Finance – Page 56

Not much to say lately

The market has been going through some corrective headaches, likely on valuation concerns of the well-known high fliers out there (including the biotech sector, which has gone bananas). This all feels like the year 2000 over again.

I still haven’t had anything pop up on the investment radar lately. One opportunity which I did identify last year as a very likely candidate to provide two or three-bagger type gains over the next two to three years has exhibited price depreciation to the point where it is trading below tangible book value. What is even odder is that this company is pretty much top in its business niche and is unlikely to lose the competitive advantage in this niche. It is only trading down because of government regulatory fears. I might write a comprehensive research report on this company, but it is something I would not want to make freely available to the public.

Liquidating Bitcoins is not easy!

People should have seen this a mile away, but MtGox (the exchange that at one point facilitated the vast majority of Bitcoin transactions for real currency) finally packed it in and documents claimed that there was a gaping hole of about 744,408 Bitcoins due to some technical issues with the exchange software that accumulated over a couple years (not to mention a net of about US$33 million cash owed to customers!).

My hypothesis is more plausible: fraud. Anybody running an exchange operation like this would be looking at their account balances like a hawk, hourly, and have proper built-in mechanisms to ensure that there are no leaks in the system. Claiming a loss like this over a period of a couple years is simply incomprehensible.

One of the great things about how Bitcoin works is that the entire transaction ledger (the blockchain) is in public view, and some enterprising people will likely be able to reconcile what happened from publicly available data. 744,000 Bitcoins is about 6% of the entire amount in circulation.

Considering the underlying value of Bitcoin is zero, it is still amazing to see that one can still sell these things for US$500 a piece on other exchanges. This is assuming, of course, they won’t go under either.

I didn’t know how high the hype would go for Bitcoin. Guessing when the tops of markets occur is a tricky endeavour and is simply that, guesswork. My initial guess was “no higher than US$10,000 per bitcoin”, but I subsequently revised that to closer to US$900 than the $10,000 mark.

Now I’ll come with an even starker prediction: Bitcoins will never reach its all-time high (US$1,200) ever again. The hype is gone and the true weaknesses of Bitcoin have more or less been shown to make the entire system unusable except as a novelty.

Bitcoins to currency almost reminds me of what gift cards are to currency: like cash, except worse. If you truly want to invest in something that is relatively immune to the machinations of evil central bankers world-wide, this is the chart of the commodity that I think has profited the most from Bitcoin’s collapse:

Right now a bitcoin is US$516 on Bitstamp (the now leading exchange for Bitcoin volume). You can get an ounce of gold for 2.6 bitcoins. An easy decision for those that still want to believe in hyper-inflationary theories.

Disclosure: No bitcoins, no gold!

More research, nothing found

Spent a bit of time today mining the equity haystack out there.

Nothing of note found at prices that would want to make me dive in. I did get the chance to educate myself on a couple obscure areas of the technology industry that would not make for very interesting cocktail conversation.

I have to keep telling myself that deploying cash for the sake of deploying cash is a good way to lose it.

And no, I’m not even interested in Bitcoins at US$160!

Bone-headed valuations marking the end of the cycle

The big headline is the deal Facebook made to acquire WhatsApp for an absurdly large piece of change – $4 billion cash and $12 billion in stock. There was also $3 billion in extra restricted stock that vests over four years, but really, $3 billion is a rounding error.

The owners of WhatsApp should be given a massively huge congratulations for extracting a huge pound of flesh and hopefully they will have the foresight to start hedging their stock so they’ll be able to live in luxury forever.

I highly suspect in five years or so that the guys at Snapchat and Instagram are going to be kicking themselves for not dumping their businesses at equally absurd valuations. They’ll probably end up being like Friendster when they are superseded by some other up-and-coming application service.

I am not a user of either technology, either Facebook or WhatsApp (or Snapchat and Instagram for that matter!). Today was the first time I ever heard of WhatsApp, and just looking at the Wikipedia summary, it looks like a well-used and functional version of BBM crossed with Skype.

This also explains why Blackberry is up today – if WhatsApp can fetch $16 billion, why can’t BBM?

Media is already panning the deal and I seriously have no idea whether this makes any sense for Facebook strategically – eventually they will want to fold the WhatsApp’s not insubstantial user base into Facebook in some seamless transition, but one can just ask Google how things went with Google+ and you’ll easily see it is a lot easier to do that on paper than it is in practice.

Financially, of course $16 billion is a huge price to pay. Even if you assume the stock component of the deal is worth zero, the $4 billion in cash is a huge investment. Putting that $16 billion in a 30-year treasury bond will reliably spin off $600 million a year in pre-tax income for 30 years and does anybody seriously think that WhatsApp will contribute that incremental income to Facebook’s bottom line?

This acquisition reminds me of what happened when Yahoo acquired Broadcast.com (from Mark Cuban), or the mergers that occurred in the optical networking space in the last couple years of the dot-com boom where you had massive equity-for-equity transactions (in particular, JDS, Uniphase, and SDLI come to mind).

Acquisitions like these highly suggest the 20-times-sales valuation hype is going to end sooner than later. I don’t know when, but I’m staying far, far away from this territory and letting the insiders and lucky day trader-types make their killing to the detriment of those that will be holding the bag when the party ends.

When interest rates rise

Constructively speaking, the federal reserve is engaging in raising interest rates, without actually raising the short term rate. The theory of what to invest in when rates rise is functionally the correct strategy here.

There is not a lot that is going to thrive except for US cash.

The federal reserve is likely to continue in the normalization direction for quite some time to come and as a result, volatility will be prevalent. Buying volatility is likely to be a winner.