Sunday, January 31, 2016

High Plateau Drifter is Long Oil, Short Facebook

Somehow, correspondent High Plateau Drifter was inspired to write two pieces in January. Here is the latest:

OK, so we have begun to hear hints from oil producers including especially Russia and Saudi Arabia, Iran, Iraq and Syria - unlikely allies to be sure - that they should come to some kind of agreement on production quotas. What the market seems to forget is that the demand for oil and energy is remarkably inelastic relative to say, new motorcycles or new granite counter tops, for example.

Energy use is surprising stable even in recessions. What inelasticity of demand means is that oil producers could cut production by perhaps 6 percent and increase sales income by 30% to 50% from current levels on lower volume of exports. Thus, reaching an accord on production is an absolute no brainer for the producing states.

Now the big dissenter at present is Iran, which, due to past sanctions has had what it believes to be far less than its fair share of the market. It is not willing to decrease production but will demand an increase in production. But then the Iranians are not fools, they understand inelasticity of demand. They are not going to want to export oil at $25 per barrel. So the real issue here is how much of a production increase is Iran going to demand and what will it take to get the other big exporters, dependent upon oil revenue, to decrease their production

As investors who are not in on the ongoing talks and not privy to the precise calculations of the players, the question is not if but when they agree, behind the scenes, to cut production while giving Iran an increased quota. And of course the truth is that these other players will get a better deal while Iran's welfare and other costs are relatively low due to budget constraints imposed by past sanctions rather than to wait until their expenses of legitimizing rule of the regime (pace Joseph Tainter) have risen to the Saudi level.

Bottom line, we will have $80 oil sooner than most investors think.

OK, now on to my favorite, FB.

What we saw with the latest earnings report and ad revenue numbers is exactly what you would expect when the bazillion social media and tech startups see that funding is drying up – a blast of desperate ad spending as the end of easy VC money comes clearly into view. I am expecting next quarter's ad revenues to be up but for the growth rate to slow. I will be modestly short ahead of FB's Q2 report, and increasing that short quickly if FB stalls out.

Keep your eye on the Tech Crunch Bubble Index going forward.
Previously by Skeptics to the Ramparts, Fun on the Permanently High Plateau, Surfing the zero bound along the permanently high plateau, and Back To The Future!


bjdubbs said...

The problem with this argument is that the biggest Facebook advertizers are the same commpanies advertizing on TV. And Facebook is more easy to measure than TV. It's likely that advertizers will cut TV advertizing before they cut FB ads.

Here are the first results from a quick search of earnings transcripts:


I made the comment on the last call that over half of moms today in Latin America are Millennials that Facebook and YouTube are enormous connection points for that community. So that’s a great place to go to touch those kind of consumers.

Ruby Tuesday

As of November, we have allocated 100% of our advertising dollars to digital and social media, leveraging platforms such as Facebook, Twitter, Instagram, and online video.

Rogers Communications

Finally, we continue to make meaningful progress on customer experience. In 2015, we reduced customer calls by 12.7%, and we delivered the most improved performance in reducing customer complaints to the CCTS amongst our peers, down 26%. As an example of innovation in this area, we were the first telecom in the world to introduce customer care using Facebook Messenger. In December alone, we've responded over 70,000 times using this platform, representing 75% of all of our online customer engagement. In 2016, we will reinvest another C$100 million to continue to improve customer experience.


Word of mouth, these days, its’ a super powerful form of marketing. If you just think about Instagram and Pinterest and the other social media, that’s a very powerful form of marketing.

bjdubbs said...

The full Ruby Tuesday quote is better:

In the past, our media was focused on national cable television with digital and social media representing only 3% of our spending.

While cable television provided us a national presence, social and digital media enables us to more effectively and efficiently reach our target consumer with a variety of messages that are specifically designed for her, and therefore more relevant to her.

As of November, we have allocated 100% of our advertising dollars to digital and social media, leveraging platforms such as Facebook, Twitter, Instagram, and online video.

Louisiana said...

It is the natural place for a local business to advertise, and more impact than a billboard. Very few people are Googling "chinese restaurant dallas, tx" to make that enough of an advertising spend. Thing is, though, if startup spending is X% of Facebook ads, then it could have an impact. The question is how non-linear are the effects of an auction. If 20% of the money disappears, do prices go down by more than 20%? And - I'd bet the bids to advertise to high tech hipsters in SF are multiples of the bids to advertise to third world moms in Brazil trying to choose a brand of toothpaste.

Facebook also has the option to increase ad frequency, and it would take business a while to react to the lower quality inventory that would result.

High Plateau Drifter said...


The "known unknown" here is the degree to which increased ad efficiency ends up decreasing or slowing the ad spend for all media - thus perhaps making FB take a larger share of a shrinking pie, especially in a recession. The unfriendly "known" is that there are only so many millenial hipsters with real jobs and real incomes. The bottom line here is that FB is locating and then targeting the impressionable who can be stimulated into buying stuff that they are not motivated to seek out. They are dependent upon behavior that could change dramatically in a recession.

The case cited above of a company that can run is customer service complaints through FB is instructive. The problem is that when enough companies use FB in essentially the same way, that book of business is vulnerable to price competition from competitors, as all the leads are coming from the ad revenue customer and are easily transported to any social media platform with similar function and offering a lower price.

As one can tell from the blog comments of former advertisers, there are broad swaths of the business world for whom FB ads don't work.

The long run problem for FB is the shallow moat, the market size of the impulse buyers, and FB's fad dependence. Bernays conditioned the population by the tens of millions to want status symbols in a unipolar media market that transformed the U.S. population over two generations. In contrast FB is shearing a herd of preconditioned sheep in a media market that lacks the FCC monopoly power to change the national culture over the long haul. Social media no longer conditions the broad population in the way that old media used to do under Bernays, as it now only seeks out and exploits a preexisting tendency toward impulsive behavior in a customer preconditioned by old media. FB cannot afford the cost of persistent and long term content generation sufficient to broaden the base of its potential targets - a weakness shared by all social media companies. As CP says, a business model that requires FB to buy out any new app that threatens potential competition is unlikely to ever deliver cash to its investors.

FB is on my watch list for a future short.

Anonymous said...

"oil producers could cut production by perhaps 6 percent" Saudi Arabia and Russia represent 40% of the world production. No other country has an incentive to cut. But to reduce world procution by 6 per cent, they would need to cut their own production by 15%. Russia is utterly unreliable as shown numerous times in the past. Maduro needs the cash to survive. USA : bankrupt frackers'assets will be picked up at 10cents on the dollar lowering production cost; Until bankruptcy, they need the cash so won't stop production; Iran : need the cash, still makes a profit. UAE : might cut.

High Plateau Drifter said...


OK so the elites in the oil producing states have never been exposed to micro-economics and are utterly unfamiliar with the concept of profit maximization. By your lights they are also unaware of the relative inelasticity of worldwide oil demand.

I readily admit that these countries are all suspicious of one another. And yet the technology for detecting cheating is now vastly greater than it was back in the 1973 crisis. There is only one way all these exporters can make more money and that is come to the table and agree to quotas. There is no other way to make money, and absent agreement, prices remain lower forever as new sources fire up again with each modest rise in price.

High Plateau Drifter said...

CP, what happened to my previous response to Louisians??

CP said...

It got tagged as spam. Now it's back.

AllanF said...

I agree with HPD regarding MyFace. If you don't think FB users are fickle beast to rely on for a revenue stream, go talk to the folks at Zynga. One minute it feels like the party will never end, the next minute it's like trying to sell a pet rock or cabbage patch doll one day after their sell-by date. I think it's fool-hardy to think FB is immune to the same dynamics that undid both their fore-runners (Yahoo, MySpace, et al) and their own suppliers (Zynga).

FB has to be _very_ careful about over-saturating their users with ads. I'm sure they've got their best minds working on measuring precise number of ads can they display before people start tuning out. But that's a bull market game at heart. In a bear market, where consumers don't wanna buy anything, they put up with fewer ads and ad buyers have fewer bucks to buy ads with.

ADL said...

I have been following Petroquest (since CP mentioned its preferred stock here some time ago) down from the sidelines. The one thing about which I feel confident is that somebody will make a great deal of money in hydrocarbons over the next few months (maybe) or years (certainly). I wonder whether it'll be any of us?

CP said...

Long oil short Facebook is flat for the year:

CP said...