The Canary Comes Home to Roost

Since all but a minuscule fraction of the shares traded on the exchanges every day (0 on most days) are not sold by the companies whose names are on the certificate (which means none of the money goes to the companies), traders aren't any different from plungers betting 14 Red at a roulette wheel. The buyers think the sellers are idiots for selling so cheap; likewise in opposition, the sellers.

The au courant cause celebre' is Facebook, and its connected companies. Today's NY Times carries a long story starting at the front (above the fold) of the dead trees Business Day. The article is of interest, but what's of interest to this endeavor is the caption to the picture inside (it is reproduced in a margin in the on-line version, so I don't have to type it out, yeah!): "Facebook has asked for patience as it invests the capital raised in its initial public offering and seeks to increase its revenue." This is interesting for its sheer chutzpah (as in "cheese").

Here's the two numbers that don't add up:

From the last 10-Q: physical assets are $2,105,000
From Yahoo!, market cap: $42,000,000

What are they going to "invest" in?? What's not commonly understood is that software companies generally, and internet based ones specifically, are capital light. Facebook is unusual in that it does own data centers; it need not, and many internet software companies do not. Their asset/cap ratios are even more outlandish.

So, what does it mean to invest in any kind of software company? You hire coders to type on PCs. A PC of sufficient horsepower to do this work can be had for south of $3,000; much less if you build them in-house from parts which is what Google does. It will be more if the company buys giant monitors, which might cost more than the PC unit itself, but still absurdly cheap. In other words, this ain't Ford. Here's their current numbers:

From the last 10-Q: physical assets are $22,105,000
From Yahoo!, market cap: $37,000,000

There's a reason the "capitalists" of the USofA have abandoned capitalism: it's cheaper to get rich if you don't actually turn fiduciary capital into physical assets. You're pulling "value" out of thin air. Alchemists of old tried to turn lead into gold; today they try to turn code into gold. If you can pull it off beyond fad duration, the gross margin in software can't be beat; Cost of Goods Sold is asymptotically 0. Whether that can continue is contingent on the US dollar remaining New Gold (discussed in previous entries). So long as the Right Wingnuts can control the game (with the help of the Banksters; and there's a fair amount of overlap between the two camps), then money is the commodity. What the Facebooks of the world "produce" is ephemeral, unlike Ford, which makes autos you can drive (if you like what Ford builds). Since this New Economy is largely unbarterable, a stable (if not falling) dollar is essential to the game. The game also depends on folks equating the "psychic utility" one gets from one's Facebook page as from the physical utility of a Mustang. Good luck with that. To steal from "The Graduate", one word -- MySpace.

To deal with the question raised by the photo caption: there's not much that they can do which supports organic growth of Facebook. As is well known by now, most of the developed world has gone to Facebook about as much as it can or will. There are those, humble self included, who've figured out that wasting time and relinquishing privacy to a rapacious kid isn't such a great idea. Facebook is just another in a long line of advert pushers, none of whom, apparently, ever considered that a more fashionable form of advert pushing might ever come along. It does, and will. Will dollar a day indentured workers in the rest of the world (assuming they have access to a PC, internet, and/or smartphone) have sufficient money to spend on Facebook's adverts' wares? I'll bet: nope.

Facebook could hire more coders, but the "investment" consumed by such is about $5,000 per coder. According to the 10-Q, they've got about $10 billion to spend. They could hire every Indian coder alive, and have money left over. And, what would they produce? MicroSoft, very good at the software game, has had only one money spinner, Office (which it first built on contract to Apple, by the way). Facebook had one neat idea. Odds, historically, that such blinkered thinkers could have another neat idea are teeny.

Adding data center support per user comes out of that pile, too. But user growth is slowing, perhaps with ABS engaged. I suspect they'll "grow" by buying up other companies, such as Instagram. Such growth can be attached to the buying company, but yields no growth from a macro-economic point of view. Most often, jobs are lost when companies consume each other. You scarf up a competitor, and either shut it down, or consolidate with your folks taking over for the non-worker bees. In all, for the economy as a whole, a net bad. And, as MicroSoft just demonstrated, buying up a competitor (or synergistic function) isn't going to work, just because it was supposed to.