Wednesday, May 30th, 2012
Facebook is hitting new intra-day lows as I write this. And again I ask, “who cares?” I don’t mean to be unsympathetic, but I’m going to assume that anyone who bought into in Zuckerberg’s heads-I-win-tails-you-lose coming out party has only done so with money they can afford to lose. If not then I would suggest that they read this and this.
Brazil, Russia, India and China. Four high-growth and highly exciting countries whose progress the world has been tracking since 2001. The stagnant and troubled economies of Europe and the U.S. are very much hoping that the BRICs will help lead us through the valley of the shadow of death, as they did the last time. But are we out of luck?
- Brazilian automakers have had 6 months of falling car sales. It’s the world’s third-largest car market and “responsible for 20 percent of the country’s industrial economy”.
- Its currency has dropped almost 15% in the past three months. This may help Brazilian exporters, but may also help stoke inflation.
- Speaking of exports, Brazil’s economy is very dependent on sales of commodities to other countries. (Vale, the world’s largest producer of iron ore is a Brazilian company.) A slowdown in its customers’ economies will lead its own economy to weaken even more.
- Its GDP growth remains positive but has slowed down recently (from 3.9% in March to 3.7% in April.)
- Its economy is also heavily dependent on commodities sales that will suffer as one of its largest customers, the eurozone, continues its descent.
- Russian politics remain volatile. Large parts of Russian society remain displeased with Vladimir Putin’s self-determined staying power and have expressed this. How will this end?
- The government doesn’t have much of an issue with budget deficits, but this could change if (1) Putin pulls a Saudi Arabia and tries to buy off his citizens and / or (2) oil prices really fall off. (My emphasis below.)
Russia’s oil sector [...] pay[s] a progressively higher share of their revenues when oil prices are higher
[T]his policy has an interesting side effect. When oil prices fall, oil companies see only a very small decline in their revenues, since when oil prices are high, the lion’s share of their revenues are taxed away anyway. The flip side is that the government takes a serious hit when prices drop. (Source: Russia Behind the Headlines)
Serious doubts are emerging about the near-term economic future of India. Here’ what the IMF has to say:
The extent of the recent slowdown in India’s growth rate has surprised most Indiawatchers even in the face of ongoing international financial market volatility, high and volatile oil prices, and the uneven global recovery.
- Foreign investment, (think of Intel, HP, GE, Honeywell, and all the other multi-nationals operating there) has slowed down dramatically.
- The coalition government seems at a loss for how to deal with its problems. India, as it likes to say, is the world’s largest democracy and its great diversity is reflected in its political scene. Imagine the political gridlock in the U.S. multiplied threefold and you’ll get a rough idea of the difficulties India has in confronting tough choices.
- This is especially true when it comes to corruption. India’s middle-class is sick and tired of the rampant corruption among the political and business class. The credibility of its leaders is vanishing at warp-speed. At this rate, it’s not clear whether India will be able to capitalize on its tremendous demographic dividend.
- As I mentioned last week, the Chinese have become extremely pessimistic about their own prospects.
- History Squared also pointed out a recent Economist article which shows that China’s top politicians, i.e. the Chinese most in the know, are making contingency plans.
Officials who can afford to send their families abroad are usually the most powerful, and the most aware of China’s problems. Says Mr Li of Peking University, “They know better than anyone that the China model is not sustainable and that it’s a risk to everybody.”
Europe’s a disaster, the U.S. is a question mark and the BRICs might be stumbling. Facewho?
(c) Finance Addict
Tags: Brazil, Brazilian Company, Brazilian Exporters, BRICs, Car Market, Economic Developments, Eurozone, Facebook, GDP Growth, Government Doesn, India, Industrial Economy, Near Death Experience, Russian Politics, Russian Society, S Industrial, Shadow Of Death, Staying Power, Troubled Economies, Valley Of The Shadow, Valley Of The Shadow Of Death, Vladimir Putin
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Monday, May 28th, 2012
Facebook Aside, Everyone Who Thinks IPO “Pops” Are Good Has Been Brainwashed
Last Friday, after Facebook stock started trading at $42, most observers immediately pronounced the IPO a flop.
Because the IPO had been priced at $38, which meant that the IPO “pop” was only about 10% above the IPO price.
Facebook stockholders who had bought the IPO the night before had instantly made 10% overnight–a spectacular return. String together a few months of daily returns like that, and you would quickly be one of the most successful investors in history.
But some Facebook speculators had expected to make much more free money overnight–perhaps as much as speculators in LinkedIn and other hot IPOs had made.
So they felt disappointed and ripped off.
And the media, who have been carefully trained by Wall Street and short-term speculators to view IPOs with big pops as “successful” and IPOs with small or no pops as “flops” immediately dissed Facebook as a flop.
Now, there were two serious issues with the Facebook IPO that complicate any discussion focused on this IPO in particular: The NASDAQ screwup that borked at least a day’s worth of trading, and the “selective disclosure” scandal, in which the underwriters told their big clients that Facebook’s second quarter was weak but did not tell their small clients this.
Both of those issues may well have affected Facebook’s first day of trading and contributed to the subsequent price decline. And both of those issues are legitimate sources of frustration, for investors and the company alike. (So please don’t bother raising these issues in the comments below: They’re separate and apart from the point of this discussion, which is about first-day “pops.”)
According to a source very close to the situation, all other issues aside, Facebook was aiming for a 10% pop. Not a 25% pop. Not a 50% pop. A 10% pop. And for most of the first day of trading, that’s exactly what Facebook got. In other words, Facebook did exactly what it was hoping to do.
Facebook knew well how this 10% pop would be perceived by the media: As a disappointment.
But Facebook understood what most companies that go public don’t:
- Any press grumbling about “disappointments” and “small pops” will be quickly forgotten.
- The only investors who benefit from “pops” are short-term flippers who won’t help the company long term and don’t deserve free money
- “Pops” cost the company and its existing shareholders hundreds of milions of dollars (in Facebook’s case, billions)
- “Pops provide no advantage to the company other than a bit of extremely expensive and ephemeral excitement and PR
- Pricing the IPO high enough to have only a small pop meant raising millions or billions more dollars that would subsequently be worth milions or billions of dollars to the company
Specifically, in Facebook’s case, if Facebook had priced the IPO at, say, $30, instead of $38, it would have raised ~$12.5 billion in the IPO instead of $16 billion.
In exchange for a bigger “pop,” happier speculators, and a more enthusiastic press reception, in other words, Facebook and its selling shareholders would have sacrificed $3.5 billion that they can now use to create real value for the company and its shareholders (including its new shareholders).
$3.5 billion is real money.
Another CEO who understands the truth about IPO pops.
Blowing $3.5 billion on making speculators and financial reporters happier would have been the height of short-term thinking. And, like other great companies, Facebook doesn’t make decisions aimed at creating short-term value. It makes decisions designed to create long-term value.
The extra $3.5 billion Facebook raised by aiming for 10% pop will create at least $3.45 billion more value for Facebook over the long term than a bigger “pop” would have. (The short-term press hyperventilation and speculator euphoria may create some value for a company, but not much. And it may even be harmful to the company by making everything after the IPO seem like an anti-climax.)
But, but, but!
What about the IPO investors?
Shouldn’t Facebook and other IPO companies want to make investors happy?
Shouldn’t they be less greedy and give investors a reward for taking a chance on them?
IPOs should not be priced “at market value.” They should be priced just below market value This rewards initial investors for taking the chance on the IPO pricing (which is always risky–no one knows exactly what “market value” will be). And it gives the investors an incentive necessary to do the research on the company before it goes public. Without that, the investors might just wait to see where the stock traded and do the research then.
But any investor who thinks they need more than a 5%-10% overnight return as a reward for placing an order on the IPO is unbelievably greedy.
Again, a 10% return overnight is a spectacular return.
A 10%-20% return, which is what early-stage IPOs should aim for, is an even more spectacular return.
So any investor who thinks they deserve more than that is just greedy.
But What About “Broken IPOs” — They’re Terrible, Right? [No]
What if the “market value” for a company on the first day of trading is higher than a conservative market value that a conservative investor would place on it? What if the stock drops below the IPO price after the first couple days of trading? What if the company has a “broken IPO?”
Yes, what about that.
This is where Wall Street’s brainwashing of clients and the media about IPOs has been most insidious and effective.
So, really, what if a company has a “broken IPO?” Isn’t that a huge disaster?
In fact, it’s hardly worth mentioning.
What it means is that investors who placed orders for the IPO at certain prices and were intending to hold the stock for more than the first day of trading and were unwilling to tolerate a drop below the IPO price were too aggressive in their bids.
You’re selling your house. Should you sell it at 25% or off just to create a “pop”? Of course not!
That’s the investors’ fault, not the company’s fault. And the resulting disappointment and disgruntlement is called “buyers’ remorse.” And it happens all the time, in almost every industry and type of transaction on the planet.
Let’s use a real-estate analogy.
Tags: Business Insider, Exac, Facebook, Faceplant, Free Money, Henry Blodget, Ipo Price, Ipos, Last Friday, Legitimate Sources, Nasdaq, Price Decline, Return String, Screwup, Selective Disclosure, Sources Of Frustration, Spectacular Return, Speculators, Stockholders, Underwriters
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Friday, May 25th, 2012
by Greg Feirman, Top Gun Financial
May 24, 2012
What a disappointment Friday’s Facebook IPO was. How anticlimactic after all the build up and hype. What a debacle for Morgan Stanley and Nasdaq in what should have been their moment of triumph. Where to begin in this comedy of errors? It starts with Morgan Stanley’s decision to increase the size and price of the offering. An IPO that was originally targeted at $10 billion ballooned to $16 billion. Gauging the seemingly limitless demand for shares, Morgan Stanley must have thought the market could bear the increased size. In retrospect, they dumped too many shares at too high a price into the market resulting in the IPO being dead on arrival. As if that wasn’t enough, Nasdaq’s computerized system botched the transaction process. The 30 minute delay in opening shares was the result of their trying to resolve a bug that prevented traders from modifying and cancelling orders. The mistake they made was opening the stock without fixing the bug which led to complete chaos. Traders who had placed orders but then modified or cancelled them did not receive confirmation. Therefore, many traders did not know if they owned shares or not or at what price for about three hours. This is the trading equivalent of playing football in the dark. My own experience appears to be typical. Shortly after Facebook started trading at about 8:30am PST, I put in a limit order for 250 shares. After a few minutes, I tried to cancel my order but received an error message. Again and again I tried to cancel my order, only to receive error messages. After about an hour, I gave up in frustration. It wasn’t until early Saturday morning when I checked my account that I saw 250 unwanted shares of FB. George Brady, a 66 year old from North Carolina, had the same experience when he tried to cancel his order for 1,000 FB shares (“Investors Pummel Facebook”, The Wall Street Journal, May 22, A1). I sold my shares first thing Monday morning at $34. However, that left me with a $1500 loss having bought shares at $40 ($6 * 250 = $1500). Immediately after selling, I called Scottrade to complain. My local branch office was overloaded by calls and I was redirected to a call center where the broker I spoke with was completely unhelpful. A few hours later I called back, spoke with a broker in the local office, and registered a complaint. I am happy to say that Scottrade called me a few hours ago to say that my trade had been scratched. If you experienced something similar, make sure to call your broker and tell them what happened. Don’t just assume you got screwed and have to eat the loss. The best account of what happened at the Nasdaq was by Thomas Joyce, CEO of Knight Capital, Monday morning on Squawk on the Street who called it “the worst IPO by an exchange ever”. Joyce explained the Nasdaq system failure to accommodate order modifications and cancellations which left traders, including his company, trading in the dark for almost three hours. He said that Bob Greitfeld, CEO of the Nasdaq, should not have opened trading before fixing this bug. The responsible thing to do would have been to delay the IPO to Monday instead of recklessly plowing ahead. He said the overall losses to the industry could approach $100 million. His interview was a tour de force and nobody has said it better. ***** But the fact that all of us are shocked and outraged that an $18 billion IPO – the 2nd largest in history – priced at 100 times earnings flopped is really more noteworthy than another instance of greed and incompetence on Wall Street. Facebook is the vanguard of a new generation of internet companies and its failure foreshadows theirs. The larger meaning of the Facebook Fiasco is the pricking of Tech Bubble 2.0. While most of the country is in a lackluster recovery, the Silicon Valley is booming. Stimulated by the incredible new wealth of Facebook’s founders and investors, hundreds of new social networking and internet startups have been launched and funded here in the last few years. Indeed, the activity and frenzy has reached a new pitch in correlation with Facebook’s path to IPO. The Wall Street Journal reported on Friday that there are now 20 privately held internet companies with a valuation of more than $1 billion – compared with 18 in 1999 and 2000 (“The $1 Billion Start-up Club List, Minus Facebook”, WSJ.com Digits Blog, May 18). The most recent new member of the club is Pinterest, an online scrapbooking site with little revenue and no profit, which raised $100 million at a $1.5 billion valuation last week. It was valued at only $200 million last October. While Pinterest has little revenue or even a business model, it had more than 20 million unique visitors last month (“Pinterest’s Rite Of Web Passage – Huge Traffic, No Revenue”, The Wall Street Journal, February 16). It wasn’t too long ago that it seemed reasonable to value companies on web traffic as a proxy for future revenues. In retrospect, we learned that those future revenues don’t always materialize. But memories are short in the Silicon Valley where all the men are strong, all the women are good looking and all the children are above average. Some of the other hot new +$1 billion internet start ups include DropBox, which allows you to share files between all your computers and smart phones, Evernote, maker of note taking apps, and Airbnb, which has created a market for the rental of rooms in private homes. Twitter and FourSquare – also on the list – are yesterday’s news. In addition to being worth more than $1 billion, another thing most of these companies have in common is unprofitability. Indeed, many of them scarcely have any revenues. They are valued by venture capitalists primarily on their future potential and they fund their operations through these investments. One result of these massive infusions of venture capital is a hiring boom for technology workers in the Silicon Valley who now make more than $100,000/year on average (“Average Silicon Valley Tech Salary Passes $100,000″, The Wall Street Journal, January 24). Most of these tech workers are young men who prefer to live in San Francisco. Flush with cash from their high paying jobs, they have bid up the apartment market in the city. The average apartment rental asking price in the city in the 1st quarter was $2,633 – up 16% from $2,299 a year ago (Average Rental Asking Price SF 1Q12 Chart Attached). Studio and one bedroom apartments are seeing the strongest demand with their asking rents up 19% and 17% from the year ago period (“Renters Scramble As Market Takes Off”, The Wall Street Journal, April 19, A9B). Rents and home prices are not the only beneficiaries of the boom. Money trickles through the entire service sector that serves these newly rich, high income, young tech entrepreneurs and employees. “I hate the word trickledown, but that’s how regional economies spread the growth”, says Steve Levy, director of the Center for Continuing Study of the California Economy based in Palo Alto. For example, the popular Rosewood Hotel at the intersection of Sand Hill Road and 280 in Menlo Park has grown from 250 employees when it opened three years ago to 420 today. Occupancy rates as well as food and beverage sales are up and as a result Michael Casey, Rosewood’s general manager, is hiring restaurant workers and housekeepers (“IPO Wealth Trickling Through The Region”, The Wall Street Journal, April 19, A9A). What does all this have to do with the Facebook IPO? Venture capitalists invest money in companies in order to sell them for more down the road. The two classic exits are acquisition by a large company and IPO. Wall Street is greedy, dumb and myopic but there are limits. It will buy hot, new, unproven internet companies at 100 times earnings or even without earnings as long as their stocks go up. But one thing Wall Street does not like is losing money. Once they stop going up, you will have a hard time selling them new issues. Investors have not completely forgotten 1999 and 2000. Nobody knows exactly when this moment occurs but we know that it invariably does. The Facebook Fiasco looks to me like the tipping point.
Copyright © Top Gun Financial
Tags: Bubble 2, Comedy Of Errors, Computerized System, Dead On Arrival, Debacle, Disappointment, Error Messages, Facebook, Fiasco, George Brady, Ipo, Limit Order, Minute Delay, Morgan Stanley, Nasdaq, Retrospect, Saturday Morning, Shares Investors, Top Gun, Wall Street Journal
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Friday, May 18th, 2012
by Steven Vincent, Bull Bear Trading
Let me start by clarifying something. I am not saying that the market could crash spectacularly in the next few days and that in that event the Facebook IPO would be a major contributing factor. I am not saying that. The market is saying it.
Facebook boosts IPO size by 25 percent, could top $16 billion
NEW YORK/SAN FRANCISCO (Reuters) - Facebook Inc increased the size of its initial public offering by almost 25 percent, and could raise as much as $16 billion as strong investor demand for a share of the No.1 social network trumps debate about its long-term potential to make money. Facebook, founded eight years ago by Mark Zuckerberg in a Harvard dorm room, said on Wednesday it will add about 84 million shares to its IPO, floating about 421 million shares in an offering expected to be priced on Thursday. http://finance.yahoo.com/news/facebook-expands-ipo-size-aims-011714…
This mammoth dumping of shares onto the market is coming at the exact moment that global financial markets are teetering on the brink of disaster. Technically and psychologically this market is as weak and poorly positioned to absorb a new float of this size as it could possibly be. As every market across all asset classes breaks major bearish technical levels, as the fundamental news flow accelerates and worsens by the hour, Wall Street if fixated upon “the biggest IPO ever”. Few ask why Facebook owners are rushing for the exits now. Few observe that the markets began their current crash on the day of the Carlyle IPO. Even fewer wonder what the potential effect will be of sucking the remaining air out of the room even as the markets gasp for breath.
Bulls will presently argue that the market is very oversold and positioned to rally. Under conditions of a healthy bull market, they would be correct. Every indicator you could think of is positioned for a rally in the context of a real bull. The trouble is that the last bull phase ended in February of 2011 and the market has been falling apart internally for over a year. In fact, technical deterioration has run far ahead of price declines in much the same way in 2011. The result then, as now, is that market price sprints to catch up to the technicals and the result is a crash.
Here’s just one example of many. Prior to the 2011 crash, the ratio between Down Volume and Up Volume began to expand dramatically even as the market made new highs, creating a divergence between market price and the indicator:
Take note that if this pattern repeats itself for a fourth time (and there are many compelling reasons to think it will as we will see later in this posting), then we are yet very early in the process. This suggests that although we could be considered “oversold” at this time, a market crash is pending. And it is important to further note that serious market crashes come from deeply oversold, deteriorated technical conditions such as those prevailing right now. When comparing 2011 and 2012 levels, the indicator also made a higher low while the market made a higher high which is a divergence.
This indicator also created a divergence at the 2011 and 2012 price highs. Keep in mind that both of these indicators are just now beginning their big moves.
One of the hallmarks of a crash is a rapid expansion of New 52 Week Lows:
Note the huge divergence between 2011 and 2012 as more New Lows were being registered at a higher price level in 2012. Also notice the rapid expansion of New Lows as price breaks the neckline of Head and Shoulders tops in both 2011 and 2012.
Many will argue that the price of the 30 Year Treasury Bond is “too high” and that the recent flight of capital to the perceived safety of that market is “irrational” or even “stupid” and that it “must reverse”. Right now, the long bond is blasting through the upper resistance band that has contained it for several decades:
Note that this very long term breakout move is coming after a six month long consolidation. Also note that this is the first time ever that this market did not return to support after visiting its upper resistance band. Traders should respect the intelligence of the market. Clearly it is saying that there is a real need for safety and that the need is so urgent that a multi-decade technical level needs to be completely taken out. Also note that this breakout move is only just beginning.
Clearly this is a move that is only just beginning. When such long term technical events occur is far more likely to mark the onset of something rather than the end of something. The presence of a clear Head and Shoulders formation suggests an immediate crash to the neckline and beyond.
The Dollar ETF, UUP, is rapidly approaching the neckline of a clear reverse Head and Shoulders formation:
This is coincident with a triple bull moving average cross. The bull cross together with a breakout from the formation neckline would be the beginning of a very strong move.
Volatility Index has broken out from a six month long inverse Head and Shoulders pattern and has closed four consecutive sessions above its 200 EMA:
This is the beginning of a very large move for VIX, which can only correlate with a significant bearish event for stocks.
I could post many more charts which show that the market is far nearer to the beginning of a major event than to a sort of end. Oversold is likely to become much more oversold as panic selling takes hold.
While we could argue that RSI is now well below 30 and therefore oversold, historical precedent shows that it can go much lower: The incidents when RSI started at 70 and went below 20 led to an average bottom for the indiator of 16. My take is we will see that reading on this decline and it will reflect a serious bearish market event.
In this context, Wall Street will be dumping an enormous new float of a new “darling” stock into the market on Friday. Market participants still largely regard the recent price decline as a buying opportunity and the expectation is that the FB shares will be “snapped up” by eager investors. Recent dip buying behavior has only served to expend what little available cash there is in the market. The Facebook IPO will suck the remaining air out of the room, leaving a vacuum. While the effect may not be immediate, it could take only a few sessions for the real selling to begin. The setup for a Black Monday is there. And I do not mean that metaphorically.
Day by day, tick by tick, technical event by technical event, the two charts are nearly perfect replicas. Will the fractal echo complete on Friday and Monday?
Any long position under these circumstances is sheer folly. And I’m not saying that. The market is saying it.
Copyright © http://www.thebullbear.com
Tags: Asset Classes, Brink Of Disaster, Bull Bear, Bulls, Carlyle, Crash, Dorm Room, Exact Moment, Facebook, Finance Yahoo, Global Financial Markets, Harvard, Initial Public Offering, Investor Demand, Ipo, Mark Zuckerberg, Reuters, Steven Vincent, Trumps, Wall Street
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The Facebook IPO: A Note to Mark Zuckerberg; or, With “Friends” Like Morgan Stanley, Who Needs Enemies?
Thursday, May 17th, 2012
by Dan Ariely, Behavioural Scientist, and author of Predictably Irrational, and The Honest Truth About Dishonesty
I just received this letter from a friend in the banking industry. He prefers to remain anonymous (you’ll see why soon enough).
There’s been a lot of ballyhoo recently about your IPO and your choice of investment bankers. Indeed, a war was fought by the banks to win your “deal of the decade.” As reported in the press, the competition was so intense banks slashed their fees in order to win your business. Facebook is “only” paying a 1% “commission” for its IPO rather than the 3% typically charged by the banks.
Congratulations, Mr. Zuckerberg! On the surface it appears your pals in investment banking have given you a quite a deal!… Or have they?
Let’s take a closer look and see what you’re getting for your money.
To start, your bankers have the task of selling 388 million Facebook shares to the public. In return, these banks will receive $150 million for their efforts. Morgan Stanley will get the largest share of that amount—approximately $45 million. But is $45 million all that Morgan Stanley makes off your deal?
Before we answer this question, let’s first dissect the sales pitch that Morgan Stanley probably gave you to justify “only” the $150 million fee. We’ll look at what they told you, and then what that actually means.
1) We will raise the optimal amount of money for the company, for our 1% fee. (Translation: How great is it that Zuckerberg believes he got a great deal by getting us down to a 1% fee! We can’t believe he got hoodwinked into agreeing to any level of what are actually variable commission fees.)
2) The definition of a successful deal is having a good price “pop” on the first day of trading. This will make all parties happy and you, Mark, look like a rock star. (Translation: No one benefits more than us if Facebook’s share price rises significantly on day one. That first day price “pop” will take money directly out of your pocket and puts it in ours and those of our “best friends”—not yours or the public stockholders. We will, at almost all costs, make this happen.)
3) This is a very complicated process, especially for such a large company, but we are here to successfully guide you through it. (Translation: It actually takes the same amount of work to do a large IPO as a small one. Thus for approximately the same amount of work we’re doing for Facebook, we sometimes get only $10 million—$140 million less than we’re making on Zuckerberg’s IPO.)
4) We will perform due diligence on your company to make sure the business and its finances are as they seem. (Translation: While it certainly does take some time and effort to perform reasonable due diligence, Facebook is a very large and well-known company, and we have done this same procedure hundreds of times.)
5) We will write a prospectus that outlines Facebook’s strategy, business plan, financials, and risks, and we will get it approved by the SEC. (Translation: Per the regulatory guidelines, a prospectus is largely a boilerplate document; for the most part, it’s just a lot of cutting and pasting.)
6) Once this prospectus is completed and with input from the Facebook team, we will come up with “the range” or the approximate price we think your IPO shares should be sold at to the fund managers. (Translation: The price of your IPO will be determined by where and how we can best optimize our (secret) profits on the deal.)
7) We believe the best shareholders are large fund managers, as they will become long-term holders of Facebook stock. However, at your request, we will allocate 25% of the IPO shares to sell to individual investors. (Translation: There are 835 million Facebook users worldwide. One could argue that what is best for Facebook would be to let all of Facebook’s legally eligible customers enter orders to buy Facebook stock. Then through the broker of their choosing, they could enter the quantity of shares they want to buy and the price they want to pay, just like the fund managers do—or are supposed to do. More on this scenario below.)
8) Our 10-day sales process will begin. For this important “road show,” you will be introduced to our large fund manager clients. These fund managers will receive our pitch for why they should buy your stock, and we will assess their interest and at what price. (Translation: Far from being long-term holders, many of our large fund manager “best friends” will, as soon as Facebook shares start trading, sell (or “flip”) for a windfall profit on all the underpriced shares we’ve given them. We’ll enable this by creating a perceived “feeding frenzy” for the stock by putting out an artificially low initial estimate ($28 to $35 per share) for where we think the IPO will be priced. We will then raise that estimate during the road show. Rumors about this begin to circulate over the next day or so.)
9) At the end of the road show on the night before the IPO, we will review the overall supply and demand for the stock and then “price” the shares. This is the price at which the large fund managers will receive their “winning” Facebook shares. (Translation: The price of the stock is already known. For the past few years, Facebook shares have been actively trading on such venues as SecondMarket and SharePost.)
10) And finally, we will put a mechanism, called a Greenshoe, in place that “supports” your share price after the IPO. (Translation: Thank God Zuckerberg doesn’t understand one of the greatest investment banking profit enhancing creations of all time—“The Greenshoe.” The Greenshoe will likely be our most profitable part of this deal. It’s a secret windfall, and although we market it to Facebook as a method to stabilize its share price, it’s really just another way for us, with little effort, to make huge amounts of money.)
We’re not done yet, Mark. Now, I’d like to dig a bit deeper into what’s going to happen and show you all the additional ways your banker friends and their large fund manager clients are going to make oodles of money off your deal.
1) Morgan Stanley only gives Facebook shares (“golden tickets”) to their best client “friends.” In other words, it’s no coincidence that Morgan Stanley’s biggest fund manager clients get the bulk of the shares offered in this kind of deal.
2) How do you become best friends with Morgan Stanley? There are lots of ways, such as trading tens of millions of shares with them or using the firm as your prime broker.
3) I’m sure there are a lot of conversations going on right now between Morgan Stanley’s salespeople and their clients. These conversations are probably along the lines of (wink-wink) “before we allocate our Facebook shares, we’d like to ask first if you plan to do more trading with us over the next week to six months….”
4) Let’s assume that 50 of Morgan Stanley’s “best friends” trade an extra 2 million shares so they can get access to more shares of the Facebook IPO. Let’s also assume that the average commission these clients pay to Morgan Stanley is 2 cents per share. Well, those extra trades will dump an additional $2 million dollars into Morgan’s coffers.
5) Now comes the part where Morgan Stanley actually gives free money to its friends. If the Facebook IPO is like the majority of other recent Internet offerings, here’s what Morgan Stanley will likely do. They know Facebook will be a “hot” deal. Especially, with all of the “5% orders” coming in, there will be huge demand for Facebook shares. My prediction is that Morgan Stanley will “price” Facebook at approximately $40 per share. This is the price at which Morgan Stanley’s “best friends will be able to buy the bulk of the 388 million shares offered.
6) Now let’s now assume that Facebook shares open for trading at $50—a lower percentage premium than Groupon’s opening share-price “pop.”
7) Let’s assume that one of Morgan Stanley’s “best friends” decides to sell 3 million shares right after the opening at $50 per share. That “best friend” will instantaneously make a $30 million profit. That’s right, a $30 million profit.
Tags: Amount Of Money, Ballyhoo, Banking Industry, Banks, Closer Look, Deal Of The Decade, Dishonesty, Enemies, Facebook, Honest Truth, Investment Bankers, Investment Banking, Ipo, Letter From A Friend, Morgan Stanley, Pals, Rock Star, Sales Pitch, Scientist, Translation
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Thursday, February 2nd, 2012
The most eagerly awaited IPO of the decade has just filed its S-1 statement (link). Some real time observations:
- Symbol: FB
- Proposed maximum aggregate offering price: $5 Billion
- 845 million monthly active users (MAU)
- 483 million daily active users (DAU)
- Users generated on average 2.7 billion Likes and Comments per day in Q4 2011. Er…”liking” is monetizable?
- 100 billion friendships
- 250 million photos uploaded per day
- FB generated $3.7 billion in Revenue in 2011, up from $2 billion in 2010
- FB generated $1 billion in net income in 2011, up from $606 billion in 2010, a 40% growth rate, compared to the 165% growth rate from 2009′s $229MM.
- EBIT margin peaked at 52.3% in 2010 ($1MM in EBIT on $2 billion in revenue), has since declined to 47.3% or $1.756Bn on $3.711Bn in Revenue
- $3.9 billion in cash and marketable securities
- Effective January 1, 2013, Mr. Zuckerberg’s annual base salary will be reduced to $1.
- Entities affiliated with Goldman Sachs own 65.9 million Class A shares or 56.3% of total, Zuckerberg owns 36.1% of Class A, and 57.1% of Class B (all pre offering)
- Peaked model? – MAU additions peaked in 2010 when FB added 248MM to a total of 608MM; in 2011 it added 237MM to 845MM
- What happens when Zynga goes: “Revenue from one customer, Zynga, represented 12% of total revenue for the year ended December 31, 2011″
- Some revent valuation data points: In December 2010, we sold an aggregate of 2,398,081 shares of our Class A common stock to DST Global Limited at a purchase price per share of $20.85, for an aggregate purchase price of approximately $50 million.
Mark Zuckerberg’s letter:
Facebook was not originally created to be a company. It was built to accomplish a social mission — to make the world more open and connected.
We think it’s important that everyone who invests in Facebook understands what this mission means to us, how we make decisions and why we do the things we do. I will try to outline our approach in this letter.
At Facebook, we’re inspired by technologies that have revolutionized how people spread and consume information. We often talk about inventions like the printing press and the television — by simply making communication more efficient, they led to a complete transformation of many important parts of society. They gave more people a voice. They encouraged progress. They changed the way society was organized. They brought us closer together.
Today, our society has reached another tipping point. We live at a moment when the majority of people in the world have access to the internet or mobile phones — the raw tools necessary to start sharing what they’re thinking, feeling and doing with whomever they want. Facebook aspires to build the services that give people the power to share and help them once again transform many of our core institutions and industries.
There is a huge need and a huge opportunity to get everyone in the world connected, to give everyone a voice and to help transform society for the future. The scale of the technology and infrastructure that must be built is unprecedented, and we believe this is the most important problem we can focus on.
We hope to strengthen how people relate to each other.
Even if our mission sounds big, it starts small — with the relationship between two people.
Personal relationships are the fundamental unit of our society. Relationships are how we discover new ideas, understand our world and ultimately derive long-term happiness.
At Facebook, we build tools to help people connect with the people they want and share what they want, and by doing this we are extending people’s capacity to build and maintain relationships.
People sharing more — even if just with their close friends or families — creates a more open culture and leads to a better understanding of the lives and perspectives of others. We believe that this creates a greater number of stronger relationships between people, and that it helps people get exposed to a greater number of diverse perspectives.
By helping people form these connections, we hope to rewire the way people spread and consume information. We think the world’s information infrastructure should resemble the social graph — a network built from the bottom up or peer-to-peer, rather than the monolithic, top-down structure that has existed to date. We also believe that giving people control over what they share is a fundamental principle of this rewiring.
We have already helped more than 800 million people map out more than 100 billion connections so far, and our goal is to help this rewiring accelerate.
We hope to improve how people connect to businesses and the economy.
We think a more open and connected world will help create a stronger economy with more authentic businesses that build better products and services.
As people share more, they have access to more opinions from the people they trust about the products and services they use. This makes it easier to discover the best products and improve the quality and efficiency of their lives.
One result of making it easier to find better products is that businesses will be rewarded for building better products — ones that are personalized and designed around people. We have found that products that are “social by design” tend to be more engaging than their traditional counterparts, and we look forward to seeing more of the world’s products move in this direction.
Our developer platform has already enabled hundreds of thousands of businesses to build higher-quality and more social products. We have seen disruptive new approaches in industries like games, music and news, and we expect to see similar disruption in more industries by new approaches that are social by design.
In addition to building better products, a more open world will also encourage businesses to engage with their customers directly and authentically. More than four million businesses have Pages on Facebook that they use to have a dialogue with their customers. We expect this trend to grow as well.
We hope to change how people relate to their governments and social institutions.
We believe building tools to help people share can bring a more honest and transparent dialogue around government that could lead to more direct empowerment of people, more accountability for officials and better solutions to some of the biggest problems of our time.
By giving people the power to share, we are starting to see people make their voices heard on a different scale from what has historically been possible. These voices will increase in number and volume. They cannot be ignored. Over time, we expect governments will become more responsive to issues and concerns raised directly by all their people rather than through intermediaries controlled by a select few.
Through this process, we believe that leaders will emerge across all countries who are pro-internet and fight for the rights of their people, including the right to share what they want and the right to access all information that people want to share with them.
Finally, as more of the economy moves towards higher-quality products that are personalized, we also expect to see the emergence of new services that are social by design to address the large worldwide problems we face in job creation, education and health care. We look forward to doing what we can to help this progress.
Our Mission and Our Business
As I said above, Facebook was not originally founded to be a company. We’ve always cared primarily about our social mission, the services we’re building and the people who use them. This is a different approach for a public company to take, so I want to explain why I think it works.
I started off by writing the first version of Facebook myself because it was something I wanted to exist. Since then, most of the ideas and code that have gone into Facebook have come from the great people we’ve attracted to our team.
Most great people care primarily about building and being a part of great things, but they also want to make money. Through the process of building a team — and also building a developer community, advertising market and investor base — I’ve developed a deep appreciation for how building a strong company with a strong economic engine and strong growth can be the best way to align many people to solve important problems.
Simply put: we don’t build services to make money; we make money to build better services.
And we think this is a good way to build something. These days I think more and more people want to use services from companies that believe in something beyond simply maximizing profits.
By focusing on our mission and building great services, we believe we will create the most value for our shareholders and partners over the long term — and this in turn will enable us to keep attracting the best people and building more great services. We don’t wake up in the morning with the primary goal of making money, but we understand that the best way to achieve our mission is to build a strong and valuable company.
This is how we think about our IPO as well. We’re going public for our employees and our investors. We made a commitment to them when we gave them equity that we’d work hard to make it worth a lot and make it liquid, and this IPO is fulfilling our commitment. As we become a public company, we’re making a similar commitment to our new investors and we will work just as hard to fulfill it.
The Hacker Way
As part of building a strong company, we work hard at making Facebook the best place for great people to have a big impact on the world and learn from other great people. We have cultivated a unique culture and management approach that we call the Hacker Way.
The word “hacker” has an unfairly negative connotation from being portrayed in the media as people who break into computers. In reality, hacking just means building something quickly or testing the boundaries of what can be done. Like most things, it can be used for good or bad, but the vast majority of hackers I’ve met tend to be idealistic people who want to have a positive impact on the world.
The Hacker Way is an approach to building that involves continuous improvement and iteration. Hackers believe that something can always be better, and that nothing is ever complete. They just have to go fix it — often in the face of people who say it’s impossible or are content with the status quo.
Hackers try to build the best services over the long term by quickly releasing and learning from smaller iterations rather than trying to get everything right all at once. To support this, we have built a testing framework that at any given time can try out thousands of versions of Facebook. We have the words “Done is better than perfect” painted on our walls to remind ourselves to always keep shipping.
Hacking is also an inherently hands-on and active discipline. Instead of debating for days whether a new idea is possible or what the best way to build something is, hackers would rather just prototype something and see what works. There’s a hacker mantra that you’ll hear a lot around Facebook offices: “Code wins arguments.”
Hacker culture is also extremely open and meritocratic. Hackers believe that the best idea and implementation should always win — not the person who is best at lobbying for an idea or the person who manages the most people.
To encourage this approach, every few months we have a hackathon, where everyone builds prototypes for new ideas they have. At the end, the whole team gets together and looks at everything that has been built. Many of our most successful products came out of hackathons, including Timeline, chat, video, our mobile development framework and some of our most important infrastructure like the HipHop compiler.
To make sure all our engineers share this approach, we require all new engineers — even managers whose primary job will not be to write code — to go through a program called Bootcamp where they learn our codebase, our tools and our approach. There are a lot of folks in the industry who manage engineers and don’t want to code themselves, but the type of hands-on people we’re looking for are willing and able to go through Bootcamp.
The examples above all relate to engineering, but we have distilled these principles into five core values for how we run Facebook:
Focus on Impact
If we want to have the biggest impact, the best way to do this is to make sure we always focus on solving the most important problems. It sounds simple, but we think most companies do this poorly and waste a lot of time. We expect everyone at Facebook to be good at finding the biggest problems to work on.
Moving fast enables us to build more things and learn faster. However, as most companies grow, they slow down too much because they’re more afraid of making mistakes than they are of losing opportunities by moving too slowly. We have a saying: “Move fast and break things.” The idea is that if you never break anything, you’re probably not moving fast enough.
Building great things means taking risks. This can be scary and prevents most companies from doing the bold things they should. However, in a world that’s changing so quickly, you’re guaranteed to fail if you don’t take any risks. We have another saying: “The riskiest thing is to take no risks.” We encourage everyone to make bold decisions, even if that means being wrong some of the time.
We believe that a more open world is a better world because people with more information can make better decisions and have a greater impact. That goes for running our company as well. We work hard to make sure everyone at Facebook has access to as much information as possible about every part of the company so they can make the best decisions and have the greatest impact.
Build Social Value
Once again, Facebook exists to make the world more open and connected, and not just to build a company. We expect everyone at Facebook to focus every day on how to build real value for the world in everything they do.
Thanks for taking the time to read this letter. We believe that we have an opportunity to have an important impact on the world and build a lasting company in the process. I look forward to building something great together.
Paul D. Ceglia filed suit against us and Mark Zuckerberg on or about June 30, 2010, in the Supreme Court of the State of New York for the County of Allegheny claiming substantial ownership of our company based on a purported contract between Mr. Ceglia and Mr. Zuckerberg allegedly entered into in April 2003. We removed the case to the U.S. District Court for the Western District of New York, where the case is now pending. In his first amended complaint, filed on April 11, 2011, Mr. Ceglia revised his claims to include an alleged partnership with Mr. Zuckerberg, he revised his claims for relief to seek a substantial share of Mr. Zuckerberg’s ownership in us, and he included quotations from supposed emails that he claims to have exchanged with Mr. Zuckerberg in 2003 and 2004. On June 2, 2011, we filed a motion for expedited discovery based on evidence we submitted to the court showing that the alleged contract and emails upon which Mr. Ceglia bases his complaint are fraudulent. On July 1, 2011, the court granted our motion and ordered Mr. Ceglia to produce, among other things, all hard copy and electronic versions of the purported contract and emails. On January 10, 2012, the court granted our request for sanctions against Mr. Ceglia for his delay in compliance with that order. We continue to believe that Mr. Ceglia is attempting to perpetrate a fraud on the court and we intend to continue to defend the case vigorously.
The Enforcement Division of the Securities and Exchange Commission (SEC) has been conducting an inquiry into secondary transactions involving the sale of private company securities as well as the number of our stockholders of record. In connection with this inquiry, we have received both formal and informal requests for information from the staff of the SEC and we have been fully cooperating with the staff. We have provided all information requested and there are no requests for documents or information that remain outstanding. We believe that we have been in compliance with the provisions of the federal securities laws relating to these matters.
Although the results of claims, lawsuits, government investigations, and proceedings in which we are involved cannot be predicted with certainty, we do not believe that the final outcome of the matters discussed above will have a material adverse effect on our business, financial condition, or results of operations. However, defending these claims is costly and can impose a significant burden on management and employees, we may receive unfavorable preliminary or interim rulings in the course of litigation, and there can be no assurances that favorable final outcomes will be obtained.
On Goldman’s share holdings:
Consists of (i) 14,214,807 shares of Class A common stock held of record by The Goldman Sachs Group, Inc.; (ii) 2,598,652 shares of Class A common stock held of record by Goldman Sachs Investment Partners Master Fund, L.P.; (iii) 1,010,587 shares of Class A common stock held of record by Goldman Sachs Investment Partners Private Opportunities Holdings, L.P.; and (iv) 48,123,195 shares of Class A common stock held of record by FBDC Investors Offshore Holdings, L.P. Affiliates of The Goldman Sachs Group, Inc. are the general partner, managing general partner or investment manager of each of Goldman Sachs Investment Partners Master Fund, L.P., Goldman Sachs Investment Partners Private Opportunities Holdings, L.P., and FBDC Investors Offshore Holdings, L.P., and each of these funds shares voting and investment power with certain of its respective affiliates. The address of The Goldman Sachs Group, Inc., Goldman Sachs Investment Partners Master Fund, L.P., Goldman Sachs Investment Partners Private Opportunities Holdings, L.P., and FBDC Investors Offshore Holdings, L.P. is 200 West Street, New York, NY 10282.
Some valuation data points:
Class A Common Stock Financing
In December 2010, we sold an aggregate of 2,398,081 shares of our Class A common stock to DST Global Limited at a purchase price per share of $20.85, for an aggregate purchase price of approximately $50 million.
During 2009, 2010, and 2011, The Washington Post Company and its related companies purchased $0.6 million, $4.8 million, and $4.2 million, respectively, of advertisements on our website. Mr. Graham, a member of our board of directors, is the Chief Executive Officer of The Washington Post Company. The purchases by The Washington Post Company and its related entities were made in the ordinary course of business on commercially reasonable terms. In addition, The Washington Post Company is affiliated with an advertising agency, Social Code LLC, that has advertising clients that do business with us.
During 2009, 2010, and 2011, Netflix purchased $1.9 million, $1.6 million, and $3.8 million, respectively, of advertisements on our website. Mr. Hastings, a member of our board of directors, is the Chief Executive Officer of Netflix. The purchases by Netflix were made in the ordinary course of business on commercially reasonable terms.
During 2010 and 2011, we made payments to GMG Lifestyle Entertainment Inc. (GMG) of $0.9 million and $0.7 million, respectively, for certain sales and marketing services. Rob Goldberg, the founder and Chief Executive Officer of GMG, is the brother-in-law of Ms. Sandberg, our Chief Operating Officer. The GMG relationship was entered into in the ordinary course of business and on commercially reasonable terms.
Tags: 1mm, 50 Million, Awaited Ipo, Base Salary, Cash And Marketable Securities, Common Stock, December 31, Ebit Margin, Facebook, Friendships, Goldman Sachs, Ipo Prospectus, Liking, Mark Zuckerberg, Net Income, Offering Price, Revent, Time Observations, Valuation Data, Year Ended December
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Sunday, November 27th, 2011
by Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors
With rising wealth in emerging markets in recent years, people in China, India and Brazil have quickly acquired a taste for mobile phone and Internet technology. The industry in developing countries is in its infancy but growth has been swift. Below are seven surprising facts about this fast-growing emerging market trend:
1. Only 35 percent of the world’s population uses the Internet today. Yet, of those on the Web, the majority currently lives in a developing country.
2. China has the largest number of Internet users—485 million to be exact—but this is only one-third of the country’s population. After the U.S., India comes in third with 100 million users, but this is less than 10 percent of its population. Brazil holds the number five position with nearly 76 million users—only one-third of its population.
3. The adoption of smartphones is expected to grow rapidly in emerging markets. According to Bloomberg News, within a four-month timeframe, five million Chinese bought Apple’s iPhone 4 from China Mobile. The company plans to have 1 million new Wi-Fi hotspots across China over the next three years, says Bloomberg, so the consumer can surf the Web via Wi-Fi without having 3G access.
4. Ninety-seven percent of all households in the Republic of Korea can connect to the Internet. The country also has the highest mobile-broadband penetration worldwide. United Nations specialized agency ITU says that implementing policies have made the Republic of Korea an “IT powerhouse.”
5. The U.S. isn’t the only fan of Facebook. Although Americans overwhelmingly make up the majority of Facebook users, Indonesia has the second-highest number of members, with 40 million accounts. India, Turkey, Brazil and Mexico have more than 30 million members each, according to CLSA Asia-Pacific Markets Research data.
6. In addition to keeping the world connected to friends and family, the Internet is also a driver of economic growth. Through e-commerce, almost $8 trillion exchange hands each year, says McKinsey Global Institute in its new report on the impact of the Internet. McKinsey says the Internet has made a significant contribution to world GDP growth. Over the past five years, if you combine advanced economies and China, India and Brazil, the Internet has contributed to 11 percent of GDP growth.
7. The Internet has also played a huge role in the Middle East protests. Read a previous post where we ask if the Internet is the Land of the Free?
By clicking the links above, you will be directed to third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content. The following securities mentioned in the article were held by one or more of U.S. Global Investors Funds as of 9/30/2011: Apple, ChinaMobile, China Unicom.
Tags: Asia Pacific Markets, Broadband Penetration, Chief Investment Officer, China Mobile, Clsa, Developing Country, Emerging Market, Emerging Markets, Facebook, Frank Holmes, Iphone, Iphone 4, Market Trend, Markets Research, Number Of Internet Users, Republic Of Korea, Specialized Agency, Surprising Facts, U S Global Investors, Wi Fi Hotspots
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Friday, August 19th, 2011
Here are this weekend’s reading diversions for your personal enlightenment. Have a wonderful weekend!
Holly B. Clegg: Seven Popular Foods With Surprising Health Benefits
Caffeinated or decaf, drinking coffee regularly may reduce your risk of Parkinson’s disease, colon cancer, diabetes and even headaches.
This probably sounds familiar: You’re out to dinner with friends, and everything’s fun, until you get that itch. It’s been 20 minutes, and you really want to check Facebook, or Twitter, or Foursquare or email. Forget about wanting; this is needing. You finally give in to the urge and sneakily check your phone under the table — or fake an urgent visit to the bathroom, where you’ll take a hit of the Internet while huddling in a stall.
There are many well-known depression triggers: Trauma, grief, financial troubles and unemployment are just a few.
We burn three times more calories whilst standing, so today aim to do routine tasks, such as making a conference call or heading a meeting, while standing.
Dr. Peggy Drexler: Strange Days for the Man of the House
Laws and changing times have conspired for decades to siphon off male power. Women got rights that had long been denied. Place in society became less a matter of force and position than information and communication. Pick a measure — education, managerial jobs — and women, in most cases, have blown past parity and assumed the lead.
These body shapes mean much more than deciding between an A-line or Empire wedding gown (the former works for Apples, the latter, for Pears). They’re a signal of our general health: Our bodies store different types of fat in our stomachs versus our thighs
Laziness can ferociously creep up on us at work even when we’re consciously committed to getting things done. It’s a byproduct those evil shiny objects passing through our periphery just begging for attention. We try to fight them off, but sometimes it’s an arduous battle we can’t seem to win. After all, being lazy is what our unconscious minds would rather being doing anyways.
Predisposition to addiction is likely the result of several interacting endophenotypes. For example, difficulty controlling one’s impulses may be an endophenotype that increases the likelihood of someone becoming addicted. In these individuals, the connections between the cortex and reward system may be weighted in such a way that drive is favored over restraint in situations where it would be the opposite for others.
The research found that non-Scrabble players tend to store and collect words by their meaning. By comparison, those who had tried to memorize the Scrabble Dictionary shaved milliseconds off their time.
Poultry wieners, by the way, aren’t much better, especially when it comes to sodium. One Butterball Turkey Frank, for example, has 370 mg of sodium or 16 per cent of the total recommended daily intake.
Tags: Body Shape, Body Shapes, Caffeinated, Canadian Market, Clegg, Colon Cancer, Dinner With Friends, Facebook, Financial Troubles, General Health, Health Benefits, Peggy Drexler, Personal Enlightenment, Popular Foods, Power Women, Routine Tasks, Stomachs, Strange Days, Twitter, Wedding Gown, Wonderful Weekend
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Tuesday, June 21st, 2011
Good Old Golden Rule Days
by William H. Gross, co-Chief, PIMCO
A mind is a precious thing to waste, so why are millions of America’s students wasting theirs by going to college? All of us who have been there know an undergraduate education is primarily a four year vacation interrupted by periodic bouts of cramming or Google plagiarizing, but at least it used to serve a purpose. It weeded out underachievers and proved at a minimum that you could pass an SAT test. For those who made it to the good schools, it proved that your parents had enough money to either bribe administrators or hire SAT tutors to increase your score by 500 points. And a degree represented that the graduate could “party hearty” for long stretches of time and establish social networking skills that would prove invaluable later on at office cocktail parties or interactively via Facebook. College was great as long as the jobs were there.
Now, however, a growing number of skeptics wonder whether it’s worth the time or the cost. Peter Thiel, an early investor in Facebook and head of Clarium Capital, a long-standing hedge fund, has actually established a foundation to give 20 $100,000 grants to teenagers who would drop out of school and become not just tech entrepreneurs but world-changing visionaries. College, in his and the minds of many others, is stultifying and outdated – overpriced and mismanaged – with very little value created despite the bump in earnings power that universities use as their raison d’être in our modern world of money.
Fact: College tuition has increased at a rate 6% higher than the general rate of inflation for the past 25 years, making it four times as expensive relative to other goods and services as it was in 1985. Subjective explanation: University administrators have a talent for increasing top line revenues via tuition, but lack the spine necessary to upgrade academic productivity. Professorial tenure and outdated curricula focusing on liberal arts instead of a more practical global agenda focusing on math and science are primary culprits.
Fact: The average college graduate now leaves school with $24,000 of debt and total student loans now exceed this nation’s credit card debt at $1.0 trillion and counting (7% of our national debt). Subjective explanation: Universities are run for the benefit of the adult establishment, both politically and financially, not students. To radically change the system and to question the sanctity of a college education would be to jeopardize trillions of misdirected investment dollars and financial obligations.
Conclusion to ponder: American citizens and its universities have experienced an ivy-laden ivory tower for the past half century. Students, however, can no longer assume that a four year degree will be the golden ticket to a good job in a global economy that cares little for their social networking skills and more about what their labor is worth on the global marketplace.
Fareed Zakaria, as usual, has a well-thought-out solution. “We need,” he writes, “a program as ambitious as the GI Bill,” but one that focuses on retraining existing unemployed workers and redirecting our future students. Instead of liberal arts, he suggests focusing on technical education, technical institutes and polytechnics as well as apprenticeship programs. Our penchant for focusing on high tech value-added jobs should be modified and redirected, he claims, to mimic the German path, which allows people with good technical skills but limited college education to earn a decent living.
One thing college does do is to keep 25 million students off the unemployment rolls, much like it did for me when I went on my own four year vacation. The world was a different oyster in 1966, however, and it behooves America to recognize the reversal and the necessity for significant changes if it is to compete in the global marketplace of the 21st century.
It is becoming obvious that the 2012 election will be fought on a battlefield of job creation. A 9.1% official unemployment rate, and a number nearly double that when discouraged and part-time workers are included in the rolls, portend an angry and disillusioned electorate, which will include millions of jobless college graduates ill-trained to compete in the global marketplace. Over the past 10 years under both Democratic and Republican administrations, only 1.8 million jobs have been created while the available labor force has grown by over 15 million. It is clear, however, that neither party has an awareness of the why or the wherefores of how to put America back to work again. Few economic advisors from either party ever mention structural long-term disconnects in employment – a recognition that cyclical influences will no longer dominate the U.S. labor market. Manufacturing and goods exports have ceded enormous ground to China and other developing labor markets, as America’s reliance on services and high tech innovation has exposed gaping holes in an historically successful model. Almost any industry dominated or significantly connected to finance and financial leverage has hit the canvas and stayed down in the aftermath of Lehman 2008. Housing construction, real estate brokerage, banking and consumer retail employment will likely never come back to levels dominated by our prior decade’s excessive leverage and its abuse leading to overconsumption. Because of that focus, a “shovel-ready,” vigorous manufacturing sector is not there to pick up the slack.
Similarly, the high tech paragons of the 21st century – Apple, Microsoft, Google, Facebook et al. – never were employers of high school or B.A. college graduates in significant numbers. Production of hardware, to the extent that any was needed, quickly gravitated to foreign ports of call where workers were willing to produce an excellent product for 1/10th of the U.S. wage. The past several decades have witnessed an erosion of our manufacturing base in exchange for a reliance on wealth creation via financial assets. Now, as that road approaches a dead-end cul-de-sac via interest rates that can go no lower, we are left untrained, underinvested and overindebted relative to our global competitors. The precipitating cause of our structural employment break is both internal neglect and external competition. Blame us. Blame them. There’s plenty of blame to go around.
Solutions from policymakers on the right or left, however, seem focused almost exclusively on rectifying or reducing our budget deficit as a panacea. While Democrats favor tax increases and mild adjustments to entitlements, Republicans pound the table for trillions of dollars of spending cuts and an axing of Obamacare. Both, however, somewhat mystifyingly, believe that balancing the budget will magically produce 20 million jobs over the next 10 years. President Obama’s long-term budget makes just such a claim and Republican alternatives go many steps further. Former Governor Pawlenty of Minnesota might be the Republicans’ extreme example, but his claim of 5% real growth based on tax cuts and entitlement reductions comes out of left field or perhaps the field of dreams. The United States has not had a sustained period of 5% real growth for nearly 60 years.
Both parties, in fact, are moving to anti-Keynesian policy orientations, which deny additional stimulus and make rather awkward and unsubstantiated claims that if you balance the budget, “they will come.” It is envisioned that corporations or investors will somehow overnight be attracted to the revived competitiveness of the U.S. labor market: Politicians feel that fiscal conservatism equates to job growth. It’s difficult to believe, however, that an American-based corporation, with profits as its primary focus, can somehow be wooed back to American soil with a feeble and historically unjustified assurance that Social Security will be now secure or that medical care inflation will disinflate. Admittedly, those are long-term requirements for a stable and healthy economy, but fiscal balance alone will not likely produce 20 million jobs over the next decade. The move towards it, in fact, if implemented too quickly, could stultify economic growth. Fed Chairman Bernanke has said as much, suggesting the urgency of a congressional medium-term plan to reduce the deficit but that immediate cuts are self-defeating if they were to undercut the still-fragile economy.
Academics also point to a theory known as Ricardian equivalence, a notion named after David Ricardo from the early 19th century. His ivory tower theorem was that consumers would become more and more confident of their financial future if in fact they believed that their own government’s exuberance would be held in check. Balance the U.S. or any government budget, he prophesized, and the private sector would extend and lever theirs. Well, commonsensically and anecdotally, I know of no family who, after watching the Republican candidates’ debate in New Hampshire, went out the next day and bought themselves a flat screen under the assumption that their Medicare entitlements would be cut in future years and the U.S. budget balanced. Ricardo and his “equivalence” belong in the trash bin of theses and research aimed more towards academics than a practical remedy to America’s job crisis.
What then, shall we do? My preferred solution has long- term elements, which includes the opening language in this Investment Outlook, concerning the value of a college education as currently structured. Peter Thiel may be on to something, but all of our kids just can’t up and quit college à la Bill Gates. Still, if we are to compete globally while maintaining a higher wage base, we must train for “middle” in addition to “high” tech. Philosophy, sociology and liberal arts agendas will no longer suffice. Skill-based education is a must, as is science and math.
Additionally and immediately, however, government must take a leading role in job creation. Conservative or even liberal agendas that cede responsibility for job creation to the private sector over the next few years are simply dazed or perhaps crazed. The private sector is the source of long-term job creation but in the short term, no rational observer can believe that global or even small businesses will invest here when the labor over there is so much cheaper. That is why trillions of dollars of corporate cash rest impotently on balance sheets awaiting global – non-U.S. – investment opportunities. Our labor force is too expensive and poorly educated for today’s marketplace.
In the near term, then, we should not rely solely on job or corporate-directed payroll tax credits because corporations may not take enough of that bait, and they’re sitting pretty as it is. Government must step up to the plate, as it should have in early 2009. An infrastructure bank to fund badly needed reconstruction projects is a commonly accepted idea, despite the limitations of the original “shovel-ready” stimulus program in 2009. Disparate experts such as GE’s Jeff Immelt, Fareed Zakaria, Jeffrey Sachs and Paul Krugman believe an infrastructure bank to be an excellent use of deficit funds: a true investment in our future. While the current administration admits that the $25 billion in Recovery Act spending on infrastructure only created 150,000 jobs, it also stabilized and improved this nation’s productivity for years to come. Clean/green energy investments also come to mind, most of which require government funding and a government thrust in order to create millions of jobs. China knows this and is off and running. The U.S. needs to learn from their state-oriented model. In times of extremis, pushing on the private sector string is ineffective, especially within the context of a global marketplace that offers alternative investment locations. Government must temporarily assume a bigger, not a smaller, role in this economy, if only because other countries are dominating job creation with kick-start policies that eventually dominate global markets.
And how about at least an intelligent discussion on “trade policy” which incorporates more than just a symbolic bashing of Chinese currency relative to the dollar. Who, from either side of the aisle is willing to discuss the use of trade measures in order to help balance our $500 billion trade deficit? This is delicate territory, reawakening fears of Smoot-Hawley in the 1930s, but we are in delicate territory regarding our unemployment rate as well. Warren Buffett in 2003 advocated an idea he called “Import Credits” which he claimed would increase exports in the hundreds of billions and jobs in the hundreds of thousands. Republicans? Democrats? Discussion please.
In the end, I hearken back to revered economist Hyman Minsky – a modern-day economic godfather who predicted the subprime crisis. “Big Government,” he wrote, should become the “employer of last resort” in a crisis, offering a job to anyone who wants one – for health care, street cleaning, or slum renovation. FDR had a program for it – the CCC, Civilian Conservation Corps, and Barack Obama can do the same. Economist David Rosenberg of Gluskin Sheff sums up my feelings rather well. “I’d have a shovel in the hands of the long-term unemployed from 8am to noon, and from 1pm to 5pm I’d have them studying algebra, physics, and geometry.” Deficits are important, but their immediate reduction can wait for a stronger economy and lower unemployment. Jobs are today’s and tomorrow’s immediate problem.
Those who advocate that job creation rests on corporate tax reform (lower taxes) or a return to deregulation of the private economy always fail to address dominant structural headwinds which cannot be dismissed: 1) Labor is much more attractively priced over there than here, and 2) U.S. employment based on asset price appreciation/finance as opposed to manufacturing can no longer be sustained. The “golden” days are over, and it’s time our school and jobs “daze” comes to an end to be replaced by programs that do more than mimic failed establishment policies favoring Wall as opposed to Main Street.
William H. Gross
Tags: Academic Productivity, Bill Gross, Cocktail Parties, College Tuition, Facebook, Google, Gross Co, Gross Investment, Infrastructure, Investment Outlook, Networking Skills, Periodic Bouts, Peter Thiel, Plagiarizing, Precious Thing, Rate Of Inflation, School Daze, Social Networking, Underachievers, University Administrators, William H Gross
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Thursday, May 5th, 2011
by Trader Mark, Fund My Mutual Fund
I am, for very obvious reasons, watching the push and pull between regulators and the financial community in regards to social media very closely. The regulatory framework is essentially something from the 1980s, whereas the real world has sprinted forward a few decades. That said, it is an extremely tricky environment and I hope ‘evolving’ as it is a major impediment to be in the one sector of the business world which is still operating as if it’s 1989.
We have news out that a couple larger firms in the broker dealer space are trying to push the rock…. it will be interesting to see the push back. Making things even more complicated is we have different regulators issuing different rules based on if you are a broker dealer or a RIA (registered investment advisor) – FINRA for the former, the SEC for the latter.
Via Registered Rep:
- In a revolutionary step forward, Raymond James Financial and Commonwealth Financial are putting the “social” back into social media—they will soon begin allowing their advisors to interact with and engage in conversations with others on Facebook, Twitter, LinkedIn and blogs.
- In other words, they will be able to post tweets, updates and comments in real-time that have not been pre-approved. Today, advisors at Commonwealth and Raymond James are only allowed to post “static” updates—all posts have to be pre-approved and commenting is turned off.
- At least one other independent b/d already allows its advisors to use social media on an interactive basis: Cambridge Investment Research. Last September, the firm began using Socialware to track and archive its advisors’ posts, updates, comments and tweets on LinkedIn, Facebook and Twitter. About 10 percent of Cambridge’s 2,000 advisors are signed up for Socialware and the firm is working with these advisors to help them set up a social media presence, says Cambridge President Amy Webber.
- But most of the other 50 or so independent b/ds that allow advisors to use social media at all permit only static updates. Industry executives and consultants predict that a number of independent b/ds will make the switch to interactive updates in the next couple of months.
- “It’s an evolving process,” said Francois Cooke, a consultant in the broker/dealer division at ACA Compliance Group. “The first stage is to prohibit, and then firms go to the second stage, which is to allow limited use, with trials, a template and training. The third stage is when they start to allow more interactive use.”
- The move from static to interactive use of social media marks a major shift. “The way regulations work is this is viewed as a live appearance because it is conversational and can’t be pre-approved,” said Commmonwealth Chief Marketing Officer Todd Estabrook. “I think it will allow them to do exactly what they do in live interactions with clients and prospects, which is to engage in conversations, or invite conversations, talking about the kinds of things they might talk about in a seminar about retirement income. It’s better than a letter because the recipient can actually ask a follow up question and have an answer back from the FA,” he said.
- Until recently, the problem for firms was finding a way to track and archive these online conversations in order to comply with FINRA rules. Commonwealth announced late last month it had cut a deal with Erado, a software company that will do just that.
- FINRA issued social media guidance in early 2010 that says all broker/dealer member firms should have social media policies and procedures and have a system in place for tracking and archiving all social media communications, among other things.
- For RIA firms, the rules are less clear. Early this year, the SEC issued a sweep letter to a number of firms regarding their social media practices, but it has yet to issue specific rules on the subject.
- Under the new Commonwealth program, its FAs will be able to comment, post, respond, like and retweet on facebook, twitter, linkedIn and company blogs. The firm will offer a how-to guide on establishing a social media presence as well as best practices ideas and compliance guidelines. “It demonstrates how important we think social media will be as part of an integrated marketing strategy,” said Estabrook. About 400-500 of the 1400 financial advisors at Commonwealth use social media today, but Estabrook expects that number to jump in June, when the firm starts to allow interactivity.
- Raymond James CEO Dick Averitt announced Monday morning at the firm’s annual conference in Las Vegas that the firm is on the cusp of signing a contract with an outside vendor to retain and track all of its advisors online communications. He said the firm hopes to have a deal by the end of the month. “The deal will allow FAs to actively participate in conversations on these websites just as your 10-year-old does. At Raymond James we fully intend to participate in the technological advances that benefit you and your clients.”
- Erado CEO Craig Brauff, who could not be reached for confirmation, has reportedly said that there will be a number of similar announcements in the next month and a half involving around 25 of the top independent broker/dealers.
- There are at least four firms that track and archive social media interactions, according to Tim Welsh, president of consulting firm Nexus Strategy: Erado; Arkovi (BMRW) and Message Watcher LLC (Joint venture); Socialite by Actiance; and Socialware’s Risk Manager and Social Marketer.
- One reason Commonwealth chose Erado is because it allows the firm to capture activity from a single-user login, instead of an entire machine, so that if a financial advisor shares a computer with other family members at home, their privacy is not disturbed. “So if I am an advisor working at home in the den at the house, and I want to tweet about something and update my Facebook page with a thought, I can do that because I will have appropriately signed up, and my kids’ postings will not be tracked,” said Estabrook.
- ………..he expects social media regulations and tools to evolve over time. “This is it as we understand FINRA regulations to be now but that’s always changing as FINRA responds to what is happening in the marketplace,” he said. “But we are following all of that and we are working to keep them safe in this space. I think it’s going to keep evolving and our regulators will react accordingly.”
Copyright © Trader Mark
Tags: Broker Dealer, Business World, Commonwealth Financial, Dealer Space, Facebook, Financial Advisors, Finra, Free Reign, Impediment, Interactive Basis, Investment Research, Last September, Linkedin, Media Presence, Raymond James Financial, Registered Investment Advisor, Registered Rep, Regulatory Framework, Revolutionary Step, Twitter
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