The BillyB, Aster & JR8 roundtable!

[sundaymorningstaple]

Would you prefer to have to wade through all that crap & the PS threads in the General Forum?

[JR8]

This makes for a jolly read!


====================================
What happens when Greece defaults

'It is when, not if. Financial markets merely aren’t sure whether it’ll be tomorrow, a month’s time, a year’s time, or two years’ time (it won’t be longer than that). Given that the ECB has played the “final card”

[Strong Eagle]

^^^^^^

I don't see how it can be any different. Greece must balance its labor costs against its labor productivity. The plan proposed by the IMF and others takes at least a decade to work, if at all, and with great pain for all. Argentina was right to tell the IMF to FOAD.

Things could turn out a bit differently, if the conversion to the 'new drachma' was about the first implementation. First thing that happens is conversion to a new coin of the realm... at one to one for the Euro.

a) Greek banks receive an infusion of 'printed drachmas', one way to ensure devaluation, and another way to prop up Greek banks.

b) Forbid foreign withdrawals and early foreclosure of notes as Malaysia did. Put as much pain in devaluation onto foreign investors as possible. Make sure foreigners cannot withdraw investments, cash, bonds, notes to prevent a further destabilization of the economy.

Greece gets to be an economic pariah for about 2 years. Then, reduced labor costs start making it an attractive place for labor intensive work. Greek standard of living is reduced, mostly by increased cost of imports but not nearly so much as would happen if IMF economic policy were implemented.

IMF has got it wrong with Ireland, too... save the banks at the expense of everyone else. Bullsh*t! This is nothing more than privatization of gains and socialization of losses.

[BillyB]

As a slight shift, did you see the LinkedIn IPO this week? GS have already dumped all their holdings. With a wave of upcoming IPO's, is there a social networking bubble on the horizon? Damn right there is!!

[JR8]

Good points SE. The measures that you describe remind me in parts of what Iceland did (excl. having a new currency).

Further on in the article it describes the French and German banks exposure to Greek debt. It even suggests the ECB are so exposed that they will go insolvent and will have to be recapitalised! Heavens above!

The trouble is that the euro is a core symbol of a politically thriving EU. If the euro implodes it could quite possibly bring down the entire EU. The EU is a guaranteed unaccountable tax-free job for life for even the most dismal of failed national politicians (Kinnock, Mandelson etc), so you can bet your last euro that the politicians are going to do everything possible to prop it up. An extreme example of how expensive self-interest and vanity can be?

Oh and on Friday Fitch downgraded Greek sovereign debt three notches to B+, because Greece are not implementing austerity measures fast enough. Yields on 10yr Greek debt is now at a record c.16%! Greece cannot afford to finance at that rate, to survive it will need rolling-'bailouts' for ever on. So... default is inevitable. I'd be interested to see a graph of the maturity profile of their outstanding debt.

BB yes I read about the valuation and it sounds mad, I don't know what LI does to generate sufficient revenues to justify that. I recently also read an article re: the valuation of Facebook... the supposed 'new paradigm' of it is all eye-poppingly reminiscent of the dot-com era...

[BillyB]

Good points SE. The measures that you describe remind me in parts of what Iceland did (excl. having a new currency).

Further on in the article it describes the French and German banks exposure to Greek debt. It even suggests the ECB are so exposed that they will go insolvent and will have to be recapitalised! Heavens above!

The trouble is that the euro is a core symbol of a politically thriving EU. If the euro implodes it could quite possibly bring down the entire EU. The EU is a guaranteed unaccountable tax-free job for life for even the most dismal of failed national politicians (Kinnock, Mandelson etc), so you can bet your last euro that the politicians are going to do everything possible to prop it up. An extreme example of how expensive self-interest and vanity can be?

Oh and on Friday Fitch downgraded Greek sovereign debt three notches to B+, because Greece are not implementing austerity measures fast enough. Yields on 10yr Greek debt is now at a record c.16%! Greece cannot afford to finance at that rate, to survive it will need rolling-'bailouts' for ever on. So... default is inevitable. I'd be interested to see a graph of the maturity profile of their outstanding debt.

BB yes I read about the valuation and it sounds mad, I don't know what LI does to generate sufficient revenues to justify that. I recently also read an article re: the valuation of Facebook... the supposed 'new paradigm' of it is all eye-poppingly reminiscent of the dot-com era...

I would have thought these bailouts would have provided Germany, amongst others, with a nice little income off the loan interest? And perhaps a greater interest in their own bonds?

Greece and all the other Euro members knew the benefits when they joined. Most of them enjoyed money being thrown at them to finance their deficits and start blubbering when it comes back to bite them in the arse. Throw someone enough rope and they will hang themselves.

The Euro problems seem to be attracting much media attention and increased prominence in the commentary, which is a tad worrying when Countries like Spain are relying on 'hush hush' sentiment to calm the negativity. The infection of so much social media that has instant global reach, means that hysteria can spread quite quickly and induce false panic.

Although, I shouldn't bite the hand that feeds me and, on another side note, I have been laughing at these sex stories about Strauss-Khan and Ryan Giggs that have been doing the rounds this week!!

[aster]

IMF has got it wrong with Ireland, too... save the banks at the expense of everyone else. Bullsh*t! This is nothing more than privatization of gains and socialization of losses.

Yeah, I can't see why a country would sacrifice itself to save a banking sector run by morons.

When you sit in a Boat Quay pub just after working hours enjoying your pint of freshly-poured Tiger/Guinness/etc., keep in mind that the taxes collected from the person who poured that beer have probably contributed to the salary/bonuses of the numerous pricks around you who just strolled out of their Raffles Place offices.

[aster]

As a slight shift, did you see the LinkedIn IPO this week? GS have already dumped all their holdings. With a wave of upcoming IPO's, is there a social networking bubble on the horizon? Damn right there is!!

Seriously, have GS offloaded everything? Doesn't that mean that the only way is... down?

[JR8]

I would have thought these bailouts would have provided Germany, amongst others, with a nice little income off the loan interest? And perhaps a greater interest in their own bonds?

The downside being the small matter of the 50% MTM loss on the principle.

Greece and all the other Euro members knew the benefits when they joined. Most of them enjoyed money being thrown at them to finance their deficits and start blubbering when it comes back to bite them in the arse. Throw someone enough rope and they will hang themselves.

re: rope, agreed. Question is WTF did the core of the EU (Germany France, Lux etc) dream of letting Greece into the euro on the terms that it did? It was nothing short of suicidal. Perhaps literally. And now the citizens are being royally shafted for this extraordinary politician’s misjudgement.

The Euro problems seem to be attracting much media attention and increased prominence in the commentary, which is a tad worrying when Countries like Spain are relying on 'hush hush' sentiment to calm the negativity.

Cute isn’t it. Spain are like the character in a film standing behind the curtains hoping to not be noticed while death stalks the room. Trouble is that ploy doesn’t usually work in the real world of the financial markets.[color]

The infection of so much social media that has instant global reach, means that hysteria can spread quite quickly and induce false panic.

True. But if I were holding PIGS debt I think I’d be panicking by now!

Although, I shouldn't bite the hand that feeds me and, on another side note, I have been laughing at these sex stories about Strauss-Khan and Ryan Giggs that have been doing the rounds this week!!

Read that if FB was valued on the same P/E as LI it would be valued at more than $107bn. Time to pass around the earplugs, something is going to go boom soon I think?
http://www.telegraph.co.uk/finance/news ... ubble.html

[aster]

This makes for a jolly read!

...

"Attention will turn to the British banks. Then we shall see…"

What exactly do they mean by this closing remark?

[BillyB]

I would have thought these bailouts would have provided Germany, amongst others, with a nice little income off the loan interest? And perhaps a greater interest in their own bonds?

The downside being the small matter of the 50% MTM loss on the principle.

Greece and all the other Euro members knew the benefits when they joined. Most of them enjoyed money being thrown at them to finance their deficits and start blubbering when it comes back to bite them in the arse. Throw someone enough rope and they will hang themselves.

re: rope, agreed. Question is WTF did the core of the EU (Germany France, Lux etc) dream of letting Greece into the euro on the terms that it did? It was nothing short of suicidal. Perhaps literally. And now the citizens are being royally shafted for this extraordinary politician’s misjudgement.

The Euro problems seem to be attracting much media attention and increased prominence in the commentary, which is a tad worrying when Countries like Spain are relying on 'hush hush' sentiment to calm the negativity.

Cute isn’t it. Spain are like the character in a film standing behind the curtains hoping to not be noticed while death stalks the room. Trouble is that ploy doesn’t usually work in the real world of the financial markets.[color]

The infection of so much social media that has instant global reach, means that hysteria can spread quite quickly and induce false panic.

True. But if I were holding PIGS debt I think I’d be panicking by now!

Although, I shouldn't bite the hand that feeds me and, on another side note, I have been laughing at these sex stories about Strauss-Khan and Ryan Giggs that have been doing the rounds this week!!

Read that if FB was valued on the same P/E as LI it would be valued at more than $107bn. Time to pass around the earplugs, something is going to go boom soon I think?
http://www.telegraph.co.uk/finance/news ... ubble.html

Regarding the last point. It's amazing where these valuations come from many of the SN companies when you look at S/EV sales to enterprise value. There is a huge amount of intangible value and sentiment towards the 'brand', because the amount of assets each company holds is a tiny % of the overall value.

Facebook - 2bn Revenues against 75bn valuation. LI 300mn (estimate, although it could be as low as 50-100mn. Its not too clear) against 8bn. From a purely fundamental perspective, it means that facebook, with 400mn customers/users, should have an average yearly customer spend of $200. Instead, based on it's current revenue streams of 2bn, it actually has $5 spend per customer. How on earth do you create more value in the product to jack up average customer spend over 4000%? And if you get a fraction of the way, say up to $20 per customer so a 400% increase, does the overall value grow inline with that based on todays ratio? Its absurd.

I think people expect these companies to continually innovate and keep producing the next big thing or acquiring everything cutting edge in their path to push prices to the next breakthrough point. It just isn't feasible or realistic to sustain in the long-term. The likelihood being, LI gets acquired from facebook or google perhaps, that gives them entry with a large customer base into business networking, and entry into the job space advertising respectively.

Only about 10-20% of the total LI shares have been released so far, so prices are inflated. Despite what happened during the dot.com boom and crash, many people are cashing in in the expectation that there will be someone who will take the shares off them at a higher price, and there will be. SN is the latest flavour of the month and there are relatively few companies in this space at the moment that are public, so that again artificially inflates prices and sentiment. When FB goes public, LI will probably fall out of favour etc. and so on and so forth with the next IPO etc.

People seem to have lost all sense of reason yet again, largely based on short-term greed. Although this is more directed to the issuing banks like MS and GS, who aren't interested in the secondary markets as much as the initial IPO's. A nice fee, undervalue the shares - do our institutional clients a favour with undervalued shares that rise rapidly, and position ourselves to be the book runner and create mass value for the upcoming wave of SN IPO's. Again, it resembles the hot potato/ponzi scheme where risk is just passed on and on until things go tits up.

@Aster.
Goldman dumping shares should send out a message that they believe there isn't much more upward value to be had. Maybe some sideways movement for sometime, but not necessarily a downward trend. They've made their killing already and executed their exit strategy without buying into market sentiment of further increases. Thats tells me they have done their diligence and analysis and believe that the LI share price hit and exceeded their internal target price.

It's more of a question as to when this bubble will deflate or pop as to if there is a bubble in my opinion. But there are a few years of 'good times' ahead before we see the the fallout. There will be plenty of winners and losers, and I think those who time their exit strategies will reap the greatest rewards. But will greed defy common sense as usual, I believe so.

[JR8]

BB
it means that facebook, with 400mn customers/users, should have an average yearly customer spend of $200.

Interesting post! One question re: the above, what formula are you using to arrive at average spend of $200?

p.s. I thought they announced FB had 500m customers several months ago. In fact just this week I read an article stating it had 600m. Does anyone know the true figure?

[BillyB]

BB
it means that facebook, with 400mn customers/users, should have an average yearly customer spend of $200.

Interesting post! One question re: the above, what formula are you using to arrive at average spend of $200?

p.s. I thought they announced FB had 500m customers several months ago. In fact just this week I read an article stating it had 600m. Does anyone know the true figure?

Assuming (for arguments sake) a fair valuation of 80bn. Across a 400mn customer base gives revenue per user of $200 to be able to pay the shareholders back. Facebook holds very little in assets and has low costs - servers and IT inventory, and staff wages - but that would be $50-100 mn max.

At the current levels, 400mn users generate 2bn which means ARPU is $5. So to justify the value, the growth needed is staggering. Let's say users increase to 1bn and the value increases less sharply to $100bn. That still means each user is required to generate $100.

To capture anything near this type of aggressive growth, FB needs to do some quite staggering development, innovation, acquisition. To put things in perspective, Apple's growth has been at 60% and Google's 25% over the last 3 years.

[JR8]

This is what I don't get.... the valuation at 1:1 of annual earnings.

Sorry, I'm being thick!

[BillyB]

Sorry, I probably didn't explain too well.

It's a quick and basic breakdown of valuation at a fundamental level on a per user basis. It serves to show the disparity between per user value and the actual average revenue per user to give an indication of intangible value / share buyer stupidity or GS inflating everything for self interest. It's relevant because, at present, there are only private placements taking place and the stock isn't tested in the markets and therefore it's unknown whether it can sustain such numbers.

Think of it as implying that if you were to buy all of facebook's shares for 80bn, would you be prepared to pay such a premium of $200 of value per user, a multiple of 40, against actual revenue per user of $5. From a fundamental perspective, looking at discounted cash flow and NPV, its crazy and requires off the scale growth to support the valuation.
Note that companies in the Telco sector that have paying customers on contract, on acquisition, usually go for multiples of 2-4.

What constitutes this added value and spectacular future growth? I don't know. I guess we'll see once it goes public. One thing I do see is GS trying to keep the price high by making the private placement fund exclusive, but, as always, their self-interest is shining through. Having purchased $450 mn of shares in the fund, they have inserted a number of clauses in the prospectus allowing them to change their holdings without notifying investors and to hedge against FB shares accordingly. Come flotation, they'll be off like a rat up a drainpipe.