Vicente Trius has a cumbersome challenge ahead of him as president of Loblaw Cos. Ltd. Brought aboard Canada’s biggest grocery chain just over a year ago and at the helm since taking over for British retailing dynamo Allan Leighton in August, Mr. Trius came in with a wealth of international retail experience behind him, including executive roles at retail chains Wal-Mart Stores Inc. in Asia and Latin America and Carrefour S.A. in Europe.

The Spanish-born exec speaks about food with a passion lacking in his Loblaw’s predecessors, and his vision involves bringing the romance of food back to the multifaceted retailer, which also offers financial services, pharmacy, general merchandise such as household goods and electronics and Joe Fresh apparel.

“We are actually bringing in better products not only because they look good, but because they taste a lot better,” he said after the annual general meeting earlier in May.

That may be true, but Mr. Trius arrived in this country at a time of turbulence in grocery retail, with a shaky economy persuading consumers to be most loyal to those offering the best deals. At the same time, Wal-Mart has embarked on a dramatic grocery expansion ahead of Target’s arrival in Canada next year.

This year and next also mark the final — and most difficult — parts of a years-long supply chain and technology upgrade at Loblaw, a process that usually involves some hiccups and delays for large retailers.

As a result, Loblaw’s financial performance has been disappointing. First-quarter profit nose-dived 22.4% and earnings per share dropped 22.4% from a year ago to 45¢, missing analyst estimates of 49¢. Sales were up 0.9% to $6.9-billion, but, more worryingly, same-store sales fell 0.7%.

Analyst reactions ranged from cautious patience to outright indignation.

“After seven years of optimistic rhetoric from various management teams, investors can be forgiven for rolling their eyes at the latest pronouncements,” Perry Caicco of CIBC World Markets wrote in a note to investors, adding the bulk of the progress in the quarter was “verbal rather than financial.”

Mr. Caicco dropped his target price on Loblaw’s stock to $39 from $40. “Even if execution at Target and Wal-Mart is less than excellent, there will be big trouble on the grocery horizon,” he said. “Loblaw’s attitude toward all this new competition is ‘let them taste it,’ a quote which has probably been posted in the lunch rooms at Target and Wal-Mart.”

STIFF COMPETITION

Food sales in Canada are split between traditional grocery stores, convenience stores, smaller specialty boutiques, mass merchants such as Wal-Mart and larger warehouse players like Costco. While traditional grocers still accounted for most retail food sales in 2011, non-traditional players grew their share to about 37% last year from 33% in 2009, a report by the USDA Foreign Agricultural Service said.

Loblaw is the biggest grocer with more than 1,000 stores and an estimated 20% market share in food, while Empire Co. (owner of Sobeys) follows at 13% and Metro Inc. at 9%. Other strong regional players include Overwaitea and Safeway in western Canada and Longo’s in Toronto.

The biggest market share thief by far is Wal-Mart, which has rapidly expanded its food footprint and this year is embarking on its biggest expansion plan since arriving in Canada in 1994.

Grocery is a crucial part of the retailer’s strategy because it brings in extra and more regular customer traffic, and accordingly boosts its general merchandise sales. Of the company’s 333 Canadian stores, 167 now have a grocery store inside them and the company is tackling 73 building projects this year, 43 of which will be grocery Supercentres.

While Wal-Mart Canada’s share of the country’s grocery receipts is only 6%, the USDA report said, its food sales have soared to $5.2-billion in 2011 from $130-million in 2006. Its buildout comes in advance of the opening of 125 to 135 Target stores in Canada next year. While Target will carry frozen food, dairy and packaged goods supplied by Sobeys, it has not announced plans to expand into the fresh food business.

SAME-STORE SALES STAGNATING

Same-store sales is a metric measuring performance at retail locations open for more than a year, and is frequently cited as a key performance indicator. Loblaw’s same-store sales have been hit in recent years because of poor performance in its general merchandise offerings. The company has been exiting unproductive retail categories and trying to improve its general merchandise business with a more compelling home assortment and store upgrades.

“Even the tiniest indication that there is something positive going on at the core retail operations… could boost the share price quickly and meaningfully,” Mr. Caicco said.

Mark Rosen of Accountability Research Corp. noted Loblaw has not posted annual same-store sales growth above 1% since 2009. And Loblaw’s efforts to stay competitive on price by offering promotions ate into its core food business sales in the first quarter.

Mr. Rosen, who earlier this week put a sell on Loblaw’s stock and a target price of $30, said Loblaw failed to take full advantage of a national food inflation average of 3.7% in the quarter.

Keith Howlett of Desjardins Securities, who rates the shares as a hold and recently cut his target price to $35 from $38, had forecast a same-store sales rise of 0.8% and called the decline of 0.7% “worrisome.”

But analyst David Hartley of Credit Suisse took another view in a research report Thursday, believing the market has applied too much of a discount to Loblaw’s shares. Loblaw has a trading range of between -0.5 times to 0.8 times estimated 2012 earnings, a 32% discount by his research. By comparison, “pure-play” grocer Metro Inc., which doesn’t offer clothing, general merchandise or financial services, currently trades at 11.3 times earnings.

Mr. Hartley said the market should pay more attention to the value of Joe Fresh, which market research firm NPD said is now the biggest clothing brand by sales in Canada.

“We think it’s possible that Joe’s sales are near management’s target of $1-billion,” Mr. Hartley said.

IT UPGRADE

Loblaw is spending $70-million this year on the final phase of an IT upgrade and $40-million to improve customer service. The IT upgrade, expected to roll out fully next year, is the culmination of a vast turnaround program the retailer began in 2007. Initially, it was a three-to-five year plan involving the integration of the company’s disparate systems onto SAP, but it will be at least next year before it’s finished.

Calling 2012 “a challenging transitional year,” given the upgrades, Mr. Howlett said, “underlying operating improvement will be more than offset by further transformation expenditures for long-term prosperity.”

Mr. Rosen said the strategic initiatives are “testing the patience of the market given the immediate margin pressures, but delayed potential benefits.”

Analysts may be recalling the long and painful implementation of SAP at Sobeys, a project that began in 1996 but was put on hold in 2000 for four years because of problems with database integration. The project resumed in 2004 and was ultimately successful, but it was costly and the retailer’s share price was hammered in the process.

Loblaw’s business strategy needs some freshening up

Montreal — In a tiny basement office in a grey stone building in central Montreal, Yves Michaud’s staff members are plotting their next shareholder insurrection.

It’s annual general meeting season and Mr. Michaud and his colleagues at the Mouvement d’éducation et de défense des actionnaires (Médac) have been busy doing what they’ve become known for: Getting in corporate Canada’s face with uncomfortable questions and lofty shareholder proposals in a bid for better accountability.

Earlier this week they showed up at the Power Corp. meeting wielding four investor recommendations, including one that would allow executives to exercise stock options only when their companies have achieved measurable objectives like higher earnings. Before that, they pestered Bombardier Inc., blasting the company for giving its executives pay increases while the stock languishes less than $4 per share.

At the National Bank of Canada shareholders meeting this year, Mr. Michaud, a former provincial politician and an ardent separatist who relishes language and appears to love to hear himself talk, was booed. But that’s really no surprise. This is a man who once lectured management at a Canadian Imperial Bank of Commerce AGM for more than an hour in a performance The Gazette in Montreal likened to “a Fidel Castro May Day address.” The bank’s then-chief executive Al Flood was forced to cancel his own speech to investors.

Lauded by some and loathed by others, Médac has become over the past 15 years one of the loudest voices for corporate governance nationwide and one of the biggest critics of excessive executive pay. The group founded by Mr. Michaud is little known outside Quebec. And yet, its message has rarely echoed more loudly than now.

It was Médac that won the legal right for retail investors to make proposals at AGMs. Long before Arthur Andersen LLP botched the auditing of Enron, it was Médac that got Canada’s banks to disclose the consulting fees they pay to their public accountants. And say on pay, Canada’s non-binding advisory vote that gives investors in banks and other companies a voice in executive compensation? Médac takes credit for that, too.

“Our paid members and our board members, I think, are militants,” says Fernand Daoust, Médac’s president. “I don’t like that word. But they are people who are absolutely scandalized by the liberty that current company leaders are taking on remuneration…. There is, among retail shareholders, a profound indifference toward these things. We’re trying to wake them up.”

Canada needs more investors who stake a public position against certain corporate abuses, says Michel Nadeau, executive director of Montreal’s Institute for Governance of Private and Public Organizations. “Anything that can help, any group that can help to make the voice of the shareholder heard, whether it be institutional or retail investors, I support that.”

Mr. Nadeau says he is disappointed that it took an American like Bill Ackman to clean house at Canadian Pacific Railway Ltd., one of Canada’s oldest companies. He says Canadian investors failed in their duty to demand that previous management boost the railway’s performance.

Some shareholders have sought private meetings with companies to make their voice heard. Médac’s approach is the opposite: Buy the minimum shares required in a company to become an owner, research its perceived corporate governance weak spots, then confront the company publicly at its AGM while trying to woo as many shareholders onside as it can.

It doesn’t always work of course. The vast majority of the 58 shareholder proposals Médac has made since 1997 have been voted down. Perhaps the biggest unfulfilled item on its wish list is a requirement that all companies trading on stock exchanges disclose the median salary of their employees and to hold the so-called “fairness ratio” (the ratio of the top executive’s pay to the average employee salary) to a maximum of 30.

Still, there have been successes as well. Canadian Imperial Bank of Commerce shareholders overwhelmingly backed Mr. Michaud’s 1999 proposal that its directors must hold shares in the bank equal to six times the annual fee they’re paid for their services. The argument was that by watching over shareholder interests, directors would also be protecting their own interests.

Mr. Michaud is perhaps best known for controversial comments he made about the Jewish people during a radio interview in 2000 when he was seeking to become a Parti Québécois candidate in a by-election that year. The remarks earned him official condemnation from the legislature and were said to have contributed to Lucien Bouchard’s decision to resign as premier the following year.

So how did a committed separatist with a contentious past come to command so much air time at annual meetings, given his organization has only one paid employee and annual revenue from its 1,500 members that barely tops $50,000?

In two words: personal misfortune.

The moustachioed Mr. Michaud, 82, took to defending shareholders after he lost part of his retirement savings in the 1992 near-collapse of General Trustco of Canada Inc., which was later bought by National Bank of Canada. National, and other banks, have been among his top targets ever since.

Critics of Médac, who include some prominent business leaders, dismiss the group as a highly political organization driven by the bias of Mr. Michaud’s separatist convictions. Mr. Daoust is also an avowed sovereigntist, and former PQ premier Jacques Parizeau recently joined the Médac board.

Opponents point to Mr. Michaud’s legal efforts to obtain the financial statements of Power Corp. newspaper unit Gesca as evidence of his crusade. Power, controlled by the pro-Canada Desmarais family, has objected.

In his September 2009 ruling on the case, Quebec Appeal Court judge Pierre Dalphond noted: “Mr. Michaud wants to show that the ‘Desmarais empire’ financially supports Gesca to promote the federalist cause, which displeases this long-time separatist.”

For his part, Mr. Michaud sounds undeterred. Though he leaves much of the actual company meeting battles these days to other Médac members, he still commands the bluster of a determined activist.

Speaking in a brief interview this week, Mr. Michaud said bankers are more avaricious than ever, the financial world is full of “bandits,” and AGMs remain “parodies” of real shareholder democracy. “I’m sickened to the limit of my existence,” he said with his typical flair for the overdramatic.

Mr. Michaud said he wished there were more activists like him outside Quebec. Whether the country could handle another Yves Michaud is another question altogether.

Investor activist Yves Michaud fights what he sees as corporate abuses

Buying the largest and most established exchange traded funds is a popular strategy for Canadian investors, but it may not be the most profitable way to play the ETF market because it continues to innovate and improve on existing management methods, say analysts.

“A lot of people just take the biggest one or the one that has been around the longest,” said Pat Chiefalo, an ETF analyst at National Bank Financial. “We found by just doing that you may be leaving a lot of performance on the table.”

Investors often choose the fund with the largest assets under management based on the belief that it will provide greater liquidity than other smaller funds that invest in a similar basket of underlying assets. In many instances, they’re even willing to pay more in management fees to do so.

For example, investors are more likely to buy a well-established ETF tracking the S&P 500 that has $500-million in assets under management and carries a management expense ratio of 30 basis points than they are to purchase another S&P 500 ETF that has only $50-million in assets under management but an MER of 15 basis points.

Mr. Chiefalo, however, said the idea that bigger funds always provide better liquidity than smaller ones is false. No matter the size, comparable ETFs should provide the same ability to be sold without causing a significant movement in the price or a loss of value.

“Liquidity is a product of the underlying basket of assets, not what happens to the ETF on any given trading day,” Mr. Chiefalo said. “Sure, a fund exposed to a venture exchange is not going to offer you the same liquidity as one exposed to a large-cap index, but the embedded liquidity of two funds tracking the TSX Composite index is the same.”

John Gabriel, an ETF strategist at Morningstar, said investors tend to have a tough time wrapping their heads around this concept because they approach ETFs like they were stocks. But whereas a stock has a limited number of shares outstanding, an ETF can be created and continuously redeemed based on supply and demand.

“How easy that is to do depends on the liquidity of the underlying securities, not the ETF itself,” he said. “The TSX 60 can be created and redeemed instantly, whereas a small-cap ETF, not so much.”

Liquidity is just one of the factors of ETFs that are often misunderstood. MERs are another one. MERs are often used as the sole gauge of a fund’s relative value largely because they are made available by providers and are therefore easy to track.

But trading expenses that are less transparent to investors, including bid/ask spreads, are not always included in the management expense ratio and can be a significant drag on returns depending on the ETF in question.

For example, trading fees for ETFs that track market-weighted passive indexes will be close to zero and vary little among providers, Mr. Gabriel said. But trading fees on equal-weighted or covered-call ETFs will be more of a variable on overall performance.

“For the most part, we’re talking basis points here, but the management process around costs can differ between providers and it can be important over time,” Mr. Gabriel said.

In addition to cost and liquidity, Mr. Chiefalo said it’s important to assess the diversification of ETFs that seem alike, as well as the structure, counter-party risk and tax efficiency of each fund.

“If I want exposure to emerging markets, am I better off getting access to 1,000 stocks, or using one that invests in 100 stocks? We want to make sure as much as possible that you get all the components of the underlying index, but there is a trade off between liquidity and replicating the index perfectly,” he said.

Based on his research, Mr. Chiefalo’s top picks for balanced investors looking for monthly income include the BMO Canadian Dividend ETF, iShares DEX Universe Bond Index fund and Horizons Preferred Share ETF.

At least, they are for the moment. As new and improved products reach the market, investors will to need to keep an open mind and carefully weigh their choices.

“Things do evolve and you can continually find better solutions to achieve a particular exposure,” he said.

Buying biggest ETFs may not be best strategy: analysts

TORONTO — The Toronto stock market gave up early solid gains to close lower Friday as traders increasingly nervous about the future of the eurozone reduced exposure ahead of the Victoria Day long weekend.

Facebook’s debut as a public company had helped overshadow news out of Europe, at least temporarily.

Facebook started trading on the Nasdaq Stock Market with great fanfare late in the morning and an initial public offering price of US$38. It closed at US$38.23 after going as high as US$45.

The S&P/TSX composite index slipped 50.04 points to 11,280.64 as prices for oil and copper hit fresh multi-month lows and worries about eurozone banks pushed bank stocks lower. The TSX Venture Exchange was off 0.2 of a point to 1,227.88.

The pessimistic mood on markets sent the TSX tumbling 3.54% this week, leaving the market about 1,000 points or 8.5% just from the beginning of this month to its lowest level since last October.

The Toronto Stock Exchange is closed for holiday Monday, but U.S. markets are open.

The Canadian dollar lost ground amid lower commodities and data that showed that inflation was slightly higher in April.

The commodity-sensitive loonie lost 0.17 of a cent to 97.96 US cents as Statistics Canada said that Canada’s annual inflation rate rose to two% in April, from 1.9% the previous month.

The loonie has lost about three and a half US cents this month as tension over Greece sent traders to the safe haven status of U.S. Treasuries and away from riskier assets such as commodities and resource-based currencies such as the Canadian dollar.

“Certainly, there is a very high level of uncertainty that continues to be manifested in extremely high cash levels,” said Robert Gorman, chief portfolio strategist at TD Waterhouse.

“I think a lot of people feel that (they’re) only getting a% in cash and that’s fully taxable. So yes, (they’re) losing ground against inflation but maybe (they feel) that is the best option given what else is going on.”

U.S. markets were negative at the end of a bruising week.

The Dow industrials dropped 73.11 points to 12,369.38.

The Nasdaq composite index declined 34.9 points to 2,778.79 and the S&P 500 index faltered by 9.64 points to 1,295.22.

The energy sector maintained a gain of 0.2% as the June crude contract gave up early gains to move down US$1.08 to US$91.48, its lowest level since the end of October. Canadian Natural Resources gained 19 cents to $29.95.

And the June bullion contract was ahead US$17 to US$1,591.90 after hitting its lowest close since last July on Wednesday. The TSX global gold sector ran up about 0.75% and Agnico Eagle Mines rose 36 cents to $36.97.

But the base metals component gave back 0.4% as July copper dipped one cent to US$3.47 a pound, levels last seen in January. HudBay Minerals climbed 16 cents to $8.38 while Teck Resources lost 60 cents to $29.45.

Worries about eurozone banks sent the financials sector down 0.82%. Royal Bank fell 26 cents to $51.70.

Investors Group, which is part of IGM Financial and the Power group of companies, says it will reduce the management fees it charges on many of its products, starting in July. Investors Group will reduce its management fees by up to 0.4% per year and adds the reductions will affect about two-thirds of the funds it offers. IGM shares slipped $1.11 to $40.45.

There were plenty of negative developments in the eurozone to fret over at the end of the trading week.

Ratings agency Moody’s Investor Services downgraded 16 Spanish banks Thursday as they face a rising tide of bad loans linked to Spain’s recession, a gloomy real estate market and high unemployment.

Spain’s central bank said Friday that the level of bad loans on the books of the country’s banks has risen to an 18-year high.

The nervousness about Spain’s banks comes as the eurozone financial crisis intensifies. Political turmoil in Greece has increased the likelihood that it could leave the 17-country monetary union, a move that could have ripple effects throughout Europe and the world’s financial markets. Greeks go back to the polls June 17 after an election May 6 proved inconclusive.

There are concerns that parties campaigning for an end to the austerity measures that secured vital bailouts will be in a stronger position after the vote.

Depositors have also been pulling their funds out of Greek banks. People fear the country’s financial sector might collapse if Greece left the eurozone and that their savings would become worthless if the country started using a substantially devalued new currency, such as the drachma.

“People are getting pretty nervous,” added Gorman, “because if a new Greek government were to determine that they’re not going to be part of the (eurozone) going forward, and hence don’t use the currency, well how much would a new drachma be worth? So people are withdrawing euros.”

TSX slides amid lower commodities, Facebook stalls after surging in market debut

NEW YORK — Facebook stumbled in its eagerly anticipated market debut Friday, as shares ended barely above the offering price, dampening optimism over the world’s biggest social network.

The shares, priced at US$38 on Thursday in the largest-ever initial public offering (IPO) for a technology firm, eked out a gain of 0.61% to end at US$38.23, amid record volume of more than 567 million shares.

Facebook stock saw roller-coaster action in what was one of most keenly awaited issues in history.

Shares jumped 12% to US$42.55 in the opening Nasdaq trades but within minutes fell back to the offering price and despite a midday rally closed almost flat.

“The negativity in the market overall has put a damper on the IPO,” said Darren Hayes, a Pace University professor and former investment banker.

“It’s not uncommon in an IPO to see a big rise and then for the price to come back down, but I’m a bit surprised after all the hype to see such a small gain,” he said.

“I think there may be some skeptical investors who see some challenges in the long-term outlook of the company.”

Gerard Hoberg, an economist at the University of Maryland said there was enthusiasm from some buyers but skepticism from professionals.

“What I think is going on is you have a lot of bullishness from retail investors, people who use Facebook, and there’s a lot of those investors creating a lot of buying pressure,” he said.

Zef Nikolla/Facebook via Getty Images

Facebook's Mark Zuckerberg speaks during the celebration of ringing the Nasdaq opening bell Friday in Menlo Park, California.

Hoberg said the market introduction “is not a disaster by any stretch, and you also could say that the Facebook owners are quite pleased because they didn’t leave a lot of money on the table. But it will not be a pleasant taste in people’s mouths if Facebook falls below US$38 anytime in the near future.”

A report on the Business Insider financial blog said the price did not fall below US$38 because of a large number of standing orders at the offering price. The Wall Street Journal said the underwriting investment banks also stepped in to support the price.

This sets up questions about Facebook trade on Monday.

James Hughes, chief market analyst at London’s Alpari said “the real value of Facebook is not likely to be known until the hype of the IPO has died away and investor have been able to digest how the company is going evolve to be the money-making machine many expect it to be.”

Investors were expected to be hungry to get a piece of Facebook, which has become a global phenomenon since its beginnings in 2004 as a project of then-Harvard student Mark Zuckerberg and his classmates.

Zuckerberg, wearing his trademark hooded sweatshirt, remotely rang the bell to open the Nasdaq, marking the historic share offering that confirms the growing importance of the social network giant.

“Going public is an important milestone in our history,” Zuckerberg told the crowd at the company’s campus in Menlo Park.

“But here’s the thing. Our mission isn’t to be a public company. Our mission is to make the world more open and connected.”

Zuckerberg and hundreds of employees cheered as the 28-year-old co-founder rang the bell via video for the New York-based Nasdaq. He wore a dark hoodie, unfazed by criticism from some on Wall Street about his casual attire.

The market debut was disappointing compared with some recent tech IPOs: the LinkedIn social network doubled on its first day last year and Groupon jumped 30%. But Pandora rose a more modest 8.9% and Zynga lost 5% on its first day.

Trip Chowdhry, who follows Facebook for Global Equities Research, said the “lackluster” opening was because Facebook failed to answer questions about how it will increase revenues and adapt to the mobile Internet.

“Management cannot sing and dance around the key issues,” he said.

The IPO gave Facebook a dizzying value of US$104-billion at its market debut.

It raised more than $16 billion, making it the richest after that of financial giant Visa in 2008, according to Renaissance Capital. The addition of a possible stock “over-allotment” could boost the total to $18.4 billion.

Facebook itself sold 180 million shares and early investors in the company the remaining 241 million.

With its current market value, Facebook is now among the most valuable US companies, ahead of sector giants Amazon (US$97-billion) and Cisco (US$89-billion), and more than twice the value of Ford Motor Co. (US$38-billion).

But it remains behind Google (US$201-billion) and Apple (US$498-billion).

Under the share plan, Zuckerberg will hold 55.8% of the voting power of Facebook shares, and over 18% of the value of the company.

One of the shadows hanging over Facebook is concerns over privacy.

Some consumer and privacy advocates say Facebook has been too loose with user data, and hope that as a publicly traded company, it may change its tune.

The IPO’s net proceeds to Facebook were some US$6.8-billion. The rest of the cash goes to Facebook insiders and others who made early investments in the social network, and to cover the IPO costs.

Facebook posted a profit of US$668-million last year as revenue vaulted to US$1.06-billion.

Key dates in the history of Facebook:

2004 — JANUARY: Mark Zuckerberg, a 19-year-old Harvard computer whiz, begins working out of his dormitory room on an online network. A month later, he launches “thefacebook” with classmates Chris Hughes, Eduardo Saverin and Dustin Moskovitz.

MAY: Zuckerberg moves to Silicon Valley, decides not to return to Harvard for the fall semester.

JULY: Facebook get US$500,000 investment from PayPal co-founder Peter Thiel.

2005 — APRIL: Facebook gets a second round of funding: US$12.7-million from Accel Partners.

AUGUST: Thefacebook.com changes its name to Facebook.

2006 — FEBRUARY: Viacom offers to buy Facebook for US$1.5-billion. Yahoo! also makes an unsuccessful US$1-billion bid.

2007 — OCTOBER: Microsoft invests US$240-million in a deal that values Facebook at US$15-billion. Membership tops 50 million.

2008 — FEBRUARY: A US$65-million settlement is reached with twins Tyler and Cameron Winklevoss over allegations that Zuckerberg stole their idea. Facebook launches a Spanish site.

MARCH: French and German sites are launched.

APRIL: Facebook dethrones MySpace as the world’s most popular social network.

AUGUST: Membership hits 100 million.

2009 — MARCH: Facebook launches the first mobile application.

MAY: Russia’s Digital Sky Technologies invests US$200-million.

SEPTEMBER: Zuckerberg says the firm has become “cash flow positive.”

2010 — MAY: Pakistan blocks access to Facebook over a competition encouraging users to post caricatures of the Prophet Mohammed.

JULY: Membership hits 500 million, including Lady Gaga and President Barack Obama.

DECEMBER: Time magazine names Zuckerberg “Person of the Year” for “transforming the way we live our lives every day.”

2011 — JANUARY: A private share offering raises US$1.5-billion, values Facebook at US$50-billion.

FEBRUARY: Facebook announces plans to move from Palo Alto to former home of Sun Microsystems in Menlo Park.

2012 — JANUARY: Facebook files for initial public offering.

MAY: Membership hits 900 million, regulatory filings show. The IPO is priced at US$38 per share, giving Facebook a market value of US$104-billion and raising at least US$16-billion.

MAY 18: Zuckerberg, wearing a trademark hoodie and surrounded by employees at Facebook’s California headquarters, remotely rings the Nasdaq bell to launch the market debut. But after an early pop, the day is a disappointment, with shares gaining a scant 0.6% to end at US$38.23.

Agence France-Presse

Facebook falls flat in market debut

Zynga Inc. shares, paused for a volatility circuit breaker that was supposed to last five minutes, failed to resume until about 50 minutes later. Another halt also lasted too long.

The stock was paused at 11:37 a.m. New York time after dropping as much as 14% from yesterday’s close to US$7.08. The circuit breaker is triggered when a company rises or falls 10% within five minutes. It resumed at 12:27 p.m. and was halted again two minutes later because of volatility. Trades hadn’t commenced as of 12:55 p.m.

The delay happened as Nasdaq OMX Group Inc., its listing venue, said it was having trouble delivering trade executions from Facebook Inc.’s initial public offering. Customers of Fidessa Group Plc, which helps asset managers track transactions, weren’t receiving confirmation of trades from Nasdaq, according to a statement.

“It’s very odd,” Sam Ginzburg, a partner and head of capital markets at First New York Securities LLC, a New York-based proprietary trading firm, said in a phone interview about the delay in restarting Zynga. “Nasdaq is dealing with its own thing in terms of getting executions back to the Facebook people.”

Dani Dudeck, a Zynga spokeswoman, declined to comment.

Facebook shares were sold yesterday for US$38 by underwriters. The stock ranged between US$45 and US$38 today. Other Internet companies slumped. LinkedIn Corp. slipped 1% to US$103.94 while Groupon Inc. dropped 6.1% to US$11.65.

The decline in Internet stocks shows “the fizzle of the hype,” Channing Smith, who helps oversee about US$1.1-billion at Capital Advisors in Tulsa, Oklahoma, said in a phone interview. “The expectation is that Facebook will come out and you will see a big rise in the share price. The earlier reaction is disappointing. Investors are looking at other names and say maybe there isn’t any much interest in this area than we thought.”

Bloomberg.com

Zynga shares paused amid Facebook difficulty

Shorting the Facebook IPO on its first day of trading is not for the faint of heart, but some traders are trying.

As the hottest initial public offering in recent memory, Facebook has drawn 1990s-style tech-mania interest from mom and pop investors and big institutions alike.

That intense appeal means short-sellers are both attracted by the stock’s high valuation and wary, at least for now.

“I have no interest in shorting a cultural phenomenon,” hedge fund manager Jeffrey Matthews of Ram Partners in Greenwich, Connecticut, told Reuters in an email interview.

Asked if this was because such stocks trade without regard to normal market valuation, he wrote back, “Bingo.”

Short sellers bet against shares by borrowing the security, then selling it. If the stock drops, they buy it back at the lower price, return it to the lender and pocket the difference as profit.

Shorts looking to bet against Facebook early face an uphill battle. Traders interviewed said the stock was going to be hard to borrow, at least for a few days, and only the best-sourced hedge fund managers will able to find lenders.

A prime broker at one of the top underwriters of the IPO said the firm would not be lending shares, at least until the initial settlement in three business days.

“I don’t know how many shares will be available for shorting,” said the broker, who requested anonymity. “We would only provide them once the deal has stabilized.”

The bigger-than-usual percentage of retail-investor ownership of the shares may make shorting more difficult, as those investors don’t tend to lend their shares for those who want to take a short bet.

“It will likely be difficult to get shares to borrow,” said Adam Reed, professor of finance at UNC Kenan-Flagler Business School in Chapel Hill, North Carolina. “In our research, we found that around 70 percent of IPOs are borrowable on the first day, but many of those names were only borrowable by well-placed investors.”

Those who are able to short need nerves of steel. The borrowing cost will be high, and short-sellers may find the trade hard to unwind by buying back the stock in the open market, and could face a lender calling in their shorts if the stock rallies sharply.

Still, some are trying to short Facebook on Day One.

“I’m doing the legwork now and calling all the brokers,” said a hedge fund manager late on Thursday, after Facebook priced its IPO at $38 per share. “Goldman and Credit Suisse are our prime brokers, so I am in contact with them about this.”

“This is about as bubbly as you can get,” he said. “My mother asked me if she could get Facebook shares and she has never been interested in IPOs before. A cab driver asked me about the IPO too. That’s when you want to short it.”

The hedge fund manager asked not to be named as he expected to be involved in shorting the stock on Friday.

At the $38-a-share IPO price, Facebook would trade at over 100 times historical earnings, versus Apple Inc’s 14 times and Google Inc’s 19 times.

Facebook shares traded at $41.06 in early-afternoon dealings on Friday, up about 8 percent.

Some hedge funds, remembering the heady days of the tech bubble in the late 1990s, have been sensing blood in the water in the recent flurry of social media and networking IPOs, including Groupon, LinkedIn, and Zygna.

Many believe those stocks’ valuations are too high, given expectations for their growth and revenue outlook.

Some traders who can’t short Facebook shares early may be betting against these other social media stocks instead, according to Max Wolff, a senior analyst at GreenCrest Capital.

Zynga shares plunged more than 13 percent in early trading on Friday and were down 5.7 percent in the afternoon. Groupon and Pandora Media were off at least 4 percent.

Zynga’s social games currently account for more than 10 percent of Facebook revenue and profit, so traders may be focusing most on Zynga shares and options as an alternative to Facebook.

“Zynga options have high skew right now. That’s the pricing difference between out-of-the-money puts and out-of-the-money calls,” said Ralph Edwards, director, derivatives strategy at ITG. “This typically means people are looking for Facebook to kind of spill over to Zynga. If Facebook catches a cold then Zynga gets pneumonia.”

Still, even among the skeptical, there is a good deal of caution in facing down a stampede of hopeful long investors. As economist John Maynard Keynes famously noted, the market can stay irrational longer than investors can stay solvent.

“Facebook is the kind of stock that, if you don’t like it, you simply avoid it,” said Mohannad Aama, managing director at Beam Capital Management LLC in New York.

© Thomson Reuters

Short Facebook if you dare

At least one analyst has already established a sell rating on Facebook Inc.’s shares, which began trading on the Nasdaq on Friday shortly after 11 a.m.

The stock is “priced for perfection,” said Brian Wieser, an analyst with New York-based independent equity research firm Pivotal Research Group.

“Having previously established our valuation expectations on Facebook at US$30 per share and with the shares currently trading above US$42, we formally apply a sell rating as shares are more than 15% above our target valuation,” he said in a note Friday.

Mr. Wieser said he’s optimistic about the company’s underlying business model and prospects for long-term success, but thinks the time to get out is now. He set a formal price target on the shares at US$30.

He said the market is pricing Facebook as less risky than Google Inc., which he believes is “simply not the case.”

“The market may very well enable Facebook stock to rocket ahead of its fundamentals, but the logic required to support such valuations should first support much higher valuations for Google,” he said.

As Facebook evolves its products to focus more on larger brand advertisers, there could be both longer-term uncertainty and shorter-term volatility in operating results, he said.

Meanwhile, capital expenditures to improve its features are likely to continue, he said, and could hit US$2-billion this year.

Finally, the expiration of lock-up restrictions on 1.8-billion shares later this year “means significantly more shares are likely to trade this year,” Mr. Wieser said.

Analyst rates Facebook stock a sell on first day of trading

Hey, junior gold mining investors: Are you having fun yet?

The gold sector, as you no doubt know if you’re a participant, has been absolutely decimated this year. Companies that were the toast of Bay Street less than two years ago are being shunned and treated like vermin. It’s now common to see gold mining companies’ shares down 40%, 50% or even 70% this year alone. This despite gold rising in price for 11 years in a row and it’s more or less flat so far this year.

Sure, market sentiment overall is bad, but it seems junior-gold sentiment is worse than everything else. What are the possible reasons for gold stocks to be singled out more than others? Here are a few possible reasons:

Selling begets more selling

Once a sector such as junior golds starts to decline, it can often bring about more selling from both individual investors receiving margin calls, and gold funds seeing redemptions. A massive amount of money has poured into the sector over the past few years, and liquidity works both ways.

We would strongly advise against using margin to buy junior golds, so at least you won’t be forced out of the sector at the exact wrong time.

Political risks

Investors used to have a love affair with Extorre Gold Mines Ltd. (TSX/XG) and why not? The company was rapidly expanding its Cerro Moro gold deposit in Argentina, resources were increasing and its share price was surging. However, that all changed earlier this year when Argentina decided to nationalize YPF, the local oil unit of Spanish energy firm Repsol, leading to fears it might do so in other resource sectors.

Extorre’s shares are down 68% this year, and gold investors are now worried about companies potentially losing assets in almost every country outside North America.

In some cases, it may be justified. For example, a coup in Mail where Avion Gold Corp. (TSX/AVR) operates, has caused the company’s stock to also drop 68% in 2012, and the company has delayed its mill expansion because of the uncertainty.

Financing risks

Junior gold companies always need a constant source of funds. Whether they need money to drill resource targets or millions (or billions) to develop their mines, most gold companies continually tap the market time and time again for funds. Now that the junior gold market has venomously turned, investors are fretting that some companies won’t be able to raise the necessary needed capital to grow, or even continue operations.

Even being able to successfully raise money doesn’t necessarily help much. Take Guyana Goldfields Inc. (TSX/GUY). It recently managed to raise $31 million, at $2.91 per share, but the stock has still dropped 40% from that issue, which only closed less than a month ago.

Lack of takeovers

In the good ol’ days, junior gold investors could count on a few takeovers to boost their overall returns. But in this market, even that isn’t happening. Jaguar Mining Inc. (TSX/JAG) surged late last year on talk of a possible takeover by Shandong Gold Group Co. in a deal that would have valued Jaguar at $9.30 per share. The takeover didn’t go through, and Jaguar’s shares are down 80% this year, it’s reducing costs, and it still needs to deal with a now-overhanging debt burden. To underscore how bad things have become in the gold sector, Jaguar’s shares are now trading for around $1.32.

Poor studies

Finally, bad feasibility and resource studies are also taking the sector down. Canaco Resources Inc. (TSX/CAN) earlier this week released an initial resource estimate that was nowhere near what investors expected. The news dropped the already-declining shares of the company another 66% and it is now down 78% on the year

Hanna Mining Ltd. (TSX/HMG) also disappointed investors this week with its update on its Botswana project. The stock dropped 68% on Tuesday and 86% so far in 2012.

What will it take to turn this sector around? Generally, when things are so bad investors get sick to their stomachs, a bottom is usually close at hand. Talking to investors recently, we have to believe we are near — or even past — that point already.

Peter Hodson, CFA, is CEO of 5i Research Inc., a conflict-free independent investment research network

What’s going wrong with junior golds?

If you were betting on a big rebound for any one sector this year, you probably would have put your money on banking instead of manufacturing.

The more glamorous rebound story has been banking and the financial services sector, but with the revelation of a $2 billion trading loss at JP Morgan Chase & Co, it’s clear some of the biggest banks may have not taken the lessons of 2008 seriously. They continue to bad-mouth and fight reforms and engage in risky derivatives trading, and there is likely more dirt under the carpet in that sector.

Megabanks are difficult to divine. The economy might be rebounding, but they might not lend widely and focus instead on making more money from their trading desks, which are still largely a black box to investors.

“Investors should stay away from financials,” says Lee Munson, a money manager with Portfolio LLC in Albuquerque, New Mexico, and author of “Rigged Money.” “I can’t figure out what’s in them. There are more time bombs out there.”

U.S. manufacturing, in contrast, is a warts-and-all comeback kid story that doesn’t get much attention. Many of the industries left for dead in the wake of the Great Recession have undergone massive restructuring and are much more productive than they were five years ago. Industrial production posted its fastest growth in a year in April, according to the Federal Reserve.

Provided the U.S. doesn’t slip back into recession, manufacturing could be the long-term investment that offers some durable profits over the next few years.
Industrial production is forecast by the Federal Reserve Bank of Chicago to rise at a “solid pace” over the next year, says William Strauss, senior economist for the Chicago Fed.

Light-vehicle sales are set for improvement this year and next. Industrial output in manufacturing has risen 6.7 percent over the past 33 months and has recovered almost 74 percent of its loss from the recession trough.

When an economy rebounds, more cars, appliances and durable goods are made. Basic industries buy more materials to produce them. It’s a rising tide that lifts all boats, particularly in the global market for manufactured goods and materials, which has been expanding due to increasing wealth and demand from emerging economies such as China, India and Brazil.

Manufacturing is also remarkably transparent. Companies often make things because they have orders in hand. They adjust inventories based on the business climate, then ramp up production accordingly. That’s why capacity utilization, a measure of how much producers are using their resources, rose to 79.2 percent in April, the highest since April 2008.

Yet it makes little sense to pick single stocks and hope for the best. There’s too much volatility and it’s too easy to make the wrong bet. It’s worth considering a broader approach such as the iShares Dow Jones US Industrials Index Sector ETF, which holds the major U.S. manufacturing companies.

For a more focused play, the iShares DJ US Energy, buys oil, gas and pipeline companies. As the U.S. once again becomes a major energy exporter because of the huge natural gas and oil reserves discovered in recent years, this is a reasonable vehicle for growth.

You also may consider a stake in the companies that make or produce the basic materials of industrial expansion. The Vanguard Materials ETF owns everything from chemical to steel companies.

Of course, not every manufacturer is rebounding and the comeback road is steep. The overall loss of output in the recession was the worst since the 1930s, according to the Chicago Fed’s Strauss. Home construction and sales are perking up, but still limping along and won’t come back until excess home inventories are reduced and employment recovers.

You should also keep in mind that, while recent reports are positive, the long-term picture for the U.S. economy is muddy at best. A recent report from the Federal Reserve Bank of Philadelphia showed that factory activity in the mid-Atlantic region contracted in May to its weakest level in eight months.
And it’s still uncertain how Europe’s economic problems will affect North America. That saga is far from over.

© Thomson Reuters

How to play the U.S manufacturing rebound