Michael Gracie

Wall Street Journal:

The House of Representatives delivered a stunning defeat to legislation designed to rescue the nation’s troubled financial system, sweeping aside a call from President Bush to “send a strong signal” of confidence to markets at home and abroad.

The 228-205 vote Monday exposed deep unease among rank-and-file lawmakers in both parties with what would be an unprecedented intervention in the private sector.

The financial markets reacted with disaccord…

Tallies for the day: Dow -777.68 (-6.98%); Nasdaq -199.61 (-9.14%); S&P 500 (above) -106.59 (-8.79%).

Side note: Barron’s added that the Nasdaq was headed for one of it’s top ten worst days. Today’s result wound up ranking #3. Paul Kedrosky says watch out for rolling boulders.

UPDATE: Today’s market result was also the biggest one day point drop for the DJIA.

A chronology

I wonder who will take credit for the plan next.

“We’re” is an understatement, and hundreds of billions might be too…

“We’re talking hundreds of billions,” Treasury Secretary Henry Paulson said in a press conference. “This needs to be big enough to make a real difference and get to the heart of the problem.”

Paulson and Fed Chairman Ben S. Bernanke’s plans, which include the removal of illiquid mortgage securities from companies’ balance sheets, sent stocks from the U.K. to China soaring. The dollar gained, while two-year Treasury notes fell the most in 23 years, sending the yield up from the lowest level since mid-March.

“We’re” doesn’t mean the Treasury Secretary and the Chairman of the Fed personally (although some will inevitably debate whether it includes the mice in their pockets). And as Forbes notes, the price tag will almost assuredly wind up being much more than originally estimated.

A what-if, as in what if this was now April of 2000

Company valuations are what the market says they, until the market says otherwise. People learned their lesson (at least with internet investing) in 2000, and there has been a dearth of big internet IPOs since - with that lack of offerings comes a dearth of information. What back in the last internet bubble could be gleaned from checking your brokerage account now comes via private investment extrapolation and backchannel chatter. Internet companies (and in particular the social network crowd) are presently illiquid private investments whose valuations are prone to ambiguity.

Take Facebook for example. The website received a $250MM investment from Microsoft late last year, and several monied individual investors (and a few institutional types) quickly followed-on at purportedly similar price tags. This investment pegged Facebook’s worth at a cool $15 billion, and social networks and related “applications” have been nipping at their heels ever since. However, there has been little information to judge the true value of the company - Microsoft also has an exclusive advertising deal with Facebook and many agree that there must be some strategic value associated with that. Still more debate whether that Microsoft investment was the true sign of “bubbledom” number two.

A few weeks back, Mike Arrington of the TechCrunch blog took a stab at valuing a number of social networks, based on an advertising expenditure survey and ComScore statistics, and a few recent transactions in the space…including Facebook. Silicon Alley Insider gave the work a general thumbs up, and then proceeded to pick apart some of the advertising assumptions (as well as the real value of Facebook and some others). I enjoyed the number tumbling too, but noticed something different was missing. Time.

Time is a cure all (although it also puts you in the grave). Time is also a critical component of valuation. When time races by in the public markets, valuation comes instantly. But when it is accompanied by fits and starts, like in the private investment markets, valuation is harder to come by. With those prospects in mind, I decided to revisit Mr. Arrington’s data to see if it still jived just weeks later. I had some more of that “backchannel” information to work with too - some rumors about brokered sales of Facebook stock - via Arrington himself.

The original valuation results via TechCrunch came about like this: Arrington first developed a “raw score” for each site, based on advertising expenditures across the internet, applying per user averages (using ComScore data) to each social network, and then factoring in the latest transaction data for three of the sites, Bebo (March ‘08), LinkedIn (June ‘08), and Facebook (October ‘07). Valuation based on those transactions is depicted below:

Subsequent to this analysis, it was revealed that insiders at Facebook might be trying to sell their shares. The rumored asking price was putting Facebook’s valuation at somewhere between $3 billion and $4 billion. There’s now new information, and we won’t bother going into what could be gleaned from knowing insiders are attempting to sell at a discount - that’s a story for another time. Nevertheless, taking this new data (with optimism, at $4 bil) and inputing it into Arrington’s model, the mean values of the 25 internet companies listed would look more like this:

In addition to reducing composite mean value by almost $15 billion, there’s another adjustment that might be worth making. After Arrington created the “points” system, recent deal values were applied to create a dollar value per point - Bebo, LinkedIn, and Facebook received $240.78, $1,325.00, and $1,467.16 per point, respectively. Bebo seemed the bargain. But based on the latest data regarding Facebook, it would now get $391.24 per point. Now LinkedIn looks like the outlier - furthermore, their deal was completed while the Facebook valuation was still firmly on investors’ minds. If we tossed in the New Data Discount Factor (copyright, me…wink, wink AP), LinkedIn falls in line: $391.24 / $1,467.16 = 26.67%. Then $1,325.00 * 26.67% = $353.33. Some will argue that LinkedIn’s professional userbase should be more valuable than the playgrounds - my contention is the “kiddie sites” have turf encroachment in mind; as well, I know plenty of people who still use LinkedIn’s free offering - LinkedIn is surely chock full of smart, saavy internet users that know how to ignore ads, meaning they are subject to the whims of the ad industry and its market prices like everyone else. Failing that, the numbers simply look more reasonable side by side.

Recalculating with the latest $/point for LinkedIn and we get:

Total downward revision under this simplistic analysis - roughly $28.4 billion.

None of this is mathematically perfect - nor are its assumptions. But I believe it sheds some light on what investors might be thinking about if there was a public marketplace full of these social networking sites, consistent with the last. One of free flow of financial information, instantly recognizable and actionable (and most assuredly so on rumor and innuendo). One that wound up looking like this:

Read more »

Sad but true

The Chinese equities market has not been performing well. But regulators and market makers have the answer.

According to Bloomberg:

China may limit new share sales and allow investors to borrow money to buy equities in an effort to boost the world’s sixth worst-performing stock market…

They are going to restrict the ability of Chinese companies to do secondary financing, thereby reducing the supply of stock, while allowing those buying the stock (i.e. the speculators who have been taking a bath as of late) to borrow money to buy. The market goes back up, but the underlying issue companies starve for new capital. And sooner or later the speculators have to pay back all those margin loans.

It’s extremely short-term thinking. The Chinese are going to have to hope and pray that the market stays up long enough for companies to get the impending backlog of issues out the door. Those same companies will likely be borrowing like mad in the meantime. The only identifiably consistent concept here? Everyone is going to be deeper in debt.

If the Chinese government would just step in and loan money directly to the pummeled shareholders to prop up their brokerage accounts, you might just have the U.S. housing market.

Paul Kedrosky says Barry Ritholtz is a perma-bear. Mr. Ritholtz’s latest claim, that a short fund manager’s April Fools Day memo caused today’s market rally might lend credence to the claim, but I am not buying it.

One need look no further than the links Mr. Ritholtz points to in his post. Each and every piece of cheerleading which referenced “the memo” has now been wiped clean, meaning the so-called journalists have tacitly admitted to being hoodwinked.

When the markets can only thrive on bogus AMBAC bailout rumors and short-fund managers’ April Fools jokes, said markets cannot be particularly healthy.

SIDE NOTE: the S&P was up 33 and change as I wrote this.

UPDATE: Looks like the joke went meta. I suspect a lot of folks are now saying they knew it all along. Me…not going there. I was duped by some masterful work - my skepticism of the media was worked over bigtime. And I doubt I’m alone in getting fooled or with regard to the media incredulity.

Me thinks he deserves it.

Two economics/finance minded fellows that I thoroughly enjoy reading are taking Ben Stein to task. Stein recently layed out the notion that the financial markets exist to provide retirees with their nest eggs - Paul Kedrosky corrects, noting the markets are about liquidity, not serving the baby boomers. Barry Ritholtz simply bids farewell to Stein after Mr. Anyone, Anyone? tried blaming traders for recent market dips.

Take it easy on him, gentlemen. All Ben Stein is trying to do is perpetuate the myth that asset prices should (and will) go up forever, as long as everyone follows playground rules. To me it vaguely resembles a Ponzi scheme pitch.

Furthermore, I’m surprised it’s taken people so long to get a clue about this guy and his thinking.