By Jack Hough
On Wednesday night, investors learned plenty about Facebook’s (FB) financial details from the initial public offering paperwork it filed with regulators. They learned nothing new, however, about LinkedIn (LNKD), Zynga (ZNGA) or Groupon (GRPN).
Those companies, after all, went public last year. Investors have had plenty of time to inspect their regular financial reports and decide how much they’re worth.
But that didn’t stop their shares from jumping 5% to 15% by midday Thursday.
Why would investors suddenly decide these three firms are collectively worth more than $2 billion more than they were a day before? The stock market is supposed to be ruled by so-called rational agents, or traders who price in available information as soon as they learn it. But Thursday’s trading didn’t seem especially rational.
A study slated for publication in Management Science, an academic journal, offers some interesting parallels. It showed that stocks and Treasury futures respond–sharply–to stale information. That information is the Leading Indicators Index, published each month by the Conference Board. It’s based on a collection of other measures, all of which are previously published.
That makes the index a surprise to no one.
Yet the study authors, Thomas Gilbert at the University of Washington, Shimon Kogan at the University of Texas, Lars Lochstoer at Columbia and Ataman Ozyildirim at the Conference Board, demonstrate that a simple strategy of front-running the index by trading S&P 500 futures would have returned 8% a year over the 13 years ended 2009.
That’s like getting the stock market’s return without having to sit in the stock market, and it comes from using old news.
“The re-packaging of previously released information in the form of summary statistics may not be helpful to the inattentive, as it gives an opportunity for arbitrageurs to profit from agents that believe such statistics provide additional information beyond that already released,” wrote the authors in a working paper.
It looks like the inattentive are grabbing after shares of Facebook’s friends, too. The earliest traders have made good money, but it might come at the expense of those who hop into the trade late.
When you can have more friends than a dog has fleas well that’s some super sexy stuff in one’s own mind.
I wonder how many of Facebook’s ~800 million “monthly users” are actually unique people.
We all know that there are plenty of people with multiple accounts, accounts for corporations, accounts for scamming, accounts for pets, accounts for babies, and accounts for astroturfing. So how many of those people are real people that are worth paying good money to advertise to?
I picked a random country to investigate the Facebook stats for. Madagascar has about 320,000 internet users and allegedly 216,000 of those people have facebook accounts that they use regularly. That seems suspicious to me. A number of African countries report more Facebook users than internet users – like Congo, which has a stat of 900,000 facebook users but only 700,000 internet users. Perhaps there are good explanations for this, but frankly I suspect massive fraud. There are quite a lot of countries where 50% or more of the internet-using population are allegedly on Facebook, and occasionally other examples of facebook use that’s greater than the reported internet use.
This is especially odd because of certain outliers. Vietnam has a fairly high internet use, about 30 million people, but only 10% are on facebook. The Philippines also lays claim to 30 million people on the internet, but virtually every one of them are on facebook.
If it’s not a bunch of fraud, then Facebook has pretty near zero growth potential unless they get into the business of spreading internet access to the rest of the world. If it is a bunch of fraud (intentional or not) then how valuable are these numbers really going to be to advertisers? Will advertising campaigns on Facebook be successful to small business long-term, or only to large corporations that count on getting as many eyeballs as possible?
Who says the market is “ruled by rational agents”? I believe rationality smooths out the hiccups after a couple of years, but on a day-by-day basis it seems obvious the market deviates wildly from logical considerations. Market psychology is difficult to determine – in the short-run. I worry less about these fluctuations and stick to longer term results of the fundamentals.
Facebook needs to be killed off!
Actually, we learned a lot about Zynga from Facebook’s S-1 filing. Apparently 12% of Facebook’s revenue comes from its relationship with Zynga, which means implies that Zygna is responsible for at least $444MM of Facebook’s revenue last year. This also means that Zynga is likely to outperform its 2010 revenue of $500MM+. http://networthprotect.com/investments/facebook-announces-public-equity-offering-are-you-buying/