About Me 0056: Stock Making Money

This week,
rather than focusing on inflation in the form of prices rising around the
globe, I thought we’d focus a specific form of inflation, namely, that of
inflated earnings.

Indeed, with
earnings season fully underway we’ve already seen some stellar results from the
likes of General Electric, JP Morgan, and Citigroup.

§ JP
Morgan: All time record earnings of $17.4 billion, earnings growth of 48% from
2009’s results.

§ Citigroup:
Annual earnings of $10.6 billion. First full year of positive earnings since
2007.

§ GE:
Total earnings of $13.2 billion, an increase of 15% from 2009’s results.

These three
companies, despite their supposed differences all have a common theme in their
results. That theme is:

Making money by lowering loan loss
reserves.

I realize
this sounds like mumbo-jumbo. It is. In plain terms, what this means is that
these companies are writing off the money they’ve kept in the proverbial rainy
day jar to cover any losses that might occur from the loan’s in their lending
portfolios (yes, GE continues to lend money via its financial arm, GE Capital…
the same arm that nearly took the company under in 2008).

Let me give
you an example. Let’s say that my rainy day jar contains $10,000 to cover any
unforeseen problems. Now let’s say that one day I decide that I only need
$5,000 to cover unforeseen expenses. Does this random mental calculation mean
I’ve made more money and need to report $5,000 more on my tax return that year?

NOPE.

However,
this is exactly how GE, JP Morgan, and Citigroup generated their “stellar”
earnings. In JP Morgan’s case, the bank did this with $2 billion, roughly 11%
of its 2010 earnings. This was on par with GE’s gimmicky at $1.4 billion or 10%
of annual profits. In contrast, Citigroup pulled out all the accounting
gimmicky stops, lowering loan loss reserves by $2.2 billion or 20% of 2010 earnings.

Put another
way, $1 out of every $5 that Citigroup reported in earnings was non-existent.
And $1 out of every $10 GE and JP Morgan reported was non-existent. Thus, the
message Big Business is sending to the world right now is clear:

If
you can’t actually MAKE the money, just MAKE IT UP.

I continually hear arguments that stocks are somehow cheap at today’s
levels. Just skimming over the results for JPM, C, and GE, I don’t see how
anyone can claim to have an accurate valuation of ANY of these companies. To
value a company you need some clue as to its earnings potential. All of these
companies are black boxes.

This is just another layer of the great financial Ponzi scheme that is
the US stock market. Bogus earnings, fictitious accounting, outright fraud,
insider trading, backroom deals… the whole thing is just one huge house of
cards propped up by one thing and one thing only…

The Fed’s liquidity.

Take this away and the whole thing comes crashing down. Some
commentators see this situation and claim that the market will never collapse.
I couldn’t disagree more. Liquidity has a price. And that price will ultimately
be the US Dollar.

Remember,
the US's Federal debt is now at $13+ trillion. And if you include unfunded
liabilities like social security and Medicare, you're talking about $70+
TRILLION in total debt on the US's balance sheet.

Let's be blunt here: the US will NEVER pay these debts and liabilities off. And
once the financial world finishes pummeling the Euro, we're going to see the US
Dollar and Federal debt markets implode.

I cannot tell you when this will happen. All I can say is that it will
happen. And when it does, inflation hedges across the board will EXPLODE
higher.

Good Investing!

Graham
Summers

PS. If
you’re getting worried about the future of the stock market and have yet to
take steps to prepare for the Second Round of the Financial Crisis… I highly
suggest you download my FREE Special Report specifying exactly how to prepare
for what’s to come.

I call it The Financial Crisis “Round Two” Survival
Kit. And its 17 pages contain a wealth of information about portfolio
protection, which investments to own and how to take out Catastrophe Insurance
on the stock market (this “insurance” paid out triple digit gains in the Autumn
of 2008).

Again, this
is all 100% FREE. To pick up your copy today, got to http://www.gainspainscapital.com
and click on FREE REPORTS.

PPS. We ALSO
publish a FREE Special Report on Inflation detailing three investments that
have all already SOARED as a result of the Fed’s monetary policy.

You can
access this Report at the link above.

Facebook has officially announced that it has just raised $1.5 billion in funding at a $50 billion valuation, according to a release issued today (we’ve embedded the release below).

As stated in the release, the investment was broken into two parts. Goldman Sachs participated in the first round (via an offering to its non-U.S. clients in a fund), which totaled $1 billion. In December, DST and Goldman separately invested another $500 million into the social network. Both rounds gave Facebook a $50 billion valuation, says the company. This brings Facebook’s total funding to a staggering $2.336 billion.

It’s interesting to note that Facebook didn’t take the full $1.5 billion from Goldman Sachs in the first part of the investment. As stated in the release:

Under the transaction’s terms, Facebook had the option to accept between $375 million and $1.5 billion from the Goldman Sachs overseas offering, at the discretion of Facebook. While the offering was oversubscribed, Facebook made a business decision to limit the offering to $1 billion.

One has to wonder if the fact that Goldman excluded U.S. investors from the round had to do with Facebook not raising the full $1.5 billion (which would push the total investment to a whopping $2 billion).

Another interesting tidbit from the release is this: Even before the investment from Goldman Sachs, Facebook had expected to pass 500 shareholders at some point in 2011, and therefore expects to start filing public financial reports no later than April 30, 2012.

Clearly, it looks like Facebook plans to IPO no later than April 2012.

So what will Facebook do with this massive amount of cash? The company says it has no set plans but vaguely stated that it will be “investing to build and expand its operations.”

The Goldman investment was first reported by New York Times’ Dealbook.

So much for that slow Friday news day.

Facebook Raises $1.5 Billion

Facebook Receives $1 Billion from Goldman Sachs Overseas Offering; Digital Sky Technologies and Goldman Sachs Also Recently Made $500 Million Direct Investment

Investment Values Facebook at $50 Billion

PALO ALTO, Calif., Jan. 21, 2011 /PRNewswire/ — Facebook today announced it has raised U.S.$1.5 billion at a valuation of approximately $50 billion.

The transaction consisted of two parts. Today, Goldman Sachs completed an oversubscribed offering to its non-U.S. clients in a fund that invested $1 billion in Facebook Class A common stock. In December, Digital Sky Technologies (DST), The Goldman Sachs Group, Inc., and funds managed by Goldman Sachs invested $500 million in Facebook Class A common stock at the same valuation.

“Our business continues to perform well, and we are pleased to be able to bolster our cash position with this new financing,” said David Ebersman, Facebook’s chief financial officer. “With this investment completed, we now have greater financial flexibility to explore whatever opportunities lie ahead.”

The investment generated a significant number of questions from interested parties and Facebook has addressed the most common ones below.

Why did Facebook raise this money?

DST and Goldman Sachs approached Facebook to express their interest in making an investment, and Facebook decided it was an attractive opportunity to bolster its cash reserves and increase its financial flexibility with limited dilution to existing shareholders.

Why did Facebook choose to raise $1 billion in the overseas offering?

Under the transaction’s terms, Facebook had the option to accept between $375 million and $1.5 billion from the Goldman Sachs overseas offering, at the discretion of Facebook. While the offering was oversubscribed, Facebook made a business decision to limit the offering to $1 billion.

What are Facebook’s plans for the proceeds of this transaction?

There are no immediate plans for these funds. Facebook will continue investing to build and expand its operations.

Does this investment mean that Facebook will have more than 500 shareholders?

Even before the investment from Goldman Sachs, Facebook had expected to pass 500 shareholders at some point in 2011, and therefore expects to start filing public financial reports no later than April 30, 2012.

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About Me 0056

Thursday, February 17, 2011

Stock Making Money

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