|
|
I posted almost a year ago on why I thought Facebook stock was a really bad investment. Unfortunately for investors, it was even worse than I had anticipated. The Facebook IPO mania has given way to a massive case of buyer’s remorse for investors. No matter how much I Like connecting on Facebook, I won’t be Friending this stock any time soon.
Check Out: 4 Important Lessons on Investing
The Question of Value
 Image by Robert Scoble The 100 billion dollar question is, what is Facebook really worth? Yes, they have 800 million users and are extremely popular. But, does their future revenue justify such a high valuation for the company? Is it really more valuable than Google, Starbucks, McDonald’s and a host of other established businesses? Before the IPO, many investors and analysts believed it was. Now, they aren’t so sure. It never was, in my opinion.
The key indicator of value is potential future earnings. Without earnings, a company is just one big expense. The bad news for investors is Facebook’s earnings estimates have been recently cut, in a sneaky way by the underwriting banks. High-profile advertisers, such as GM, have pulled their advertising campaigns. The Facebook ads weren’t generating enough sales to justify the cost. Internet advertising isn’t always profitable and that could be a huge problem for Facebook and their shareholders.
Check Out: Facebook Bankers Secretly Cut Revenue Estimates
Wall Street vs. Main Street
The small investor rarely gets an even break on Wall Street and the Facebook IPO is a prime example of how they are played as pigeons. First, Facebook shares have been trading in private long before the IPO. Of course, these shares were only available to the preferred customers of some of the investment banks. When the IPO finally launched a half hour late, most of the shares went to institutional customers of the investment banks. Meanwhile, orders from some discount brokers went unfulfilled for more than two hours.
The most obvious and under-handed way small investors were swindled in the IPO, was by the lack of notice of the earnings cuts. According to Reuters, there was “selective dissemination” of this information, which means insiders were told, but others weren’t. Since analysts from the underwriting banks all cut their earnings estimates at the same time, they must have known something bad was going on. Yet, they only told a privileged few, while most investors were left in the dark.
Check Out: Facebook Share Price Plunges Again
Continue reading Following Up on the Facebook Fiasco
I’m a pretty laissez-faire kind of guy and I believe in a free-market economy. I don’t believe in government red tape choking the life out of business. But, I do believe banks must be firmly regulated for their own good and the good of our country. It’s the right thing to do for Wall Street and for Main Street. Here are 10 reasons why.
1. History of Economic Failure
 Image by Byzantine K If you have ever studied American history one thing is perfectly clear. Most economic problems for the past two hundred years were caused by banks and speculators. From the bank panics of the 1800s to the Great Depression, banks have contributed to economic hardship for millions of hard-working Americans. After the great depression, sound banking reforms, such as the Glass-Steagall Act, ensured economic stability and prosperity for over 70 years. Unfortunately, these reforms were quietly gutted in a bi-partisan effort, which lead to the financial collapse of 2008. Some of these reforms were restored under the Dodd-Frank law of 2010. But, they haven’t been fully implemented and regulated. Banks are still ignoring and undermining these reforms, which means we are all still at risk for future economic problems.
2. JP Morgan Chase Lost $2 Billion
Just in case you haven’t seen the financial news lately, JP Morgan Chase bank may have lost 2 billion dollars on some extremely complex hedges. It’s unclear even to management and regulators how much money was lost or how they lost it. But, it has something to do with credit default swaps. If you don’t know what a credit default swap is, it’s the financial instrument that caused AIG to lose $100 billion dollars during the financial crisis of 2008. Of course, the taxpayers of America were kind enough to bail out AIG and Goldman Sachs for 100% of every dollar they lost. The funny thing is that Jamie Dimon, the CEO of JP Morgan Chase, has been railing against all of the new “unnecessary” banking regulations at the same time his bank was hedging with these dangerous derivatives.
3. U.S. has Exposure in Europe
There is a reason the U.S. stock market tumbles every time bad news comes out of Europe. Investment banks and hedge funds know the U.S. has huge exposure to the banks and currencies in Europe, while most taxpayers have no idea. The Fed and Treasury both recently testified the European crisis was “contained”, but this is similar to the statements they released about investment banks, right before Bear Stearns went bankrupt. During the financial crisis of 2008, the Fed lent $16 trillion in emergency funds, $3 trillion of which went to foreign banks. Since the Fed has no transparency, Americans have no idea what type of monetary guarantees or exposure we have to European nations and currencies. EU nations can’t be kicked out of the union for being reckless and insolvent. That equals a blank check and the debtor nations have figured this out. If Spain, Italy, Portugal and Ireland follow Greece into insolvency, America could be drug down with the EU.
4. Derivatives are too Risky
There are some legitimate business reasons to sell commodity futures. There are legitimate reasons to hedge positions. But many of the new derivatives and instruments are so complex and dangerous, they should be made illegal. And, they should only be traded on regulated exchanges, never over-the-counter in private. The continuous fallout from credit default swaps, Collateralized Debt Objects (CDOs) and synthetic CDOs highlight the need shut down the gambling by financial institutions. These instruments are so complex it often takes months to figure out how much was lost and where the money went. The risk is way too high and their business purpose is dubious.
5. Extreme Leverage is Legal
Back when I took economics in college, I was taught banks could lend $10 for every $1 in deposits. Now, because of over-the-counter derivatives and other synthetic instruments, it’s obvious banks, hedge funds and other financial institutions are using much higher leverage to maximize profits. One example is the recent collapse of MF Global, where $1.6 billion of its customer’s deposits went missing. Estimates of MF Global’s leverage ratio were around 40:1 at the time of their bankruptcy. According to Forbes, their leverage ratio was 80:1 back in 2007. This much risk and leverage should be illegal.
Continue reading 10 Reasons why Banks Must be Closely Regulated
Last weekend, I was talking to my brother-in-law who is a jet mechanic and pilot. He told me many of the private jets are up for sale right now, because the super wealthy are concerned about the economy. This got me thinking, if I had hundreds of millions of dollars, would I care about losing a couple million on a jet? More important, would I even want a private jet or hundreds of millions of dollars?
Who Wants to be a Billionaire?
 Image by Shine 2010 With all of the Facebook IPO fever, it seems like everyone wants to become the next billionaire. For me, that is probably my worst nightmare. I can’t think of anything more stressful than managing a huge financial empire. Sure, I could do a lot of good in the world with that kind of money, but it would come with a lot of personal sacrifices. I can’t imagine needing private security or consulting with lawyers regularly. I can’t imagine everyone wanting something from me. I would much rather fly coach, live in a modest house and own my life.
I bought lottery tickets with a group of people from work and I found myself hoping we didn’t win. I know that sounds ridiculous, but that’s how I felt. Instead of envisioning all of the things I could buy, I started thinking about the media attention and people hounding me. It seemed like more of a problem than a solution. I was glad when someone else finally won.
Truths about Money
Money doesn’t always buy happiness and it can bring misery.
As I was writing this post, I heard the tragic news of the apparent suicide of Junior Seau. It’s too early to speculate whether money problems contributed to his death, but money problems and divorce seem to plague most professional athletes. I remember an interview with Junior many years ago when he spoke about how simple life was when he had little money and drove a Pinto. After becoming successful, he had to worry about his Mercedes getting scratched or stolen. Money can be a blessing and a curse.
No matter how much money some people have, it’s never enough.
One thing I can’t understand about athletes, entertainers, bankers and executives is why they never seem satisfied with their incredibly high incomes. There always seems to be a squabble over the number. Players hold out for an extra million, when they are already making ten. CEOs make more getting fired than ten workers make in their lifetimes. Is it all about ego at some point? Or, do they really feel they need the money? True happiness doesn’t come from a massive paycheck.
Money doesn’t always bring the security people think it will.
One of the things that drive people to accumulate wealth is to provide financial security. In the awesome book The Millionaire Next Door, one of the things discovered that drives successful people is the search for security. The odd thing is that security never becomes assured when someone reaches a certain level of wealth or income. In fact, the leveraged nature of some investments and the uncertainty of business can increase the risk. Peace of mind comes from enjoying our lives. That doesn’t come with a dollar figure.
Continue reading How Much Money is Enough?
This year, I paid to have my taxes done. I had been preparing my own taxes since my Mom shut down her tax service many years ago. I finally got fed up with doing my own taxes and went into H&R Block. It was a positive experience and I wish I had of done it years ago. Now, I am kicking myself for all of those years where I had to suffer through late nights with a calculator at the deadline.
Getting the Maximum Refund
 Image by QRRTY One thing I had always suspected was that I wasn’t getting the maximum refund when I did my own taxes. That was confirmed this year when I got a much bigger refund than last year. So, I had my 2010 taxes reviewed by the Second Look program and I will probably get more back. Even though it cost quite a bit to have my taxes done, I was losing considerably more money by trying to do it myself.
The biggest mistake I was making was by taking the personal deduction, instead of itemizing. I didn’t think I had enough deductions to itemize, but the H&R Block agent showed me a number of items I didn’t realize were deductible. This boosted my refund quite a bit and made me realize how much money I had lost. I own a house, have investments and a family, so it’s a lot of work to do my taxes. There are a lot of schedules and forms and it’s easy to mess up. I should have gone to a professional years ago.
Taxes are Way Too Complex
 I’m a pretty sharp guy and was the top student in my college Algebra class. I program computers all day and solve dozens of difficult problems in a typical week. But, I made a couple of errors on my past taxes that created problems for me with the IRS. Luckily, I didn’t owe them any money, but I had to fill out extra forms to straighten things out. I am so glad I had my taxes done this year, to reduce the chances of errors. The last thing I need is to waste time dealing with the IRS.
The IRS is Antiquated
The IRS should create an online tax filing website, like most of the sates have. Instead, they have fill-in PDF forms, which are difficult to follow and easy to make mistakes. If they weren’t stuck in the stone ages with their technology, it would be easier for individuals to do their own taxes. I honestly think they are keeping accountants, tax preparers and the post office in business. The IRS spent billions of dollars trying to upgrade their computer systems a while back, but that was a colossal failure. They have no incentive to modernize or make things easier for taxpayers.
The Bottom Line
The bottom line is that there are some things you should have done and some things you should do yourself. If you are spending too much time with taxes and you aren’t getting the maximum refund, you should have your taxes done by a professional.
“The taxpayer – that’s someone who works for the federal government but doesn’t have to take the civil service examination.”
Ronald Reagan – 40th President of the United States
Recommended Reading
Barbara Friedberg - Why I usually do my Own Taxes
Green Panda Tree House - Two Ways to Make Money
Thousandaire – What if you Don’t File your Taxes On Time
I’m pretty lucky that I only have a 3 mile commute to work and $25 worth of gas usually lasts me a week. The last time gas prices spiked in 2008, I had a 40 mile round-trip commute and spent $75 per week on gas. I commuted for 25 years and it was an expensive proposition. When gas hits $4 per gallon, it costs me $100 just to fill up the tank on my F150. That’s a real budget buster.
We’re Getting Ripped Off
 Image by Kevin Dooley I read an article last week that estimated 15% of gas prices are caused purely by speculators. So, even though domestic use of gasoline in this country is down from 2008, oil prices aren’t. Investment banks and hedge funds are bidding up the prices and taking a tidy profit, even though they have no use for the oil futures. Oil companies are making record profits based on the speculation, so they are happy with the scam. Don’t expect them to give up any of this money anytime soon.
Another way we are getting ripped off is by retail control of pricing. Oil companies are quietly forcing out independent filling station owners and running the stations themselves. This allows them to set the retail prices, which is why gasoline prices remain high even after oil drops. Plus, they have consolidated the number of refineries, which gives them control of the supply of gasoline.
The government is a big part of the problem. Not only do they need the tax revenue from energy, they have misguided energy policies that hurt consumers. President Bush was an oil man and everything his administration did benefited the oil companies. President Obama is for alternative energy and his administration believes high gas prices will move consumers away from oil. Either way, they are picking winners and losers. We are the losers.
What about Peak Oil?
There are some estimates that Peak Oil (the maximum amount that can be produced per year) may come as soon as 2015. I don’t know if this date is accurate and to be quite honest nobody really knows when peak oil will hit. But, there are major production drops in some of the world’s largest oilfields, including those in Mexico and Iran. The major oilfields in Kuwait and Saudi Arabia have been pumping for over 60 years, so they will likely run dry, just as they did in Texas. This could be offset by oil shale and deep-water reserves, but this oil is much more expensive to produce.
Peak oil doesn’t mean the world’s oil fields will suddenly run dry creating a panic, but it does mean oil will start to get very expensive. With a lot of the world rapidly developing, high demand for oil could come at the same time as dwindling supply. In 10-20 years, long-distance commuting by car may become too expensive for the average worker. This could shift populations away from suburbs and bedroom communities, back to urban centers.
Continue reading Is Gasoline Busting your Budget?
|
|
Popular Posts