The Economist Shares My Economic Ignorance.

Russ Steele

Our local lefty blogger writes:

BTW, longtime hard-right blogger Russ Steele is showing his ignorance about financial matters here:

https://2012nevadacounty.wordpress.com/2012/05/21/gov-brown-call-your-office-facebook-shares-plunging/

Russ doesn’t seem to understand that Facebook rank-and-file and “insiders” — California residents — sold their shares before the public IPO and that capital gains taxes and sales taxes will be recorded regardless of what is happening in the “retail” market.

ooo

This is all good news. Nobody ever said the Facebook IPO would bail out California.

Having never been and “insider” like our lefty blog has been when C/Net went public, I would not know how those “insiders” make out while the rest of of 99% wish we were one. That said,  this is what the Economist said about the Facebook IPO and CA budget bailout.  The basis for my comment about the economic impact on California if the Facebook stock fails to soar after the IPO.

The Facebook Effect

A single IPO may have a big effect on the world’s ninth-largest economy

AMONG those in suspense as Facebook prepares for its initial public offering (IPO) of shares later this month are the bean-counters of California. After all, Facebook, which could be worth as much as $100 billion, is a Californian company and many of its employees, including its founder, Mark Zuckerberg, live there. That means they may soon be paying lots of tax.

The IPO’s timing fortuitously coincides with the beginning of California’s annual budget “kabuki”, as a former governor, Arnold Schwarzenegger, called the process. This kicks off with the official revision, on May 14th, by the current governor, Jerry Brown, of estimated incomings and outgoings. It drags on through June in the legislature and then, if all goes well, the governor signs something resembling a balanced budget by July 1st, the start of the new fiscal year.

Last year Mr Brown proposed spending $89 billion for the current fiscal year, which began on July 1st. As in recent years, however, revenues are falling short of official projections. Jason Sisney of the non-partisan Legislative Analyst’s Office says that the state seems to be facing an overall budget “problem” of more than $9 billion this year and next.

Enter Facebook (see article). The details are not yet known—at what price the shares list, how many Facebookers cash out, and so forth. But back-of-the-envelope calculations by Mr Sisney suggest that California might get a windfall of $2 billion over the current and coming fiscal years, and possibly billions more if the shares trade well.

In California such mathematical games bring giddy memories of the dotcom boom in the 1990s, and of the previous big listing, by Google, in 2004. That particular IPO [Goodgle] led to $7 billion in windfall tax revenues over the subsequent three years, by minting a new batch of millionaires with income and capital gains to declare. [Emphasis is editors]

If I understand what the Economist said, Governor Brown’s budget could see a big upside if Facebook stocks failed to soar.  The stock was sliding down hill when I posted and it is still down at the end of the day.  The shares dropped below their offering price in their first full day of trading Monday, wiping $11.5 billion off the social network’s market value.

That was the basis of my “ignorant”comment, which was a little in jest.   It is nice to have the company The Economist in my ignorance. They seem to think a soaring FB stock would have an economic impact on CA.

If I has been an “insider” cashing out would be the right thing to do.  Three years after IPO 2/3s of all  stocks had negative returns. Since 2010 60% of all IPOs have negative returns so far. Stay tuned for more ignorance.

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About Russ Steele
Freelance writer and climate change blogger. Russ spent twenty years in the Air Force as a navigator specializing in electronics warfare and digital systems. After his service he was employed for sixteen years as concept developer for TRW, an aerospace and automotive company, and then was CEO of a non-profit Internet provider for 18 months. Russ's articles have appeared in Comstock's Business, Capitol Journal, Trailer Life, Monitoring Times, and Idaho Magazine.

5 Responses to The Economist Shares My Economic Ignorance.

  1. Dena says:

    Let’s see if I have this right. They have a 9 billion problems and Face Book may net them 2 billion. Any way I figure it they still have a big problem. What are they so happy about?

  2. Arthur M. Day. says:

    Dena, you live in Realville and the happy ones are lost in a benighted fog shrouded swamp of self congratulation.

  3. Jerry Pournelle on the Facebook IPO.

    The tumult and the shouting dies, the Goldman Sachs and the Sovereign funds depart…

    Which is to say that the Facebook IPO is over, and on today’s trading those who invested money in the notion that Facebook is worth 40 or more times earnings per share have lost money. I don’t know why anyone would be surprised. Think on it: if you bought Facebook at the initial price of $38 (and thus put money in the bank for the founders, employees, and early private investors in Facebook who certainly would like to have your money) you have bought paper that Facebook will need forty years to be able to buy back. The alternative is that Facebook will cleverly invest its earnings in a way that causes other people to buy that paper for what you paid for it. Or that enough people out there will decide that this is such a good deal they have to get in on it, and they will bid more for your paper than you paid.

    By contrast, Apple is trading at about ten times earnings, and Google trades at about 12 time earnings.

    Of course Facebook can grow. It only has a billion members. It can get more. Surely there is great potential for growth here. And we can advertise to them, and companies will pay to run those ads. Facebook shares will rise, double in value –

    And thus are bubbles created, but it didn’t happen that way. Facebook is now down to below the initial offering price, and is likely to fall more. Those whose orders got lost by the buggy NASDAQ software and thus didn’t get in on the IPO turn out to be lucky. Even more lucky – or astute – would be the initial stockholders who sold out at the IPO price – at least it certainly looks that way. I would think that the end of the hype is the end of the Facebook bubble, and the price will continue to fall until Facebook is down in the region of ten times earnings. Even at that it will take Facebook ten years to earn enough to buy your share (just as it takes Apple or Google that long to make enough to earn enough to buy their own shares. Which is to say that given current earnings, Facebook would be worth about $38/4 which is to say less than $10 a share.

  4. Market Watch has some insight

    Over at BusinessWeek they’re warning investors that the growing number of “cutesy mascots” is a dangerous reminder “of the dot-com boom’s irrational exuberance.” They’re also red flagging new reports that “more Chinese investors are betting on U.S. start-ups.” And feeding the flames.
    What’s going on? Facebook’s in trouble, that’s what. Now in the crosshairs of public scrutiny, everybody’s taking potshots. And the warnings are just beginning:

    Everything from Facebook FB -8.90%  being “too big to fail or succeed” to a Chicago attorney warning that the stock could “crater” if Facebook can’t grow revenues 41% annually for five years to “sustain its value” to a warning that Facebook’s one of the “Black Swans” that could eventually bring down the global economy.

    California’s economy could just as well be brought down by Facebook as well, first out of the box shall we say!

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