Before reading this article, ask yourself a few simple questions:

What was Facebook’s value, at its Initial Public Offering launch?

“$104 billion”

What was Facebook’s operating profit in the previous year?

“$1 billion”

So how on earth did they reach that outrageous valuation & how does a pump and dump really work?

This question will take a little more explanation.

So you have probably already realised that I am less than impressed with the way Wall Street has handled Facebook’s IPO!

Yet again they seem to have convinced the average investor and pension fund managers to throw more money down the drain, on an asset that does not justify its price tag. Is this a pump and dump or is it just clever marketing?

Let’s think about this numerically; would a company with a profit of around $10,000 in 2011 be sold for $1,000,000 the next year?

If this proposition was put on BBC’s “Dragons’ Den”, the Dragons would have ripped the its balance sheet  to shreds!

So how have Facebook managed to get this preposterous value attached to it?

Let’s start by finding out exactly what a pump and dump really is? (Courtesy of Investopedia.com)

“A scheme that attempts to boost the price of a stock through recommendations based on false, misleading or greatly exaggerated statements. The perpetrators of this scheme, who already have an established position in the company’s stock, sell their positions after the hype has led to a higher share price. This practice is illegal based on securities law and can lead to heavy fines.

The victims of this scheme will often lose a considerable amount of their investment as the stock often falls back down after the process is complete.

Traditionally, this type of scheme was done through cold calling, but with the advent of the internet this illegal practice has become even more prevalent. Pump and dump schemes usually target micro- and small-cap stocks, as they are the easiest to manipulate. Due to the small float of these types of stocks it does not take a lot of new buyers to push a stock higher.”

So the above explanation gives you the basic principles and then goes on to explain how cold calling is traditionally used as a sales method, to dupe willing investors into parting with their cash.

In my opinion, the above explanation seems pretty spot on.

However, Facebook and the bankers went a lot further to convince people of its massive price tag; they created a media buzz and I must say, hats off to the marketing drive, it almost had me convinced!

They used some the biggest banks and underwriters to launch the IPO, they did this shortly after a blockbuster movie and used their own user base to spread the news around, in almost every country in the world.

I’m not suggesting that “The Social Network” was secretly funded and made by Zuckerberg, but it certainly played a part in pushing up this historic IPO’s launch price.

Once this price tag was put on the company from subscriptions, it was pretty simple for the initial investors to dump their shares and flood the market.

Let me explain this in more detail and give you a step by step guide to what happened.

Step one: Boost the share price, by exaggerating statements.

At the beginning of a pump and dump, the company must build its reputation.

They essentially need to create demand, so that people want to buy shares in the company. Facebook and the bankers had the task of convincing all of us, that they are potentially going to be one of the most profitable companies in the world.

This was not too difficult with Facebook’s user base and following; the bankers knew that this was a prime target to pounce on and reap the benefit.

Many people didn’t ask why Facebook’s profit was only 1% of the company valuation. I’m sure the public simply thought……. “Who cares, its Facebook; I love Facebook!”

I personally can’t detract from Facebook’s user base, there are more than 840 million users worldwide and more than 55% of those users, actually log on every day; I personally log on at least a few times a week!

Facebook is no doubt a fantastic idea and truly has revolutionised the way we connect with friends and family online…….. Oh dear, they have got me saying these things too!

Step two: The Pump

Now that Facebook has made its name and has some good strong partners from Wall Street, they can begin by going hell for leather on the marketing.

If you didn’t know already, Facebook’s original partners and the insiders got their shares for between $1 – $5 per share, so its not too hard to make a large profit from this point forward.

You are right to think that some of the large investment banks got in at this price. I personally would have snapped Facebook’s hands off, if they offered me that share price.

Step three: More pumping

Now that the subscriptions are flowing and a desirable price has been set, hype up the launch further, inform the general public that the price is going up and up and it’s the buy of the century.

Unfortunately even pension accounts dropped millions and possibly billions into this stock; fingers crossed your pension scheme didn’t do this!

By the end of the marketing, the IPO confirmed a price tag of $38 per share and was officially the largest technology IPO ever; they raised a whopping $16 billion in total.

This gave Facebook a Price to Earnings Ratio of around 100!

Just for the record, an average PE ratio is around 5 – 15 and it effectively means that Facebook will take around 100 years to pay your initial investment back. Does that sound like a bargain or what?

Even some of the News channels were convinced; Jim Cramer from CNBC was saying that it could hit $70 per share in the first day…….. well done Jim, well spotted!

Step Four: The IPO’s launch date

Now you have millions of zombie followers who want to purchase the stock; open the flood gates and let the lambs come to slaughter.

The unfortunate part of this, is that a lot of pensioners don’t even know how to switch a computer on, let alone understand how to log onto Facebook and their pension money has been dropped into this IPO and flushed away!

Facebook had subscriptions coming out of their ears, the marketing was fantastic and they have hundreds of millions of loyal followers. This really was the bankers dream and they could not have done a better job.

Step Five : The Dump Begins

So how and when do the big investors jump out, how do they break some negative news and get away with it?

Not surprisingly, Morgan Stanley published an article saying that they are reducing Facebook’s profit outlook and even Facebook themselves issued an amended prospectus with the SEC, where they stated that the company expressed caution about their revenue growth, because of users migrating over to mobile devices! (See Reuters)

So literally days before the subscriptions go live, they drop a huge bombshell on the consumers and for your average Joe, it was simply too late.

The price is sitting above $38 and the insiders have a huge profit margin to play with.

This was the nail in the coffin for me, I was now fully convinced that the banks have done it again; they have duped the general public into forking over their hard earned cash. The insiders creamed between 7 – 38 times what they originally invested and were laughing all of the way to the bank ……… not a bad 3 and a half months work for Wall Street indeed!

Step six: The Dump ends

The insiders and big banks dump their shares on unsuspecting buyers and then watch the share price crash and burn over time.

Some people see this as clever marketing and some as a pump and dump. Whichever way you see it, the fact of the matter is that the bankers are triumphant and the consumer, which don’t forget includes pensioners, are worse off again!

So where does Facebook stand now?

Facebook is now valued at around $20 a share, which is around half of its original offering; in my opinion a new age pump and dump and they have gotten away with it. Its just a little better put together than a dodgy boiler room scam, because of the huge marketing budget and highly experienced Wall Street partners.

The classic adage, the rich get richer and the poor get poorer is pretty accurate and to top things off the biggest holders are pension funds all over the world. The key difference here is that Facebook are a real company with a good business plan, it’s just that Wall Street jumped on at the start and used their experience to milk the consumer.

So, do I think Facebook will go bust?

The short answer is No; they have a large following base and can make profit to stay afloat.

However, and it’s a BIG HOWEVER, they really don’t command a share price of $38 a share at the moment. Let’s see the ideas that Mark Zuckerberg has first, before putting a price tag on of that amount!

I’m just sorry for the pensioners that simply don’t know what Facebook is, let alone that part of their pension money has been lost in it.

If you honestly fear that your pension fund is not safe, please don’t hesitate to contact me right away; I have helped many expats move their pensions to QROPS and SIPPS. These structures give my clients full control of where their money is being invested.

Intelligent financial architecture is what is needed in the world today and if you don’t keep an eye on your investments, then who knows what you may be holding!

I hope that you enjoyed reading.

Stuart Anthony Yeomans 

CEO

Farringdon Group

Kuala Lumpur : Malaysia

Economists are well aware that Spain will be next to seek a bailout, however it still remains unclear when they will need the funds and the levels of funds they would need. With Spain’s economy being the twelfth largest worldwide and the fifth largest in the European Union, as well as the Eurozone’s fourth largest, it would suggest that Madrid would be seeking a multi-billion Euro bailout for its banks and possibly for the state itself.

Spain’s Prime Minister Mariano Rajoy has repeatedly said Spain doesn’t need or want a bailout, and is trying to convince investors that Spain’s finances are under control after his refusal last month to meet deficit targets set by the European Commission. Economists refuse to agree, and believe that Spanish banks will eventually have to turn to the Eurozone’s rescue fund – the European Financial Stability Facility (EFSF) – to cover losses caused by a property crash which is still ongoing!

According to the Bank of Spain, levels of non-performing loans were at 8.16% in February, compared to 7.91% in January, as an additional 3.8 billion Euros of loan went bad in February. This is a 110% increase on a year on year basis, the highest level since 1994 and from less than 1% in 2007! This brings the total credit in the economy which the regulator lists as “doubtful” to 143.8 billion Euros.

Investors are fretting about the capability of Rajoy’s centre-right government to enforce deep austerity whilst reviving a recession-bound economy which has “one out of five” unemployed.  Defaults are continuing to rise and credit is steadily shrinking at a record pace, which reduces the quality of loans built up in the country’s credit boom and weakens the need for banks to produce new ones. Due to doubts on the high level of non-performing loans being held by the banks, financial stocks are taking a hit and costs on supporting lenders are driving up the government’s borrowing costs as investors are concerned this may add to the debt burden.

In the past week we have seen the markets reacting to fears about the Eurozone’s fourth largest economy. Yields on 10-year bonds, which reflect the risk investors attach to owning Spanish debt, have risen to over 6%, a level that has proved a trigger point for other troubled Eurozone countries. However, economists believe that Spain will be able to hold out for some time and are not in need of immediate funding, though they will eventually need EFSF money to recapitalize their banking sector.

Interestingly, Eurozone leaders are in same view as Rajoy and believe that Spain is incomparable to other Eurozone countries which are already in bailout programmes. Jean-Claude Junker, who chairs the Eurogroup of Eurozone finance ministers, believes that Spain is taking necessary steps to get back on track, despite being in recession and having unemployment at 24%. German Finance Minister Wolfgang Schaeuble mentioned that fundamental data in Spain is not comparable to those that are in a bailout plan and that Spain will need to work to win confidence if positive developments are to continue.

Some believe that the four-month-old government may have just started to knuckle down to meeting the new targets which includes deeply unpopular austerity and tackling the economy’s structural problems. However, others beg to differ and fear Spain will drag in Italy, which has suffered similar problems with rising borrowing costs.

Stuart Anthony Yeomans 

CEO

Farringdon Group

Kuala Lumpur : Malaysia

The financial crisis in Greece is a long-standing issue that sees little improvement with its unstable political situation. Placing their ideology aside, contesting parties are either for austerity measures or against it. Most recently, Socialist leader Evangelos Venizelos gave up the mandate to form a coalition government after negotiations proved fruitless. Although a coalition may be formed amongst pro-bailout parties, it is not sustainable with strong anti-austerity sentiments, resulting in the need for a new election. Apart from prolonging all the uncertainty in Greece, what does this point to the future of the country?

Currently, 70% of the Greeks support an end to austerity measures, evident from the increasing support SYRIAZ is enjoying. Ironically, a survey reveals a similar percentage of Greeks wanting to stay in the Eurozone. Although there is a commitment by European leaders to keep Greece in it, they face accusations of forcing Greece to leave the EU by dismissing any renegotiations of the bailout terms.

It seemed like an exit is imminent when rising political star, Alexis Tsipras, denounced the bailout terms. Uncompromising, authorities have made it clear that Greece will not receive the next tranche of aid and this is something that cannot be afforded. Furthermore, as much as newly elected leaders would want to satisfy their people in moving away from austerity, they are constrained by the fact that debt payments must still be made and therefore, tightening their belts will be inevitable.

On the other hand, an exit presents the option for Greece to reinstate the Drachma and undergo massive devaluation of the currency. Proponents argue that this may help to improve the economy’s competitiveness by making its exports look more attractive. What Greece needs is to reposition its economy to support growth in the long run and not merely be sustained by aid at the expense of other countries. However, others contend that this radical solution will leave Greece with a crippled economy with higher levels of debt and hyperinflation.

Other negative short-term effects can also be seen in the collapse of the banking sector, severely affecting liquidity locally and economies that have exposure to Greek Banks, mostly Eastern Europe countries like Romania and Bulgaria. In view of a certain degree of contagion effect, we expect more volatility in global markets due to natural risk aversion and negative market sentiment. Previously we have seen stock indexes in London, Paris and Frankfurt all dropping by more than two percent and we are likely to see dips exceeding or at least on par with these percentages following a sell out. Portfolios are likely to see similar trends, the extent of which is limited to how resilient stock picks are.

Looking long-term, market expectations should start to adjust and the EU will be in a better position to ride out any remaining traces of the crisis. Portugal, Ireland or Spain might be next to default but talks to build up a “Financial Firewall” can circumvent a Greek domino effect with the issuance of Eurobonds and greater political will to effect a proper recovery of the Eurozone. Hence, a fall in stock markets presents investment opportunities, especially with a rebound well on its way.

Stuart Anthony Yeomans 

CEO

Farringdon Group

Kuala Lumpur : Malaysia

There is a widespread sense that what is happening in the European economy today is unprecedented – the fallout of an attempt at economic union without political commitment to fiscal transfers. There is some truth in this, but European exceptionalism is a myth. In many ways, the countries of Europe’s periphery are reading from a script that has already been played out by many developing countries. There is much to learn from those experiences.

There is a typical scenario, which begins when a country is chosen by financial markets as an attractive destination. The reasons can vary, from perceptions about its growth potential to simply being the neighbor of a “dynamic” country. (In the Eurozone, periphery countries were chosen to benefit from low interest rates because of sharing the same currency as Germany or other core countries). This preference sets in motion processes that are eventually likely to culminate in the crisis, through the effects of a surge of capital inflows on real exchange rates.

With flexible exchange rates, capital inflows cause the currency to appreciate, but even with fixed exchange rates (or in the Eurozone’s case the same currency) real exchange rates appreciate as domestic prices rise faster than those of trading partners. This appreciating real exchange rate encourages investment in non-tradable sectors, the most obvious being real estate and construction, and in domestic financial assets like stocks and shares. But it also makes exports more expensive and imports cheaper, discouraging investment in these tradable sectors and often contributing to their relative decline despite rapid overall growth.

All emerging markets that received large capital inflows also had real estate and stock market booms. These in turn generated the income to prop up domestic demand and keep some sectors growing at high rates. This resulted in a macroeconomic imbalance, mostly not in the form of rising government deficits, but current account deficits reflecting debt-financed private profligacy. At some point, markets decide that this trend is unsustainable. We know that any factor, even the most minor or apparently irrelevant one, can trigger capital flight and financial crisis. Contagion is also a strong factor.

When that happens, countries are blamed for being “irresponsible” and “imprudent”, with fingers pointed at either public or private behaviour. But this misses the point, which is that when a country cannot control the amount of capital inflow or outflow, both movements can create consequences which are undesirable. Large capital inflow must necessarily be associated with current account deficits, unless the inflows of capital are simply (and wastefully) stored up in the form of accumulated foreign exchange reserves. This has indeed become the precautionary strategy of choice in the developing markets, but it is pointless (because money that comes in is not spent within the country) and expensive (because losses in holding reserves that are determined by differences in interest rates).

Therefore, with completely free capital flows and completely open access to external borrowing by private domestic agents, there can be no “prudent” macroeconomic policy; the overall domestic balances or imbalances will change according to behaviour of capital inflows, which will in turn respond to the economic dynamics that they themselves have set into motion.

This is really what has also occurred in Europe, particularly after the formation of the Eurozone. Private investors (banks and others) funnelled savings from the richer core countries to the poorer ones at the periphery, creating processes that led to what is now celebrated as the “productivity divergence” between north and south in Europe, but is more fundamentally a reflection of these same macroeconomic forces. If the run-up to the crisis is similar, what about the denouement? Here too, the global south can offer lessons. Adjustment through domestic contraction is hugely painful, socially devastating and often politically convulsive. Also, it does not always work; such a strategy eventually generates a recovery only if exports increase enough to make up for the collapse of domestic demands. This is much easier if countries can depreciate their currencies, but even that is not necessarily sufficient. Additionally if the world economy is not growing at that time, the chance of a recovery is generally slimmer.

The crisis can then involve not just short-term damage but longer-term loss of potential output and sometimes a different growth (or stagnation) trajectory altogether. Simply rescheduling the debt does not help; it delays the problem but then usually makes matters worse by adding to the eventual debt burden.

The countries that bounced successfully out of financial crisis in recent times to generate real recoveries in activity and employment – for example Malaysia or Argentina – are those that did not play by the rules laid down by the global establishment. They imposed capital controls, “restructured” their debts (effectively defaulted on some it), used expansionary fiscal policies to come out of slumps, and did other things that are frowned upon by the powers that be. But it is only the creative responses that work. So if the European periphery – and Europe in general – is to come out of the economic hole it has dug for itself, it may need to start “thinking out of the box” and look at these other experiences more seriously. The question however is, can this occur at all within the straitjacket imposed by the currency union and its present leadership?

Stuart Anthony Yeomans 

CEO

Farringdon Group

Kuala Lumpur : Malaysia

Economic confidence in the Euro-area decreased more than economists forecast to the lowest in almost three years in July, suggesting the economic slump extended into the third quarter as governments struggled to tame the debt crisis.  According to a report by the European Commission in Brussels, the index of executive and consumer sentiment in the 17-nation Euro-area dropped to 87.9 from 89.9 in June. That’s the lowest since September 2009. The Bloomberg News survey showed economists had forecasted a drop to 88.9, which is the median of 206 estimates. The debt turmoil which the European governments are struggling to contain, has undermined confidence and has forced Spain and Cyprus to seek external aid. Stuart Yeomans

On July 26^th, shortly after Moody’s Investors Service put a negative outlook on Germany’s Aaa rating which caused the borrowing cost from Spain and Italy to surge to record highs, European Central Bank (ECB) President Mario Draghi had announced that policy makers would do whatever was needed to preserve the threatened currency. The Euro has depreciated by over 7% against the US dollar over the past three months after Spain in June asked for a loan amounting to 100 billion Euros to bail out its banks. Stuart Yeomans

In a report compiled by Moody’s, they cited that Greece could leave the Euro and there is an increasing likelihood that nations such as Spain and Italy would require additional support. Stuart Yeomans

With governments seeking ways to plug their budget deficits, the economy is edging towards its second recession in four years. Europe’s largest economy has grown more pessimistic as German’s business confidence in July fell to the lowest in the last two years and more than what economists had expected. On 16th July, the International Monetary Fund (IMF), reduced the Euro-area growth forecast for 2013 to 0.7% from 0.9% and said that the gross domestic product will drop 0.3% in 2012. The IMF had also cut its global growth forecast for 2013. Stuart Yeomans

Sentiments among European manufactures continued to look gloomy with the indicator of manufacturing confidence index falling to minus 15 from minus 12.8 in June. An indicator of services confidence dropped to minus 8.5 from minus 7.4, while a gauge of consumer sentiments fell to minus 21.5 from minus 19.8. Confidence in the construction sector has also continued to deteriorate. Stuart Yeomans

Economic data in Asia also showed weaknesses in the manufacturing industry. Japan’s industrial output unexpectedly declined and South Korean manufacturer’s confidence dropped to a three year low. Stuart Yeomans

According to a Bloomberg survey, the European Central Bank is expected to keep its benchmark rate at 0.75% when the council members meet on the 2nd August. In June, the Frankfurt based central bank had reduced borrowing costs to a record low. Stuart Yeomans

Stuart Anthony Yeomans 

CEO

Farringdon Group

Kuala Lumpur : Malaysia