View 725 Monday, May 21, 2012

The tumult and the shouting dies, the Goldman Sachs and the Sovereign funds depart…

Which is to say that the Facebook IPO is over, and on today’s trading those who invested money in the notion that Facebook is worth 40 or more times earnings per share have lost money. I don’t know why anyone would be surprised. Think on it: if you bought Facebook at the initial price of $38 (and thus put money in the bank for the founders, employees, and early private investors in Facebook who certainly would like to have your money) you have bought paper that Facebook will need forty years to be able to buy back. The alternative is that Facebook will cleverly invest its earnings in a way that causes other people to buy that paper for what you paid for it. Or that enough people out there will decide that this is such a good deal they have to get in on it, and they will bid more for your paper than you paid.

By contrast, Apple is trading at about ten times earnings, and Google trades at about 12 time earnings.

Of course Facebook can grow. It only has a billion members. It can get more. Surely there is great potential for growth here. And we can advertise to them, and companies will pay to run those ads. Facebook shares will rise, double in value –

And thus are bubbles created, but it didn’t happen that way. Facebook is now down to below the initial offering price, and is likely to fall more. Those whose orders got lost by the buggy NASDAQ software and thus didn’t get in on the IPO turn out to be lucky. Even more lucky – or astute – would be the initial stockholders who sold out at the IPO price – at least it certainly looks that way. I would think that the end of the hype is the end of the Facebook bubble, and the price will continue to fall until Facebook is down in the region of ten times earnings. Even at that it will take Facebook ten years to earn enough to buy your share (just as it takes Apple or Google that long to make enough to earn enough to buy their own shares. Which is to say that given current earnings, Facebook would be worth about $38/4 which is to say less than $10 a share.

Will it fall that far? Who knows, really? But without a lot more expected revenue – either for real, or expected from exciting new ideas in converting that huge membership to a revenue source, either directly or through buying something that can be advertised on Facebook – it’s highly unlikely. Microsoft shot up from its first days after going public because Gates had the vision of a computer on every desk, and in every home, and in every classroom, and Microsoft software running on every one of those computers; and Microsoft pretty well achieved that. Apple almost died until the Return of King Jobs with his visions of smart phones and elegant tablets brought it back from a minor player to a giant worth ten or twelve times earnings, and stays there partly because of momentum and partly because Jobs infused Apple with his vision of how to take the inevitable new technology and make it something everyone wanted. Google is there because – well, that depends on to whom you listen. But for Apple, or Microsoft, or Google to get up above 20 times earnings is going to take a lot of vision along with the razzle-dazzle to sell it.

There was a time when people bought stock based on expected dividends. American tax laws have made it far more worthwhile for corporations to use their revenues to increase the value of their stock rather than concentrate on long term steady profits and dividends. That encourages speculation and bubbles – you pay less tax on money ‘earned’ by razzle-dazzle than on income from making good stuff and selling it at a profit. The result is that companies devour each other, buy their competition, and generally do whatever they can to increase capital gains. One remedy would be to tax interest, dividends, and capital gains at the same rates – after all, they are returns on investments made with money you’ve already paid taxes on – but that doesn’t seem to be in the realm of political possibilities. Thus we have all this focus on growth and razzle-dazzle, and not much on just building a solid company that makes stuff people want and will buy.

That’s not the way capitalism is supposed to work, but it’s what we have.

I’m off to work on fiction. Mail bag tonight, I hope.

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Space-X launch tonight.

View 725 Sunday May 20, 2012

I’ve been busy with a bunch of stuff. We’ve seen the eclipse. Sable went to a new groomer yesterday, and she loves the place. She looks gorgeous. I’ll do a photograph tomorrow.

I was digging about looking for some other stuff and I found my 2002 walking tour of Rome. I’ll have essays tomorrow sometime – tomorrow is part of the new regime which includes a Monk’s Cell tour – bit if you’re looking for some observations about life and times in 2002 and a photojournalist walking tour of Rome, it starts here: http://www.jerrypournelle.com/reports/trips/rome1.html and goes on through three more parts.

View 724 Friday, May 18, 2012

The Facebook IPO charges forward, with the share price rising, and everyone is happy. Particularly Eduardo Saverin, whose 4% ownership of Facebook translates into more than a billion dollars. Saverin, born in Brazil and brought here as a child, became a citizen of the United States, and then renounced that citizenship after he fled to Singapore. Singapore has no capital gains tax. The United States, which is fixated on growth (as opposed to, say, small but reliable and sustained profit) has one of the highest capital gains taxes in the world. There is outrage in the United States Senate: Saverin, having enjoyed the hospitality of the United States and having participated in building one of the largest companies in the world, was insufficiently grateful. He should have stood by and paid his taxes like a man (is it politically correct to say things like that now?) and have been glad to do it, rejoicing that he was able to pay his share of SNAP (Supplemental Nutrition Assistance Program) cards now issued in lieu of what we used to call Food Stamps. For those who want to know more about how we spend the money that Saverin doesn’t want to pay, see “Food Stamps and the $41 Cake” by Warren Kozak in today’s Wall Street Journal. And never forget the Bunny Inspectors. Incidentally, the authority of that section of the Department of Agriculture has just been expanded to include home kennels who sell puppies: they are getting closer to requiring a Federal license if you sell dogs from your home. Just think. Saverin has passed up the opportunity to pay for Puppy Inspectors as well as Bunny Inspectors.

Democrats in the Senate want that money. The health of the Republic is at stake. Just think , we might have to combine the duty of Puppy Inspector with that of Bunny Inspector! We can’t overwork these tireless civil servants! Go get that expatriate money. The Constitution doesn’t allow ex post facto laws nor does it allow bills of attainder, but surely we can find ways around that. SNAP cards, bunny inspectors, all these Federal marvels: no wonder the government needs more money.

Perhaps the remedy is to raise the capital gains tax. Facebook is going to be valued at a hundred billion dollars. Surely we can shake them down for half of that, which can be used to give SNAP cards to voters.

Federal Food Stamps, Bunny Inspectors, and Puppy Inspectors are activities best left to the states; there is absolutely no reason why these ought to be federal programs, and had these ideas been brought up for discussion at the Convention of 1787 they would not only have been roundly rejected but the very notion that they might become federal activities would have ended the Union before it began. Now we issue Federal SNAP cards. Want to bet that they will be advertising them just before the election? And I know of at least one SNAP card wielded by an illegal alien.  Which, of course, Mr. Saverin will be if he foolishly returns to the United States now that his work in creating Facebook is over. We’ll fix him.

And the beat goes on. We have sown the wind. Now it is time to reap.

Yesterday’s mailbag had this item:

Exploding Liquid Nitrogen: Where Does the Energy Come From?

Jerry

LN2 + H2O = explosions, videorecorded:

http://www.wired.com/wiredscience/2012/05/exploding-liquid-nitrogen-where-does-the-energy-come-from/

Ain’t science grand?

Ed

It has generated a lot of mail, which will go in a future mailbag. Thanks to all who commented. For the record, the energy comes from the temperature difference in the tank after the event – it will be smaller than it was before the explosion. The reason the tank explodes is that the liquid nitrogen boils immediately, and being a liquid it mixes readily and has a large surface area exposed to the warm – room temperature, but that’s very hot compared to the boiling temperature of LN2. Fast boiling is another word for very rapid expansion, which is to say an explosion, which sends a layer of water and a large pile of rubber ducks into the air.

What surprised me about the event was that the can itself was lifted off the ground. The shock wave from the boiling LN2 must have distended the bottom of the can violently enough to lift the entire can several inches. I wouldn’t have predicted that in advance.

Anyway it looks like great fun, and let me repeat the warning, don’t do this at home. I survived making several ounces of nitroglycerine many decades ago, and as I look back on it, even though we took a number of precautions (the Encyclopedia Britannica warned us that the reaction was violently exothermic), we were extremely lucky. People bright enough to enjoy that kind of experimentation should survive. Playing with explosives is fun, but the future is in biology anyway. Get your kids a copy of Robert Bruce Thompson’s Illustrated Guide to Home Biology Experiments: All Lab, No Lecture. I just got a review copy. With luck I’ll be able to start doing the column again and I’ll do a full review, but if you know any bright kids this would be a good present.

The evidence piles in on the Zimmerman/Martin case, and all of it supports the view that the local police and local prosecutors made the right decision in the first place. You can charge Zimmerman with poor judgment, but it does not appear that he started the fight, and it does appear that he was losing it. The likely outcome of all this take years and will be three expensive trials all ended with hung juries. I am not convinced that outcome will be satisfactory to anyone, nor is the example healthy for the Republic.

If you want a picture of the near future, see Kimberly Strassel, Vampire Capitalism, in today’s Wall Street Journal.

This week the Obama campaign debuted its attack on Bain Capital, the private-equity firm Mitt Romney founded. Its two-minute ad purports to tell the story of GS Technologies, a Kansas City-based Bain investment that went bankrupt in 2001.

To hear the Obama campaign, this is a tale of greed: GST was a healthy, happy, quality steelmaker until Bain plundered its worth and stripped its 750 workers of their due. "It was like a vampire," laments one former employee in the ad. "They came in and sucked the life out of us."

Unsurprisingly the real story is a bit different. You can expect to see a lot more of this over the long hot summer. The productive are vampires robbing the poor, and the worst of them flee the country to avoid paying their fare share of taxes. You’ll see a lot of this.