good indicator, this means that it will outperform once the market averages recover.

It is Christmas in September for gadget lovers. Samsung and Apple are expected to reveal new products. The rally in select semiconductor and tech license stocks is not an accident. The market is discounting the potential impact of new products on their sales. $INVN, $CRUS, $MPWR, $SWKS, $NXPI among others stood out in the sea of red last week.

There are still plenty of setups on the St50 list. $MDSO and $N made a good impression on Friday and are near breakout points. We always take new setups when they trigger, because we don’t know in advance which setups will fail, which will deliver a small gain and which will turn out to be a home-run. It is true that during choppy market environment, most setups fail. It is also true that many future market leaders will break out to new highs while the indexes are still struggling. The only thing we change is position size and the current market environment calls for a lot smaller position sizes.