Wall Street was abuzz recently with the IPO of the business-focused social network, LinkedIn.
The company received enormous attention as the first in a wave of US social networking and Web 2.0 companies set to go public. This wave will include the likes of Facebook, couponing company Groupon and social games service Zynga.
To describe it as a successful IPO is putting it mildly as its shares doubled in their first day of trading. With a valuation in excess of $8 billion, LinkedIn is trading at 30 times its revenues of $243 million for the past 12 months and over 170 times its cash flow.
A stunning valuation to say the least for a company born in 2003. And a valuation that had Silicon Valley investors feeling giddy.
If Facebook were given the same valuation level, it would be valued at more than $60 billion. The discount coupon business Groupon would be worth $25 billion.
A Closer Look at LinkedIn
Why were investors willing to pay so much for LinkedIn? Good question.
The most likely answers are the very limited number of shares – 7.8 million – offered and short-term traders.
For longer-term investors, LinkedIn doesn't look like a value proposition.
The share structure of LinkedIn actually has much in common with the share structures of both Google and Chinese social media company Renren.
All three companies have a dual voting structure. New investors will have only a fraction of the votes attached to existing shares held by company insiders and its initial investors.
This arrangement does provide protection against hostile takeovers. But it does ensure that near-complete control of the company remains with the founders, employees and venture capitalists.
In effect, corporate governance is weak...the average public shareholder doesn't really count. His or her only purpose is to drive the share price higher for the benefit of the original shareholders.
Companies like LinkedIn must love the day traders who don't care about anything longer term than a day or a week at the most.
But LinkedIn is not alone. Many other companies in the sector have adopted similar share structures.
Social Media Sector
What should investors think about the social media sector as a whole?
Warren Buffett, who has long shunned the tech sector, spoke about social media companies a few months ago. He said, “Most of them will be over-priced...Some will be huge winners, which will make up for the rest.”
Based on history from over a decade ago, he is right. For all the many internet dogs like Pets.com which soon disappeared, there were some big winners like Priceline.com.
As long as social network companies are growing and pulling in millions of new members, such as Facebook and Twitter, they have great revenue potential.
But when growth stalls, or even slows, things tend to go bad quickly. Just look at MySpace or Friendster, the pioneer of social online networking in 2002.
Both Facebook and Twitter are clearly worth some number of billions of dollars. Facebook is now the world's leading social network with more than 500 million active users and estimated advertising revenues of about $2 billion last year.
Consultancy eMarketer says Twitter last year had revenues of $45 million. And the company had zero overseas revenue...which clearly means it has room for growth there.
Even the bears on social media have to agree that more advertising dollars will flow into social media companies as marketers adjust to the shift in online consumption. The only question will be how many advertising dollars will flow. After all, many users go to social networks to socialize, not to buy something.
Investing in Social Media
If someone decides to invest into social networking companies, they must remember that they are betting on the cash flows of these businesses not only expanding rapidly but turning out to be sustainable.
During the tech bubble, many of these businesses turned not to be sustainable. But will it be different this time?
Many who believe it is argue that much has changed since the last time. And they make some valid points.
Far more people globally are connected to the internet, There are an estimated 2 billion online users today compared to only 248 million in 1999.
And this time the frenzy was ignited somewhat more rationally – by profit generation within the growing connections between social networking, gaming and other social phenomena.
That narrower focus should limit the number of companies coming to market and hopefully limit most of the IPOs coming to market to the higher quality companies.
As with any new issues, potential investors into this sector need to exercise their due diligence. The prospectus of LinkedIn with its 19 pages of 'risk factors' point that out.
Go ahead and invest in social media stocks. Just do so with both eyes open.
Saturday, June 11, 2011
Saturday, June 4, 2011
A Look Back at the Silver Market
Mark Twain has been quoted as saying, “History does not repeat itself, but it does rhyme.”
Good observation...especially for investors in the silver market.
In recent months, these investors enjoyed a stunning ride to highs near $50 an ounce. This is a level not seen since the early 1980s. Then they had to endure a stomach-churning rapid drop in silver's value due largely to the raising of margin requirements by exchanges.
Rumors were rampant in the market that the only “real” reason that silver was going up was that a mysterious “someone” was accumulating a large position.
Many boogeymen were being blamed. Several prominent Russian billionaires were mentioned in the rumors, as were the Chinese. Several rumors pointed to a secret silver buying program initiated by the People's Bank of China.
Jack Farchy of the Financial Times discussed some of these rumors recently in an article.
The characters may have changed but this is very reminiscent of the late 1970s and early 1980s when the Hunt brothers tried to “corner” the silver market. This appears to be one of historic 'rhymes' that Mark Twain spoke about.
Therefore, investors today will be well served by a look back at what happened during that time.
The Hunt Brothers and Silver
It started with the Hunt Brothers buying approximately 55 million ounces of silver in late 1973 and early 1974 at around $3-$4 a ounce.
In fact, they actually physically moved the silver to Switzerland because they thought the US government would confiscate silver much as it confiscated gold in the 1930s.
The brothers continued buying silver during the 1970s.....
Subsequently, in the summer of 1979, they even went into partnership with several Saudi sheiks and set up a Bermuda-based company to buy silver, the International Metals Investment Company Ltd. This company bought 90 million ounces of silver and again took delivery of the physical silver.
Over the next few months, silver spiked from $8 an ounce to $16 an ounce as fears intensified over silver supplies at the Comex, which today is part of the CME Group (NASDAQ: CME).
Unfortunately for the Hunt Brothers, the odds were stacked against them.
The board of directors of the commodities exchanges had a number of sitting directors which came from the big Wall Street banks. And these banks, with 9 of 23 directors, were short 38 million ounces of silver. Needless to say, they were not happy with what the Hunts were doing.
Regulators Step In and On the Hunt Brothers
The first step the Chicago Board of Trade (CBOT) took was to raise the margin requirement. The CBOT also declared that silver traders would be limited to 3 million ounces of futures contracts. Anyone with more than that would have to divest their holdings by February 1980.
After these actions, the price of silver really began to take off. The rumors of a silver shortage had, in effect, been confirmed by the exchange.
Silver stood at $34.45 an ounce at the of 1979.
On January 7, 1980, the rules changed again. The exchange announced new position limits for all silver futures contracts of 10 million ounces.
After this announcement, silver really began to skyrocket! And as the price climbed, the Hunts kept buying.
Silver hit $50 an ounce.
But then the ax fell on the Hunts on January 21, 1980. The Comex said that trading in silver would be limited to liquidations only. The exchange changed the rules so that no one was allowed to open any new positions from that point on.
The next day silver fell off a cliff and plunged from $44 to $34 an ounce. Prices kept falling and falling and eventually the Hunts couldn't cover the margin for the futures they had bought.
They were forced to liquidate everything...their entire fortune would soon disappear. Mostly thanks to the exchanges changing the rules in the middle of the game to favor the “home team”.
By the way, the most famous of the brothers, Nelson Bunker Hunt went bankrupt in 1988.
Today's 'Rhyme'
Fast forward to 2011 and we see that silver recently climbed to nearly $50 an ounce again. And what happened? Once again, it appears that some big Wall Street banks were caught heavily short on silver.
And a similar pattern is beginning to emerge. The exchanges have raised the margin requirement on silver and silver dutifully plunged by 27% in a short period of time.
If silver begins to recover again back to the $50 level, look for more “rules changes” to come from the exchanges.
It's what Mark Twain would expect. And so should silver investors.
Good observation...especially for investors in the silver market.
In recent months, these investors enjoyed a stunning ride to highs near $50 an ounce. This is a level not seen since the early 1980s. Then they had to endure a stomach-churning rapid drop in silver's value due largely to the raising of margin requirements by exchanges.
Rumors were rampant in the market that the only “real” reason that silver was going up was that a mysterious “someone” was accumulating a large position.
Many boogeymen were being blamed. Several prominent Russian billionaires were mentioned in the rumors, as were the Chinese. Several rumors pointed to a secret silver buying program initiated by the People's Bank of China.
Jack Farchy of the Financial Times discussed some of these rumors recently in an article.
The characters may have changed but this is very reminiscent of the late 1970s and early 1980s when the Hunt brothers tried to “corner” the silver market. This appears to be one of historic 'rhymes' that Mark Twain spoke about.
Therefore, investors today will be well served by a look back at what happened during that time.
The Hunt Brothers and Silver
It started with the Hunt Brothers buying approximately 55 million ounces of silver in late 1973 and early 1974 at around $3-$4 a ounce.
In fact, they actually physically moved the silver to Switzerland because they thought the US government would confiscate silver much as it confiscated gold in the 1930s.
The brothers continued buying silver during the 1970s.....
Subsequently, in the summer of 1979, they even went into partnership with several Saudi sheiks and set up a Bermuda-based company to buy silver, the International Metals Investment Company Ltd. This company bought 90 million ounces of silver and again took delivery of the physical silver.
Over the next few months, silver spiked from $8 an ounce to $16 an ounce as fears intensified over silver supplies at the Comex, which today is part of the CME Group (NASDAQ: CME).
Unfortunately for the Hunt Brothers, the odds were stacked against them.
The board of directors of the commodities exchanges had a number of sitting directors which came from the big Wall Street banks. And these banks, with 9 of 23 directors, were short 38 million ounces of silver. Needless to say, they were not happy with what the Hunts were doing.
Regulators Step In and On the Hunt Brothers
The first step the Chicago Board of Trade (CBOT) took was to raise the margin requirement. The CBOT also declared that silver traders would be limited to 3 million ounces of futures contracts. Anyone with more than that would have to divest their holdings by February 1980.
After these actions, the price of silver really began to take off. The rumors of a silver shortage had, in effect, been confirmed by the exchange.
Silver stood at $34.45 an ounce at the of 1979.
On January 7, 1980, the rules changed again. The exchange announced new position limits for all silver futures contracts of 10 million ounces.
After this announcement, silver really began to skyrocket! And as the price climbed, the Hunts kept buying.
Silver hit $50 an ounce.
But then the ax fell on the Hunts on January 21, 1980. The Comex said that trading in silver would be limited to liquidations only. The exchange changed the rules so that no one was allowed to open any new positions from that point on.
The next day silver fell off a cliff and plunged from $44 to $34 an ounce. Prices kept falling and falling and eventually the Hunts couldn't cover the margin for the futures they had bought.
They were forced to liquidate everything...their entire fortune would soon disappear. Mostly thanks to the exchanges changing the rules in the middle of the game to favor the “home team”.
By the way, the most famous of the brothers, Nelson Bunker Hunt went bankrupt in 1988.
Today's 'Rhyme'
Fast forward to 2011 and we see that silver recently climbed to nearly $50 an ounce again. And what happened? Once again, it appears that some big Wall Street banks were caught heavily short on silver.
And a similar pattern is beginning to emerge. The exchanges have raised the margin requirement on silver and silver dutifully plunged by 27% in a short period of time.
If silver begins to recover again back to the $50 level, look for more “rules changes” to come from the exchanges.
It's what Mark Twain would expect. And so should silver investors.
Saturday, May 28, 2011
Oil Prices Will Move Higher Again
Oil prices have been in the news again lately...but this time because of a drop, not a rise in price.
It, like many other commodities, slid due to fears whether these markets were frothy amid apparent slackening demand around the world.
But fears of an even deeper sell-off in oil may be overblown. Wall Street, as usual, is looking at only one side of the equation – the demand side.
Demand is indeed slowing from the torrid pace of a year ago. The International Energy Agency (IEA) forecast a growth rate of just 1.3 million barrels a day this year. This is down from a near record rate of increase of 2.8 million barrels a day last year.
However, oil investors should not lose sight of oil supply growth which is also slowing down. It is the supply side of the oil equation which remains very positive over the long term for higher oil prices.
Iraqi Oil
One area that oil bears have been pointing to lately is Iraq. The country has the stated intention of raising its oil production from 2.6 million barrels of oil per day to more than 12 million barrels of oil per day by 2017.
But now some Iraqi oil officials have hinted that this goal is unattainable due to mounting constraints in pipelines and export terminals.
An official downgrade from the government on its oil target is expected soon. The target is likely to be at most in the range of 5-6 million barrels a day by 2015. And even that target may not be hit.
The head of Lukoil in the Middle East, Gati Al-Jebouri, said “Whether that [2015 goal] is achievable given the infrastructure is a difficult question to answer.”
A senior official from a western oil company in the region was quoted as saying that Iraq was moving from “propaganda to the reality” regarding oil output targets.
Yet, many on Wall Street continue to believe the propaganda and think that oil supplies in the future are not a problem at all.
The projected huge increase in Iraqi oil along with increased production from non-Opec producers such as Brazil is critical to hopes for lower oil prices in the years ahead.
Do these hopes have any chance of becoming reality? Most likely not.
Supply Problems
The reality is that oil supplies are slowing despite the incentive of higher oil prices.
This trend is important because supply growth in non-OPEC countries over the past two years has been exceptionally strong. It averaged about 1 million barrels per day annually. This is the highest two-year period since 1996-97. Last year's 1.1 million barrel growth spurt was the biggest annual increase since 2002.
This surge in production was critical in actually holding down oil prices somewhat. But this surge seems now to be coming to an end.
The IEA forecasts growth from non-OPEC sources to be only 750,000 barrels per day. And even this forecast is highly suspect.
It has a lot of very optimistic assumptions built into it. One of them is that, despite the turmoil, Middle East oil production will only drop by 100,000 barrels a day until July and then resume full production. Not likely.
Other assumptions include troubled Yemen producing its full output...and the North Sea fields, some of which shut down every summer for maintenance, not shutting down at all this year.
Oil Prices' Future Course
Wall Street though is partially right. Strong global demand, especially from emerging markets, has played a part in driving oil prices ever higher over the past decade.
But even more critical to surging oil prices has been the lack of growth in supplies of easily accessible oil.
As famed commodities investor Jim Rogers has said time and time again “where is the oil?” He's right – there hasn't been a large discovery of easily accessed oil in decades – that era is over.
Oil investors need to keep in mind that, barring a major surprise discovery, the situation with oil supplies in the years ahead will lead to an oil price rise. And most likely, as Jim Rogers recently told the BBC, “beyond expectations”.
It, like many other commodities, slid due to fears whether these markets were frothy amid apparent slackening demand around the world.
But fears of an even deeper sell-off in oil may be overblown. Wall Street, as usual, is looking at only one side of the equation – the demand side.
Demand is indeed slowing from the torrid pace of a year ago. The International Energy Agency (IEA) forecast a growth rate of just 1.3 million barrels a day this year. This is down from a near record rate of increase of 2.8 million barrels a day last year.
However, oil investors should not lose sight of oil supply growth which is also slowing down. It is the supply side of the oil equation which remains very positive over the long term for higher oil prices.
Iraqi Oil
One area that oil bears have been pointing to lately is Iraq. The country has the stated intention of raising its oil production from 2.6 million barrels of oil per day to more than 12 million barrels of oil per day by 2017.
But now some Iraqi oil officials have hinted that this goal is unattainable due to mounting constraints in pipelines and export terminals.
An official downgrade from the government on its oil target is expected soon. The target is likely to be at most in the range of 5-6 million barrels a day by 2015. And even that target may not be hit.
The head of Lukoil in the Middle East, Gati Al-Jebouri, said “Whether that [2015 goal] is achievable given the infrastructure is a difficult question to answer.”
A senior official from a western oil company in the region was quoted as saying that Iraq was moving from “propaganda to the reality” regarding oil output targets.
Yet, many on Wall Street continue to believe the propaganda and think that oil supplies in the future are not a problem at all.
The projected huge increase in Iraqi oil along with increased production from non-Opec producers such as Brazil is critical to hopes for lower oil prices in the years ahead.
Do these hopes have any chance of becoming reality? Most likely not.
Supply Problems
The reality is that oil supplies are slowing despite the incentive of higher oil prices.
This trend is important because supply growth in non-OPEC countries over the past two years has been exceptionally strong. It averaged about 1 million barrels per day annually. This is the highest two-year period since 1996-97. Last year's 1.1 million barrel growth spurt was the biggest annual increase since 2002.
This surge in production was critical in actually holding down oil prices somewhat. But this surge seems now to be coming to an end.
The IEA forecasts growth from non-OPEC sources to be only 750,000 barrels per day. And even this forecast is highly suspect.
It has a lot of very optimistic assumptions built into it. One of them is that, despite the turmoil, Middle East oil production will only drop by 100,000 barrels a day until July and then resume full production. Not likely.
Other assumptions include troubled Yemen producing its full output...and the North Sea fields, some of which shut down every summer for maintenance, not shutting down at all this year.
Oil Prices' Future Course
Wall Street though is partially right. Strong global demand, especially from emerging markets, has played a part in driving oil prices ever higher over the past decade.
But even more critical to surging oil prices has been the lack of growth in supplies of easily accessible oil.
As famed commodities investor Jim Rogers has said time and time again “where is the oil?” He's right – there hasn't been a large discovery of easily accessed oil in decades – that era is over.
Oil investors need to keep in mind that, barring a major surprise discovery, the situation with oil supplies in the years ahead will lead to an oil price rise. And most likely, as Jim Rogers recently told the BBC, “beyond expectations”.
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