This is a syndicated repost courtesy of Money Morning. To view original, click here. Reposted with permission. There was really only one good thing for…
This is a syndicated repost courtesy of Money Morning. To view original, click here. Reposted with permission. The Dow Jones Industrial Average set another fresh…
I hope you didn’t buy shares of Facebook (Nasdaq: FB). The valuation was always too aggressive.
And increasing both the price and amount of Facebook stock at the last moment ensured that both underwriters and retail investors ended up with far more shares than they bargained for.
In fact, the Facebook fiasco reminds me of another deal that marked the peak of the dot-com boom.
No, not the ineffable and rather sweet Pets.com- their IPO was far too small a deal to have genuine market significance.
Instead I’m talking about the AOL and Time Warner merger announced on January 10, 2000.
Like Facebook, the deal was sold as a big success. It was only later that it quickly became clear that AOL had sold itself at the absolute peak of the market.
From there on out it was all downhill as the storied merger practically top-ticked the market.
Before Facebook There Was AOL
AOL had built up a nice business from “dial-up” Internet access, but it was already obvious by January 2000 that the arrival of broadband Internet would make for a difficult transition.
As such, AOL’s market capitalization of around $200 billion was purely the result of the frothy market of 1999.
Nevertheless, that rich valuation enabled AOL to become the senior partner in an acquisition of the Time Warner media conglomerate, getting 55% of the merged company in a deal valued at $350 billion. It was the largest merger in U.S. history.
Investors are not taking lightly the lackluster performance of the Facebook stock price (Nasdaq: FB).
On Tuesday the finger pointing blame game began, followed today (Wednesday) by lawsuits.
The markets rallied Monday on news that global leaders favor additional stimulus. The hope is that additional spending will induce growth and put the world back on track.
Don’t hold your breath.
Big government robs the economy of wealth, strips it of initiative and further undermines our recovery.
So why, then, do our leaders continue to throw good money after bad?
Try this on for size.
In 1958, a man named Cyril Northcote Parkinson published a series of essays in book form called Parkinson’s Law: The Pursuit of Progress. In it, he postulated a mathematical equation that describes how bureaucracies expand over time and why.
I don’t know if he had a wicked sense of humor or a dramatic flair for irony but the equation at the core of his argument relied on something he termed the “coefficient of inefficiency.”
The coefficient of inefficiency says the size of a committee or government decision-making body is determined by the point at which it becomes completely inefficient or irrelevant. Or both – hence the name.
Parkinson determined that the minimal effective size for a decision-making body is about five people, and the optimal size is somewhere between three and 20.
Last time I checked, we had 548 people inside the beltway – 535 voting members of Congress, nine Supreme Court justices, one president, one vice president, one treasurer and one Fed chairman – who are responsible for making decisions on behalf of 330 million citizens.
Combine that with nearly 2.8 million total Federal employees (excluding our military) and we’re waaaaay beyond anything even remotely resembling workable decision making.
Now here’s the thing. Parkinson also observed that bureaucracies grew by about 5%-7% a year, “irrespective of any variation in the amount of work (if any) to be done.”
In other words, the larger bureaucracies become, the more ineffective they get even if additional people are hired to do work that doesn’t exist.
And to think, all this time I thought our government ran on the Peter Principle!
Parkinson attributed this to two things:
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When you’ve been working the markets as long as I have, you learn that the biggest dangers are always found in a place just over the horizon.
It’s why I spend my time hunting for stories, news items and opinions that in the old days were considered far “below the fold.”
Invariably, what I am looking for is the stuff that everybody else has missed.
Because I believe that’s where the real information is — especially when it comes to uncovering profitable opportunities others don’t yet see or understand.
It’s the story behind the story that interests me. To find it, you need to go beyond the headline news.
In that spirit, here’s my take on five things that I’m thinking about right now.
Gold prices hit a two-month low Wednesday after the Federal Reserve indicated no new stimulus measures would be issued, and silver prices slumped to a seven-week low.
The metals fell after the Fed, led by Chairman Ben Bernanke, announced a positive outlook on the U.S. economy. The Fed reaffirmed it would hold interest rates near zero through 2014, and failed to mention any more means of stimulus.
Without more Fed steps to stimulate growth, and with more positive U.S. economic data, investors expect the dollar to strengthen which puts downward pressure on gold and silver prices.
But the long-term outlook for gold and silver is the same, and investors should instead take the Bernanke Effect as a key time to buy metals.
“This should be treated as an opportunity to buy, or if you already own but feel you don’t own enough, to accumulate,” said Money Morning commodities and mining expert Peter Krauth. “These two precious metals remain in a secular bull market and are integral to every investor’s portfolio.”
The Bernanke Effect on Gold Prices, Silver Prices
After Tuesday’s Fed announcement, gold for April delivery fell $51.30, or 3%, to finish at $1,642.90 an ounce. May silver slumped $1.40, or 4.2%, to $32.18 an ounce.