Facebook: Fool’s gold for fad lovers
DAVID ROEDER THE CURIOUS INVESTOR DROEDER@SUNTIMES.COM January 8, 2011 10:32PM
Updated: August 4, 2011 4:20PM
So you think Facebook will be a great vehicle for investors to make money? Get your cash ready and then party like it’s 1999, because you’ll be making the same mistake people did back then.
The end of the last century was the time of the Internet bubble, when companies with dubious business strategies attached “dot-com” to their names. The ruse helped them raise investors’ money without having to report actual profits or prospects for any. Webvan is one example that comes to mind.
But in the case of those companies, mostly long gone, at least they had to publish their financials. Facebook isn’t even going that far as its teams with Goldman Sachs (GS) to draw in $1.5 billion in outside cash.
In doing so, it is issuing only the barest financial details, unaudited. It’s an act of titanic chutzpah by Facebook founder Mark Zuckerberg to offer just a peek-a-boo look at the company while soliciting interest from well-heeled elites.
The argument can be made that nothing is wrong because the Goldman clients are consenting adults who can afford the risk. But the Facebook-Goldman axis is designed to generate buzz toward a possible initial public offering in 2012. Its private shares are traded in secondary markets, which draw the unwary even before the doors are thrown open to the general public. What better time to pump up the values than when Facebook has surpassed Google as the most visited site on the Internet, when its founder has inspired a hit movie and been named Time magazine’s “man of the year.”
What’s really behind the curtain? Facebook has a hard time extracting money from those who use its social network. Just ask your “friends” if they’ve ever bought anything from Facebook or clicked on one of its ads. An analysis by JPMorgan Chase, based on media reports that Facebook collects about $2 billion a year, finds that Facebook earns about $4 per user, vs. $189 for Amazon (AMZN) or $24 for Google (GOOG). Even Yahoo (YHOO) is good for $8 a user.
The Goldman gambit implies a $50 billion valuation to Facebook, or 25 times its sales. That compares with nine times for Google and more than three times for Amazon.
There are many more warning signs. Internet usage in the United States is leveling off and people are getting more worried about protecting personal information. People who update their Facebook status to tell us about their every meal aren’t technological pioneers anymore. They’re people with too much free time. The point of the Facebook share deal is designed to reward insiders and early investors, the same as a Ponzi scheme.
Zuckerberg wants to be remembered in the same breath as Bill Gates or Sergey Brin. The “man of the year” needs to contemplate Bernie Madoff.
VIX TRICKS: Somewhere there was a wag — maybe it was me — who said the motto of the Chicago futures and options market ought to be “Volatility R Us.” Traders often don’t care whether markets are up or down, just that they have bet on the correct direction and that volatility offers opportunities to enter and exit. The Chicago Board Options Exchange best exemplifies that mindset with one of its most popular products, the volatility index for overall stock prices, called the VIX. Introduced in 1993, it is a widely followed vital sign of the market, but nothing more than that until 2004, when the CBOE made it a tradeable commodity.
Its success has led to expansions of the VIX franchise, with the CBOE applying the calculation to stock indexes and exchange-traded funds. In the first half of this year, it hopes to begin listing options and futures on the “Gold VIX,” which are based on the CBOE Gold ETF Volatility Index.
And that’s hardly the end of it. Friday, the CBOE began distributing VIX readings for individual stocks. The readings are published at cboe.com but cannot be traded yet, although that’s the long-term goal. The stocks in question, with the ticker symbol for their VIX values, are, Apple (VXAPL), Amazon (VXAZN), IBM, (VXIBM), Google (VXGOG) and Goldman Sachs (VXGS). The exchange said more stocks will be added depending on demand.
RAINBOW BANKING: It’s not your granddaddy’s Northern Trust (NTRS) anymore. La Salle Street’s imposing establishment bank once was the repository of old-money values, but lately it’s been stepping out. I wrote a few weeks ago about its unheralded practice of advising clients in socially conscious investments, a specialty that came to light when Northern was named a subadvisor of the Green Century Equity Fund (GCEQX), a mutual fund for social investing.
Then last week NTRS announced it was forming a practice for advising gay couples and families on their financial needs, with attention to estate and tax issues. It will be led by Northern Trust veteran John McGowan, an avowed gay man with 24 years in the industry. So I guess it’s past the time to put the banks stodgy image to rest. Thirteen years ago, Northern Trust became one of the few financial services companies to offer domestic partnership benefits to employees.
CLOSING QUOTE: “An investor who is a long-term investor has probably never been in a better position than they are [today] to take advantage of the market.” — William Brodsky, chairman, CBOE Holdings (CBOE), arguing that technology has made Wall Street “more transparent, cheaper and more accessible.”
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