An Exit Tax… Or an Act of Extortion?

May 18, 2012

  • The math on Facebook: You want 15% a year for the next five years? Here’s what has to happen…
  • Living with Uncle Sam’s “exit tax,” setting up a floating country: Two stories about early Facebook investors more interesting than the IPO
  • Show me the evidence, says Doug Casey… finally weighing in on gold manipulation
  • Huge gains in a down market… Nickel-and-diming bank customers… quips about the Goldman Sachs “swirlogram”… and more!

   The gods sure have a good sense of comic timing: The biggest Internet IPO ever coincides with our own Internet access getting throttled.

For more than 24 hours, we’ve been contending with a bandwidth bottleneck here at Agora Financial headquarters. If you’re receiving email from us late… or not at all… or if the charts in those emails don’t load right away… rest assured, we have a small army of people on the case, working to restore normal operations as quickly as possible.

In the meantime, “I had an email from a reader asking if Facebook met CODE,” writes Chris Mayer.

CODE is the recipe he uses to unearth investment ideas for his Capital & Crisis advisory. “C” stands for “cheap.”

   “And that’s where we can put our pencils down on Facebook,” says Chris. “It ain’t cheap.”

“At a $100 billion market cap,” he adds, “Facebook trades for 25 times sales.” To say nothing of 100 times earnings.

And if that’s not convincing enough, Chris passes along this intriguing valuation metric from famed value investor and Vancouver veteran Vitaliy Katsenelson:

“Let’s say Facebook investors want to receive 15% a year over the next five years. In that case, Facebook’s market capitalization has to double in five years, to $200 billion. Conveniently, $200 billion happens to be Google’s valuation today.”

“Since both companies are in the advertising business and have very similar cost structures, all Facebook has to do over the next five years is achieve Google’s current sales level, which is a meager $40 billion (for purposes of this discussion, we’ll ignore Google’s $40 billion pile of cash, or about $100 a share, compared with Facebook’s few billion, though that would only further make my point here).”

FB’s revenue last year? $3.6 billion.

   “Anyone who clicks on a ‘Like’ button is counted as a monthly user,” adds Vancouver stalwart Barry Ritholtz, poking a few holes of his own in the Facebook case, “making that 900 million monthly user number grossly exaggerated.”

Three more points from Mr. Ritholtz:

  • “Facebook does a very poor job monetizing users, getting a mere $5, versus $30 for Google and $144 for Netflix”
  • “Enormous questions exist as to the efficacy of advertising on Facebook”
  • “Facebook mobile offerings have even more limited engagement than Web-based.”

That is, you can’t slap as many ads on the display of a mobile device as you can on a computer screen. And a user looking at Facebook on a phone while sitting with friends at a restaurant is less likely to buy something than someone at home looking at a computer screen.

   “When it comes to trading IPOs, you simply avoid them—at least during the formative early weeks and months,” says Greg Guenthner, tackling the matter from a technician’s view.

“A single candle can’t possibly tell this stock’s entire story. You need to allow the name to develop a trend. One day—or even one week—simply doesn’t cut it.”

“We might see an opportunity once the chart has a chance to develop. But realistically, Facebook is a crowded trade that could very well be susceptible to sharp price swings. It’s on our list of stocks to avoid for the time being.”

   “Many FB insiders,” adds Chris Mayer, “are also selling about half their holdings.”

“Which brings to mind my general maxim on IPOs: insiders selling what they no longer want at prices they’d never pay.”

Besides, we see far more interesting things going on today with some of Facebook’s earliest investors.

   “I’m not a tax expert,” says co-founder Eduardo Saverin, speaking up for the first time since news got out a week ago that he surrendered his U.S. citizenship.

“We complied with all the known laws. There was an exit tax.”

Indeed, there was, the simpering of Sens. Chuck Schumer and Bob Casey yesterday notwithstanding. The “exit tax” became law in 2008. “The instant you surrender your citizenship,” Addison explained last year in Apogee Advisory, “you are subject to capital gains taxes on the appreciated value of everything you own — as if you sold it.”

Saverin’s Facebook stake, as of today, is worth about $3 billion. Long term, forking over the exit tax now and taking a Singapore passport might work out to be a better deal than the 35% or more in estate taxes his heirs would fork over when he dies.

But “this had nothing to do with taxes,” says Saverin. “I was born in Brazil; I was an American citizen for about 10 years. I thought of myself as a global citizen.”

We don’t much care whether his motive was taxes or otherwise. Not so for the aforementioned senators, who propose a 30% capital gains tax on expatriates’ future U.S.-based investments.

“One might think that, if the senators were so upset with Saverin, as they piously claim, they would take down their own Facebook pages,” wrote The Daily Reckoning’s Joel Bowman yesterday. “Since they have not, we encourage fellow Reckoners to swing by and leave them a warm and fuzzy message.”

Indeed, one bold reader linked to Joel’s piece on Sen. Schumer’s Facebook page.

[Ed. note: Have you friended Addison on Facebook yet? His brand-new page is up and running. Give it a look and connect now. And grab your free copy of The Little Book of the Shrinking Dollar at this link.]

   Meanwhile, one of Facebook’s earliest investors is a step or two closer to implementing his own version of expatriation.

Peter Thiel’s concept for a floating country now has a name: Blueseed.

Billed as “Silicon Valley’s visa-free offshore startup community,” Thiel and collaborator Patri Friedman (Milton’s grandson) plan to convert a cruise ship or remodel a barge and park it off the coast of San Francisco.

That would allow international entrepreneurs to get close to the Silicon Valley startup scene without jumping through the hoops of getting a work visa:

Well, it’ll look something like this (artist’s rendering from Blueseed).

Some 100 international tech companies are already on board. “Blueseed hopes to have room for around 1,000 inhabitants in the live/work cruise ship of their dreams,” according to SFist, “with all-inclusive rent estimated at about $1,200-3,000 per month.”

Blueseed’s website has an amusing FAQ: On the subject of seasickness, it says, “Given the shape and size of the Blueseed vessel, and the ocean conditions at our mooring spot, it is very unlikely that seasickness will be a concern.”

Ditto for pirates: “They don’t exist near California to begin with, and they have much better targets (cargo ships, for instance, with little personnel and a lot of cargo already packaged for resale).”

   The Facebook chatter has largely overshadowed the fact this will be the second week in a row in which major U.S. indexes will log “their worst week all year.”

As of this writing, the Dow and the S&P are negligibly in the red after yesterday’s big losses. The S&P has a tenuous hold on 1,300.

The stomach-churning volatility has delivered steady-Eddie returns to readers of Options Hotline. They’ve had the chance to bag the following gains as of midday today…

  • 343% in less than two months on a falling Nasdaq index
  • 167% in a little over a month on stumbling small caps
  • 166% in less than two months on a tumbling tech giant
  • 125% in a week and a half on flailing financials.

So far in 2012, editor Steve Sarnoff has delivered five potentially money-doubling plays. That works out to an average of one every month. What’s more, he’s delivered those 100%-or-better plays an average of once a month for over 12 years.

For the next 72 hours, you can access Steve’s trading guidance at half off the regular fee.

   After a big jump yesterday, gold is taking a small leap upward today. At last check, the spot price is $1,589 — a $50 improvement in 48 hours.

Silver, after touching $29 in overnight trading, is at $28.67.

   “I like to see evidence for everything,” declares the inimitable Doug Casey, weighing in on the question of whether the gold and silver markets are manipulated.

“I’m completely willing to believe central bankers are capable of any kind of nefarious foolishness, but I’d like to see proof. I’m constantly reading assertions of how ‘the boys’ come along at ‘precisely’ 1 p.m. or 2 p.m. or perhaps ‘precisely’ 11:37 a.m. or 12:16 p.m. and, on a purely not-for-profit basis, decide to ‘smack down’ the market for gold or silver or both.”

“Meanwhile, the market has been hitting new highs for a dozen years.”

“I know most of the believers in the precious metals manipulation theories personally and am only a phone call or email away from those I don’t know. And I’m curious. So I ask questions of these folks, who are generally intelligent, well informed and sophisticated. But I don’t get answers that I find make sense.”

Among those questions: What’s it matter to JPMorgan Chase and other banks what the metals prices are? “The only reason that makes any sense,” says Mr. Casey, “is that they are acting as proxies for the U.S. Treasury; the Treasury doesn’t go into the markets itself. But does it direct a commercial bank to act for it to buy or sell gold? It might. But there’s zero proof of any sort it’s doing that.”

“These banks have no dog in the fight; they couldn’t care less what the metals prices are and have no reason to try manipulating the market.”

“I advise readers to buy gold — even at current levels — but I’d like to see them do it for the right reasons,” Doug concludes. “And it seems to me the arguments about gold manipulation are more redolent of religious belief than economic reasoning.”

Ooh boy, we sense the ol’ inbox filling up over the weekend. But we’d expect nothing less from Mr. Casey than to stir the pot. It’s why we invite him back every year for the Agora Financial Investment Symposium.

Same goes for the aforementioned Barry Ritholtz. Dr. Marc Faber will make a return engagement this year, and historian Niall Ferguson will join us for the first time. You’ll be peppered with ticker symbols all week, along with unique investing ideas you can’t buy on any exchange.

Seats are filling up quickly. Last year, we were full up by the end of May, so if you’re thinking of joining us, it’s a good idea to move now.

   The greenback is about where it was 24 hours ago, the dollar index at 81.3. The euro has settled back to $1.271, while the yen is at 79.13.

Looks as if Abe Cofnas’ “mock trade” of the week won’t work out; he was swinging for the fences with a play that counted on the yen moving past 80.25 by today’s close.

Still, he’s 9 for 12 on these demonstration trades here in the The 5

   “I recently noticed,” a reader writes, “that a small (under $100) balance in a Bank of America savings account, which has earned me a dollar or so per year interest for many years, had started dwindling rapidly… at the rate of $5 per month.”

“Simple calculations showed me that in a few more months’ time, my savings account balance would be zero. After that… negative. Bank of America, whom I trusted to keep my (admittedly small) savings safe and sound… was unabashedly and systematically taking my money from me, in the form of a recently introduced monthly service-maintenance fee. It seemed that in a few short months, I might actually start to owe Bank of America an every increasing sum… to store and protect my (by then reduced to zero) savings account balance!”

“I telephoned Bank of America, and a helpful customer service representative offered to… and had the authority to… pay back into my pillaged savings account all the money (something like $25) that had previously been vacuumed out. This restoration process was so quick and easy that I suspect I was not the first and only person to complain about being robbed in plain daylight, by my friendly bank.”

“At this point, I can only wonder how many millions of small savings accounts are being brazenly plundered in this way… right now… as I write. Because there are so many small savings accounts extant, the total take on this new kind of reverse bank robbery might be surprisingly large.”

“Let’s see… $60 per year… times 1 million accounts… hmmm… $60 million dollars. That’s not too bad for a bank robbery. Needless to say, goodbye, Bank of America… and hello credit union!”

“Keep the fun stuff coming, 5! I love ya.”

The 5: Once again, it’s the law of unintended consequences in action. New regulations on overdraft fees in checking accounts? The bank will make up for it by nickel-and-diming small savings accounts.

   “Does that swirlogram,” a reader inquires after yesterday’s episode, “look a lot like empires going down the drain, or is that my imagination?”

   “The swirlogram,” adds another, “is the visual interpretation of the beginning of the flushing the economy down the toilet.”

“Hold your noses! Hold your breath! Hold on tight!”

The 5: If it’s one of the government-mandated low-flush toilets, maybe it won’t be so bad…

Have a good weekend,

Dave Gonigam
The 5 Min. Forecast

P.S. “Uncertainty rules in 2012,” says Ray Blanco of our tech team. “The markets lack direction. The political atmosphere is a mess.”

But you already know that. Ray is focused on the things he’s certain about: “What we know today is the Internet is about to take a quantum jump forward. The ripple effects promise to create vast fortunes. From consumer products, medical advances, even new planets.”

Ray’s latest research has unearthed six discoveries that will change the way we live… and perhaps make you very wealthy. See his latest report here.


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