Addison Wiggin – February 1, 2012
- 800 million teeny-boppers wasting time on Facebook: Is each one really worth $125 to an investor? The hottest IPO ever, seen through the prism of The 5…
- Iran, Venezuela, China… A laundry list of “strategic threats” loading up on gold
- Trillion-dollar deficits forever… and that’s not even the scariest thing to come out of a new congressional report
- Using your cellphone like a credit card… Ray Blanco on investing in the advent of “mobile payment technology”
- Russia as more business-friendly than the U.S… an inquiry about gold confiscation and gold stocks… the profitable way to overcome euro-boredom… and more!
Stocks are up today. The major indexes have jumped 1%… for no obvious reason.
There’s talk of a halo effect from the pending IPO of Facebook, which could file the paperwork as early as today.
Oy… Talk about “riding on a smile and a shoeshine,” to borrow from Death of a Salesman.
“You have 500 million people,” we wrote 13 months ago, the last time we deemed Facebook worthy of our attention, “playing FarmVille and Mafia Wars and telling the world how wasted they got last night”… but what makes them worth an average $100 in market value?
That was based on a presumed market cap of $50 billion.
We pose the same question today… only now, with 800 million users, and a presumed market cap that’s doubled to $100 billion, that “value” has grown to $125.
“The $10 billion IPO alone,” writes our Greg Guenthner, “easily places Facebook among the largest offerings of all time — and the biggest U.S. Internet IPO by leaps and bounds.
“For some perspective, Google’s 2004 IPO netted the search engine (and now-Facebook rival) what now seems like a paltry $1.2 billion.”
For further perspective, consider the biggest U.S. company by market cap is Apple — valued at $425 billion, according to the latest figures from FactSet. No. 2 is Exxon Mobil at $403 billion.
Apple produces computers, phones — tangible stuff. Exxon Mobil produces oil, natural gas — tangible stuff.
Facebook produces… eyeballs to deliver to advertisers.
And coming out of the gate, it will be valued at nearly 25% of the nation’s biggest companies with decades, if not a century, of track record.
The giddy reaction makes us long for some of the most tangible stuff of all this morning. And we’re evidently not alone…
The owner of the world’s 16th-largest gold reserve has finished up the process of repatriating its overseas holdings. The final shipment of Venezuela’s gold bars arrived at the Caracas airport Monday.
Its transport to the central bank was the occasion for a motorcade broadcast on state TV. “In two months, we’ve brought 160 tons of gold valued at around $9 billion back to Venezuela,” said central bank chief Nelson Merentes.
President Hugo Chavez ordered the operation last August, cleaning out vaults at the Bank of England and J.P. Morgan Chase, among others, as a precaution against turmoil in the financial markets. “The repatriation of our gold was an act of financial prudence and sovereignty,” Merentes said.
Meanwhile, the owner of the world’s 8th-largest reserve is beefing up its holdings.
Iran’s gold reserves now total 907 metric tons, according to a Tehran Times report citing Yahya Ale-Eshagh, who heads the Tehran Chamber of Commerce, Industries and Mines.
The average purchase price, he says: $600 an ounce. At current prices, Iran’s gold is just under 10% of its total foreign exchange reserves.
“We don’t have any shortage of foreign currency or gold to meet the local demand,” Mr. Ale-Eshagh said. Music to the ears of President Ahmadinejad, we presume…
Ordinary Chinese couldn’t get enough gold for the Lunar New Year. Sales volume at Beijing’s biggest gold markets — Caibai and Guohua — totaled $95.3 million.
That’s nearly 50% more than the year before, according to the Beijing Municipal Commission of Commerce.
We were at Caibai last May. The place was mobbed… early on a Tuesday morning.
And now? “You can hardly even see the gold bars, necklaces and pendants in the display case,” said one shopper looking for gold bracelets for his granddaughter. “You have to quickly decide whether to make a purchase, or it will be taken away by others,” he told China Daily.
“Gold is no longer owned only by a privileged few,” according to Caibai assistant manager Guan Qiang, “ but has become a new investment channel open to all.”
[Ed. Note: Our friends at First Federal have once again secured a limited supply of 2012 20th-ounce Gold Pandas. And we do mean limited: For the third year in a row, the China Mint called Nick Bruyer asking to buy back some of his bulk purchase, so intense is the demand.
Nick graciously agreed, knowing it’s the only way to keep the supply coming his way. But there’s that much less remaining for everyone else, so you want to grab yours while you can.]
In fairness, some Americans seem to recognize gold’s value: In fact, it’s flying out the door of the U.S. Mint.
The Mint sold 127,000 ounces of Gold Eagles in January. That’s the highest monthly total in a year… although no doubt sales were goosed by the availability of fractional sizes, which ran out at the end of last year.
Silver Eagle sales totaled 6,107,000 — the second-highest month on record after January 2011.
Heck, even Pimco chief Bill Gross is coming around to gold. “Recent central bank behavior, including that of the U.S. Fed,” he writes in his latest monthly missive, “provides assurances that short and intermediate yields will not change, and therefore bond prices are not likely threatened on the downside.”
“Still, zero-bound money may kill, as opposed to create credit. Developed economies where these low yields reside may suffer accordingly. It may, as well, induce inflationary distortions that give a rise to commodities and gold as store of value alternatives when there is little value left in paper.”
Welcome to the club, Bill. It’s still not too late to position yourself for gold’s next big run-up.
Gold is within reach of $1,750 this morning. At last check, the bid was $1,748. Silver’s knocking on the door of $34.
The Congressional Budget Office, perhaps cottoning to our forecast of the mother of all financial bubbles, is forecasting trillion-dollar deficits all the way through… 2017.
In a shockingly forthright appraisal, the CBO has significantly revised its forecasts from six months ago. It now sees a $1.01 trillion deficit for fiscal 2012… and not much improvement beyond that.
No longer is the CBO relying on pie-in-the-sky GDP estimates to come up with pie-in-the-sky projections of growing tax revenue and shrinking deficits. It calls for 2% GDP growth this year and 1.1% next year.
That’s almost believable — well, except for the fact that GDP is a seriously fudged number, but that’s another story.
The most shocking take-away from the CBO report: Government spending on health care will rise 8% a year over the next decade.
Hmmm… Let’s apply the Rule of 72 here… 72 divided by 8 means… federal spending on health care will double in nine years.
That means in 10 years, Uncle Sam will be spending $1.8 trillion annually on health care.
$1.8 trillion? That’s 50% of last year’s total federal budget. We can confidently predict that will never, ever happen.
This reinforces our own forecast of how in the not-too-distant future, you’ll no longer be able to rely on the government for things you’ve come to expect. Best prepare yourself here.
Here we go again: California might run out of cash next month. Collections aren’t keeping up with spending, says Controller John Chiang. Somehow, the state needs to scrape together $3.3 billion for March and the first two weeks of April.
But no worries this time, Chang says: The state won’t have to issue IOUs to creditors the way it did in 2009. It can get by with “still more borrowing, payment delays and deferrals.”
Payment delays and deferrals? Oh, the “Illinois Solution”…
Illinois’ backlog of unpaid bills could more than triple by 2017, warns the watchdog group Civic Federation.
Thanks to an “unsustainable” increase in Medicaid spending, the current backlog of $9.2 billion this fiscal year could explode to nearly $35 billion by 2017.
“Failure to address unsustainable trends in the state’s pension and Medicaid systems will only result in financial disaster for the state of Illinois,” says Civic Federation chief Laurence Msall. Moody’s lowered Illinois’ bond rating last month to A2, the lowest in the nation.
We’ve long said the next financial crisis will be hellish… and it will first be felt on the local level. You can watch that forecast coming to life — and take steps to prepare yourself — here.
This being the first of the month, we’re getting the pulse of the world’s manufacturing sector. With all of the following numbers, 50 is the dividing line between expansion and contraction.
- China: Still expanding, still just barely, at 50.5. For the moment, China’s “soft landing” thesis remains valid
- Eurozone: Shrinking for a sixth-straight month. But the January reading of 48.8 was an improvement from December
- United States: The ISM number rang in this morning at 54.1, the strongest performance in seven months.
The number of private-sector jobs in the U.S. grew by 170,000 last month, according to the payroll firm ADP. Most of the growth was among small- and medium-sized employers, and most of that was concentrated in the service sector.
However, last month’s number proved wildly optimistic compared with the “official” number that came out from the Bureau of Labor Statistics two days later. We’ll see what happens come Friday…
“I think that the time to invest in mobile payment technology has finally arrived,” says Ray Blanco, having done some homework after returning home from the Consumer Electronics Show in Las Vegas.
“Smartphones are becoming a tool to accomplish what has previously required the use of cash, checks or credit cards.”
But unlike a piece of plastic with a magnetic stripe, “a payment system based on an intelligent, networked device has the advantage of providing real-time feedback on account and payment information.”
“Combine these advantages with the fact that most of us are carrying a mobile device anyway and a virtual wallet could eventually make credit cards as uncommon for retail transactions as personal checks are today.”
This day is coming sooner than you think, thanks to something called near-field communications. “NFC,” says Ray, “is a set of radio communication standards that allow devices to communicate with each other over short distances. It is also very fast at establishing a network connection, taking only a fraction of a second.”
“If you’ve ever used a contactless payment system before, such as the kind that you can attach to your key ring and use at a gas station, you’ve used an early form of NFC.”
To learn how this will revolutionize the way we conduct commerce every day… and how your portfolio can piggyback on the trend… check out today’s Penny Sleuth.
“I was on vacation skiing in Austria,” a reader writes, “and turned on CNBC or CNN when I got back to the room.”
“The reporter was interviewing John Chambers, the Cisco CEO. One of the things that Mr. Chambers said was that it is easier to do business in Russia than in the U.S.”
“I am sure someone could write an interesting rebuttal, but the amazing thing is that a man in his position could say such a thing. And the administration wonders why we aren’t recovering faster. Take me back to the ’30s again.”
The 5: “Right now,” Chambers’ exact words to CNN were, “it’s a lot easier to do business in the U.K., or Canada, or Russia, which I never thought I would say, or in China.”
“No other developed country in the world pays more than 2% on their foreign earnings,” he added. In the United States, Cisco would pay 33%. Thus, it’s holding $43 billion overseas.
“I was born in 1931,” a reader writes, “and my parents were so desperate that they moved to the Mojave Desert to try to find gold in an abandoned mine. We lived in a tent and boxcar.”
“My question is if this event is repeated and gold is confiscated again, what happens to the owners of gold mining stock?”
“The government can pay the citizens any amount they see fit, and normally it would be below market price. But who buys the gold that comes from the operating gold mines? What happens to the quarterly returns for owning the gold stock? What happened in the Great Depression?”
The 5: The iconic story of gold stocks during the Great Depression was Homestake Mining. A dollar invested in Homestake in 1928 would have turned into $1.97 by 1932.
The confiscation came the following year… and that $1 invested in 1928 would have become $4.95 by year-end 1933… and $6.40 by the end of 1934. The price retreated in subsequent years, but if you’d held on through 1938, your original $1 would have become $6.76 over a decade.
For Byron King’s best gold stock ideas of the moment, look here.
Cheers,
Addison Wiggin
The 5 Min. Forecast
P.S. Once again, we point out that if you’re bored by the eurozone crisis, you might as well make some money from it. There’s optimism today about a resolution to the latest Greek debt talks… enough to push Germany’s main stock index, the DAX, up 2%.
Thus are Abe Cofnas’ readers able to pocket a 120% gain after only two days. In addition, a play on the dollar versus the Swiss franc has proven good for a 25% gain. This one also played out in a mere two days.
Abe’s one-of-a-kind service, Fear & Greed Trader, is currently closed to new members. When it reopens, we’ll be sure to let you know.