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Thursday, May 31, 2012


Facebook, the Fiscal Cliff, and Alumni at Play

After two blogless weeks, we are back and posting. There is no shortage of subjects to comment on, so let's get right to it. I don't have a lot to say about the Facebook IPO that you haven't already read. The business press consensus seems to be that the exercise was blown, a combination of mispricing by the company and its investment banker advisors, and technical snafu's at NASDAQ. The usual measure of a successful IPO is the comparison of the first day's closing price to the offering price. By this measure, Facebook was a clear disappointment closing barely above its offering price of 38. Since then, the issue has traded considerably lower. To make matters worse, Zuckerberg went to maximize the shares sold into the market, putting even more pressure on the stock. As is often the case, I have a somewhat different view. I think the closing price should be somewhat above the offer, but not too much. Otherwise, there is a concern that the company has left too much money on the table. In fact, it seems that Facebook maximized its offering proceeds and didn't leave enough value for its new shareowners. The problem here is that so much of the money did not go into the company, but instead went to insiders and angel investors. The few times I have participated in IPO's, I read the prospectus carefully trying to determine where the proceeds of the offering would be going and how they were going to be used. I also wanted to understand the business, its pro forma balance sheet, and its potential. So rather than shooting for a one day profit, I treated the offering as a real investment and made my decision accordingly. This is a hard way to get rich, since the odds are agianst any IPO succeeding as a long term investment. Yet, I did make money on all of my IPO's (ok, there were only a handful) though it took a fair amount of patience. They were all based on good business plans, and I insisted that I would only invest if the lion's share of the proceeds were going toward that business. Of course those requirements disqualified a very large percentage of the IPO's I was shown. Where will Facebook go from here? Beats me. My guess is that there is more than enough money to conduct business, and lots of ideas for monetizing the access to their vast user base. But the amount of outstanding stock issued is going to make this a hard lift just to get back to the offering price. I had no interest in this issue which did not really meet most of my requirements and failed the most basic one in terms of where the proceeds were going. ---------------------------------------------------------------------------- You have no doubt been reading quite a bit about the Fiscal Cliff looming at year end. The term refers to the tax increases and spending cuts coming out of the expiration of the Bush tax cuts and the compromise deal Congress reached last year to enable the increase in the debt ceiling. Since both of these changes would serve to reduce federal borrowing and contract the economy (according to Keynesian theory), the concern is that if Congress does nothing, we could tip back into recession. The concern is well taken, though on balance, I think deficit reduction will be more helpful economically then hurtful for reasons discussed on this blog many times before. However, one aspect of what's coming would be a serious problem, and that is the increase in the tax rates on capital gains. In fact, this will cause less profit taking and a reduction in capital gains tax collections, as has occurred in the past. The higher rates on dividends and capital gains will be very damaging to the capital markets. I am more sanguine about the expiration of the Bush tax cuts, since for most high earners, it will simply transfer taxes now paid as part of the AMT to form 1040. However, middle income earners will really pay more taxes if their cuts also expire. Better would be to let none of them expire, and just cut the federal budget as much as we can consistent with maintaining adequate military spending. One tax I would raise for sure would be the rate on "carried income," the farce that allows hedge fund managers to pay capital gains rates on their earnings. That should definitely be taxed as ordinary income. Keep in mind that capital gains also escape the AMT calculation. In short, there is a growing consensus for adoption of the Bowles Simpson program, warts and all, since it was an honest, bi-partisan effort to do something about our fiscal mess. This effort was perhaps President Obama's best idea since taking office, and why he has not pursued its implementation is a continuing mystery. Above all, it adds to the perception that he is a completely ineffectual President, a perception that is likely to result in his (deserved) defeat this November. Bowles Simpson would certainly be a better alternative than diving off the Fiscal Cliff. --------------------------------------------------------------------------- This past weekend was alumni weekend at Haverford College, my alma mater, a weekend I enjoyed thoroughly, particularly since my classmates were very much in attendance (about 40 of us representing more than 25% of the surviving class members). Rather than try to improve upon last year's alumni weekend post (one of redwavemusings most popular ever - see the year ago entry in the archives if you want to enjoy it again), I will simply mention a couple of highlights/lowlights. The Class of 1957 put on a panel show, in part on Energy Efficiency and the Energy Future. One of the presenters is Managing Director of something called the Energy Reduction Group, which should put you on guard right away. Sure enough, his portion of the show was a simply brutal exposition on how we should return to... a pre-industrial society, I guess. For example, his argument against fracking was that decades ago, Pacific Gas and Electric had dumped pollution causing a superfund site, though of course this had nothing to do whatever with fracking. I wish I could say that he ever actually talked about fracking and its consequences, or even mentioned why it's a problem but he never did. As for nuclear plants, his comment was that even the utility companies won't build a plant because of the expense involved (somehow, he never mentioned that the expenses that have put new plants out of reach are largely the cost of meeting outrageous requirements pressed by groups like his). As for green energy, our ultimate salvation, he remarked that all we had to do was cover approximately 10% of the earth's land area with solar cells, surely a manageable goal I guess for something so obviously important. I kept looking for the guys in the white coats to come and remove him, but I guess their electric cars wouldn't start. No one in the audience called him on these and other obvious logical shortfalls. I was fully prepared to start a verbal row, but luckily I had my own class's panel to go to, a surprisingly interesting discussion around liberal education and its future. Another good session was a Friday afternoon panel presented by the Class of 1962 on Quaker Life at Haverford: Then and Now. It seems that Fifth Day Meeting (which stopped being mandatory in 1968) is now held on Fourth Day (Wednesday), which is a good trick, but the bottom line is that the Quaker tradition and values are still in evidence on campus. Our old house band, consisting of members of the Classes of 1971 and 1972, played Saturday night for our listening and dancing pleasure, and they were quite a bit better than last year (which was the last time they played together). They did very good renditions of Space Cowboy, I Got a Line on You, and Sympathy for the Devil. One not on the old playlist but fit in nicely was Sweet Child O' Mine. And an added female singer did a first rate version of White Rabbit. And, of course, I made the usual mandatory visits to the local Irish Pub, Roache and O'Brien's. Closing time in the Philly area is 2 AM, strictly enforced and arriving each night all too soon, it seemed. ------------------------------------------------------------------------------ For the third straight year, "sell in May and go away" proved to be very good advice for those who took it. We took a lot of profits in January and February, you may remember, but have been buying into the market the last three months. So we are feeling about 6% poorer since the end of April, like everyone else. On May 16, we bought 50 shares of Dupont (DD) at 50.33. On 5/17, we bought 100 shares of Protective Life preferrred (PLP) at 22.06. On 5/18, we bought 300 shares of Genie (GNE) at 6.96. On 5/21, we bought 400 shares of USA Trucking (USAK) at 6.26, not for the faint of heart I might add. On May 24, we bought 20 shares of the Treasure Inflation Proof ETF (TIP) for the IRA at 120.34. On 5/29, we bought 400 shares of Newpark Resources (NR) at 5.85. NR is part of our "Tulane Portfolio." On 5/30, we sold 100 shares of Roper Industries (ROP) at 101.35. We paid a split adjusted 18.22 on 9/19/01. The bad news is that we have to pay tax on a pretty big gain. The good news is that we will be paying that tax at this year's rate as opposed to the possibly higher rate that will apply next year. On 5/31, we bought 300 shares of FNFG bank for the IRA at 8.02. For those of you who are new readers, we report these trades as a simple log - they are not to be considered recommendations or suitable for anyone else. Our investing philosophy is based strictly on an asset allocation formula - we buy when cash gets above 20% and sell when it goes below 20%. Stock selection is subjective, but which stocks out of our buy/hold portfolio get purchased or sold is strictly by formula. We keep emotion out of these decisions and never try to time the market, except as occurs naturally because of adherence to our asset allocation target. To find the formula, you'll have to explore the archives - some day I will actually print out these posts and will be able to refer to them more specifically. For now, I have enough trouble writing them without providing ancillary services.

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