There has been a lot of hubbub surrounding the recent announcement that Facebook is looking to raise equity through a deal with Goldman Sachs. If you haven’t heard, Goldman Sachs is helping Facebook raise $1.5 Billion in additional equity through the private markets. All of their equity is totally private, so you’d assume that most of the shareholders are employees and very wealthy individuals with ties to the company or a good wealth manager.

Quick Lesson: Equity and Debt are the two ways that a company can get capital (cash). Debt comes with terms like a set maturity time and interest rates… equity, on the other hand, allows people to simply invest in a company and in return own a portion of profits into the future! In general, debt is cheaper than equity, but carries a higher liability and adds risk to the balance sheet.

Many newswires are reporting stories that would lead you to believe that this move is indicative of an upcoming Initial Public Offering (IPO) — in other words, trading with a ticker symbol on the open stock market where anyone can buy/sell their equity. For some examples, see: “Is Facebook’s IPO coming sooner than expected?“; “Will Facebook Succumb To IPO Pressure?“; and ”The Facebook IPO Is Proof That Everything Is Being Reinvented“. To the contrary, I believe that this move is actually one in which Goldman Sachs is behaving as the white knight… bailing Facebook out of the need to go public with their numbers.

Why An IPO Ain’t Comin’!

For Facebook, the thought of being a publicly-traded company runs contrary to the “cool” factor that has made it such a success. The new age of tech startups is a lot different than the prior era where firms couldn’t wait to get themselves public with free access to capital on the open market. There are several disadvantages to being public nowadays, and Facebook is (supposedly) far from a mature company, so the general consensus is better private than public.

Unfortunately, once Facebook has 500 private shareholders, the SEC regulates that all of their financials must be made transparent. For Mark Zuckerberg, this spells trouble because private equity is one of the company’s most sought after forms of compensation. The beauty behind this deal is that Goldman will invest around $1.5 billion into the company… but won’t add more than one shareholder if all goes according to plan. Here’s how it works: 1) Goldman Sachs goes out to its clients and offers the chance to invest in Facebook; 2) Goldman Sachs pools all of the money that it has received interest for; 3) Goldman Sachs invests the collective sum on its investors behalf… but it is only technically counted as ONE investor! Pretty smooth, eh? It is almost like a syndicated loan — a “special purpose vehicle (SPV)” by definition.

To me, this move by Zuckerberg and Facebook is one that says “hey, we need cash… but we really don’t want to go public.” In no way to me does this say “giddy up, lets go public baby!”

So contrary to public belief, I see Goldman Sachs actually stepping in to save Facebook the need to “sell out” by becoming openly traded. There is already a bit of undeserved outrage from Facebook users in groups like “Keep your dirty hands off my FB“, but hey… we’ll see how it works out for the company. Only problem is: how long can Facebook feasibly wait until investor pressures to execute an IPO get the best of them?

Stay bullish.
-Jimvesting.com

Many financial research analysts make their predictions every year about what they think the economy will do. As a word of warning, it is nearly IMPOSSIBLE to nail these things, and any advice that you read here should be taken with a grain of salt. My portfolio has now outpaced the market (S&P 500 is my benchmark) by a considerable amount 3 years running, and I’d like to hope the success continues.

Jimvesting.com’s Year-Opening Trades

This year, I am betting on a solid market that favors late-cyclical companies… meaning stocks that benefit once a recovery is in place and businesses start outlaying capital with increased confidence. We’re talking certain industrials, materials and energy stocks for the most part.

My biggest bet so far is one of the biggest basic materials companies, specializing in aluminum and other metals. Naturally, I’m talking about the bellwether Alcoa (AA), which I purchased at $15.20 on December 31st, 2010. I love this company going forward as their product is heavily involved in late-cycle industries like construction and automotives, and management has just begun to turn bullish after having big negative numbers throughout the recession. They still trade very cheap at 15 times forward earnings, and I’m up almost 9% on the trade in a matter of two days.

My second trade was into an oil services company called Weatherford International (WFT). I think the oil services space is ready to roar in 2011 after being held back too long from the BHP oil spill many months ago. Weatherford is healthier than a Baker Hughes or a Schlumberger and have seen a lesser stock price appreciation over the past few months. I bought in also on December 31st at a price just north of $22/share… flat on the trade thus far but I am optimistic with oil expected to tear up toward $100 by year end.

Five Contrarian Market Predictions for 2011

A “contrarian” pick is one that the market isn’t expecting. This means if you happen to bet big, you win big… but if you are wrong, you probably won’t lose that much because nobody thought it’d happen anyway, eh? I like to bet against the market when I think that there is an opportunity to see reversion, and if I had to take a few shots… I’d go with the following:

1. The S&P 500 Index Will Climb More Than 15% on the Year
Businesses are flush with cash and ready to expand. Many of the economic indicators like ISM Manufacturing are headed in the right direction. Investors are (finally) hopping out of the bond market and the global environment is slowly stabilizing. Commodities are moving higher as the dollar stays suppressed which encourages exports. Finally, the Standard and Poor’s Price/Earnings (P/E) ratio is still on the lower end of historical averages and is well below recession-recovery levels we’ve learned to trust in the past. THERE ARE STILL HEADWINDS… but I think the positives are going ignored and investors nowadays love to be bearish. The average expectation right now is around 10% appreciation on the markets, and I love a better than expected result.

2. Chinese Inflation Stays Under Control
Yes, China has a booming economy and has had to raise interest rates two times over the past few months to fight it. Many investors assume that with commodity growth getting out of hand, and a housing oversupply potentially creating a bubble, they are doomed to see hyperinflation. I believe differently, and think that the decentralized command economy may actually be better suited to handle the rush of inflation than a capitalist regime. They are certainly being aggressive so far as they try to control drastic price movements, I think it could be just what the doctor ordered.

3. U.S. Federal Reserve Raises Rates Before Year End
Yep, I said it. I haven’t seen anyone talking about the United States Federal Reserve actually (*gasp*) RAISING the federal funds borrowing rate this year. If we learned anything from the post-IT bubble crash, it is that you simply have to take the punch bowl away when people are clamoring for cheaper borrowing rates. The makeup of the Federal Open Market Committee should change in favor of those more hawkish (a.k.a. aggressive against inflation) in January, and I believe this along with a good stock market will create an environment where we might see a rate hike later on this year.

4. Gold Ends the Year Flat
Gold, gold, gold… everybody wants to buy the stuff. I say the metal is finally at a point where it is fairly valued, and investors will start to shift out of the protective portfolio stance of owning gold once gains begin to be realized in the equity markets on lower volatility. I don’t think gold will close lower, but all the big managers are recommending to stock up on the good stuff and I think it’s gone too far. The GLD has been the best performing ETF for a long time running, but I say you need to own something with intrinsic value. Can gold really go 20% higher without rampant hyperinflation or another depression? There’s not much left in the tank in my mind.

5. Unemployment Breaks Back Above 10%
Sorry to say, but I think the problems in the municipal market will blow up in our faces in 2011. I do not think that this will come in the form of utter bankruptcy, rather… I see a soft landing as states are forced to drastically cut costs and end up surviving. However, you know what happens when we cut costs — layoffs. Government jobs were a big part of the recovery, and I think they lead us in the opposite direction in 2011.

So there we go, five out-of-favor predictions for the market in 2011. We will revisit this at the end of the year to see what hit and what missed. Please remember that nothing in this article should be thought of as investment advice, as I am not a licensed financial advisor. If you are looking to invest on your own and aren’t set up, I use ThinkOrSwim as my stock brokerage.

Stay bullish my friends.
-Jimvesting

Back in April of 2010, popular MMO blogger John Chow and myself got into a debate over where you should trade Apple (NYSE: AAPL) on the markets. This was the Monday following the initial release of the infamous Apple iPad, which reportedly sold a few hundred thousand units. I bet that the direction of Apple would actually be LOWER on Monday, despite a great headline number — John disagreed, citing a good response to the new product launch. The result? Apple traded higher on Monday, April 5th by 1.07%.

Why John Chow was the winner

As soon as the day closed, John and I got to talking:

Now, while the stock of Apple was up on the day, my verdict was that I was in fact the winner because they underperformed the market. Perhaps John and I come from two different schools of thought, but I really don’t care how awesome my stocks are doing if they are underperforming the market. On the day, Apple underperformed the technology benchmark slightly… so I took this as to say if there was zero news, Apple would have been up more. Why do I put more weight on relative performance versus nominal performance? Any investor can just dump their money in a large index fund and do fine… there is no point in owning Apple and trying to pick stocks if you are underperforming the broader basket of stocks.

Regardless, I read what I said… and because I didn’t mention relative performance I am writing this review as payment for a lost bet. As it happens, John was absolutely correct about Apple’s stock! Looking over the past few months, Apple has actually outperformed the S&P 500 Index by roughly 15% and has been one of the best performing companies in the markets. Was this due to strong iPad sales? That is too much for me to extrapolate — but the news now is that Apple valued higher than Microsoft!

Is Apple Overvalued Here? Was John Chow Just “Lucky?”

It remains my contention that John was the fortunate benefactor of random upward momentum in Apple’s stock. The reason that he expected the stock to trade up was that the iPad sold a lot of units. Despite how many units they sold (which was actually in-line with expectations), it is important to look at how the stock market actually works. Naturally, everyone and their grandmother knows that Apple is “sexy” and that people like their products. The problem here is that investors aren’t dumb — positive sentiment is already factored in.

Apple is a great growth company, but I absolutely hate putting cash to work in stocks that are positively viewed by the market. Why? Think about upside and downside. Assuming that market movements are relatively unpredictable, which I think most of us would agree to, stocks that are “good” will not move up on positive news (they are already assumed to be good) but will get slaughtered on bad news (nobody expects a company like Apple to issue a product recall). On the other hand, stocks that are frowned upon now will do awesome on any piece of good news, while bad news is largely ignored because the company is already seen as being of lower quality so they won’t do too bad.

Looking at the performance of Apple, it is common for stocks to trade up on the expectation and sell on the news — in fact, so popular it is an axiom. This is why Apple always gets killed the day after they release good earnings: they might have been good but everyone saw it coming. The market sees forward 6 months, so trying to profit off of news like the iPad is insane difficult. Did John Chow get lucky? I don’t think so — he knows a lot more about the tech space than me and probably has additional insight into Apple’s products. However, I would think that over the short term my track record would be better. John won this round.

A Smarter Investment Strategy That Makes Sense:
At the very least, I think that it is psychotic that Apple is valued higher than Microsoft… and would embark on a long-term “short Apple, long Microsoft” strategy for investing. This will capture any outperformance of Microsoft in a market-neutral way. My prediction is that growth in Apple will inevitably slow down, no matter how good you think they are. People are currently willing to pay more than 22 times the amount of Apple’s current earnings to own shares (what we call a “P/E ratio”), whereas Microsoft is getting less than 14 times. However, Microsoft generates cash like nobody’s business ($21B last year), and Apple isn’t even close to that good ($12B last year). Stock value is all about cash flow that the business is experiencing. Despite the fact that Apple might gain more cash flow per year over time, they would have to surpass Microsoft’s $21B number in around 6-7 years in order to end up more profitable into perpetuity. To this, I say “fat chance.” In fact, if both companies held their current cash generation rates, Microsoft is worth twice as much as Apple.

My Gift to John Chow

For John’s birthday, and for winning our little bet, I compiled a completely customized portfolio strategy report for him and sent him it in the mail, along with a copy of one of the best investing books out there — “One Up On Wall Street” by Peter Lynch, one of the greatest investors in history. I put some effort into developing this report, and it recommended a portfolio allocation to John based on two things: 1) his personal investment profile (as a technology lover); 2) the market conditions. I recommended weighting his stock portfolio in a certain manner that I feel will outperform the markets, and recommended stocks that I felt are underpriced and worth investing in. I don’t want to reveal the actual report, which was around 5 pages and professionally printed, but here is a screenshot:

The Proof Is In The Pudding

I issue an unofficial email newsletter to friends and family that want stock picks and pans when I see the opportunity. I run what I call “Jim’s Value-Growth Portfolio” privately through ThinkOrSwim.com (my broker). My portfolio to date is actually up a considerable amount — despite the fact that the market is down. I do not short stocks in it, so anyone can get invested and feel comfortable.

The last date I updated my performance was May 2th: My portfolio is up 9.31% and the S&P500 is down 2.64%, an outperformance of about 12%. Here is a chart of my investments versus the market:

To me, it’s all about timing the market and investing in the right industries when it is most prudent — this is why John Chow’s strategy of investing in companies that have a new product that he thinks is cool, is basically heresy to me. And hey, when John wrote “ Oh crap! That was wild market ride! I hoped you picked up some nice stock bargains! I did!” on May 6th, I recommended staying on the sidelines and the broad market is down over 6% since then.

Bottom Line: John Chow won this round of stock picking in the tech space, but I’d still give myself the edge on the broad market. At any rate, I figured this would be a chance to get a few good jabs in on the man. Congratulations John, you’ve proven your mettle in IT stocks.

-Jimvesting Dot Com

Recently I made an upgrade to the header on my blog, and it was a BIG update at that! Not only did I enhance the looks of the most-viewed area of my blog, but I added a newsletter opt-in box which could potentially boost my subscribers tremendously.

But was my excitement premature!?

One of my readers, Rob from myTTOOS.com, pointed out the following:

Rob: “Really cool, but i bet it will be overseen a lot = bad conversion. Let us know if i am right.”

Jim: “Could be true… but then again I am not trying to spam people like typical marketers, haha”

Rob: “at least put the focus on the chalk board, put a few blinking stars around it or something lol”

Though it sounded silly at first, I started thinking about just how right he was! While I was all concerned with making the new opt-in newsletter box look at good as possible… I made it flow TOO WELL! Therefore, I needed a little something to get people to notice it (though I won’t be putting blinking stars on my header anytime soon, haha). So what did I do? I added a big ol’ floating arrow! Read the rest of this entry »

We’ve got a special today, a sale of one of the websites I am part-owner of!

BullishBankers.com is an established and popular financial research community with a strong subscriber base and pull in the industry. Recently, we had ceased to operate the site as of May 2009… so there has been a period of about 6 months where there has been nothing done to the site. HOWEVER, we believe that despite the recent activity, it will be very easy to revitalize the website and should make for an attractive buying point for any interested buyer.

There are many reasons to consider the website, including (but not limited to):

• Fully customized website, based on WordPress, that has integrated features and custom coding for a financial audience
• vBulletin-based forum, including license, that is custom-skinned to match
• Twitter account (@bullishbankers) with almost 4,000 followers
• Average 37,500 uniques/month (during normal operations, July ’08-May ’09)
• Averaged $700/month, with a peak monthly earnings close to $1,200/month
• Quality partnerships, including theStreet.com, Seeking Alpha and Morningstar
• RSS feed with over 1,750 daily readers
• Aweber newsletter with almost 1,500 subscribers Read the rest of this entry »