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Commentary on The Capital Markets- Category [Market Musings]

This is no longer "just" a profit recession, you see.

Nor is it "just" a commodity recession.

Nor is it "just" a transportation recession, although that one ought to get your attention, and fast.

No, it's also in industrial machinery and, well, pretty-much everything else, with few exceptions.  Even retail sales are getting hammered.

How do you square where the market is with this economic fact and outlook?

You don't.

One of the two is wrong, and that one will move (and probably quite rapidly) to match the other.

PS: I've seen this movie before, and so have you.  Topping pattern, swoon, attempt to break out above old highs fails on false, pumped media hype and hope, and then........


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Ok, analysis time.

Facebook is currently selling at a 110 P/E and 20x sales.

Many people point to the firm's "large" profit margin.  That's false; the firm has a margin of about 19%.

The usual mantra is that "it'll be fine because the company should earn $4/share in 2017."

Ok, let's analyze that.

First, there's a huge problem with that assumption -- the current year earnings are $2/share, so that's a double.  To do that it has to manage to pull off a ~40% EPS improvement in each of the next two years.

Assuming operating margins remain more-or-less constant this means revenues have to double, and that in turn means users do too, or something close to it.


No, and here's why -- the company already has the majority of Internet users on the system.  There is no additional reservoir to tap.  This, in turn means that user acquisition must slow -- remember, you're not looking forward one year here to get your "reasonable" figure, you're looking forward two years, and if you do get there the stock still sells for 50x earnings and 10x sales.

For it to be worth that it would have to be expanding at roughly 50% annually on an indefinite forward basis in 2017, but by then more than the entire current Internet user base would be on the platform.

In other words it's not going to happen and the analysts know it -- it's basic arithmetic.

Therefore, the current price is unsupportable -- period -- because we live on a finite rock with a finite population and therefore a finite opportunity, and Facebook, even if nothing goes wrong with the story, is already near full penetration of the available opportunity!

There's nowhere to go here folks but down, although the idiocy of the analysts and you lapping it up may well drive it materially higher before this is figured out.

However, the arithmetic always wins, and when it does the haircut is going to be really aggressive; a saturated market is perhaps worth 12x actual earnings, not 100x.

You do the math on where that puts the share price.

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The Naz is being notably amusing today.

Facebook, Amazon, Tesla and Netflix are all up big, as is Bidu.

A few other things are up marginally.

Everything else is down hard.  With the exception of Amazon, Netflix and Tesla (all "consumer discretionary" according to the classifications) the group is a disaster.  Consumer Staples, Industrials, materials and Health care are a blowup, not blow-out.  IT is up only because five firms are the bulk of the group; Google (twice since there are two listings) Facebook, BIDU and Ebay, all of which are green.  The rest are mixed.

The S&P is pretty ugly too.

Own one of the high-flyers?  You're ok for today.  Don't and you're red.

This is exactly like the "Four Horsemen" of 2007 and we know how that ended.

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