Tuesday, May 29, 2012

How Facebook Could Destroy The Market

Too-big-to-fail mentality replays the dot-com bubble. (By Paul B. Farrell, MarketWatch) "Facebook (FB) just joined a “troubled club,” warns The Economist. Now it’s just another “endangered public company.” Yes, endangered. What’s going on? Facebook’s in trouble, that’s what. The Facebook mystique is so powerful today that in our minds it is too big to fail. FB will just keep growing indefinitely, at rates that remind us of the old dot-com mind-set of 1999. And that’s exactly why Facebook is the ultimate economy killer. Could Facebook really bring down the economy? Be a global economy killer? Yes. Facebook has now been added to my list of global macroeconomic triggers that the denial system driving the collective brain of American investors will simply tune out until it’s too late. Until a crash takes the economy down again. Yes, folks, Facebook is that dangerous to not only our economy, but the global economy. FB is now one of my top 12 economy-killing triggers, any one of which could ignite a firestorm: euro-zone ills, overpopulation, China, climate crisis, peak oil, the Fed’s cheap money, the 2012 elections, austerity vs. growth, high-frequency trading, extreme capitalism, and the black swan nobody ever sees coming until it hits - you know, like the 1914 assassination of a relatively unknown archduke that ignited WWI. In behavioural economics, extreme denial creates an illusion that misleads us by minimizing risk in our brains. Remember Treasury Secretary Hank Paulson’s classic remark before the 2008 meltdown, that he was witnessing the “best economy in my career.” But seriously, does our beloved too-big-to-fail Facebook really have that kind of economy-killing power? You bet. Our too-big-to-fail banks like J.P. Morgan have trillions in hard assets, hundreds of billions in capital, and huge leverage with the Fed and Treasury. But Facebook is just the opposite: it is too big to succeed. Its cash value is now in the pockets of the insiders who are cashing out with the IPO. The “value” is in the minds of a billion "friends", a collective illusion that must be kept alive with future cash. There’s a huge possibility FB will lose big in the aftermarket, and eventually our love affair will evaporate. When the euphoria wears off, please remember the following remarks from Andrew Stoltmann, a Chicago lawyer and investor advocate: "The Facebook IPO poses huge risks for retail investors. FB may have millions of users worldwide and plenty of investment sex appeal, but beyond the sizzle I can virtually promise you there will be thousands of small investors that get burned bad on Facebook. How? Market orders like the ones so many investors made back “in the early 2000s “ by “people who made that error in hot tech stocks.” Stoltmann sees through the dark veil of denial that shields most of America: “Virtually any slip-up in performance by Facebook and the stock will crater.” Yes, “crater,” as in bottom, crash, meltdown. “If Facebook is valued at $100 billion, its valuation would be 33 times its advertising revenue, compared with 5.5 times for Google. To sustain its value, Facebook would need to grow its revenues by 41% percent per year for the next five years. That is very hard to do for any company, especially one of Facebook’s size. Even a minor hiccup in the business model could lead to significant losses for purchasers. Facebook operates in an extremely competitive industry with many major, deep-pocketed rivals, including experienced, well-financed rivals like Google.” Remember 2012’s hot dot-coms, Groupon and Pandora? Their shares fell 48% and 41%, respectively, from their IPO prices. Now that Facebook has a thousand new millionaires, Stoltmann’s expecting “thousands of retail clients with significant losses in Facebook in the next three months ... This could get very ugly.”