Wherefores and Whys of Facebook Stock - Where it will end

(click for larger image -- Facebook stock chart this morning)

I'm taking off my geek hat and putting on my technical trader software guy hat and my entrepreneur hat, and will look at my favorite bête noire, Facebook. As I have so fearlessly predicted in these pages (HERE and HERE and others), Facebook stock is going to tank, and tank badly. Where will it end up? I am not afraid to make fearless predictions, and they usually end up near the mark. So I predict that Facebook stock will sink initially to the $14-16 dollar range. It will momentarily find some support there and then find its true valuation in $7-9 range. Remember you read it here first on August 2, 2012 when the stock price is pennies over $20.

So why will it tank may you ask, when Wall Street jokers like Arvind Bhatia say that it is worth the $38 dollar opening price? Either these buffoons were paid by the underwriters to say this, or they are hugely mistaken about what constitutes real value in business, and were enamored with the business play.

Facebook stated that because they have 900 million followers, that this is a huge unmonetized potential. I maintain that they cannot monetize this user base, because people do not go to Facebook to buy things. They go there to be social. It is like a hooker trying to sell her services in church. The French have a wonderful word: inaccrochable. It means "You can't hang it!". It's like trying to put up a Playboy centerfold in a kindergarten class. You can't hang it. Here's another example. If every time you met your neighbor on the street, he tries to sell you Amway, would you still be glad to see him on the street? Nope, in these instances, we just want to be social and not commercial. Facebook and Wall Street do not understand this.

But let's look at the pure business side of this. Zynga, the social networks games folks have tanked and lost 75 percent of its value. Groupon is limping like a ship pierced by torpedo in the hull losing 70 percent of its skin. Pandora Media's ship has plummeted to the depths of Davy Jones' Locker. What gives? It's the business side, stupid. What is the value proposition of these companies. Zynga sells you a $4 virtual cow. How big is that market and how long until you saturate the IQ-challenged market? The Pandora value proposition has disappeared because people don't want streaming -- they want to own the music for their iPods -- thanks to Steve Jobs. Groupon can't provide deep discounts in an economic downturn, because merchants need to milk every dollar from every person that comes through the door.

And Facebook? Let's face it. They are a Php driven website for desktop computers. They have missed the mobile market. They are brogrammers. They are not smart like the Google programmers who can spooge code down to the bare metal. They have missed their core value proposition -- that people want to connect in a lazy fashion with each other, and really don't want to shop while doing so.

So, I predict that unless Zuckerberg has the testicular fortitude to say that he was wrong and turn the Facebook ship 180 degrees, then they will continue their slide into oblivion.

What will the Facebook replacement look like, and how will it make money? Stay tuned.

The Perils of Technical Trading in Stocks

I was first introduced to technical trading as a software analyst. I was hired to write some proprietary algorithms for a stock and commodities trading group. When I was first introduced to the principles of technical trading, I was blown away. I had thought that fundamentals were the only way to trade (in fundamental trading you look at the companies balance sheet and how well it is doing and whether its markets are expanding and contracting. In technical trading, you just look at the performance of the price alone to gauge what will happen next.)

Here is an example of a very simple algorithm in technical trading. The red line is an exponential weighted moving average of the stock price plotted against the actual price day by day. The rule is when the red line is above the stock price, the price will fall, and when the red line is below the stock price, the price will rise. And it can work rather well. Look at the 5 day example below:

(click for larger image)

It works even better on the long run. Here is a one month run. It is all neat and tidy. It looks like any fool can make money, and that this is a huge money spinner. It truly is the Dummies Guide to Getting Rich. So what's the catch?

(click for larger image)

The catch is that technical trading doesn't work all the time. Fundamentals can trump technical trading. Emotions of the marketplace can trump technical trading. If there is panic because of a terrorist attack, or if there are bad job creation numbers, stocks fall. That is why I don't trade stocks based on my proprietary systems. But I do like to watch what happens.

Do you know why they call computerized stock traders "day traders"? Because it is too dangerous in technical trading to hold a stock overnight. This is a prime example illustrated below. I am using my favorite whipping boy stock Facebook. All of the above charts are the official stock prices during stock market trading hours. But there is pre-market trading going on. Examine the stock chart below. If you will notice, the blue stock price is above the red line meaning that the stock should go up and up. But the stock is Facebook, and today Facebook will announce their earnings. They aren't expected to be that hot.

(click for larger image)

So if you went to bed last night, dreaming of counting your money after Facebook stock rises, you woke up this morning to a nasty surprise. The stock is down over 6% before the market opens. If you were holding a long position overnight, it's not champagne and caviar tonight, but dog food spread thin on crackers.

Technical trading is not for the weak of heart, and as the Gambler says " You got to know when to hold them, when to fold them, when to walk away, and when to run"!

Huge Hilarious Facebook Ad Fail

This ad is gut-splitting hilarious. I went to the NASDAQ site to check on my favorite "stock most likely to go down the crapper" and I saw a couple of funny, ironic things.

First, a full 74% of the public amateur pundits who waste time with an account on NASDAQ, rate Facebook stock a BUY. It is these people who's money is taken when the market whipsaws their positions senseless. It is these people who bought early and are hoping to get their money back.

And it is probably these people to whom the above ad is aimed at. I took this ad directly off the NASDAQ site. For those of you without glasses, the ad says that if you invested in Facebook after the IPO, you were likely too late!!! FAIL !!!!!!!

But if you send this company money, they will tell you also how to get in early at the high price of Facebook, not at the low price that it is two weeks later. And if you act now, they will throw in a set of John-the-Baptist steak knives and Dead Sea Scroll shower curtains added to your order.

It's the John Q. Public way of investing -- buy high and sell low. Now if you were an institutional investor, you would have been tipped off by Morgan Stanley et al, that the earnings, estimates and outlooks were being revised in the general direction of one's sphincter muscle, and you would not have lost money. Or if you were as smart as Warren Buffett, you would have stood aside. But you aren't. Like poor old Abner Snodgrass who will take piano lessons to try and get a date, you will send your money to get in early on other stock market losers.

All this to say, is that PT Barnum had it right about one born every minute -- especially with this ad pictured above.

But never mind the ad, have I got a deal for you. Send me $50 and I will make you happy (limited time offer).

Guess What Tech Stock is Gonna Tank Today?

It's 8:47 AM. About 13 minutes before the market opens. Guess what famous stock is going to tank again today? (says he gleefully -- he who predicted that Facebook is dead man walking).

Update 2:12 PM EDT. It's at 28.36 down $3.06 and that 9.62%. Now if it loses half of what's its at now, it might be getting near the range of a buy.

Update 4:07 PM Market Close. Facebook closed at 28.75 3.16 9.9% down almost 10%

This downward slide isn't over. The market will ultimately correct.

Daytrading Facebook ~ Get Your Rectum Handed to you on a platter

(not exactly as illustrated ~ it's the Morgan Stanley version of the truth)

If you are a day trader, and you are in any position with Facebook stock, I am willing to bet you that you are getting your rectum handed to you on a platter.

Regular readers of this blog know that I write technical analysis software. I have been watching Facebook and something is rotten in Denmark.

I am convinced that the stock is being heavily manipulated, the short sellers are largely absent, and when someone wants to liquidate a long position, an automagic counter trade appears to cushion the downward descent.

All of the stock charts say sell. Yet the bloody stock declines by pennies and then it edges upward by pennies.. It is the most amazing stock price pattern, especially the discontinuity and singularities in the price between open and close. But what is happening, is that day traders are being whipsawed out of their positions because of the apparent manipulations going on. There are patterns here that are not seen with stocks in the "free market".

My analysis, which is pretty good, has shown that the stock should have tumbled at many occasions, yet it has not. We all know that this is not due to fundamentals, so the only other explanation is manipulation.

These games that the Wall Street underwriters are playing make investing a mugs game for the rest of us. There oughta be a law.

Microsoft Turning into Spamming National Enquirer

(click on image for larger picture)

During World War II, intelligence agencies used something called content analysis to determine conditions and morale in war-time Germany. They did this with soft information. They would get regional and small town weekly newspapers, go through them with a fine tooth comb.

Typically, these papers would have lists of local people that died. From that, they could create overall casualty estimates. The local papers would have notices that the butchery was closed due to lack of supplies. That would tell the Allies of food shortages. An article telling folks how many ration coupons was required for a liter of gasoline was a good window into fuel.

Essentially, content analysis is taking innocuous bits of information, making inference about them and coming up with a bit of knowledge. It is the process of integrating facts into knowledge about a situation.

Analysts on Wall Street do this by looking at balance sheets. However analysts miss the big picture very often. I am still irked that Arvind Bhatia was all over the media, pumping up Facebook saying that it was the best thing since sliced bread. He should be fired or resign in disgrace.

That aside, let's put Microsoft under the lens. I could not believe that my Hotmail inbox had spam from Microsoft. And to top it all off, it was salacious spam of the National Enquirer ilk.

My own content analysis tells me that their search engine Bing is suffering. Of course I don't have to cogitate hard to come to that fact. I have several websites, and I can see what search engines are the referrers, and Bing shows up once in a blue moon.

However this latest spam from Microsoft trying to encourage me to use Bing is pretty much a sign of Seattle desperation. The spam says: "We can't make this stuff up. Scary disease is turning cats into living robots !!!!!!". THe fine print says that you are seeing some of the hottest Bing searches.

I suppose that their reasoning, is that if they spam their entire hotmail userbase, and get a few clicks, then their numbers will improve. But this strategy is just as lame as those used by the spammers of malware and the Twitter spammers who say: Click here because I saw a funny picture of you on the Internet.

How the mighty have fallen. Microsoft used to be so supercilious that they didn't need to advertise at all. Now after begging didn't work, they tried scaring. After logging out of hotmail, they re-directed to a page that tried to tell me that my secure Chrome browser was a 2.5 out of 5 and that I should upgrade to the virus haven Internet Explorer. When the scare tactic didn't work, they sunk even lower and tried the tabloid effect with the kitty robots.

So, chalk up another dead man walking. Microsoft has had its day. And I am a geek but I oughta be a stock analyst. And if I was, I would advise my clients to short the living crap out of Microsoft stock. You will make a ton of money. (Fine Print: This by no means constitutes investment advice. You should consult a professional to be properly advised on how to lose money in the stock market. It is their job to mislead the ordinary investor and give inside information to institutional clients.)

I oughta be a stock analyst instead of a geek

Instead of rising with a bullet, Facebook stock is deflating like a bullet wound in a balloon. I ought to be a stock analyst instead of a geek. I can pick them better than widely reported analyst Arvind Bhatia. His total paeans of praise for Facebook is either due to lack of objectivity (through payment or self-delusion) or simply that he made a huge mistake, and really isn't that smart when it comes to the stock market. It reminds me of the time where a kindergarten class outperformed a bunch of Wall Street analysts by picking stocks that they knew and loved (McDonalds, ToysRUs etc).

This Facebook IPO price was so wrong on so many levels, and yet greed made the underwriters do it anyway. It is now 18 percent below IPO price. The hedgefunds who bought the stock are not going to have a good year. Warren Buffet was vindicated.

Now two days on the market doesn't mean much in the long term, but it means a lot to the optics of the deal. The market is waking up after a 2:00 am orgy and finding itself in bed with a ugly woman, a male midget and Doberman (with all due respect to plainer women, smaller men and angrier dogs).

The correction is taking place. My bold prediction is that it WILL reach the $14 per share mark where it belongs. Actually it belongs lower than that, but lets see if they are made of sterner stuff.

Facebook's True Valuation, Stock Price and Capitalization

In yesterday's blog entry, I outlined why Facebook will never overtake Google. Most of the valuation of the company at $38 per share is based on unrealized, unmonetized potential. I argued yesterday, that the user base is near its limit of monetization, and gave reasons why.

So lets assume that one of the biggest fans of Facebook, Arvind Bhatia is right about Facebook's search capability. (I don't buy it, but let's go with it for the sake of argument). Bhatia says that Facebook's search capability is better than Google's and Facebook will monetize it. Nobody is better at monetizing searches than Google. They are the gold standard. They do it with less data on the searcher than Facebook, and they outperform Facebook by orders of magnitude in the revenue department.

Google currently trades at 19 times revenues. Facebook at $38 is 100 times revenues. If we say that Facebook is at least as good as Google, then it would be fair to assume that they also would trade at 19 times their revenue. That would make a fair share value of Facebook at $7.22 at share. That would make a market capitalization of $3.04 billion dollars instead of $16 billion.

Just for fun, let us double the fair market valuation to $14 per share because they have close to a billion in followers (although even Facebook admits that a fair percentage are fake accounts). That still is a long way off from $38 and $16 billion.

Facebook has a lot of potential to realize. I suspect that the Morgan Stanley and the hedge funds that bought Facebook did a lot yesterday to support the price at $38 a share in the last hour of trading. And the hedge funds are not going to permit the borrowing of shares to short the Facebook stock, so it may be kept up artificially for a while.

My own risk radar says that this valuation is way too high, and that Facebook will not fulfill its potential. There has to be a correction, like there was for Zynga that lost 13 per cent of its value on the same day that Facebook had its IPO. Ten percent of Facebook's revenue comes from Zynga and its Facebook games, so another red flag goes up.

The thing that really gets me, is that if a geek like me can see the obvious, why can't Wall Street and the pundits see the obvious? Are the financial markets so out of tune with reality, that players like Morgan Stanley and Goldman Sachs can tell us to believe what they say and not believe what our eyes and rational senses tell us?