Heads I Win, Tails You Lose ... Caveat Emptor.

In the recent Facebook IPO debacle, the role that Morgan Stanley and other underwriters have played is a curious one. (See Morgan Stanley made money on Facebook share drop).

As a routine procedure, it seems that the underwriters typically get to buy an additional number of shares from the company offering stock to the public.

"Investment bankers typically sell 15% more shares in an IPO than they actually have. ... Included in every IPO deal is an agreement that gives underwriters the ability to buy more stock from the company at a slight discount to the IPO price. So if the price rises after the offering, the underwriters can buy the shares from the company that they have promised to other investors, but don't actually have, and book a small profit. ... In effect, the underwriters were short the stock. ..."

So far, so good. Underwriters, in effect, have a call option on the stock.

Networking Giants and the Stock Market

The sentiments of the investing public are a bit hard to fathom. Both Cisco and Juniper produced good quarterly results. But, Cisco has taken a nearly 20% beating from its high of $29.39 of Jan. 20 to today's $23.68 and Juniper has fallen to today's close of $25.95 from a high $31.25 on Jan. 20, a loss of 17%. I guess good results brings out the sellers.