What's Important in the Financial World (7/27/2012)

Now that Facebook (NASDAQ: FB) has issued its quarterly report and its stock has fallen another 10%, investors wonder how low the shares can go. Revenue last quarter rose to $1.184 billion from $895 million in the same quarter a year ago. But Facebook had a GAAP loss of $157 million compared to a $240 million profits in second-quarter 2011. Fortunately, Facebook has more than $10 billion in the bank. Its market cap is down to around $65 billion, based on a stock price that has fallen from a post IPO high of $45 to under $24 in the aftermarket yesterday. Other than broker downgrades, Facebook likely has until its next quarterly report to raise the market’s perception of its prospects. That means shares may trade in a narrow range between $25 and $30. The nagging issues that will not have a publicly disclosed resolution until three months from now are whether Facebook can grow much beyond one billion users, whether it can sell advertising to huge marketers in large dollar increments and whether its mobile platform can draw much revenue at all.

Bundesbank vs. Mario Draghi

Germany has formally rejected the plans of the European Central Bank (ECB) president, Mario Draghi, to buy sovereign paper, which could range into the tens of billions of dollars, to bring down borrowing costs of the eurozone’s most financial troubled nations. The Bundesbank continues to stress the case that the central bank should not try to control the mechanism to solve the region’s problems. It represents the German opinion that the problems of weak countries must be solved by those countries as they set austerity budgets that make them worthy of bailout dollars. Bundesbank officials say that bond buying to bring down interest rates only prolongs the period before countries like Spain and Italy have to reckon with falling gross domestic product, deficits and high national debt. And the international capital markets may see the ECB move for what it probably is: a very temporary and unsustainable solution.

Barclays Strong Earnings

Barclays PLC’s (NYSE: BCS) strong earnings briefly masked the great obstacles the bank faces because of the Libor scandal and management and board resignations. The bank made $6.4 billion last quarter. The management said July results appear strong. The good news lifted shares in London trading. But the enthusiasm about the bank will be short lived. By all appearances, the investigation into Libor fraud has become international, and Barclays is one of the institutions at the center of it. Even if other banks are implicated, Barclays cannot escape what are likely to be months of investigations, fines and perhaps prosecution of several of its traders.

Douglas A. McIntyre