D&D Note (5-17-2012) ~ Don’t Buy Facebook, Yet.

D&D Note (5-17-2012)

With the IPO price now set for Facebook (FB) the CEO of the company, Mark Zuckerberg, is now worth $19 Billion – making him the 29th most wealthiest person in the world. Richer than both the Google Founders.

Even the richest San Franciscans all felt a little less rich today. That is, unless you work at Facebook. And there are around 1,000 new millionaires that are going to pop up literally overnight here in the Bay Area. As a colleague said today “I bet the sales reps at the Ferrari dealership in Menlo Park are giddy over tomorrow.” Giddy is probably an understatement.

But lets actually look at the company, as in the end we are investors. Currently FB will be trading at 107 future earnings… meaning it will take 107 years at current earnings to justify the valuation. So what does that mean? FB needs another Zynga (ZNGA) – which is not likely considering Zynga is finding hard to keep pace with themselves. Or Facebook needs to find a way to increase the earnings per user through an Amazon related model… possibly could be done by buying Pinterest.

However, like Apple (AAPL) which has a huge X factor (being China for Apple), Facebook also has a huge X factor. Except its not China, Zuck pulled completely out of China due to the communist government wanting to censor everything, so currently FB has 0% user base in the Peoples Republic. What Facebook does have  is huge potential from its mobile advertising.

In fact every company has this X factor possibility of mobile advertising. Problem is FB hasn’t monatized mobile advertising, mainly cause the industry is young and really ad agencies haven’t yet cracked HOW to do mobile advertising (as in the correct or best way to serve ads to users).

Tonight Facebook is having Hackathon 31- a great way to see inside Zuck’s mind as the CEO of a publicly traded company. He want’s to remove the negative connotation to “hacking” and promote the positive business usage from having hackathons (which are all night hack sessions held at the company with DJ’s and a lot of Red Bull… only rule is you work on something you don’t normally work on at work – a new different project).

Mark Zuckerberg himself said he wants to get back to programming/hacking and actually stated he wants to get back to programming everyday. Perhaps the proper way of serving mobile ads can come from inside the company and not from Madison Avenue.

Interestingly the only social media ETF, Global X Social Media Index ETF (SOCL), announced today they will not be buying Facebook on the first day of trading. Rather, they will wait exactly five days and then buy shares and will put it at their market cap for individual holdings at 10%.

When should the retail investor buy Facebook? Definitely not in the first 2 hours of trading, and trading begins on the Nasdaq at 11:00 eastern. Probably shouldn’t buy it even the first day at all.

On May 29th the options come available at the CBOE for Facebook for the first time. And it is that day that day traders can begin their calls and puts on the stock.

In 90 days the insider selling ban gets lifted and thats when Facebook employees can go from rich on paper to rich in paper and actually sell their shares in the company. And with capital gains taxes in question next year, those 1,000 new millionaires are probably gonna wanna cash out a large portion in this tax year.

What the retail investor needs to do is watch the tape on the first day. What is the highest print, what is the opening print, what is the closing print. Then watch the charts over the next 5 days and see how it trades, let the technicals form.

When the stock eventually drifts back to or close to the original IPO price, or the open/close prints then that will signal that its time to buy. If you get a big gain within the first 90 days, might look to take some profits and hold the rest as a net long position.

In other non FB market news… the 10 Year note was a bit scary today when you look at the closing yield of 1.70% falling 3.57% meaning still people are buying US treasuries. At a rate that returns a negative yield when inflation adjusted. And that 1.706% yield represents THE lowest closing level on record.

There isn’t a tech bubble, there is a treasury bubble.

The DOW dropped 156.06 points to close at 12,442,49. The Nasdaq dropped 60.35 points to close at 2,813.69. And the S&P 500 broke through a technical level falling 19.94 points to close at 1,304.86. We could see a bit further downside since we broke technicals before resuming the overall bull market. Expect to see further volatility which allows to buy on dips and sell into rallies.

Oil slipped 25 cents to close at $92.56 a barrel.

Gold rallied today $38.30 to close at $1,574.90 an ounce. Just don’t get too giddy yet on Gold we could still see further volatility in the commodity as well.