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Random Thoughts: Global Markets, Facebook, and German Lines in the Sand


Turnaround Tuesday arrives on cue.


Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.

The world's wildest reality show continues as investors digest yesterday's sharp rally, weigh it against the 9% May slide in the S&P and try to figure out where we go from here. In the interest of respecting your time, I'm gonna dive right into some good old-fashioned Random Thoughts, in no particular order:
  • If you stretch a rubber band enough in one direction, one of two things will happen: It will snap back, as it did yesterday, or it will snap period (the definition of a "crash," other than a "cool cat," is when traditional tools and metrics no longer work).
  • Those who stair-stepped risk down the ladder with me had a snazzy trade (100 handles in two weeks) and got stopped yesterday morning. Good traders know how to make money but great traders know how to take a loss; the definition of an investment should never be a trade gone awry.
  • The new range is S&P 1300-1340; other levels of lore include S&P 1279 and BKX 41.83 (the respective 200-day moving averages) and of course, DAX 6500 (under that level "works" to DAX 5800)
  • Until DAX 6500 is re-captured, I'm viewing this global reflex rally as an opportunity to make sales -- long, short, or otherwise. Size yourself, think positive, and remember that the ability not to trade is often as important as trading ability.
  • I'm a buyer of my first tranche of Facebook (FB) in the $28-30 range; we'll call that "put away" stock. Other long-term holdings I will look to add at the right price include Twitter and LinkedIn (LNKD). Indeed, as far as Twitter is concerned, I haven't been this excited about a stock in a very long time -- if ever.
  • I'm fairly certain we'll have the opportunity to buy stocks -- not just Facebook and others, but stocks -- cheaper in the months, if not the years, ahead, and I have no problem if my first buy is my worst buy.
  • If I miss 'em? I'm a trader, baby, and I'll trade. I still "catch grief" in some circles for adopting an "all cash" posture in front of the first phase of the financial crisis (in my long-term bucket) but I don't -- and indeed, can't -- look back; I prefer to look "up and out."
  • I had the "Long Durant-Short Artest" trade on in size and it paid off handsomely last night. I'm not talking money; I'm talking about an example that was set for my soon-to-be stepson after I had to explain how a guy named "World Peace" threw elbows and played dirty. I bought him a #35 Thunder jersey -- that he wears proudly -- and we've been rooting for the good guys. It's nice to see those type of lessons rewarded.
  • If Morgan Stanley (MS) "secretly" slashed estimates and tipped its top-tier clients -- I don't know if this is true but it is being bandied about -- Lucy is gonna have alotta 'splainin' to do!
  • The sharpest rallies occur in the context of a bear market; balance that axiom against overseas credit improving on the margin, and sprinkle in some Turnaround Tuesday vibes for good measure, and we're ready to roll.
  • Close calls tend to make you re-think your bucket list. Aside from the obvious (cherishing my betrothed, watching our kids grow, and doing 'more' for others), I'm looking forward to our honeymoon safari (over the New Year holiday), watching the Raiders win (at least) one more Super Bowl, rewarding Minyanville investors in size, losing those 20 extra pesky pounds, making peace with those I'm not currently at peace with (there are two, by my count) and generally remaining mindful of as many moments as I can, which includes demonstrating more patience and empathy for those who may be scared, weak, or otherwise confused.
And Finally, Giving Credit Where Credit Is Due!

There has been some extremely strong content in the 'Ville the last few weeks -- GREAT work to our MVHQ staffers and our professors. Gratitude doesn't begin to express how thankful I am for the effort involved.

I would like to highlight Chris Dixon's take in particular, from our Ten Takes on the Facebook IPO.

And I quote (emphasis mine):

From a valuation point of view, the key metrics all come down to the revenues per user and projected margins. Based on the S-1, with 2011 average monthly users of 726 million, and $3.7 billion in sales, the company generated average revenues per monthly user of $5.09 per year, or only $0.42 per month, and posted an EBITDA margin of 46.7%. Should the public Facebook be able to augment its monetization model to $0.75 per monthly user ($9.00 annual ARPU) and increase its user base to 1.2 billion, the company would generate a remarkable $10.8 billion in revenue and bring down between $4 and $5 billion to the EBITDA line. These are sufficient growth metrics to support the hoopla, but raise serious questions about an appropriate multiple. Historically, 15 to 20x multiples have been achieved, but are rarely sustainable. So based on that scenario, an $80 to $100 billion valuation would be justifiable, but the company would have a more likely valuation of $60 to $75 billion (12 to 15x) once the smoke begins to clear. Based on 2.3 billion fully diluted shares and $3.9 billion of cash, the stock should trade about $34 a share.

Which raises the bigger question: What happens to other kahunas in the tech world: Apple (AAPL), Google (GOOG), and and Amazon (AMZN)? In my view, herein lies the opportunity. Anytime a new entrant absorbs $5 billion of equity capital there is massive rebalancing by institutional investors, including ETFs, indices, and a broad array of tech funds. Everyone of these guys and gals will need to own Facebook in their portfolio, and the bigger question will be where they get the cash. If they need to sell some Google, Apple, or Amazon, we can expect to see real pressure on those stocks as tech holders need to build positions in Facebook in the coming weeks. Can you imagine being the head of a tech fund who didn't participate? For those of us who have been looking for an opportunity to add to positions in Google, Amazon or Apple, the time may be ripe. I'm looking very closely at what happens in the coming weeks to those stocks to see if an opportunity can be realized to buy some Google or Amazon on a dip.



Twitter: @todd_harrison

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