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Wednesday, September 17, 2014 1:05 PM


Companies' Stock Buybacks at Biggest Pace Since 2007; Companies Rewarding Investors?


In yet another sign of market over-exuberance, the Wall Street Journal reports Share Repurchases Are at Fastest Clip Since Financial Crisis.

Corporations bought back $338.3 billion of stock in the first half of the year, the most for any six-month period since 2007, according to research firm Birinyi Associates. Through August, 740 firms have authorized repurchase programs, the most since 2008.

The growth in buybacks comes as overall stock-market volume has slumped, helping magnify the impact of repurchases. In mid-August, about 25% of nonelectronic trades executed at Goldman Sachs Group Inc., excluding the small, automated, rapid-fire trades that have come to dominate the market, involved companies buying back shares. That is more than twice the long-run trend, according to a person familiar with the matter.
Large Repurchases in 2014



Rewarding Investors - Not



Contrary to the above graphic (and common wisdom), companies do not reward investors by buying back shares at inflated prices. Companies bought back the most shares in 2007, right before the crash, and the least shares at the most opportune time in 2009.

In practice, insiders buy low and sell high, and pocket cash from options all the way up. Insider activity is exactly the opposite of how companies treat shareholders.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Tuesday, September 16, 2014 11:50 PM


Venture Capital Risk Taking and Cash Burn Rates Unprecedented Since 1999; 47% of Nasdaq in Bear Market


Venture capital risktaking and burn rates on cash are at levels that exceed the technology bubble in 1999. Companies that haven't made a dime, and perhaps never will, have valuations of $10 billion more.

Curiously, it' venture capitalist Bill Gurley who Sounds Alarm on Startup Investing in an interview with the Wall Street Journal.

WSJ: Mr. Gurley, who often voices his opinions on his blog, Above the Crowd, sat down with The Wall Street Journal as part of a Journal event series called "Tech Under the Hood." The investor in Uber, Zillow, OpenTable and other Web startups spoke on a wide range of topics. What follows is an edited excerpt of a conversation specifically about potential cracks in the tech-startup investing scene.

Mr. Gurley: Every incremental day that goes past I have this feeling a little bit more. I think that Silicon Valley as a whole or that the venture-capital community or startup community is taking on an excessive amount of risk right now. Unprecedented since ‘'99. In some ways less silly than '99 and in other ways more silly than in '99. I love the Buffett quote ["Be fearful when others are greedy and greedy when others are fearful"]  because it lays it out.

And I guarantee you two things: One, the average burn rate at the average venture-backed company in Silicon Valley is at an all-time high since '99 and maybe in many industries higher than in '99. And two, more humans in Silicon Valley are working for money-losing companies than have been in 15 years, and that's a form of discounted risk.

In '01 or '09, you just wouldn't go take a job at a company that's burning $4 million a month. Today everyone does it without thinking. 
Bubble Risk

The Guardian picks up on the story in Leading tech investors warn of bubble risk 'unprecedented since 1999'.
Two of the world’s leading tech investors have warned the new wave of tech companies and their backers are taking on risk and burning through cash at rates unseen since 1999 when the “dotcom bubble” burst.

Bill Gurley, partner at Silicon Valley-based investor Benchmark, sounded the horn of doom on Monday warning that “Silicon Valley as a whole or that the venture-capital community or startup community is taking on an excessive amount of risk right now.”

His comments were backed up Tuesday by Fred Wilson, the New York-based co-founder of Union Square Ventures who has backed companies including Twitter, Tumblr and Zynga.

Burn rates – the amount of money a startup is spending – are “sky high all over the US startup sector right now”, he wrote in a blog post [Burn Baby Burn].

“We have multiple portfolio companies burning multiple millions of dollars a month. Thankfully its not our entire portfolio. But it is more than I’d like and more than I’m personally comfortable with,” he wrote.

The comments come after a new generation of tech companies have attracted record levels of investments at levels that give the profitless businesses eye-watering valuations.

In August Snapchat, the social messaging service, was valued at $10bn after a new round of funding. The free service’s fans send 500m self-deleting messages a day, but Snapchat has yet to declare how it intends to make money. Among the other big tech valuations in recent months are Uber, the taxi app service, which was valued at $18bn after its last round of funding in June, and Airbnb, the short term rentals service, which was valued at $10bn in April.
Record S&P 500 Masks 47% of Nasdaq Mired in Bear Market

Speculation is running rampant. But just as in 2000 when market breadth turned sour, and profitless companies died before the rest, Bloomberg reported yesterday 47% of Nasdaq Mired in Bear Market.
About 47 percent of stocks in the Nasdaq Composite (CCMP) Index are down at least 20 percent from their peak in the last 12 months while more than 40 percent have fallen that much in the Russell 2000 Index and the Bloomberg IPO Index. That contrasts with the Standard & Poor’s 500 Index (SPX), which has closed at new highs 33 times in 2014 and where less than 6 percent of companies are in bear markets, data compiled by Bloomberg show.

The divergence shows the appetite for risk is narrowing as the Federal Reserve reins in economic stimulus after a five-year rally that added almost $16 trillion to equity values. It’s been three years since investors saw a 10 percent decline in the S&P 500 and they’re starting to avoid companies that will suffer the most when the market stumbles, said Skip Aylesworth, a portfolio manager for Hennessy Funds in Boston.
Expect the rot to spread. It starts the same way every time.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

9:50 PM


One Thing You Can Always Count On


Congratulations (of sorts) go to French prime minister Manuel Valls for being able to count sheep properly.

Valls staged a vote of confidence in French parliament even though polls show 62% of voters would like president Francois Hollande to step down now.

In spite of what the public wants, Valls was certain of the outcome in advance.

Why? Because a vote of no confidence would have triggered new elections and leftist parties would have gotten clobbered.

Count on This

One thing that is always safe to count on is politicians won't vote themselves out of office.

Sure enough, Valls wins confidence vote and vows to press on with France reform.

France’s prime minister on Tuesday vowed to continue his reformist drive as he won a crucial confidence vote to strengthen his hand in efforts to restart the country’s faltering economy.

Manuel Valls said restoring competitiveness was “indispensable” for reigniting growth yet he stopped short of touching the 35-hour working week or other closely held symbols of his Socialist party’s left.
Reform?

Well then - by all means let's have reform ... as long as it does not touch anything socialists want.

Did this strengthen Valls' hand? Hardly.

This staged maneuver will upset socialists who do not want any reform at all as well as conservatives who want real reforms.

The favorable rating for Hollande is 13%, a new record low. Barring some miraculous turn around in the French economy, expect support for Valls to plunge to new lows as well.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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