July 31, 2012 Comments

The Case-Shiller report today showed that U.S. house prices rose in May.

We are past the bottom of house prices in the U.S. House prices are higher than the bottom on all 20 Cities in the survey / index. The increases range from 1.7% in New York and 2.5% in Detroit to 11.7% in Phoenix, 11.8% in Washington and 14.9% in San Francisco. The average for the 20 Cities is an increase of 3.6% above the lows. I use the raw non-seasonally adjusted figures because I believe that seasonal fluctuations are tiny compared to the trend in increases.

Facebook was down to $21.71. That is just 57% of the $38 Initial Public Offer (IPO) price. So a 43% decline.

It’s interesting to take a look at the share price and valuation of Facebook since just prior to the IPO until today.

As of December 31, 2011 Facebook had paid in equity of $2.684 billion. There was also retained earnings of $1.606 billion for a total common share equity of $4.29 billion. The founders and very earliest investors had paid essentially nothing for their shares and later private investors had paid in substantial amounts. It was not clear what the company was worth.

After the IPO The paid in capital rose to $11.684 billion. So $ 9 billion was raised by the company. The total IPO amount was $16 billion and so it appears the company got $9 billion and early investors sold $7 billion and walked off with that cash. After the IPO there were some 1880 million shares.

At the IPO price of $38, the company was valued at $71.4 billion.

But now at $21.71 the company is worth $40.8 billion. The book value per share is $7.08 consisting mostly of cash.

That is a loss of $30.6 billion in a few weeks.

It’s interesting to think about where the money went. In fact the $30.6 billion of wealth of the owners of facebook simply evaporated. That’s bad. On the other hand most of the original $71.4 billion of wealth was conjured from thin air. After all as June 30, 2012, facebook had raised a total of $11.684 billion from investors, it had earned another $1.654 billion. So that is a total $13.3 billion. (There was also another $7 billion raised at the IPO that went to former shareholders but that was just a trade some investors sold to new investors. Of the $71.4 billion total value, $58.1 billion was the estimated value of future profits on top of the $13.3 billion book value. That $58.1 billion in wealth essentially came from thin air.

What has happened since the IPO is that the estimated value of future profits has fallen to $27.5 billion from $58.1 billion. The difference $30.6 billion has simply disappeared into thin air from whence it came in the first place.

But all of that is just a matter of interest.

The real question is, should we buy facebook?

I don’t know. But I think it might be worth nibbling at. It is speculative and it could certainly fall further. I would not place a big bet on it. But a small position in it would be okay. According to analysts it is trading at 34 times estimated 2013 earnings. Not cheap certainly. But perhaps not totally outrageous. On the other hand the 2013 earnings are only a guess.

The big story on Wednesday will be whether of not the Fed stimulates the economy. If they don’t the market will fall, I suppose. I’m at the point where I really don’t care what the Fed does. The value of stocks will ultimately not be determined by the Fed. They can influence the short term but not so much the longer term. If the market falls substantially, I will be adding to positions.