Wipe That Book Off Your Face

Ironically none of the readers have asked us about Facebook. A few people outside this enlightened group have asked me my opinion. We even had one person who WAS going to plop 25-100 thousand into the stock. Here is my gut feeling about the infamous IPO of the century. (At least until the next IPO of the century.)

Before you get our two cents, it is fair to note that Barron's had a great piece with all the grizzly details concerning the atmospheric price to earnings ratio at $35.00 a share. If you really care, pick up the article or grab it on line if you have a subscription.

Ok after hearing two solid weeks of banter about this stock and reading too much SEC information, WE ARE NOT buying Facebook even though we could have participated in some of the syndicate groups to play directly with Morgan Stanley and other underwriters.

Here are our reasons beyond the fact that the 35.00 price is unjustified. We do not get the business model. The young company will have a market cap (Use Investopedia off to the right there if you don't know what that means.) of about and probably above 100 Billion. They will have 2.188 billion shares launched at the IPO. BUT (Behold the Underlying Truth) there are two buckets of stock to be aware of. One is the "Private Money" which is held by employees, early investors, and venture capitalists who have much of those shares (1.8 billion to be exact) tied up in 180 day lock up periods which means they cant be traded for 180 days. (I believe Zukerberg and other Board Members who get bequeathed shares will have longer lock up periods.) The other bucket is the 388 million shares of liquid share being launched tomorrow. (Some of those will have a 90 day lock up period.) So what does that mean to you?

If there is a scarcity of liquid (ones that can be bought or sold) shares available in the first 90 and then 180 days and you have almost a billion people interested in getting a small piece of the pie, the laws of supply and demand should blast this stock easily to the quick double everyone is talking about. Yes, we could conceivably see $70 and above shortly after the IPO.

Some would say that those 900 million people are not going to be able to buy shares because they are not in a trading friendly environment or they can't afford it. We agree, so pick a number, any number. 50%, 25%, 10% or even 1%? At 1%, that would still be 9 million people who might have the wherewithal to play in this rigged game. It is rigged because those 9 million people will be fighting over a very small percentage of the outstanding shares during the first 90-180 days. This does not take into account the ETFs, Mutual Fund Managers, and Hedge Fund managers who will be fighting for these scarce shares. (More than 500 institutional representative showed up for the road show meeting in NY on Monday. Zukerberg was there but had little to say.)

So let's say we a right for a change (Note to self, adjust disclaimer on the blog to say "I have made more money that a I have lost between 1986 and 2011." More later.) and FB (That is going to be their ticker) goes to 100 a share. In September or October whenever they report earnings, a whole bunch of shares will now be tradable. And a lot of those 1.8 billion shares are being held by early investors who KNOW their capital gains taxes are going up on January 2, 2013.

During their first earnings call (Did you notice that Zukerberg was not present at the Analyst IPO meeting. The most anticipated IPO since Moses tried to go public with a Ferry Service across the Nile, and the Chairman was not present? The Board asked him to go shopping for a new Hoodie instead of attending the meeting. That has got to worry some folk?) The FB team will have to explain:

*How they are going to monetize their hundreds of millions of users.

*How they are going to get advertising to work on the various smart phone platforms.

*Why is revenue slowing from 1.13 B to 1.06B Q1 2012 and maybe lower for Q 2 2012.

*How they will increase their less than 10% of the on line advertising sales market.

*What is FB going to do to ward off legislation about privacy globally that makes their user targeted niche marketing programs so valuable.

In a nutshell, a lot of things have to go right in order for Facebook to be worth 35 a share none the less the double that a lot of people are talking about. In 5 years this could be a 35-50 dollar stock. We don't see it now.

Here is how we will play this out. We will sit on the sidelines for the first few days and look for bump in price. Probably next Friday we will go out and buy "in the money" PUTs with October-December dates and simultaneously buy similar dated "out of the money" call options on AAPL and GOOG. Here is the rational. We will look for a significant drop in FB after the first quarter earnings report because they probably will not be able to answer many of the questions above and because the lock up period will be over and they will all wake up to an ugly person laying in bed next to them and say, "Whoa, I gotta get out of here with a profit because my Taxes are going up next year." They will take their gains and assumably want to stay in the tech sector. Hello AAPL, GOOG, PCLN, etc. But what do I know.

Verwy Verwy Scwary

It was ugly in the markets today and we have moved into a 100% cash position. Here is a note we sent out to our Salve Lucrum Portfolio Family today:

BAGAKOAA;

If you have not noticed, I have moved everyone to a cash position.  We fell through a significant support level in the S&P 500 this morning (1325) and the trend of decliners over gainers on the NYSE have us very concerned.  We liquidated everything with in a few points of our stops.  A couple of you, myself included have enough shares and margin exposure to hold the long shares and sell calls against those shares, but most of you have been sold out, to an "all cash" position.  

We had some very good economic news yesterday, but the news in Greece and the Euro contagion is driving the market down.  The 10 year bond is at amazingly low 1.69 which means the dollar is winning the ugliest dog competition.

Most of these liquidations have caused losses in your account and we will square up at the end of the year if we don't hit the overall goal of 5%.  I am still confident we can.  I am not using the money market accounts in Schwab because the trade will cost more than any interest you will earn over the next month or so we stay in cash.

This is your money.  If you have any questions, please let me know.  In your own self managed accounts and 401K accounts, watch what is going on closely.  This could get more ugly really quick.

I hope to have my computer up and running by Saturday so I will probably not be posting tomorrow.

Salve Lucrum