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No Friend of Facebook

Stocks in this article: FB ZNGA GOOG RIMM YHOO

Allowing a brief moment of reality to take over, Facebook actually lost about 8 cents per share for the quarter. It's up to you to decide if you want to ignore one time charges or not. If you do accept that one time charges are just that, one time, don't be surprised if more "one time" charges appear in the future.

You have no say in Facebook. As a shareholder you have rights, but how wonderful is that when the CEO owns a controlling interest? I have a 10-year-old and an 8-year-old. Sometimes one will come to me and declare, "It isn't fair that he _________ (fill in the hourly gripe)." If the equity in the situation isn't important to me, I will often respond, "Life isn't always fair" so I can avoid a hassle.

If shareholders start to believe they are not receiving fair treatment, rightly or wrongly, investors can expect to hear "life isn't always fair" because no one will care. The board answers to the CEO, not the other way around at Facebook.

Zynga's (ZNGA) shares not only nosedived but it sent Facebook's lower, too. Facebook depends on Zynga for a large proportion of Facebook's revenue and earnings. ( TheStreet's Jim Cramer writes about the latest rally in Not Trusting This Rally . You need a Real Money Pro account to read, but Cramer's analysis makes it worthwhile.)

The connection with Zynga is the next red flag for Facebook. Zynga is clearly in trouble. More than one out of five shares are shorted. Short-sellers are typically the smartest guys in the room. It's not small mom-and-pop retail traders driving short interest up to 34 million shares. It's not just the shorts who are questioning Zynga.

Zynga doesn't have any debt, but at $3 per share the market is not valuing Zynga for much more than cash. The market isn't pricing in substantial earnings. Add in an inflated price due to the wide interest in the company and you may have troubling locating many large long positions.

Institutional and mutual funds account for about 60% of the Facebook shares. That's a relatively small amount when you consider all the insiders who will soon sell their shares at the end of the lockup period.

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