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TWTR (google.com)
405 points by sc90 on Nov 7, 2013 | hide | past | web | favorite | 338 comments

Can someone with more clue please tell me that the following cynical thought I keep having is wrong and laughably misinformed (and then explain why)?

Twitter's investors (who have plowed hundreds of millions in to a loss making company) decide to sell some of their stock at $26/share (after consulting with banks to arrive at this price). This will make right the losses they've experienced so far and pass the problem down the line. The banks buy at $26 and then immidiately flip for north of $40. This lines their pockets and passes the problem down the line once more to joe public.

End result: investors in loss making company cover their investment and make some profit, banks make some juicy profit for facilitating the game, joe public swallows the hype and makes the whole dance possible by eventually footing the bill.

Edit 1: thanks everyone for the thoughtful replies. I guess I can only continue to feel cynical if I believe that the original investors did all of this knowing full well that twitter never has a chance of living up to its valuation i.e. they just wanted to cover their losses, make a nice profit on top and punt the problem down river. The alternative is that the investors do honestly believe in the future profitability of the company and have decided now is the time to take some well earned profit as a reward for taking the financial risks in getting the company to where it is today.

It's going to take me some time to make my mind up as to which of those two scenarios I believe.

Edit 2: still difficult to understand why the banks have managed to come away with doubling their money though.

Edit 3 (final one!): See https://news.ycombinator.com/item?id=6691157 for a nice reply that seems (to my clearly very untrained eye) to make the investors motives a little less cynical.

I think you fundamentally misunderstand the process but that is ok, its not all that straight forward.

The transaction here is between risk takers (venture capitalists and investment banks) and risk pricers (people who buy stock). Nobody is getting "ripped off" as long as everyone is following the rules set down by the SEC.

Investors put money at risk. You know that because you've been here on HN a couple of years and no doubt read the <foo> is shutting down. stories. For each of those there is usually one or more investors who have put in thousands if not millions of dollars who get anywhere from $0 to some fraction of their investment back. Sometimes, their investment 'bet' pays off and they get back multiple times their investment. The trick is you blend all of those $0 and multi-X returns and you get their "effective" return.

"Joe Public" and by that I assume you mean an unsophisticated retail investor (they aren't investing anyone's money but their own). Can achieve a similar result by buying "shares" in a fund managed by a banker. When folks ask me where I would put some extra savings I tell them I've been very pleased with the Vanguard funds. You make more than then .8% return that a Bank savings account pays, and your risk is relatively moderate (but if it is not zero like it is with the savings account). But this unsophisticated person should never be investing in an IPO stock.

The professional managers who invest in an IPO stock may have hundreds of millions of dollars under management. They spread some of those over a number of IPOs as a way to provide 'long kicks' (which is that the stock is held for a long time and the success provides a large return many years later). Clearly they aren't putting their kids college fund in there. And most of the other dollars in their fund are on much 'safer' sorts of things, like Coca Cola or Alcoa.

So this is the 'cycle of life' for many new tech companies, and if these investors in Twitter do well their Venture Funds will have a reasonable rate of return, and more rich people will give them some of their 'excess' funds to invest in other tech companies, and you and I can go get some of that by pitching them a great team and a great idea.

So for the 11 times smart people came to them and they gave them millions and got nothing back, this 12th time they got a lot back. Nobody gets hurt as long as the people who don't know what they are doing stay out of the game. That didn't happen in the late 90's lets hope it doesn't happen again.

The underwriters who will make hundreds of millions here... (EDIT, well, many millions at least) What sort of risk are they taking that justifies their rewards and how does it help the economy? And the individual bankers who will take millions of dollars in bonuses home because they get paid for the 12th time and don't get penalized for the 11 others, what sort of innovation did they contribute to the world?

I think we all understand the deal with investors who get in early and invest money in something that has a chance to fail will make money if it succeeds.

The IPO is a suckers game. It says me as an insider value the company less then you as an information limited outsider. If Twitter is worth $50 bucks a share why were its investors willing to part with their stock for $26 a share only yesterday? Sometimes you can profit even in the presence of this information disparity because the company will outperform its expectations, but now you're 1 out of 144...

<rant over> :-)

EDIT: I think a solution to that is perhaps a combination forcing companies to go public sooner (limit IPO valuations or spread the share sale over longer periods), combine with more limits on insiders, more and earlier disclosure and perhaps combine that with a more KickStarter like model - eliminate the middle man.

The undrewriters don't always come out doing so well. Take a look at the Facebbok IPO as an example. They didn't end up selling all of the stock that was issued in the IPO and had to buy up stock back from the market at elevated prices in order to keep the stock from plummeting on the first day. They still made money but not what they expected.

As for the insider vs outsider. In order to issue an IPO, a number of stocks are agreed to be issued. These stock either come from the company issuing more shares and diluting the value to current stock holders and the company receives the money from the new share purchase, or the stock holders offer up some of their stock to be sold in which case they receive the money. I believe is usually mix of the two. The current stock holders don't offer all of their shares up. Just enough (I believe this is set by the SEC) to enter the market.

The underwriter assumes a large risk and for the portion of the stock that goes through them to market, they are paid the $20 difference ($26 to $46). As well they facilitate the actual sale of the shares. This is not an easy task (again see the technical issues with the Facebook IPO).

So in the end the 11 rounds of investors get $26 for some of their shares, in order for the rest of them to be worth $46 or now $50. They are also now allowed to sell those remaining shares on the open market. Something they were not able to do before the IPO.

No one is getting screwed here. There is a very big pie, and everyone, from the first investor to the undrewriter, gets a piece.

I believe that usually the underwrites have buyers for all the stock prior to the IPO. The only reason they intervene to keep a stock from plummeting is to secure their own profits as they usually get options on the stock as part of the IPO deal. Talk about conflict of interest. Obviously a lot of the buyers are funds managed by other investment banks. Again talk about conflict of interest. What was the story the other day, that GS didn't record a single day of trading loss for an entire year...

That said, most of the money still does end up in the company which can use it to build its business. The process isn't completely broken. But it's very inefficient.

>The undrewriters don't always come out doing so well. Take a look at the Facebbok IPO as an example. They didn't end up selling all of the stock that was issued in the IPO and had to buy up stock back from the market at elevated prices in order to keep the stock from plummeting on the first day. They still made money but not what they expected.

If they still made money, what's the risk? I don't consider "X chance of making 100% return, (100-X) chance of making 10% return" to be much of a risk.

Then when you have a company, don't IPO. Then you don't have to give anything up to underwriters.

One comment... Google and Facebook each tried to stick it to the bankers in their own ways. In the end both struggled as a result. Google tried to cut out bankers and make them play by special "Just for the Google IPO" rules and rates. By creating a custom-IPO process, they saved on banker fees but wound up leaving an awful lot of money on the table.

Facebook went the other way. They tried to grab every last penny on the table. Their stock underperformed post-IPO which isn't good either.

You can put Twitter in an overreaction the other way - they didn't want to leave money on the table (raising the shares to 26) but didn't want to be too greedy either.

The bankers get paid to line up supply and demand. They may be helped by being an oligopoly, but right now the market isn't set up to cut them out of the loop.

Help me understand why Facebook taking every dollar out of the market was a bad thing for them. I understand why Wall Street wasn't happy about it (since they expected a pop they could profit from & had to buy stock to fulfill their obligations... and why should taking a company public be an entirely risk-free profit opportunity anyway?)

But, why was it bad for Facebook? Sure, their stock was below the IPO value for almost a year, but employees almost certainly had their options priced well below the IPO price, right? What other ways can a slightly lowered stock price hurt a company in the year after an IPO? Genuinely curious about this.

Not "certainly." We had an IPO where I work in 2012. People hired very recently before the IPO had a strike price near the offering price.

Moreover, there is a mental dynamic when recruiting. A steadily appreciating stock is a helluva recruiting tool.

I saw a few intelligent commentaries about this who agreed it was a great IPO for Facebook. The way I think about it, they floated it like a wet sponge, something you can only do if you are confident and taking the long view.

You're correct in your understanding - the company maximized the price and ended up with a nice chunk of cash in its bank account.

Internally someone starting the week of IPO might have received his stock grant at that week's price might not feel particularly upbeat when the stock price is later cut in half. There's always some churn and renegotiation going on at the companies whose stock price suffers significantly, and that makes it harder to concentrate on execution.

The backlash will come the next time Facebook tries to raise money. That said, the cost is much less than the amount of money that Twitter left on the table.

Also - if every company flopped post-IPO, the IPO market would die. That's not Facebook's immediate problem, and again "doing the right thing" isn't worth leaving $20/share in the hands of flippers.

By creating a custom-IPO process, they saved on banker fees but wound up leaving an awful lot of money on the table.

Could you elaborate? I thought the dutch auction was a good way to maximize google's share of the pot (by taking money away from well-connected people who received shares at the IPO price). Looking back at historical reports it only "popped" 17% ($100 from offering price of $85) compared to twitter's 73%.

The price went up ~5x from the $85 within the first year. One interpretation is that they had tons of good news. Another is that the initial investors didn't understand the value inside of Google, and perhaps the traditional road show would have helped.

I view the bankers like real estate agents. Many are worthless, but a good real estate agent can raise the price you sell your house for much more than the 6% in fees they charge.

"Google and Facebook each tried to stick it to the bankers in their own ways."

This is a good example of a situation where you should stay close to what you know and stop thinking you can outsmart people who make a living a certain way everyday and know as much or more than your advisers. And definitely more than "you" (meaning the google guys) who made decisions based on things they read or what they were advised as opposed to having an actual seat of the pants feel for why something is done a certain way. And the pros and cons.

There is a reason, you know, why people cooperate with the "mafia" and pay the vig and play the game. Is it right? No. But stick to what you know and stop thinking you can outsmart others out there who do something for a living and have established procedures and actually do add value in a system that essentially works. So others take their cut.

mathattack is wrong though. Both Google and Facebook improved the amount of money the company got instead of lining the underwriter's pockets with that money.

With all due respect (and I'm wrong a lot!) Google left quite a bit on the table. Their stock price went up 500% from $85 over the next year. Wouldn't they have been better off capturing some of that?

The jury is still out on Facebook. Their IPO could hurt them getting money in the future, but maybe not.

It's not the underwriters who get paid when stocks double, it is the people they allocate the stock to.

"If Twitter is worth $50 bucks a share why were its investors willing to part with their stock for $26 a share only yesterday?"

http://en.wikipedia.org/wiki/Time_value_of_money http://en.wikipedia.org/wiki/Expected_value

Yes. Yes. That's not the question. The question is why does an insider who is intimately familiar with all the details of the business and has been following it since it started values it so much less than Joe Plumber who is clueless and buying it today on the stock market. If Twitter is such a good business why would I as an owner want to part with it? What is it going to be doing with the cash it raised?

As Warren Buffer says, in the short term the stock market is a beauty contest. So yeah, Twitter is very beautiful today.

The idea behind the stock market is to have a way for businesses to raise money for expansion (other than getting a loan from the bank) and investors buying into the future profit of this expansion. This is capitalism and it's great. It has turned into this casino pumped by easy money with wild up and down swings where any correlation to the soundness of the business, its prospects or performance are purely coincidental.

Market Dynamics.

The "insider" doesn't have to compete with as many people for an ownership share. A small sampling of "insiders" does not efficiently price a security the way an offering to the greater market does.

This idea that capital markets are designed to screw over the little guy is amusing to me to see HERE on THIS WEBSITE of all places.

You act like the market works like Amazon.com where these scary "insiders" list $45 price tags on things. In reality, people are creating BIDS. That's how it works.

I'm not sure what your expectations are of this web site but as far as I can tell we're a bunch of people with different opinions. :-)

To me an IPO is very much a conflict of interest situation with asymmetry of information. There are laws to govern this but there is a huge gray area.

Once a company is public it's a little different...

In my opinion capital markets have been getting more broken in many ways and have been favoring the big guys over the little guys in many ways. I say that as someone who invests in the markets, have benefited from stock options and pretty much seen things from many different angles. In the last 15 years capital markets have failed to deliver the economic growth and the gap between the rich and the poor has widened.

It's not your specific opinion here that amuses me, but that there is certainly an anti-twitter-ipo vibe here. Across several stories. I've been a regular here for 5 years or so and I've seen many IPOs come and go and few have been treated with this level of derision.

You're obviously entitled to your own opinion, and certainly IPOs carry much risk. That "insiders" get made liquid is not, IMO, one of them. Somebody who invested in GOOG on day one would've made over 10x on their money today. Somebody who did the same in ZNGA would not. It's obviously very risky, with potential for commensurate reward.

I'm not sure why you think the markets have "failed to deliver the economic growth" over the last 15 years, or that it's somehow their job to "deliver" economic growth. I think us "little guys" who have invested in the market in that time have done very well on balance.

I'm not one for long back and forths, so feel free to have the last word if you'd like it. I replied initially because I'm very much turned-off by the save-people-from-themselves philosophy.

You quoted Buffet, I'll quote Jesse Livermore: "t was never my thinking that made the big money for me, it always was sitting."

If you think the "little guy" is screwed over by the "big guy", become a buy-and-hold investor. There's little way to be screwed there. Spread your bets out--diversify--and buy and hold. When it comes to trying to time the market or play ER or day trade, you're right, it's hard for a retail investor to make a buck. So buy and hold and let the stock market help you accumulate wealth the way it's done reliably for over a hundred years.

If it is not the job of the capital markets to facilitate economic growth then what are they there for?

facilitate != drive/deliver

Or $18 the day before.

One answer is there are a lot of people who just want to get their billion out. Or million. Or hundred thousand. They are largely undiversified. They are selling to diversified owners who are less impacted by day to day price shocks.

The underwriter take a huge risk in the deal, underwriting means that he sometimes needs to buy the shares from the company (i.e. Twitter here) and Twitter will not need to care if the underwriter get reed off the shares on the market because he got paid first this is a huge risk .

A second point is that the underwriter is paid to keep the shares liquid on the market at least for the first 30 days depending on the contract deal. It means that the underwirter will need to put himself on the buying side or the selling side everytime someone want to buy/sell his shares ... this is a huge risk again just look at the volume of the share deals everyday on the market to see what kind of liquidity the underwriter need to keep ready to play ... I agree with you that this don't create value for the economy out there but it is necessary to keep the wheel rolling ...

Recently I've been thinking about Kickstarter et al as a tech sector replacement for the stock market. What form or function does the stock market lay for companies that can be replaced with a more direct consumer/business to company investment? Is the instability and irrationality that speculation and large investment groups bring to the stock market necessary for funding/investing?

Exactly why would kickstarter be immune from irrationality, instability, or speculation?

On every trade two speculations are made, I don't see how bringing in unsophisticated retail investors would help with regard to price discovery.

Thanks Chuck for the thoughtful reply. If anything, I think I need to direct my negativity towards the public stocks and shares system as whole (i.e. it just appears to boil down to a numbers and sentiment game that doesn't seem to be a rational way to determine a company's "real" value at any given point in time) rather than looking for cynical players ripping people off.

Looking at it another way: the whole thing is intrinsically speculative. Starting a company is speculative, investing in a company early on is speculative, IPOing is speculative, buying publicly traded shares is speculative. It's all speculation in a never ending quest to divine what a company's (or idea's) true value is.

The more I go down the rabbit hole trying to think about and understand all of this, the more I find myself ending up here: http://en.wikipedia.org/wiki/Wikipedia:Getting_to_Philosophy :D

You're welcome of course, I suggest though that you might want to think about this a bit,

" it just appears to boil down to a numbers and sentiment game that doesn't seem to be a rational way to determine a company's "real" value at any given point in time"

The interesting question is "What makes this important to you?"

I ask because there is absolutely a rational way to determine a company's value, it involves analyzing its market, its product, its ability to grow and develop and the its ability to stay ahead of others who would try to do the same thing.

Putting the world "real" in scare quotes suggests that there is a large difference between a value that you came up with internally and the one being exhibited on the stock market today. This isn't a whole lot different than the 'SnapChat is worthless' discussion of a few days ago. It also isn't surprising since different people value things in different ways. But it is important to recognize that you are not wrong, if it is worthless to you, it is. And that is just as valid an assesment of the company as one that thinks it's the best thing since the wheel.

So why is it important?

> if it is worthless to you, it is

When I was 8, I was selling some baseball cards at our yardsale, priced per their trade book value. At the end of the day, I was distraught because the only offers I got were well below the cards' value. The response from my mom still resonates to this day:

"Things are only worth what people are willing to pay"

There is no such thing as 'real' or 'true' value. Looking for it is akin to waiting for Godot.

The only way you can ascribe value is from the point of view any one particular entity (including yourself) at any one particular time. The only way you can see it is when a transaction takes place.

Direct your negativity towards poor regulation but also players who use lobbying and political gifts to enact their will and who use money and influence to escape prosecution.

There's nothing wrong with stock markets conceptually, and there are indeed some which are nicely regulated and quite fair.

The risk of losing money in a savings account is not zero. By losing I mean, losing its purchasing power. Banks have repeatedly gone bust throughout all of history, in all countries. But there is such a thing as deposit insurance. In the U.S., your savings (up to 100K per account) are 'insured' by the FDIC, but the FDIC has a mere pittance of money compared to the total deposits in all the banks, or even in one of the big banks. It cannot, using the money it has, save all depositors if a big bank is allowed to go bust.

So, given your bank goes bust in say, one of those recessions the U.S. experiences in greater and greater frequencies, either you lose nearly everything in your 'savings' account as the FDIC doesn't have enough money to cover all of its deposits the bank loaned out for its own profit - fractional reserve banking serving YOU since 1913. OR the FDIC pleads to the Federal reserve to 'give' it money, print it that is, causing massive inflation. Though in that latter case, you get the money first, so get to spend at current prices before the influx of new currency causes prices to inflate.

Though in current times, the solution is that these banks are too big to fail. So whenever they gamble your money to make a profit, yet lose, they get some of those nice big bailouts from the Fed. In that case the banks get to the spend the money first, and everyone else holding USD gets an inflationary hit - again you lose your purchasing power of your savings.

I do just want to point out that corford is spot on with the banks' piece. They do add value by facilitating the process, but ultimately the fees they rake in, and I mean rake in, are disproportionately high compared to that value.

Only a small percentage of TWTR shares were up for sale in the IPO--there are 544.70M total shares and just 70M were part of the IPO (a little less than 13%). Unless I missed something the shares sold in the IPO were issued, so for example if you were a VC with a million shares of TWTR you would still have a million shares of TWTR (now valued at $45M). The money from the sale will go to Twitter, not an investor. Twitter did "leave money on the table", but their #1 goal was not to pull a Facebook and have the IPO be DOA.

Ahh now that's the sort of info I was hoping someone would reply with. So the shares that made up the IPO offering came from newly issued stock, not from existing share holders?

That makes it all a bit less cynical to me since all it means now is that the investors are worth more on paper. They still have to actually sell some of their shares at some point to realise any profit and presumably it's not easy for them to sell large quantities quickly (i.e. they're in this for the longish haul and thus far haven't covered their losses to date with actual bankable money)?

Would have been better in my book if they'd have waited until twitter at least turned a profit before going for the IPO but then I guess why wait if you're only plausible exit is IPOing and the banks are telling you the market will support it.

"Insider" selling in the IPO is rare (Facebook was an exception). Insiders typically must wait for a secondary or the 180 day lockup during which the company must demonstrate in a more public way how it behaves.

When you say "Joe Public" you make it sound like the stock is being bought with our tax dollars.

Anybody who buys TWTR is making an informed decision and expects Twitter to do very well. It's hard to imagine Twitter today eventually being worth the current market cap of $25B. However, take a look at Google as a prime example of success.

When GOOG first hit the market in 2004 it got a market cap of $23B. It was somewhat hard to imagine a web search company ever being worth that much. Today it's at $340B.

Google had a solid, well-working monetization mechanism: AdWords, released in 2000, 4 years before the IPO. It was easy to see how it performs financially and why it might skyrocket.

Can someone enlighten me how Twitter might earn some steady money?


Think about all of the paywalled news outlets out there. Think about how many journalists tweet their stories to drive their personal brand. Think about immensely popular twitter accounts and sought after domain experts. Think about the fact that someone who is very entertaining on twitter needs to leave twitter to ( consult, sell t-shirts, produce media, etc. ) if they want to make money. Think about how t.co makes it possible for them to track url usage attributable to them.

Remember when micropayments for media was a buzzword?

If you still don't get why twitter might be undervalued. I would be happy to to explain it to you with, charts, graphs and a full research report; for a fee.

I don't want to sound dismissive, but this is very similar to the 'eyeballs' strategies that were bandied about prior to 2000.

If a million people use a link to go to a paywall site, that's awesome - except as of now the data shows that Twitter users don't become buyers as a general rule.

Can they make money? Sure. Can they make money with ads? Sure. Can they make money with massive vertical media funnels? Well...what will make them more successful than Apple, Google, Microsoft and TimeWarner who have all been trying to do the same exact thing for many years?

Not saying they won't...just saying I'd like to see some track record before I buy into an idea that no one has been able to make work yet.

Can they make money? Sure. Can they make money with ads? Sure. Can they make money with massive vertical media funnels? Well...what will make them more successful than Apple, Google, Microsoft and TimeWarner who have all been trying to do the same exact thing for many years?

Err.. I'm not sure about Apple or TimeWarner, but Google and Microsoft have been very successful at making display advertising work well.

Check out the IAB 2013 Half Yearly report[1]. Some key quotes:

Display-related advertising accounted for $3.1 billion or 30% of total revenues during Q2 2013, up 8% from the $2.9 billion (33% of total) reported in Q2 2012. Q2 2013 Display-related advertising includes Display/Banner Ads (19% of revenues, or $1.9 billion), Rich Media (3% or $329 million), Digital Video (7% or $676 million), and Sponsorship (2% or $181 million).

Note that they aren't counting mobile advertising as display advertising (even though much of it effectively is).

Mobile revenues continued to quickly gain share, representing 15% of total revenues in HY 2013, as compared with 9% reported in FY 2012 and 5% in FY 2011. First half 2013 Mobile revenues represent 90% of total 2012 Mobile revenues.

Note that Twitter has particularly strong mobile usage.

Many people don't realize that people still pay a lot for "eyeballs":

At 65% of advertising revenues through half-year 2013, performance-based pricing appears to have leveled off, even experiencing a slight decline from its high of 66% for the full year 2012. As a result, CPM/impression-based pricing gained slightly, up to 33% for the half-year, its highest point since 2010.

[1] http://www.iab.net/media/file/IABInternetAdvertisingRevenueR...

Who said anything about not making display advertising work? I'm talking about the whole vertical integration to television that so many analysts are basing their 75X revenues pricing on.

From using their ad service I can say:

their demographic targeting is razor sharp, you can target followers of specific users, or people within any of the standard demographics. You can also target people by specific interests.

I think this is the AdWords for branding

That isn't the direction I was going with it.

I think there's a big opportunity for twitter to be middleman allowing authors to charge for their services. Twitter influencers might get articles for free publicity. But most people would pay to twitter to pay authors proportionately; and if you logged in with twitter on any news site; it's covered.

If I could pay 1 outfit and have it distributed fairly to everyone whose stuff I read... So that I don't have to get a subscription to all of [ nytimes, latimes, chronicle, guardian, bloomberg, j.random.techblogger etc. ] But never got paywalled and knew the authors were getting paid; I would find that a compelling offering. Now Amazon could probably make a play for that position, but they have some structural issues that limit them and twitter has a better story for independents.

Advertising will be a major component. But I think there are some other powerful revenue-making opportunities around data and services.

Many investors appreciate a blurrier future since it can lead to more upside.

I would love to see twitter take the other route: no advertising, charge for the service. Keep the quality of the experience high (which advertising will certainly not do), and it will be more than worth a dollar or two per year to millions of people. Offer a premium service to high-value individuals and businesses (quite what that offer is, of course, I'm not entirely sure).

Advertising online is, I believe, in the long run, going to be tricky to maintain as a source of income, even for content-centric sites. For service-oriented sites, such as twitter, I just don't think it's the right approach, especially given a nice API which allows the ads to be bypassed. OK, I'm sure plenty of people will disagree, but it would be really nice for a high profile social network to just try this and see if they can make it work (I know linkedin's model is essentially this, but I see them as a very different beast from the general interest communication juggernaut that is twitter).

Partnerships with TV networks seem to be the big thing now. I guess lots of people cozy up to their iPad and post reactions to TV shows in real time on Twitter with hashtags -- driving live viewing of TV, watching of ads and giving marketers another way of delivering coordinated mesages to people.

I see you listen to NPR also.

Well, they already have hundreds of millions in revenue that has been growing 100% a year. It's not like they've never made a dime. The other responses here give a few ideas for new revenue streams as well.

A lot of investors actually prefer a less known upside.

> Anybody who buys TWTR is making an informed decision

If only.

Regarding tax dollars: please take a moment and google for "QE3 stimulus package". If not tax dollars, it's inflation dollars, which is an indirect tax anyway.

This is total nonsense

No it's exactly what caused the massive asset inflation across all major assets in the US economy in the last four years. Look up the perfect correlation between the S&P and the Fed's pomo shots, and its balance sheet expansion.

But don't take my word for it. Recently the US Treasury conveniently wrote a paper admitting that the Fed was responsible for spurring the asset inflation.

The dollar has lost 97% of its value, according to the Fed, over the course of a century. That was before they were knee deep into the economy 'printing' trillions - having increased their balance sheet by 300% in five years. How can they ever stop printing while the US Govt. runs a $700+ billion deficit? They can't. The outcome is obvious.

The Fed intentionally re-inflated assets, because it's the only gimmick they have left. Once you lower interest rates to zero, there's nowhere else to go but to intentionally try to spur asset inflation and generate a fake wealth effect, which the Fed has done two other times in the prior decades. They use their POMO program, along with mortgage purchases and cheap interest rates to inflate the stock market and the real estate market. It's real simple.

There has been no job recovery. There has been no manufacturing boom. There has been no improvement in the welfare and poverty picture. There has been no improvement in incomes. And we're still missing seven million full time jobs, and millions have fallen out of the labor force.

So why are asset prices booming? The answer to that is obvious as well.

Alright, since you can't speak for yourself or rebuttal with anything more meaningful than "This is nonsense.", I'll respond to the article.

1.) Quantitative Easing is printing money -- "This is because when the Fed buys bonds from banks it does so by crediting those banks’ accounts at the Fed with reserves that didn’t exist before. But it’s misleading to call this process “money printing” because it doesn’t actually do anything to increase the amount of money in circulation. In fact, in our monetary system, most money is created by private banks and not the Federal Reserve. When a bank lends you money on your credit card, that’s “printing” money."

They say it's misleading to call it "printing money" because all they do is increase the amount a private bank can lend out. Apparently it's not their fault for putting in the extra reserves, it's the private bank "printing the money."

2.) Quantitative Easing will eventually lead to inflation: "If the government literally began printing money and started mailing out new $100 bills to citizens, that would lead to price inflation." --- Apparently, using their own example above, people getting lent more money and using that lent money is not inflation. The author is purposefully evading the core argument and instead paints a ridiculous definition of inflation (direct inflation). It doesn't take a genius to see that more reserves = more money to lend = more money to spend = more money in circulation.

3.) Quantitative Easing is responsible for recent stock market highs --- Point isn't pertinent to the discussion and quite frankly, I don't care. The stock market is driven by people who decide to buy or sell. When more people buy, prices go up.


So, what are your thoughts?

To say that all recent stock price increases, much less the one-day price of twitter's stock specifically, are caused by QE alone is an extreme claim and it is not my burden to disprove it.

The simpler and more plausible explanation for stock market growth is coinciding GDP and earnings growth. QE should lead to a mild preference against (UST) bonds by lowering yields, but it is dubious that this alone could explain stock market indexes doubling over the same period. Twitter's one-day stock price specifically is idiosyncratic investor behavior and blaming that on QE is absurd nonsense.

It's a common misconception, but QE does not change the ability of private banks to make loans in any way. If you think I am wrong about this, please explain the mechanism by which you think QE increases the ability of private banks to make loans.

In fact, there are almost no serious arguments for why QE should stimulate the economy in any way, except for a small straw, which is that QE might reduce long-term interest rates, and that this drop of long-term interest might induce more people to take out bank loans and increase their spending in this way.

Also, yes, Quantitative Easing might lead to inflation, but this is exactly what people hope for in the first place :-)

And no, Quantitative Easing will not lead to uncontrollable inflation. If loan-driven inflation gets too high, the central bank can simply decide to raise interest rates and stop QE again.

> If you think I am wrong about this, please explain the mechanism by which you think QE increases the ability of private banks to make loans.

Not the parent but I thought depository and possibly other types of loans were limited by the size of reserves.

The rules say that amount of reserves held by a bank must be at least r * X, where r is the reserve ratio and X is the amount of deposits owed by the bank. That is, there is absolutely no link between loans and reserves in the rules (laws and regulations).

As long as the amount of reserves is close to the legally required minimum amount, there is an indirect link between loans and reserves, but its causality goes in the other direction as traditionally believed. When the volume of loans increase, then deposits increase also. Then the banking system as a whole needs more reserves.

If the amount of reserves available were fixed, this would lead to banks bidding up the overnight interbank interest rate. However, after some disastrous experiments in the 1970s and 80s with alternative policies, central bank policy is to keep that interest rate fixed. And that means: the central bank accommodates the banks' desire for more reserves by buying assets from the banking system.

Conversely, banks bid down the overnight interbank interest rate towards zero if there are too many reserves in the system, unless the central bank pays interest on reserves. This is exactly what central banks in most of the Western world want to happen today.

In any case, the story is that the amount of loans made by banks causally sets a lower bound on the amount of reserves in the system. The reverse direction does not hold.

Again, anybody who believes the latter would have to exhibit an explicit mechanism that establishes a reverse causality. There is no such mechanism in the rules (i.e. laws or regulations).

Oh, and if you are appalled because you believe that all this means that banks can just make loans as they please: they can't. However, the limits on loans are set by capital requirements, and for good reason: capital is a suitable buffer against defaulting loans, reserves aren't.

So say I have $100 of deposits, reserve ratio 0.1, lend out $90. My reserves are $10. Now say the government increases my reserves by $5. Can't I now lend out an additional $5 that I wasn't able to before?

Again, that's not how it works. You don't need the reserves at all (if you're a bank; if you're not a bank, then you have never in your life held reserves, and the way you may or may not be able to make loans is qualitatively different).

When a bank makes a loan, they simply create a new deposit, say worth 100#. If the reserve ratio is 0.1, and assuming that bank had exactly the required reserves before this operation, then they will have to acquire 10# in additional reserves within a week or two (yes, you read that correctly; reserve requirements are after-the-fact requirement that can be fulfilled with some delay).

More likely, though, the person or company that the loan was made to will use these 100# to pay somebody else, and in doing so, the newly created deposit is transfered to another bank B.

To balance this transfer, bank A must transfer 100# in reserves to bank B. Usually, it will simply borrow those reserves from bank B against an appropriate collateral such as the loan it has made. The profit of bank A from the loan is the different in interest between the interest owed by their customer, and the interest they have to pay in the interbank market to bank B.

At the same time, bank B now has an increased reserve requirement, and they need to get those 10# from somewhere.

As I explained previously, this will lead to the interbank rate being bid up if there are no excess reserves in the system. When that happens, the central bank buys assets from banks in exchange for new reserves (instead of outright buying, a repurchase agreement may be made).

However, banks also have the option to directly borrow reserves from the central bank, at a fixed interest rate.

Thanks for taking the time to reply, it was informative. To summarize: banks aren't constrained by reserve ratios because they can borrow reserves from other banks or, if total reserves are low, from the central bank whose policy is not to let total reserves get low due to the impact on interbank rates.

Is that correct?

Do you work in finance? Can you recommend any books on money?

That is correct as far as my understanding is concerned. And again, I think it's important to point out that this doesn't mean that banks are unconstrained, it just means that the constraints are somewhere else (capital requirements and internal risk calculations mostly).

I do not work in finance, but I became curious about such things when the financial crisis hit. I ended up reading (among other things) Understanding Modern Money by the economist Randall Wray and the more populist 7 Deadly Innocent Frauds by the former trader Warren Mosler. Those books were the first time that I glimpsed a coherent view of what "reserves" and related topics are (seriously, almost every traditional media mention of the word "reserves" is a bit confused in some way - this really should be a topic in school curricula).

Since then I've just been piecing more things together by following blogs and tracing their statements back to original papers, including things like the actual text of the Basel regulation agreements and corresponding national laws (of Germany, where I'm from) and central bank publications.

Thanks again

I'd prefer this to QE because it should cause a bigger increase in money velocity. http://en.m.wikipedia.org/wiki/Demurrage_(currency)

Asset price inflation is not consumer price inflation. The average person is not seeing any significant level of consumer price inflation.

The simple answer is that a share price is the present price to pay for the future cash flows of the company. Just because they aren't making money now doesn't mean that will always be the case. If twitter starts making billions of dollars soon, and starts paying that out to investors, then everyone makes money.

They "eventually foot the bill" if twitter doesn't make money. Your cynicism reflects the fact that many companies don't end up making enough money. But there are counterexamples like GOOG where joe public actually did fairly well

I find it hard to accept that a rational person thinks twitter will ever have the profit earning capability of Google. It just seems nuts to me to justify twitter's future earnings potential on a black swan event.

Speculation on the other hand I can sort of understand and accept (although it's kind of sad that the speculation is driven entirely by hype rather than any kind of solid metrics).

It doesn't have to have the earning potential of Google to be successful. It's valuation is 1/10th of Google's.

1/10th of the earning potential of google is still... substantial.

Fair point

I find it hard to accept that a rational person thinks twitter will ever have the profit earning capability of Google. It just seems nuts to me to justify twitter's future earnings potential on a black swan event.

I don't think anyone has claimed Twitter is going to be as efficient as Google at making money. But TV stations make a lot of money, and Twitter has a closer relationship to its users than a TV station. Twitter also has more users than most TV networks have viewers.

It's hardly a black swan to follow a model that has been proven to work over 50 years (ie, advertising around entertainment).

speculation is driven entirely by hype rather than any kind of solid metrics

Why do you say that? There are very solid metrics on Twitter's user base, and very solid metrics around what an average user is worth to an advertiser, either on the web or on a mobile device.

> Just because they aren't making money now doesn't mean that will always be the case.

This is dangerous speculation.

That's the nature of investing in stocks. If you want something guaranteed, open a savings account.

Unless you're in Cyprus.

Welcome to VC. But seriously, that's the stock market for you. Gambling with lots and lots of rules.

It's also dangerous to assume that all companies must be profitable from day one. Facebook is a good example of a company that was "losing money" but was able to turn profits recently.

Which is not to say that I believe twitter deserves the market cap currently implied by the share price.

Facebook is also a good example of a company with its business model out of whack, meaning this ride isn't going to last.

It is dangerous, that's the whole point. Investors are expecting high returns - this is not exactly a slow-growth stock, and they've taken a commensurately high risk in exchange.

Note that GOOG hasn't actually paid out any of its cash flow to investors.

Until recently, neither has AAPL. Doesn't mean the cash disappeared.

GOOG has 56.52B in cash and short-term investments (as of end of september). It's on GOOG's books but could easily be paid out (either directly or in the form of a share buyback)

The market prices stock accordingly, though. Google reinvesting cash into the business is why their stock is now over $1,000 a share.

and starts paying that out to investors

That part doesn't actually happen anymore these days rendering most of these new tech stocks very complex insider wealth generating schemes.

I have a similiar thought I always return to when I read news about big IPOs- what (if any) value is added by stock exchanges? The only thing I see is the ability to use stocks as long-term storage for excess money.

* After the IPO, money made by circulating stocks is of no benefit to company in question. * Companies rarely pay out dividends (I usually see that in news, as if it was something special)- so buying stock in hopes of dividends does not seem a good idea. * Publicly traded companies are then put under pressure to meet arbitrary analysts' expectations by majority shareholder(s)- which does little to help company meet it's long term goals.

None of this seems to create any value for anyone except stock exchange. So isn't stock trading just a legal way to gamble?

I can easily see the value added by banks (handling money transfers so we don't have to deal in cash, trading foreign currency when I need it, etc). Traditional investment is also (meant to be) of benefit for both parties- people with excess money can help fund businesses, which then in turn pay them back from their proceeds.

There sure needs to be something I am missing in the stock trading (the question being- what exactly?)

I think you accurately described the Greater Fool and the nature of this tech IPO climate. http://en.wikipedia.org/wiki/Greater_fool_theory

How else could companies with no revenue go public?

quick note: no profit =/= no revenue

How does Wall St always seem to end up with the blame on these threads? They priced the Facebook IPO too high and they get the blame, they priced the Twitter IPO too low and they get the blame. The company just went public and raised $2B+ at a higher valuation initial valuation then anyone expected. IPOs are tricky things to get right. Give it a few months for the hype to settle down before you start screaming about "joe public".

Yeah how could people distrust banks after they've shown to be so completely trustworthy and transparent recently...?

And the SV/VC/Tech startup culture is just brimming with altruistic, wonderful people?

Sociopathy isn't restricted to finance. Silicon Valley has seen its share.

So because there are some corrupt people in Silicon Valley, one is simply not allowed to distrust bankers who have proven to not be trustworthy? Life must go well with logic like that.

>So because there are some corrupt people in Silicon Valley

So because there are some corrupt bankers, one is simply best served to dismiss an entire occupation as "proven to not be trustworthy"?

Your lessons in logic are laughable.

I am not an expert, but it seems like there should be a better IPO mechanism that sets the price just right. Why not have an auction?

Pricing an IPO is more or less an auction. When pricing an IPO they set a range and then meet with institutional investors to sell their book (in this case 70M shares. The original price was 17-20 per share, and there was excess demand at this price, so the bankers and company, pushed the price to $26 per share.

WS is the ticketmaster of the financial world: public companies, private corporations, startups, VCs, angel investors, investment firms, hedge funds, and HNWIs all blame wall street for some reason, yet they thrive on the services WS provide (and depend on the money made available by WS)

If twitter never makes money, you're mostly right. If twitter eventually makes enough money to justify its share price, you're wrong.

In 2013Q3, Twitter made $168M of revenue (not profit).

How do you think, how long is it going to take them to cover their current market capitalization of $24670M? After that, they will start making profit for the shareholders.

How long ago was $168m their annual revenue? How long ago was their annual revenue $0?

If you're making an argument that their revenue growth has plateaued, that's a separate argument. But their current growth curve is impressive.

Your point is valid, but past performance is not indicative of future performance. Just because Twitter went from $0 to $168M (which is chump change on the NYSE), that does not mean they will continue on that curve or that there's proof that they haven't already tapped their market.

Under Bayesian inference, past performance is the ONLY indicator of future performance...

Bayesian inference would only be relevant with the management team, not the growth of a market. In order for Bayesian probability to be used, it would require other exact or remarkably similar scenarios by which to build on.

Not at all on the stockmarket.

Your comparison of revenue to market cap is nonsensical.

Shareholders will make a profit if the stock goes up or if it pays a dividend.

Apparently Twitter thought it was a good deal: http://www.cnbc.com/id/101110025

Banks' incentives are misaligned: a higher share price raises fees collected from underwriting since they get a % of total money collected in the IPO; a lower share price leads to commissions, goodwill and management fees from the private wealth/managed fund clients.

Could anyone elaborate on how these concerns are/may be separated to keep the process transparent?

The underwriter's goal is to facilitate a successful IPO. There are obviously different interests at play. The company and its investors would like to say as high a price as possible. The new public investors the shares are being sold to would like to see as big a profit potential as possible. The bank's job consists of choosing a sensible price point for all parties involved and advertising the offering so as to generate interest in the shares. Once the actual IPO happens, the public is able to see whether or not the bank did a good job. This in turn is important for the bank's reputation and ability to acquire future deals.

The FB IPO was widely considered a failure because the initial share price was unsustainable. The underwriters had to buy massive amounts of shares on the IPO day to stabilise the price above the initial level. This, however, couldn't avoid the crash over the next months which lead to early public investors being underwater. Morgan Stanley's (as well as Nasdaq's) reputation took a big hit thanks to this and it will haunt them for quite a while. It's also the reason why the TWTR IPO is lead by Goldman Sachs and the shares trade on the NYSE.

Successful for who? The existing insiders? The underwriter? The new investors? (subscribers).

The FB IPO certainly wasn't a failure in the capital raising sense. Fb raised a lot of capital than if they had IPO'd at $25 outright and the stock price had stayed there.

Hard to determine which part your most concerned about. When $25b of wealth is being created, there are going to be some folks making money. And you might not think some of those folks earned their take.

First, you're too fixated on "loss-making". IPO companies are almost by definition loss-making. IPOs are fundraising events. Growth companies use money to invest in the business for growth, not profits (yet).

Second, it's rare for early investors to cash out on the IPO (Facebook was an exception). Instead, they usually wait for a secondary or for the lockup expiration.

Third, yes, there is frequently an artificial "pop" on the day of the IPO because of the pent-up demand but that usually tempers quickly. Investors should definitely be careful and know what they are getting into. If they bought into Yelp, LinkedIn or even Facebook at the popped price and hung on as long term (read: every) investors should, they are doing fine.

Fourth, yeah, the investment banks get to dole out typically underpriced shares to their top clients. Get over it.

Fifth, the banks do take on some risks. Facebook IPO presented the banks with considerable risk of loss depending on when the banks were able to unwind their positions.

Sixth, the pre-IPO market has evolved such that a lot of people who want in are getting in prior to the IPO.

Feeling cynical might be fun but isn't very attractive or lucrative.

> When $25b of wealth is being created

Woah there. I think this is the fundamental issue. $25b of wealth hasn't been created. It's not free money. It's a scam.

Could you explain why you think that IPOs are scams that don't actually create wealth? Or is it just this one?

Though I'd rather say that an IPO serves to acknowledge the worth already created by the company before the IPO?

I think bolder88 has a problem with the idea that an IPO creates intrinsic wealth, or somehow increases the overall "wealth" of the entire system (either global or within a given country).

Yup, and now the word "wealth" is just a random series of letters when I read it.

As far as I can work out, the IPO does not "create intrinsic wealth", the value is generated by having a successful startup, and this value is then recognised by the market at the IPO - If there was no success in the company already, there would be no wealth at the IPO. But this could be a semantic difference between "creates" and "recognised".

How has $25B of wealth not been created? The market believes that the price of the stock is a price such that the total company would be valued at $25B. What asset can you own other than the dollar that is not based on market pricing? Is $25B worth of gold today worth $25B of wealth? What if the world woke up tomorrow and thought gold was worthless.

I think you have different requirements on what constitutes "wealth".

If you print some more money is that wealth?

Yes, because it could be exchanged for other goods and services. You could buy gold or land (if you printed enough money). Is that not "wealth" to you?

Just printing money in the absence of a reason is generally regarded as a bad idea. More money in the system casing the same quantity of things to buy just causes prices to go up to compensate. In short, inflation. this is very basic economics.

So the short short answer to "If you print some more money is that wealth?" is "No".

https://www.google.co.uk/search?q=printing+money+inflation http://economics.about.com/cs/money/a/print_money.htm

Sometimes it is just the public taking the fall. In this case, the loss making company has been growing revenues 100% a year so there is a chance joe public will end up doing ok. Even with the disaster that was the Facebook IPO, if you held for a little over a year you'd be up nicely.

Also joe public isn't really joe public. Joe public is hedge funds and pension funds controlled by professionals. Your 401k or pension might have some twitter, but in that case it was a professional making the call. Regular twitter users aren't bidding the stock up. They make up a small part of overall trading activity.

> Even with the disaster that was the Facebook IPO, if you held for a little over a year you'd be up nicely.

It could be argued that the Facebook IPO pricing was absolutely brilliant, in that Facebook and its selling shareholders received (what in retrospect was) top dollar under the then-extant market conditions, instead of in effect giving away hundreds of millions of dollars to the fortunate few who were able to purchase IPO shares.

Well... I can't see a fault in your logic.

Maybe you remember the dot-com boom in 1999? It looked somehow similar.

Not really. not only did those companies not have profits, they also didn't have any revenues or users. Twitter has > 200 million users, and they are growing revenue 100% a year. Dot-com boom was a whole different animal.

Let's calculate.

Twitter revenue was $391M for last 4 quarters [1]. Twitter market cap is currently $24670M, or about 63 times the revenue. If Twitter's revenue grows 100% each year (that is, twice each year), it will take 5 years for them to catch their current market cap with revenue: 1 + 2 + 4 + ... + 32 = 63.

But what investors are interested in is not revenue, it's profit. Let's imagine that Twitter discovers a magnificent monetization strategy that gives it 25% margin, like the one Apple enjoys. It would then pay out its market cap in 2 more years (4x growth).

This assumes that Twitter will always enjoy unfettered 2x revenue growth and the same high margin each year, while its valuation stands still, as does the dollar inflation. All these assumptions look a bit unrealistic to me, alas.

[1] http://www.businessinsider.com/twitter-revenues-2013-10

I didn't say anything as to whether Twitter was over or undervalued, just that it was significantly different than the dot com boom. Hundreds of millions in users and hundreds of millions in revenue is decidedly different than very few users and no revenue.

As for your numbers, there is no reason that a company needs to match their valuation with revenue each. That would likely be extremely undervalued. Apple had 170 billion revenue in the last 12 months and a market cap of 465 billion that many people think is undervalued. 63x is excessive, but 1x is silly.

>But what investors are interested in is not revenue That's not always true. See AMZN

Profit is what I am interested in, and it is what a lot of people are interested though. Why are we comparing it to Apple, a hardware company with huge costs? It makes a lot more sense to compare to Facebook, which enjoys 50% margins. Also, why are we expecting it to have profits = to market cap? Really, 1x pe? Market average is ~15, with lots of companies being higher.

If, in 7 years Twitter has profit = to it's current market cap, it is an absolute steal at this price. Like unfathomably good deal. I'm not convinced they will keep growing revenue at 100%, certainly not for 7 years, but I am convinced that they will become profitable due to their low cost structure. I wouldn't be surprised to see 50% margins.

So your argument is that a company's value should be limited by 1 year's profits? Please start a company so that I may buy it from you.

I projected literally exponential growth of revenue for Twitter. Well, if it does grow exponentially, it won't be bad! Supposedly their costs won't grow as fast, and they'll have some healthy profits.

It will be a quite long-term investment anyway. Like, well, when Forrest Gump invested in AAPL.

You're doing that math as-if 1x forward PE is a goal or something.

Why should the current years revenue have anything to do with market cap?

Yea--you're right. We are definetly in bubble.

The term for this is "bagholder".

Congratulations to whomever was on the sell side of this today. Sucks to be an employee who is locked up for 180 days.

It only sucks to be an employee if his shares or options are contingent on a market cap above the current price.

I was a GRPN employee at IPO and I can confirm that even with your stipulation, it sucked.

GRPN and TWTR are not the same. I can assure you, that things worked out just fine for GOOG employees. GRPN was very clearly broken. TWTR is not. Whether it is worth this or not I don't know, but I wouldn't expect it to behave like GRPN.

No, it sucks to be an employee because it is possible that a material part of your wealth is now in a casino, your tax liability just matured, but your ability to pay for it is riding a train with a potential to crash, and all you can do for the next 180 days is watch.

On Edit 2 - The banks don't double their money on large bets. They make smaller risk free sums. The banks are generally paid a certain % of the deal size, and are expected to make markets in the stock.

Most of the people who bought at $26 and flipped at $40 or $45 were individual customers of the banks. These could be retail investors, but they were largely institutional.

Generally institutional funds that do IPOs aren't flippers (investors prefer stable capital, so banks don't allocate as much to hedge funds) but they were the ones who had the shares.

Net - the banks weren't the ones getting rich from flipping, their customers were.

The banks sold at $26 to their institutional clients ("building the book"). The banks didn't hold the stock at $26 themselves.

But the banks also got an option to buy an additional 10M shares at $26 in the next 30 days. By keeping the price low, the banks made a $500M profit on top of their fees.

The banks are triple dipping on the IPO: the fee (3.25%), their options on 10M shares, and their ability to limit IPO access to clients that give them profitable business.

That said Twitter extracted some sweetheart loans from their underwriters and the fee is much lower than the usual 7%, so it's definitely a two way game where both sides are trying to take advantage of the other.

The market still has to be willing to buy at $40+ which they evidently are. They do this expecting to sell down the line for even more.

So in effect it's just one giant speculation game that everyone's in on and the only trick is not to be left holding shares when the hype stops?

I guess I'm fine with that as long as everyone playing knows the rules (although it's tough for the index funds that have no choice in the matter).

That's an oversimplification. For one thing, stocks can pay dividends even though few do anymore and Twitter seems unlikely to do so any time soon. Also, there's no reason the hype needs to ever die. GE has been trading for 120 years.

I would say generally the market recently in IPOs has been losing the banks money, so you're at least wrong there. I do wish the public had a chance to invest in rapidly growing things like Twitter earlier - let's say 2010.

If it stays at $46, that's a gigantic fuck up. They left a billion dollars on the table, and that's borderline breach of fiduciary duty.

Of course, we have to wait and see what it settles at, and it's a little premature to heap scorn just yet. But the initial reaction is it looks like they overreacted to the Facebook IPO debacle (in my book, Facebook did the best thing possible for the company and extracted as much value as possible from the public markets --- and the value buyers didn't get screwed, given that a year later it's trading at ~20% above the IPO price.).

I believe you have the logic backwards here.

Facebook was the fuckup because they priced correctly and all the buddies of the underwriters didn't make bank on the IPO. Twitter is back to the old system and nobody will be complaining this time around.

I suppose it depends on who you are trying to please. If you are Twitter, it's a major loss.

If you give a shit about bankers (most of us do not), then you win.

But the bankers come up with those magical "buy/hold/sell" recommendations that everyone else listens to and panic-sells when their advice says so. Or "oops, they missed our magically predicted revenue by one penny per share". It's all part of the game.

Sell side analyst recommendations are a complete joke. They are basically trailing indicators (i.e. price drops and then the sell recommendations come out). I don't think anyone takes them seriously.

I saw an interesting article about GOOG recently that had explicit instructions about where to buy/sell and how long to hold. I laughed.

Which says to me that bankers are probably still holding a lot of TWTR. If that doesn't change short-term, it could poison the social network.

I believe going public poisons any company. CEOs change their vision from long-term to insanely short-term. Gotta make those quarterly numbers or they're screwed.

There have been a few exceptions to this, Apple being the most famous one. Facebook was on the same track but the SEC rules about share ownership forced their hand.

Amazon has pretty weird numbers, and is public.

I think Amazon is another outlier, as we've already discussed:


Notable pull quote: "It's important to note that if any other company spent until their EPS was negative, investors would /flip/. Amazon is playing with razor thin margins while trying to scale up a platform to end all platforms that we might someday use for everything without thinking about it."

So again, like Apple and Facebook, everyone knows the CEO is playing the long game and doesn't give a crap what the stock price is.

It depends on who holds the stock, and how they're voting. That's pretty clear. When bankers buy a company anticipating a highly profitable return via their models and slam that expectation into the leadership like a floppy do... you know what happens.

Can someone who knows about these things explain why no one else does auctions like Google did? I mean, these guys are supposed to be about markets, right, so why the heck is the price decided by some kind of "central committee"?!

I think the Google IPO was a bit unique where they kind of gave Wall Street the finger and said "we'll do it our way, thanks". They pissed off a lot of bankers but I don't think Sergey and Larry really cared.

Haven't seen a situation or company like that since.

Google's auction didn't work, they marginalized wall st. and the banks ended up rigging the bidding. While it only popped 20% on opening day, the stock was up 4x in a matter of months.

When you say "didn't work", what do you mean? "Rigging the bidding" sounds like a big deal - where is this covered?

I have no actual idea, but I saw a comment the other day to the effect that:

Choosing a good price is a) hard, because of the due diligence, and b) expensive, because if you chose wrongly, you lose money (in an auction, this is called the winner's curse.) So the cost of estimating the price before the shares are on the market needs to be priced in to the initial sale price.

Probably doesn't explain a 100% jump though, but in regard to the rich supposedly supporting free markets, I will remark that people's ability to be for things when they are applied to other people, and against them when applied to themselves, never ceases to amaze me.

I don't really know these things but as far as I can tell what Google did was something really unpopular that only what Google used to be could do: they only allowed the "right" VCs to invest to their conditions, and they were not interested to the reaction of bankers and alike, and everybody wanted the Google shares. Twitter was nowhere in such a kind of predominant position given that is in a weaker situation (it is not clear if it will ever make enough money to justify even the IPO initial price).

Because it works MUCH better. Google could have made much more money on its IPO if it used a sales team.

From the Bloomberg story, which sums it up:

“The company did everything to secure the most cash for itself while leaving some money for the IPO buyers,” said Josef Schuster, the founder of IPOX Schuster LLC, a Chicago-based manager of about $1.9 billion. “You need a pop at the opening to leave a good taste with everyone. They did a pretty good job managing the whole situation.”


I was pretty sure that the financial companies demanded massive bribes in exchange for orchestrating an IPO, but it's still amazing to see it admitted in such a blatant fashion.

Can you say for a fact that if they priced at $46 that people would have bought at $46? Markets are highly irrational.

What does it mean for a market to be "highly irrational"? Normally the term "irrational" is applied to actors, while "efficient" refers to markets.

Are you suggesting markets are not efficient? In that case, when can we expect you to become extremely wealthy from your inefficiency-proving strategy? (Claiming the EMH is false is equivalent to claiming that such a strategy exists.)

Incidentally, when an actor behaves irrationally in an efficient market, this happens:


I don't know if he is, but I would certainly suggest that markets are not efficient. Not even close. Google had a 40 billion dollar swing in valuation in a day last month. Were they really worth 40 billion more that day? Apple lost 300 billion in market cap in a matter of 6 months. Either they weren't worth that much at the peak, or they weren't worth that little at the bottom. There is no way you could ever convince me that Apple was efficiently priced at both ends (most likely neither end).

Knowing that the market is inefficient is not equivalent to knowing which stocks to buy or sell, or when to do so. It doesn't give you a magic formula, but it does give you some idea of what to look for.

FWIW, I have done pretty well picking stocks for myself, but I'm far from what I would consider "extremely wealthy". That being said, if I had a magic formula for instant huge wealth you can be damn sure I wouldn't be sharing it.

You seem to be using a definition of "efficient" that has some sort of moral or intuitive meaning. That's not the relevant definition. It's really something more like "the market will not exhibit large-scale persistent arbitrage opportunities", which is why showing the market is inefficient pretty much by definition requires you to produce a method to consistently make substantial quantities of money by exploiting the arbitrage opportunities you found.

Market efficiency is not a moral concern; it's more like a physics observation.

In fact trying to understand economics with morality or some other form of normative claim is a huge and quite pervasive mistake that destroys people's ability to understand it before they even start trying. It's a machine. What we do with it may be moral or immoral, but the market itself is all but a natural force.

According to investopedia[1] - An investment theory that states it is impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier investments.

At the very least, if not me, Warren Buffett has shown that the market does in fact exhibit large-scale persistent opportunities. You just have to be patient. I don't think "arbitrage" is actually the relevant term here. It has a very specific meaning that isn't simply a stock being mispriced. Really though, the market offers deals all the time.

FWIW, I don't have Buffett's track record, but I currently have 20 stocks in my portfolio most of which I've held for several years. Of those, 19 have made money and 1 has lost a small amount, and on the whole I've beaten the market nicely. I could just be written off as lucky, or as about to lose lots of money, but how do you explain Buffett? He has a track record of consistently beating the market by wide margins for 50 years. Seems like that wouldn't be possible under EMH.

[1] http://www.investopedia.com/terms/e/efficientmarkethypothesi...

"Opportunities" is not "arbitrage". The value of an item going up over time is not disproof of a market's efficiency; efficiency is a point-in-time characteristic, not an across-time characteristic. A market is not required to be psychic to be efficient. It especially doesn't pertain to the case where someone generates value; Warren Buffet is not a passive purchaser of stocks, Warren Buffet seeks out stocks where he can generate value in some manner with better management.

As for your positive returns, the easiest explanation is that you're in a green square on this graph (suitably updated): http://www.nytimes.com/interactive/2011/01/02/business/20110... (Read what the graph is carefully, most people misinterpret it at first glance.)

>According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices...

...on average. Which is what makes "beating" the market, over enough time, impossible.

But we know there are pricing discrepancies and information asymmetries in finite periods of time because we see them every day.

That's one of the main problems with the efficient market hypothesis, actually.

The EMH is false for values of "efficient" that are interesting, and the values of "efficient" for which it might be true are boring and useless in the grander scheme of things.

A lot of needless bad blood enters discussions because everybody interprets the word "efficient" as they please.

> That being said, if I had a magic formula for instant huge wealth you can be damn sure I wouldn't be sharing it.

But I'd be selling it, and you can find out how by buying my book for the low, limited time price of three payments of $99.99. If you act now, we'll also throw in this great place-mat shaped like a $3 bill, and a ring-tone for your phone that sounds like money. Just pay separate shipping and handling. <insert three thousand word disclaimer here>

Are you suggesting markets are not efficient? In that case, when can we expect you to become extremely wealthy from your inefficiency-proving strategy? (Claiming the EMH is false is equivalent to claiming that such a strategy exists.)

What if I were able to prove that markets are inefficient because efficiently pricing securities is an NP-complete problem? Well, sure, maybe a strategy exists, but if it requires solving an intractable problem then I'm not about to get rich off of my proof ;)

Yes, David Pennock has had these results for a while. The economist would merely argue that results which are computationally intractible are equivalent to information which does not exist. And the computer scientist would point out this doesn't mean markets can't approximate efficient with a high degree of accuracy.

I believe the counter argument to a money making inefficient market strategy is "I'm just a little guy and the big evil bankers won't let me make money".

> Markets are highly irrational.

That depends which recent Nobel Memorial Prize winner you believe.

In this world of quant-bots, I don't know how anyone can argue that we have a fully rational market.

My understanding is that much of the progress in economics has been merging economics with psychology to identify rational failures.

"Homo economicus" is still really important for macroeconomics. The reason for this is pretty simple: designing rich, large models is still hard to do and the practical limitations introduced by basing your assumptions on the idea that people act irrationally instead of rationally can make things too complicated to be of practical use.

So in microeconomics or small models, people can practically accept and implement these (pretty obviously true) ideas that people don't behave rationally. But in large scale macroeconomic models it's hard to do. It would certainly be a lot easier if people just acted like computers...

The issue is not just that models are hard. The claim of some economists is that while people behave irrationally, not everyone behaves irrationally all the time, so the issue is self-correcting as long as you have enough liquidity and participants in the market.

It's like the law of large numbers; while a single transaction may have a completely wrong price, a sufficiently large number will average the irrationalities out.

If people make biased (http://en.wikipedia.org/wiki/Bias_of_an_estimator) guesses you will still have a problem. I think that's often what's meant by "rational": that people, in aggregate, make unbiased guesses.

The truth is not so - people get irrationally exuberant or are afraid to cut their losses, etc. These are problems of statistical bias of their estimations - and the opposite is assumed in many (most?) economic models.

Most of the time it's like that, but sometimes you have a situation like nominal loss aversion/sticky wages where humans are very consistent about their irrationality and that irrationality has very important effects.



Simplifying models has always struck me as a particularly dangerous idea in economics, since a lot of the time it's actually profitable for economic actors to deliberately exploit the difference between your assumptions and reality.

I believe the argument (massively simplified) goes that if the market were truly irrational someone would be able to reliably beat it and there's not much evidence that that has happened.

Quant bots make the market better by increasing liquidity.

I've always thought that's a sketchy claim. The market would have sufficient liquidity without the bots.

More importantly, they're a huge waste of resources that produces nothing of economic value.

There's no such thing as sufficient liquidity.

Which one claims that all actors in a market have perfect information?

I'm guessing parent's talking about Eugene Fama, who shared the prize with Robert Shiller.

He doesn't actually claim the markets have perfect information, just that the price always reflects all available information. In essence, you can't "beat the market" consistently, assuming you have the same information.

> assuming you have the same information

Which you don't, since Goldman Sachs is always a few milliseconds ahead of everyone else. Given that almost everyone else out there is going to be trading on information that has already been consumed and acted upon by privileged parties, the markets may as well for all intents and purposes be irrational.

There's a lot of fuck up IPOs then. I know I got double my money pretty quick on the VMWare IPO and the Visa IPO, just buying as soon as they went public and selling at a peak after news.

Yes, there are.

If you were able to do that, that means that VMWare and Visa both got screwed out of billions of dollars.

And of course, little guys can't get in right at the IPO price. That's reserved for big players. By systematically underpricing IPOs, the finance folks make billions of dollars for their friends at the expense of the companies they're supposed to represent.

Please provide extraordinary proof for the extraordinary claim that tech IPOs are rigged to transfer shareholder value to the banks managing or participating in the OP.

Virtually every IPO is priced such that the market price is substantially higher than the offer price. This unquestionably transfers money from the market to those who are allowed to buy at the IPO price. That they are designed to do that seems like a reasonable conclusion from the fact that it happens over and over again.

Furthermore, when an IPO is priced such that this does not happen, such as with Facebook, it's criticized and called out as a disaster even though they sold all the stock they wanted to issue and made much more money for their company than they would have otherwise.

That was informative, thanks.

> borderline breach of fiduciary duty.

That's not a real thing.


"breach of fiduciary duty" is a very real thing. (29 USC § 1109 specifically) In this case it has nothing to do with the link you posted. He means the contract that Twitter signed with the banks probably has language that says they will attempt to get the best possible price for the shares. The resulting pop shows that they did not do that.

He means the contract that Twitter signed with the banks probably has language that says they will attempt to get the best possible price for the shares. The resulting pop shows that they did not do that.

Not true. If I'm selling 1 share and see $40, I can probably get $40 for that share. If I'm selling 1M shares it is a lot harder to get $40 for every single one. If I'm selling ~550M shares with zero existing market then getting that $40 is nearly impossible. Twitter worked out a guaranteed ~$26/share which is pretty good. A bird in the hand is better than two in the bush and all that.

No, it doesn't. It would only be a breach of fiduciary duty if the underwriters knew they could price the stock higher, but intentionally decided not to. Something tells me they were expecting a pop, but not quite this significant.

Isn't 29 USC § 1109 about corporate benefit plans? What does that have to do with general Director breaches of fiduciary duty (which is covered under state level business corporate law...)

Wow, it totally is. It's the Employee Retirement Income Security Act. GP are you just pulling stuff out of your ass?

First link that came up on Google, I didn't really dig into it further since I was just refuting that "breach of fiduciary duty" was a made up thing.

Unlike Facebook, none of Twitters employees and VC's are selling, so no internal pressure to grab every last dollar.

There was an employee lockup of Facebook stock, if I remember correctly, so Facebook employees were not selling.

Please correct me if I misunderstood something.

Many Facebook shareholders sold at the IPO. Zuckerberg sold 30M shares and other large investors with huge allocations also sold some. It was calculated, not a free-for-all.

The lockup applies to shares on the open market after IPO. That doesn't preclude someone from participating in the IPO itself.

Got it, thanks for explaining.

Interesting; how is it that employees are able to trade right after the IPO? I thought there was a waiting period for insiders.

not every employee is an insider. Public companies that issue stock to employees can limit the number of people that are made privy to non-public information about the performance of the company, such that some/many employees are allowed to freely trade.

> borderline breach of fiduciary duty.

Fiduciary duty to who? The shareholders that cashed in today are the same ones who are behind the IPO. You're trying to make it seem like some poor distant shareholder got screwed over, which is not true.

There's no guarantee that all the IPO shares would have been placed at $46 (I'd doubt it).

What's the problem with the stock prices remaining high? How is that leaving money on the table? I'm genuinely curious, and have no idea how these things work (if you feel like explaining it like I'm 5 - or directing me to a site that can).


Unless you mean that twitter "sold" shares at $26, but the actual value was closer to $46 - meaning their investors nearly double their money, and twitter raise nearly half of what they could have?

I now little about the stock market, so I'm not sure why you're upset but it sounds important! :) Anyone care to elaborate?

The owners of Twitter prior to the flotation have basically sold a chunk of what they owned on the stock market. To do that they needed to put a value on those shares. Determining that price is pretty tricky but through one mechanism or another they settled on $26 a share.

The fact that people are now willing to buy them for $46 a share suggests that they basically sold them at too low a price (arguably $20 a share too low).

In doing so they've lost out on a fair bit of money. Establishing a value ahead of the flotation is difficult and often companies will err on the side of caution (that is sell slightly cheap) to make the sell off look like a success, but I think it's being suggested that this gap is too big to just be that and that some of the previous owners may be unhappy that they've lost out.

I understand what you mean by "they lost out a fair bit of money". However, that is not exactly true.

They have failed to gain that (admittedly huge) chunk of dollars but they have lost nothing: the have the same money they started with and they never had any more than that. You only lose when you start with X and end up with X-Y, for positive Y.

They have probably missed the opportunity to gain more but that is their mistake (if it is a mistake).

Well, two days ago, they owned n shares of assets that were sellable for $46 a share. Now they have n * 26.

They lost out, just as if I took your $20k new car and gave you $10k, you'd have lost out even though you have more cash.

Did that information exist two days ago? Because if it did not exist, then there was no real $46 value. No REAL market (which is the place where information on value is) implies no monetary value (or a worthless one).

What happens is that they did not guess (and this is an important term, there is no inherent value in a guess) TODAY'S market's expectations correctly. But that has little to do with true monetary loss or gain.

Of course, their expectations today might be crushed. But personal expectations and hopes are not valuable as shares are.

"REAL". I think it's a lot less clear what that means in this context than you apparently do.

That there were explicit people explicitly willing to buy those shares at that price. Exactly that. The explicit term is quite important. Secret information is not part of the market (it is not market information).

Agreed, I should probably have said "there is a feeling they might have missed out on a lot of money".

It's not clear cut but the share price hitting $46 suggests that they could have floated successful at a higher price.

Absolutely true. However, markets are not that easily understood and implicit expectations are quite difficult to assess.

My opinion is that if they had not gone public, nobody would have bought their shares for $46 each. But this is a worthless statement :)

By that logic a random-trading machine that never bought the same security twice would never lose anything, despite reliably winding up with a very worthless portfolio.

No, because you lose value, not shares. So X and Y are measured in $$ not in shares.

Surely the price is only half the equation, and you have to consider the volume too?

Could it not be the case that while they could find buyers for some of the shares at $46, they could only guarantee selling all of the shares at $26?

I agree that Facebook did the best thing, that is raising the most money with the least dilution, though you can see culturally how downward pricing pressure and momentum has forced them to be much more focused on driving revenue than in the past. Revisiting the price in ~3 months will be a much better gauge of the accuracy.

It's not that big a deal. TWTR will do a secondary which will close most of the gap. Popping over 30% is better than 20% or going down. Yes, they were conservative but I think that was prudent here. Maybe they could have gone up a few bucks. I wouldn't sweat it.

Income statements:


About $553 million in revenue in the last year, with spending of $668 million.

Give me $1.20 cash. I spend. I make $1.00 of sales. I hero!

About -0.20 net? Is accounting detail. Instead, please to look at sales growth. Give me more cash, I grow more sales. I entrepreneur!

I meet investment bankers. We go to club. Many strippers. I give them $1.00 from sales. Everyone happy.

Welcome you invest now! You welcome!

I'm personally shocked they have that much revenue. Is it just selling ads?

I'm amazed how much they're spending. What are they paying for?

2000 employees.

I'm more interested to hear why does twitter need 2000 employees?

Who what, make 200k a piece?

With taxes and benefits, it's not that far off. Plus office space for them, computers for them, a whole host of other perks.

And they say this isn't another tech bubble...

50x trailing revenue... This is terrifying. When was the last time we've seen valuations at 50x revenue for a $1bn+ company?

Serious question: Why does the Hacker News crowd seem to be so cynical about big tech IPOs? Considering for most startups this is the dream, why aren't there more congratulatory high fives? Is it just a case of jealousy?

This IPO is going really well. The stock is being well received in the marketplace. I know twitter employees who just got rich are reading this, but can't comment due to SEC rules, so congrats Twitter peeps!

I think it's a bad sign when you see a company as dramatically overvalued as Twitter is. The primary function of stock markets is capital allocation, i.e. directing capital to companies that can provides the greatest return. When you see an IPO like TWTR today, that's not a sign of rational and efficient capital allocation; it's a sign of speculation gone wild.

Why is this bad? It can cause a couple of negative effects:

(1) Good companies that deserve the attention of investors may be starved of capital while billions of dollars gets directed to flashy overvalued companies.

(2) If it turns out to be another bubble, investors will feel burned and they'll become more risk adverse in the future. Investors will be reluctant to provide capital to companies that can make good use of it.

Twitter just made more money from selling stock than they have ever earned in revenue in their lifetime. Something is seriously wrong when companies start making more money from selling stock than they do from selling products or services.

Let me tell you about a billion dollar company. The company is called Loudeye. It had a huge IPO party in Seattle with bands, a James Bond theme etc., gifts for each guest. The IPO price was $16, it soared the first day to $40. The market cap at the end of the day was $1.4 billion. They had 200 employees, $2.7 million in revenues, but had losses in the millions.

They IPO'd in mid-March 2000. The tech market almost immediately began collapsing the next day.

The founder used to give interviews during the so-called quiet period. A shareholder class action lawsuit argued the prospectus was false and misleading.

They sold to Nokia for $60 million in 2006. $60 million, not $1400 million.

I guess people remember the last time around when companies losing money instead of making money IPO'd.

On an individual level, it's hard to predict if Twitter will do well or not, but on a general level it's safe to say that companies large enough to IPO are generally safer when they're making money as opposed to losing money.

Advertising platform + Web does not equal "tech company". I've never really been excited about Twitter's tech, since it's mostly just inverted IRC. You "join" people, rather than channels. And channels become hashtags. Then they centralized the entire thing and put a dot-com face on it all. The only way Twitter makes money is by buying out or eliminating competitors, mostly mobile apps. Any high fives for getting crushed by Twitter?

So the tech isn't interesting, nor is the business. The interesting part here is what people are willing to pay for it.

The whole point of Twitter was you could tweet from an SMS wasn't it? SMS was supposed to be the primary platform...

Probably the easier startup lottery these days could be join a startup that is rumored to be an IPO. I'm not sure if software engineers get to make millions, but even 500K to 1M vested over 4 years is pretty good.

It's a hangover from the dot-com bubble.

What's funny is that anyone with a bit of a forward thinking could have doubled their money today by buying TWTR Inc (which is not Twitter) trading for $0.03 with an identical symbol TWTR, but on another market exchange.

As already happened several weeks before (after it was announced Twitter will be trading as 'TWTR'), the wrong stock exploded due to traders mistakenly placing their buy orders.

It should have been perfectly safe to assume similar would happen on the IPO day. It went from $0.03 yesterday to $0.06 today for a while :)

Just look at this graph over 1 month span:


Not really. First it's not sold on an exchange, it's only available over-the-counter, meaning very few brokerages are going to grant access to it. And even for those who do you can't just submit your order anytime you feel like it and get executed against, you have to apply to buy the shares and the brokerage has to find a market maker willing to facilitate the exchange, it can take days for a trade OTC to go through.

Third, the volume for that stock is only 1.5 million shares a day, that's only 40,000 dollars worth of stock traded a day. To give perspective that's less than the average amount of Microsoft stock traded in a single second.

So no... you really couldn't have done this strategy.

It's interesting how Google got it mixed up as well. All the news stories for the stock are for the 'real' Twitter.

Well, I followed the link.

This must be what non-programmers feel like when somebody links them to a GitHub repo.

I don't know how these things typically work.. it started out at 46, now it's below, ~45, but it says +19.66 (75.62%)? Is that because that's the highest it was today? I would expect the +/- to be against the starting amount at any time...

That's because its pre-opening (IPO) price was $26.

So for everyone who got shares before the public trading, their stocks are way up.

(This is also why people are saying that the IPO price was set way too low; insiders make tons of money but Twitter itself raises much less money.)

Is there any way for the lay man to get in on an IPO like this, or is it purely for insiders? (I'm thinking about the next one...)

Actually, if you have an account at various retail brokers such as Schwab and Ameritrade, they have a trade IPO capability. For run-of-the-mill IPOs, it isn't a big deal and retail investors can get an allocation. For high-profile ones such as this one, you'll have to be an account holder with lots of money under their management and generate a lot of revenue for them to get preference in the allocation process.

No. It's only for accredited investors, and those that have connections into the deal.

The price movement is based on difference from the previous day's close, not today's open. Those may differ if there was news overnight. In this case, there isn't really a previous day's close, just the price that was set.

Google Finance doesn't seem to show previous close, but Yahoo Finance does: http://finance.yahoo.com/q?s=TWTR

The opening price was $26.

Opening price was $45.01 according to Google Finance, $45.10 according to the WSJ, and $45.10 according to Yahoo finance. Not $26. Insider pre-order price was $26.


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