Friday, December 02, 2011

Regarding Facebook's Valuation

The Wall Street Journal has published several page one articles recently concerning Facebook's putative $100B market value. I had to go to the Journal's site to confirm Tuesday's edition's lead which contained that number, it seemed so staggering. Facebook is looking to sell just 10% of that value in its IPO scheduled for early next year.

Much is being written regarding the appropriateness of that valuation. I'm not in that business, so I'm not going to argue over billions.

What I am, though, is a strategist who has learned to apply that type of critical thinking to business and equity management.

Among online ventures, I would agree that Facebook should be at the upper end of the valuation scale. Here's why.

Zuckerberg's- and his famous twin collaborators- big idea was initially simply replacing the once-popular college paper 'picbooks' or 'facebooks,' which I first encountered as a graduate business school student at the University of Pennsylvania, with an online version. From there, the rest is history.

Like Google's Brin and Paige, Zuckerberg and his colleagues invented one thing, which just happened to be a popular 'app' for which, in time, advertising was a natural fit. For Google, the search results were just begging for nearby ad placement. And the best part was that, unlike passive television, active searches allowed Google to sell literal terms to advertisers, thus making specific buyers much more valuable.

Facebook has the same characteristic. By developing an application which induces people to spill their guts about their lives onto a webpage, it's tailor made for associating advertising with these pages. And because of its communal nature, it multiplies that value through the various platinum-plated, self-organized, genuine communities of great and frequent interest.

For a marketer, it's a dream come true. Instead of searching for, say, early adopters, you have the ability to link to the close friends of one by virtue of the site's very nature.

How can that not be valuable? Or, as the late Steve Jobs might say, 'insanely' great and valuable?

And because Facebook is simply a generic self-expression tool, it's potentially usable by every living person on the planet, and maybe, in the future, the dead, as well, in absentia. So the accessible market is literally the entire global population that has web access.

Search engines have come and gone. Who even recalls Webcrawler or Lycos anymore? But, like telephony or the mail, social networking technologies become more valuable and monopolistic by their very nature. That's why MySpace became such a money sink and, ultimately, loss for NewsCorp. Second place in social networking is nowhere. Especially when the market share leader is so far ahead as Facebook is.

Thus, while Linked-In is, by comparison, relatively narrow, with its business- and skills-focus, and Groupon is deal-specific, Facebook is perhaps the most common of social networking applications. It probably does belong, if not now, then eventually, in Google's league, which is now about $200B.

Stunningly, that's only twice what Facebook's IPO-imputed valuation. Barring gross mismanagement, I think that sort of valuation range is quite reasonable and appropriate. In the future, who knows by how much that could increase?

From an equity management perspective, of course, that doesn't mean my portfolios would include Facebook in the future. Google never made it into the portfolio. In the early years, its valuation was simply too rich, relative to its growth rate. By the time the valuation had become reasonable, according to my selection criteria, its growth, too, had moderated. Perhaps Facebook will undergo the same dynamics. It will be interesting to see.

About Angela Merkel's Prussian Values

I wrote this post last week, in which I provided a disclaimer relating to my views on how Germany views the profligacy of many of its fellow EU members,

"As a disclaimer, let me mention that my own heritage is Germanic. So the Teutonic insistence on the profligate Europeans paying for their sins is not foreign to me."

By the way, I'm not just of German extraction, but Prussian. Both sides- one from the permanently-German states, the other side from borderlands between Poland and Germany.
Thus, I was amused to read this in Wednesday's lead Wall Street Journal staff editorial,
"In opposing that option, the Germans are said to be imposing their Prussian morality on everyone else. But without reforms, the countries of southern Europe will never pull out of their downward debt spiral. The Germans are at least telling the truth."
I highlighted the two words in the passage which I found so amusing. It's not just me who sees this long-evolving crisis as a morality tale now relying on Prussian values and discipline to resolve it.

Thursday, December 01, 2011

Monetary Cocaine From Six Central Banks

What can you say about yesterday's equity index responses to the announcement that six large-country central banks, and the ECB, provided coordinated dollar funding support to European financial concerns? This news, along with a optimistic ADP payroll forecast, drove the S&P500 Index up 4.3%.

But if you listened to various pundits on CNBC and Bloomberg television, the news wasn't actually so good. It gradually dribbled out that un unnamed European bank was set to go bankrupt over this coming weekend from insolvency due to an inability to replace lost dollar funding. The credible pundits, people like El Erian of PIMCO and Alan Meltzer, for example, were relieved with the immediate move, but remain concerned that the longer-term problems in the Euro zone remain unresolved. Meltzer advocated a two-track Euro, effectively saying he believes the currency, as we now know it, is finished.

But let's be blunt, if seemingly cynical.

What you heard from the asset management community was a gigantic sigh of relief that these six central banks have put their taxpayers' incomes behind promises to dollar-fund failing European banks, thus providing a free floor under the values of those managers' portfolios.

This is the sort of hyper-global crony capitalism against which Occupy Wall Street rails, only most of them aren't actually sufficiently knowledgeable to understand that.

Does anyone who is informed about the history of markets actually believe that a handful of central banks, several of which, I believe, aren't exactly all that significant (Canada, Switzerland), can outgun the world's hedge funds? Recall how George Soros gained a huge leg up in his net worth by betting against the British pound, allegedly on an inside tip, and won?

What about the Baker Plaza Accords of the 1980s? When central banks go to war in the markets with fund managers, the managers typically bring more assets to bear. Yes, the banks can 'create' money, but, in doing so, depreciate the value of the currency they are printing. There's a relevant range of effective expansionary monetary policy, i.e., printing or borrowing money, with respect to time, quantity and fiscal context. Right now, the Euro nations don't have much range, the US a bit more, but, in total, global economies are phenomenally over-leveraged already.

So how is it that a Euro-zone crisis caused by over-borrowing will be solved by central banks....borrowing or printing more money to magically produce dollar funding for near-insolvent European banks?

That said, I hope you enjoyed yesterday's landmark US equities rally. I'm sure the hedge fund managers whose asset values have been saved, provided they weren't naked short Euros, or can wait out the short-term pop in the currency's value, are very pleased. Everybody who was in the market got a nice 4% or so boost in value before selling the top in the coming months.

But as Rick Santelli said on CNBC this morning, the Fed is now 'all in' backing the Euro-zone and ECB. Helicopter Ben has linked the US economy and dollar to a bunch of entitlement-loving Euro nations and their failed fiscal policies.

Wednesday, November 30, 2011

Tom Keene's Housing-Related Program Yesterday On Bloomberg

Bloomberg's Tom Keene continues to slip in my estimation with almost every program of his that I view. His guests are of uneven quality, and Keene tends to project this naivete that makes you wonder if he's really up to cross-examining his guests. I'm guessing not.

Yesterday he had two women guests discussing the US housing situation. First was, I believe, Laurie Goodman, a principal with an asset manager.

Goodman declined to attribute responsibility for how we came to have 20% of all mortgages in existence five years ago now delinquent, and 23% of all US mortgages underwater.

Keene was totally in love with a trend chart purporting to illustrate that job growth was dependent upon housing, so without housing growth, the US economy is dead. He never questioned whether perhaps this had been a short-term (only a decade or so, I believe) and artificial correlation that is, in fact, unhealthy for the US economy.

Goodman sensibly said that thing will get better as new construction stops, thus forcing the huge foreclosure overhang to be worked off. And that two other events need to occur.

One, which Lew Ranieri explained over six months ago on CNBC, is the appearance of a government program allowing local investors to buy foreclosed properties and rent them. The second is to process as many foreclosures as possible in order to eliminate the old, high costs bases and allow new owners to buy at market prices.

She added that lending for these new mortgages is stalled, presenting a stumbling block.

The second guest, Stephanie Meyer, now with BofA Merrill Lynch, echoed Goodman's sentiments. She was clear about the need for foreclosures to move along and allow repricing of housing stock.

Interestingly, and another incident of Keene's failure to adequately question his guests, neither woman, nor Keene touched on the political issue of dumping so many existing delinquent homeowners out of their homes. That the current administration is trying to prevent this by threatening 'cramdowns' and such forcible taking of investor value to reward delinquent homeowners.

Disappointing, too, was Keene's failure to challenge whether the housing sector should ever have become so central to the US economy, and whether its removal of mobility for homeowners was a mistake in our modern economy?

Still, the raw information from these two guests concerning what would move the housing sector forward was refreshing.

Tuesday, November 29, 2011

Black Friday & Yesterday's Equity Market Pop

Positive news about Black Friday's sales numbers propelled equity indices up sharply yesterday. The S&P500 Index rose 2.92% on the strength of the information.

However, as a Wall Street Journal article explained, there's actually little correlation between Black Friday sales and sales for the entire holiday season. It mentioned the 2008 holiday season, when Black Friday sales were up 3%, leading estimates for the entire season to be increased to 7.2%, only to see the actual data come in at -4.9% for holiday season spending.

Moreover, as I watched CNBC's coverage of the unfolding Friday shopping, guest hosted by well-regarded retail analyst Dana Telsey, it was clear that people were out shopping because of the large discounts being offered. Telsey admitted that this season's sales would be low-margin in nature but that, due to falling commodity prices, hopefully 2012 would be 'the year of the margin.'

Meaning that Black Friday's sales were robust because many people were out taking advantage of sales. And this is good news? This is going to fuel a long-lived US economic expansion?

I doubt it.

Another reason for yesterday's equity index performance was reported to be, as one analyst coined the term, 'hope-ium' that Euro governments discussing coordinated, tougher and enforceable fiscal policies would eventually resolve that trading bloc's sovereign debt woes.

If that isn't a pipe dream, what is? Looking at the reactions of the populace in Greece and Italy to austerity measures, what do you think will occur if/when the same is applied to Spain and France?

As I write this, the S&P futures are up to 1194, presumably on the news that Cyber Monday sales were 15% higher than last year.

Again, fine for a passing S&P500 rise, but suspect as the source of lasting US economic expansion. As a friend of mine opined last night regarding the holiday sales reports, and his own experience at a crowded restaurant over the weekend,

'It seems like if you have a job, you're spending. But if you don't, it's a different story.'

Just so. And with broadly-defined, actual US unemployment between 15 and 16%, and real median income for the past decade flat, that doesn't seem to be an improving underpinning for the US economy going forward.

US equity indices reflect global economic activity, so they may outpace US economic growth. But Europe's slide into recession should concern investors looking at the global GDP outlook.

Monday, November 28, 2011

The Economist's Denial Concerning The Euro & Europe's Entitlements Crisis

The current issue of The Economist entitled it's lead staff editorial "Is This Really The End?" Of the Euro, of course.

The piece then goes on to examine various ways Euros may be printed or borrowed, or back yet another instrument in hopes of fooling investors into overlooking the EU's real problem.

While usually on target, the Economist is hopelessly in denial on this issue. They concentrate mostly on the topic of Germany and Merkel simply bailing out Europe, about which I wrote recently. But that's almost a sideshow.

What the editorial never mentions is that this isn't simply a financial or sovereign debt crisis, per se.

It's a European entitlements crisis.

The Economist can blather on all it wants about the ECB, the EFSF, the Euro, and various means to move the same old monetary pieces around the same board, sometimes with new labels on them. But none of that will solve the problem.

The United States and Europe's nations all share a common, heretofore not experienced problem. Their lush government defined-benefit obligations have finally outstripped their abilities to fund said obligations. They are all gigantic Ponzi schemes, in which 1.5-2 generations have legislated extravagant benefits for themselves, to be paid by borrowing now and taxing later generations, or simply taxing later generations. Thus, there's no possibility of resolving the loss of confidence by global investors, because the money to solve the problems doesn't exist yet.

And with the suffocating tax and regulatory burdens besetting all these nations, it's looking like economic growth won't be helping anytime soon.

Face it, the developed nations are in for a rough economic ride for probably at least one decade- maybe more. Since WWII, governments have voted their older citizens benefits never before enjoyed in the history of civilization. And clearly won't be again, either. It's been a massive acceleration of spending fueled by wealth borrowed from future generations. Thus, GDPs since the war have also probably been artificially pumped up on this monetary equivalent of steroids.

Only a return by all large economies and nations to defined-contribution social welfare and corporate pensions and health care schemes will bring this unsustainable financial joy ride to an end.

And forget what you hear about any of these oldsters having "earned" their promised benefits. That's a lie. Those benefits were legislated without a clear explanation of their funding, while economists stood by and remained silent on the senselessness of promising such large-scale fixed and escalating benefits to be funded by dynamic, competing, uncertain economies throughout the world.

In America, beneficiaries of Ponzi schemes are forced to return their payouts by virtue of the scheme being a fraud and, thus, no real gains being available for anyone to realize. As an example, witness the ongoing recoveries of the Madoff fraud's payouts.

Why should the payouts of similar government-run Ponzi schemes for retirement and medical care be any different? Nobody 'earned' those benefits. They were never really affordable in the first place.

It may take years, but eventually, voters will have to accept that they elected governments which promised benefits many voters knew weren't really affordable. And they'll all have to take haircuts on those benefits.

Which brings me back to my starting point.

Germany can't fix the Euro problems because they aren't, strictly speaking, just about sovereign debt, the Euro and defaults. They are about totally unsustainable government benefit programs which can't be financially finessed back into solvency.

It's not a liquidity or currency issue. It's a social welfare state issue around the globe.

The Economist should know better than to go into denial about this truth.