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Posted on 16 August 2012 | 1,891 views

Facebook (FB) Stock Price Crashes Again

Shares of Facebook (Ticker Symbol: FB) hit a fresh all-time low on August 16, 2012 — falling as much as (6.5%) in early trading after the company’s insider lockup period expired.

Facebook Stock has already fallen over 50% from its 52 week high and as many as 271 million shares could potentially hit the market today. It’s the first of a series of expiration’s that could result in almost 2 billion shares being released to the public over the next two years.

Facebook currently has 420 million shares in the public markets. With a lack of demand having already cut FB shares almost in half, the prospect of more supply is horrifying to those hearty few that are still long.

The single biggest thing it might do is make it less expensive to be short Facebook — to the likely horror of the bulls.

For companies like Groupon (Ticker Symbol: GRPN) and Yelp (Ticker Symbol: YELP) where the floats are small and prospects viewed as dim, getting a borrow can cost as much as half the face value of the stock itself. At such a price the stock would have to drop 50% before the bear makes money; an unattractive risk/reward set up for most.

The Facebook traders making bearish bets on the end of the lockup are off base. Just because the venture capitalists and select insiders can sell their shares doesn’t mean they will. Some, like Microsoft (Ticker Symbol: MSFT), which has more than 26 million shares getting freed, already said they have no plans to sell. Other holders may not need the liquidity or even think FB shares are undervalued.

Unless a good portion of the 271 million shares up for sale get dumped into the market, Facebook shorts can get caught in a classic Short Squeeze. Perhaps it’s going to be a little cheaper for them to be short selling going forward on the borrow side but if the selling pressure doesn’t hit, a lot these shorts are going to scramble.

Market makers are estimating that Facebook stock could move as high as $26.00 or $27.00 per share if the bears get snagged.

Sometimes the less obvious trades have the most potential. In the case of Facebook, it’s not in the least bit clear getting long ahead of another quarter billion shares potentially coming to market this week is counter-intuitive, to say the least.

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