My Computer Ninja

An article on http://theregister.co.uk reported that Facebook experienced its first drop in monthly viewership since its inception. This got me thinking about Facebook and its proposed $15 billion pricetag.

I, for one, think the valuation of Facebook at anything near $15B is completely ridiculous. It seems this is a repeat of recent history, where clicks/user was a better valuation metric than profit/user. With a valuation of $15B, it would mean that Facebook is worth more than General Motors, Xerox corp, or Starbucks. Stated another way, you could theoretically buy, outright, any of the three companies previously listed. I think this should be a warning sign to any tech investor to STAY AWAY from the company that picks up Facebook, because its gonna be a train wreck.

My case in point is Ebay. As some of you may know, Ebay purchased Skype for ‘only’ $2.6 Billion in 2005. Since then, Ebay hasn’t found a way to make their money back, and ended up writing off $1.4 Billion of that purchase almost exactly a year later. Ebay closed at $46.75 in January ’06, and has been dropping ever since. In the beginning of Feb. ’08, Ebay has been hovering around the $27, which equates to a 42% drop in 2 years. The best part about it is that Skype actually makes money! They have subscribers and a per minute charge for their land line functionality! Facebook has loads of users, but do they pay a subscription? Not a chance.

This brings me to my next point: how do you monetize Facebook? Facebook effectively provides a novelty service. It’s a service that people find interesting, but it’s not something that they need to survive on the internet. When compared against a service like Google’s search, or Gmail, or Google Maps, it starts to look pretty ridiculous. There are probably not many people who would pay a subscription to view Facebook, unless it unlocked hidden profiles or something of that nature. So they are left to use advertising. Advertising works great when you have lots of eyeballs, but you have to think about conversion rates. What percentage of users actually click on a link? My guess is that it is really low.. and although it provides a consistent revenue stream, its hardly the moneymaker that our comparison GM or Starbucks could make.

I find the valuation of Facebook and Myspace intriguing, because it really seems like investors have forgotten about the internet boom. The same exact thing is happening, and investors seem to simply want to jump on the next bandwagon so bad that they don’t stop to think for a moment about where that bandwagon is headed. I think it is safe to say that social networking is an interesting fad, and while it is not going to disappear, it certainly doesn’t seem to have the staying power that justifies a $15 billion price tag. My warning to you investor types is to steer clear of whatever company tries to digest Facebook, because its not going to turn out well in the end.

Among my trader friends, there has been a lot of speculation as to where the Dow will end up at the end of the day on Tuesday, Jan. 22nd. I decided to write this article to capture my thoughts in this chaotic time. Nearly all of us think the Dow is going to shed 400-500 points intra-day, but few of us are willing to hazard a guess as to where we will close. My personal opinion is that we will end down near the 11,500-11,600 mark. The dow recently broke the 500 day SMA, and is heading towards the 1000 day, or 11,400 mark, at a pretty fast clip. For historical reference, Black Thursday, the drop leading to the Great Depression, as well as Black Monday in 1987, both never crossed the 1000 SMA. If we break that tomorrow, then the issues facing our economy may be perceived to have been worse than these points in history. I don’t think that we will break the 1000 sma.

As far as my game plan for Tuesday, I plan to hold my shares of MO all the way down(most likely). I bought in at $69.97 nearly 4 months ago, and recently purchased more around the $76-$79 price. It is currently at $75 and change, and I plan to hold it for the next year at least, and I will not be deviating, now matter how bad it gets.

Regarding my prediction of how the markets will behave tomorrow, I think we will have a strong sell-off through about noon eastern time, giving us only a 100-200 point buffer between the Dow average and its 1000 moving average. Then, after lunchtime, we will see buying pick up, and we will recover a few hundred points at the most, finally ending down in the 11,500-11,600 mark as mentioned above.

In anticipation of all this, I did some research as to the recovery period between great downturns, such as the one we saw in 2001, as well as the downturn in 1987. It looks like indexes generally recovered their value after approximately 2 years time, with 1.5 years being the average. To contrast this, the great depression, and subsequent second world war caused a 25 year gap in share prices. The moral of the story is that given our modern financial system, downturns should be short lived. So if you’ve got more than 2 years until your retirement, sit tight, and let the panic sellers give themselves a heart attack.

As an additional note, I would like to mention that I believe the price of gold will peak sometime in the next month. Tomorrow, people will most likely be trying to find refuge in commodities, which will simply provide futures traders with a major headache, and give gold and other commodities a nice boost which will provide an excellent peak in value. The markets may well stay depressed through the next six months, in which people will try to hedge in gold, but it will ultimately fall once again to a price more reasonably in line with its supply and demand.

As a final note, despite the chaos that may be present in the financial markets, those of you sitting on a wad of cash may do well to open a brokerage account in the next week and start buying like crazy. These downturns are millionaire makers for people with loads of cash. Buying opportunities like this only come a few times in a lifetime, and if your young, it might be a great time to get in while the getting is good. This might well be the only article on the internet telling you to buy like crazy tomorrow, but I know I will be to back up my statement.

To everyone who already owns stock, don’t panic sell. Your investment hasn’t appreciated or depreciated until you sell, and tomorrow is probably going to be one of the worst days for sellers in many years. In the immortal words of Warren Buffet, “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently. ”

Good luck, and god speed..