How Low Can Facebook Go? Look to Business Books to Tell the Tale

This trusim is something I alluded to in my last blog posting, and for me, this is a fascinating reality: “If it isn’t a book, it isn’t a stock.” Having just celebrated my 30-year anniversary in the business book industry, I certainly have seen my share of “phenomena” books. Electronic day trading was a phenomenon in 1998 before dying a quick death by late 2001. In the early 1980s, in the wake of the stunning success of In Search of Excellence, every publisher and their mother brought a book out with excellence in the title. That worked for a few weeks before that market died.

Unlike a hot topic like electronic day trading, most social media books have been spectacular failures from the start. I don’t even need the Nielsen Bookscan numbers to know that, for I know intuitively┬áthat this genre of business book would die on the vine. How did I know? Because social media books are the classic case of publishers barking up the wrong tree. Publishers have an incredible penchant of publishing the hell out of the wrong topic at the wrong time. Sure, a few social media books did well, but they are the exception, not the rule. While social media is still growing by double-digits in developing nations across the globe, few top tier publishers are bringing out any new books on this topic. Why? Because people who are active on Facebook and Twitter spend hours on these platforms—and no time reading books on the topic. They don’t have to. They know how to access and use these sites so why do they need a book telling them how important it is or how it will influence their lives or society as a whole?

There is also great competition entering the Facebook space: for example, Pinterest, the “online billboard,” is quickly emerging as the next big thing in social media.

This brings us back to the stock market. As I have mentioned before, I have been short Facebook (that is, betting it to go down) since the end of May. I have always believed that there is a dearth of leadership at the $60 billion company, especially in the chief executive’s office. I knew that if publishers could not make a go of social media books, then the biggest company on the block would have a hard time making it as a publicly traded company. The problem isn’t that the customers aren’t there. With nearly a billion users, they have the eyeballs that would make 99 percent of companies salivate. The problem is that they haven’t found a way to monetize their hundreds of millions of users. And when sales can’t keep up with users you have a problem. And when the entire industry is shifting to mobile, a much smaller platform for advertisements, you have an even bigger problem. While I think there is a good chance Facebook will figure it out eventually, it will require time and a kings ransom to get it right. While the firm has money, they don’t have much time. In late 2012 there are far fewer investors out there and more traders than ever. Fewer and fewer people are buying and holding stocks. That means that companies have less time than ever to right the ship. If Facebook can’t get mobile revenues into the multi-billions by say, Q1 2013, I could see the stock sinking into the high single-digits. Single digits? That’s impossible right? Ask Zynga, a firm that, at the time of this writing is trading at $3 per share after hitting a high of just under $16 per share in April of 2012. Or the discount coupon company Groupon (another company I am shorting), which is down almost 80 percent since it went public last November.

The truth is that no one knows what will happen to Facebook stock. But one thing is for sure: as a book category, social media books are likely to go the way of Friendster and MySpace.

Betting Against JP Morgan’s Jamie Dimon

Sunday, July 22nd, 2012: We certainly live in interesting times. Especially if you follow the stock market as closely as I do. I have loved the market since I was 13, and that is a very long time. In all of those years, I have never witnessed a time in which seen so many factors could move the market as I see now. There is everything from the fall of Europe, the weakening of China to the very real possibility that the U.S. will actually fall off the “fiscal cliff.” (That is, the raising of taxes for hundreds of millions of Americans come December 31st unless Congress and the president acts—and how often does Congress actually “act” in a way that helps financial markets?).

In this new tumultuous environment, things can—and do—change very quickly. For example, news came this morning that the IMF (International Monetary Fund) has made the decision to discontinue payments to Greece. While the cable news channels have not picked up on this story at all, this could be a huge event that leads to Greece leaving the Eurozone. No one knows exactly how that will play out, but the chances are that it would be a huge mess as Euros get converted to Drachmas, the value of which would have to be determined. Greece is already in a “depression,” says the newly elected Prime Minister Antonis Samaras (and Spain, Europe’s fourth largest economy, is following in the footsteps of Greece. We know this because their bond yields have risen to the “insolvent” level of 7.2 percent, meaning no one will lend them money).

All of this turmoil has turned me into a different type of investor in two key ways. One, I am now more trader than investor. No more “buy and hold.” Now its buy and watch closely. Also, for the first time, I now short stocks. That is, I bet on certain stocks to go down. Which stocks am I shorting? The first stock I shorted was Facebook. That’s because I live by a rule that lies at the intersection of my work life and investing life: “if it isn’t a book, it isn’t a stock.” What does that mean? Although social media is huge and getting even more popular, people tend NOT to buy books on the topic. They don’t need to. They know how to “friend” someone on Facebook or send a tweet without a book. Sure, a couple of social media books did well, but 90 percent of them were dead on arrival. When Facebook’s IPO came out, I went short on the stock about a week later and have held that position ever since.

But the more interesting stock I shorted next was JP Morgan Chase with its “fortress” balance sheet (that’s how CEO Jamie Dimon characterized his company). After the huge “London Whale” loss was announced a couple of months back, I shorted the stock because of the “cockroach” theory. What’s that? If you see one cockroach in the kitchen you know there has to be more (meaning JP Morgan has more problems than the one bad trade). However, I didn’t stop at JP Morgan. Because of the recession sweeping across Europe (and on to our shores next, I predict), I shorted most of the big banks including Bank of America, Morgan Stanley, Citigroup, and Credit Suisse. I figured that the banks would be hit the hardest if the bottom fell out of our economy. I have only added to those positions since.

But it is important to put things in perspective. Perhaps 75% of our savings are in stocks (in long positions), bonds and cash. Only a quarter of the whole are in short positions, and even in that account I am long my favorite stock, which are eBay and Pfizer (among others). I think of my short portfolio as a hedge against an “end-of-the-world” scenario.

But back to JP Morgan Chase. Last Friday it was announced that CEO Jamie Dimon and his wife purchased 500,000 shares of JP Morgan stock on Thursday and Friday. That means that I was adding to my short position while the executive—who supposedly knows the company better than anyone on the planet—was betting the other way. I was shorting 1,200 shares while he was buying 500,000 (talk about David versus Goliath). However, not only am I not deterred I plan to increase my short position today. Why? Well, for a few reasons. I can’t help but recall the time that Jeff Immelt, CEO of General Electric, went on TV telling investors that someday they will look back and see how lucky they were to purchase GE stock at $30-something per share. Since then—and one huge financial crisis in 2008—the stock traded at $5 and change. Today GE trades at $19 and change. That means CEOs are not as infallible as we would be led to believe. In fact, the opposite could be true. Dimon is a very smart CEO (as evidenced by his expert testimony in front of both houses of Congress). However, he is not exactly objective about his firm. Besides, macro events like Europe will move his stock and there is nothing he can do about it.

Only time will tell who was right. For the record, as a long term investment I agree with Dimon. His company will do well; that is, as long as an investor has a 3-5 year time horizon. But in the short term? I didn’t even mention the Libor investigation hanging over most of the banks. That’s too inside baseball and this blog posting has gone on long enough.

BEST BUY: “Amazon’s Showroom?” Not so Fast.

Tune into any financial news network or pick up the business pages of your local newspaper and you will hear the following about electronics giant Best Buy:

* Best Buy is the next Radio Shack (not good—Radio Shack is a $4 stock, down 75 percent since last July’s $16 price).

* Best Buy’s business model is a dinosaur, a relic of a by-gone era.

* Best Buy is Amazon’s showroom (meaning people check out the merchandise at Best Buy before going home to buy it at Amazon and other e-tailers).

The last claim is particularly annoying, because it has been uttered by such luminaries as CNBC’s Jim Cramer and other financial “geniuses” countless times in the electronic and print media. But what these pundits neglect to tell us is that Best Buy price matches on all new, boxed items (in some markets). But I am getting ahead of myself.

Call me old fashioned, hell, call me a dinosaur but I happen to think that Best Buy’s prospects are quite bright. And it isn’t because they are trying to be the next Apple store, which many of those same pundits have asserted in recent days on those same financial channels. Then why am I so bullish on Best Buy? Much of this has to do with my personal experiences at my local Best Buy (located in a Chicago suburb called Downer’s Grove, Illinois). First some history about me and my personal buying preferences.

I do indeed like to touch and play with gadgets and electronics before I buy them. But once I do, I have the patience of an ant. Once I have decided that I want, say, a particular laptop computer or TV, I have to have it, and I have to have it right then and there. Not tomorrow, not in a week, not in ten days. Nothing thrills me more than walking out of that store with that computer under my arm as I show the over-sized bouncer at the door my store receipt. And if you think I am impatient, you have never met my twin boys. But I am getting ahead of myself again. Bear with me as I tell you this week’s computer war story.

Two days ago I went to that Best Buy in search of a new PC. Mine was home dying like some ill-fated, cancer-ridden patient on life support. It is worth noting I am a great Best Buy customer. I had purchased several computers over the last six years—each with multi-year “Black Tie” protection warranty plans (that’s the plan that covers everything unless you do something really stupid like throw your computer off a building). I know that store well, so upon entering, I headed right for the computer section. One of the first items that caught my eye was a “clearance” priced Toshiba with a good sized screen, nice touch-pad, and all the bells and whistles including Windows 7. The price? $329! I couldn’t believe it. The last Toshiba I bought there cost me more than $1,000 and this one seemed even nicer. Long story short, I bought it on the spot with a two-year Black Tie warranty, along with Windows software. I took it home and to my delight instantly fell in love with it. That’s when my wife and I decided that I would go back to the store the next day and buy not one—but two more of those Toshibas for my almost eight-year old twin boys (it would be their first computer). They had been begging for their own computers for many months and the time—and price—seemed right.

When I returned that next day, a salesman named Jim came right over to help me. Jim was great—helpful, incredibly respectful and upbeat. As was their customer service rep, Elliot. Still, I decided to ask for a manager to see if he or she would cut me a price break on the computers or accessories I was buying. After all, I had bought my wife a pricey Mac back in June, and now I was buying three more computers within 24 hours. I figured that makes me a “platinum” customer, and I had hoped that Best Buy management would see it the same way. That’s when not one, but two managers came over to help (I felt platinum!). The first manager took immediate control of the situation. Her name was Krystle H., and she made me feel like a million bucks. How did she do that? By immediately recognizing my value as a frequent customer and by discounting all three Toshibas, even the one I bought the day before. I had never received a retroactive price adjustment by a retailer and it felt great. Then she did the same thing on the Skull Candy headphones I was buying, as well as a few more accessories. Another manager named Andrew L. got into the act and also helped (he also engaged me in conversation about the Best Buy/online retailer debate). The only thing I paid full “retail” for was the Black Tie protection programs, as those prices are etched in stone. Still, I got a terrific price break on just about everything else and never felt better about a major purchase in my life. I was delighted to show the bouncer my store receipt on the way out!

Now, all of that begs this question: have you ever negotiated with a Website? (eBay does not count). Obviously not, but that doesn’t mean the Amazons of the world are not great places to shop. It’s just that its not for me. Besides, when things go south with the computer you buy online, where do you bring it to get it fixed? But those are just details. Why will I always choose a Best Buy over an online retailer? The answer is Jim and Krystle and Andrew and Elliot. I love people and I love to do business with people. I may buy my books online but I will never buy larger-ticket items online. I simply have way too much fun negotiating for lower prices…something that online shops know little about.

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