Where to Go: Treasuries or Facebook?

05/25/2012 7:45 am EST

Focus: FUNDS

Ron Rowland

Editor, All Star Fund Trader

The social network company may have won the headline war for the week, but the IPO certainly became a cautionary tale quickly, observes Ron Rowland of All Star Fund Trader.

The most anticipated initial public offering in years came to market last week, but investors seemed far more interested in old-fashioned Treasury bonds. Stock investors prioritized safety over growth.

Facebook (FB) became a public company on May 18. The offering valued the company at $104.2 billion, or 107 times its trailing 12-month earnings. There was no opening-day pop; in fact, underwriters had to step in to prevent FB from posting a loss on its first day.

This is actually good news for Facebook; it suggests the IPO was properly priced and the company received close to full valuation for its shares. Nevertheless, most investors expected more. This week's trading brought the opposite, with FB shares sinking well below the $38 IPO price.

Meanwhile, turmoil in Europe continued, driving capital into the relative safety of US Treasury bonds. The ten-year yield fell 12 basis points last week, closing Friday at 1.72%. More ominously, a Treasury auction for $13 billion in ten-year inflation-protected notes went through at a negative yield of -0.39%. Clearly, investors are more than a little worried about something.

The "something" seems to be the very real possibility that Europe is headed for financial oblivion. Greece is going through the motions of new elections but the public mood seems unlikely to change. Banks in Spain are plainly feeling pain, and Germany is losing its ability to control the continent's economy

All this outweighed economic indicators that actually look somewhat better. US manufacturing and housing activity seem to be improving a bit. The drop in energy prices gives consumers a little bit more breathing room, too. Once again we see financial markets are not necessarily tied to the economic climate. Investors have their own agenda, and right now it involves taking as little risk as possible.

Fund Strategy Updates
Outside of Treasury bonds and cash, there weren't many places to hide last week. Corporate and muni bonds posted losses, but equity market action was even worse. Gold was one of the few bright spots.

In our last update, we said Financials were holding up quite well in the face of the JPMorgan revelations. This is no longer the case, prompting us to make sell recommendations on SPDR S&P Regional Banking (KRE), Fidelity Select Banking (FSRBX), and Rydex Banking (RYKIX).

PowerShares QQQ (QQQ) also lost upside momentum, and we will remove it from our model today. We will reduce portfolio risk by keeping all proceeds from these sales in cash (money market).

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