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Archive for June, 2009

As Facebook secured some investments earlier this year, and invested it towards international growth, the latest news spark renewed IPO rumors.

Of course, no one knows, but the hiring of a CFO from a larger corporation is nothing you do unless you have greater plans. First and foremost, it costs you a bunch of money, secondly, the demands this person has on you by his experience will force the structure needed upon you.

The biggest challenge remains though – to create profitability.

Here is a quoted article from BusinessWeek.

“In April, when Facebook announced the departure of Chief Financial Officer Gideon Yu, the social network said it would look for a replacement “with public company experience.” Facebook found what it was seeking in David Ebersman, a 15-year veteran of biotech pioneer Genentech (DNA).

“David [Ebersman] worked at one of the most innovative and respected [companies] in the world, so he brings a lot to the table when it comes to our efforts to build a lasting, important company,” Facebook spokesman Larry Yu says of the appointment, announced on June 29.

Ebersman’s appointment keeps alive speculation over whether and how soon the world’s biggest social network is headed for an initial public share sale. “We have no plans to go public,” says spokesman Larry Yu. Facebook CEO Mark Zuckerberg was quoted in May saying an IPO remains “a few years out.”

Ebersman, 38, served as Genentech’s CFO for the four years leading up to its $46.8 billion sale to drug giant Roche Holding (ROG) in May. In Facebook’s press release, CEO Mark Zuckerberg noted that under Ebersman, Genentech’s revenue tripled. Zuckerberg envisions high growth for his company as well, saying sales will rise 70% this year. (eMarketer has projected that Facebook’s revenue will grow 20% this year, to $300 million.)”

Read the full article here.

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Here is an article I found at cleantech.

“San Francisco, Calif.-based CMEA Capital is on the hunt for the best and brightest cleantech investments. But if the investors can’t find what they are looking for, founder and Managing Director Tom Baruch told the Cleantech Group they’ll create their own company.

The venture capital firm usually invests anywhere from $10 million to $15 million per company, over the life of its involvement with the company, he said. And these days, renewable fuels and chemicals from cellulosic precursors as well as algae are catching the attention of CMEA investors. Baruch said they are working on a stealth project in collaboration with a university in San Diego to genetically modify algae to produce chemicals.

“We’re working to see if we can build our own company,” he said. “We’re shopping for the right technologies and supporting some small research projects.”

CMEA has also invested about $15 million to date in Codexis, which makes producing biofuels, pharmaceuticals and industrial products faster through its next-generation biocatalytic chemical manufacturing processes. CMEA was involved in spinning Codexis out of Redwood City, Calif.-based biotech company Maxygen (Nasdaq:MAXY).

Codexis, which filed its S-1 in 2008 (see Codexis files for $100M IPO) and then pulled it due to market conditions (see Codexis withdraws IPO), has attracted significant private equity investment with IPO plans on the horizon again come 2010.

In March, global energy giant Royal Dutch Shell NYSE:(RDS.A) and Codexis expanded an agreement to develop better biocatalysts, with Shell increasing its equity stake in Codexis. The companies first announced the partnership in 2006 to investigate other biofuels, researching new enzymes to convert biomass directly into components similar to gasoline and diesel, with Shell taking a stake in the company in 2007 (see Shell partners with Codexis for next generation biofuel research and Shell, Codexis in biofuels agreement).

Baruch said he expects Codexis to turn a profit by the end of this year.

“We want to be involved in companies that are truly transformative—that change the way people do things and think about things, that have cost and performance characteristics that are a leap apart from what’s currently available,” he said.  “And frankly, if it’s not transformative I don’t want to do it.”

To read the full article, click here.

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Here come an article written by Mark Scott at BusinessWeek.

“Last week, I was in Geneva attending a cleantech summit that brought together Europe’s top venture capitalists and entrepreneurs looking for investment. One theme kept emerging: VCs are moving their money away from energy generation projects, such as wind-farm and solar-parks. The reason? Funding those types of businesses is just too expensive for investors already struggling from the global downturn.

That message was reinforced on June 23 when consultants New Energy Finance released preliminary results about cleantech investment. Not surprising, they also found VCs were steering clear of energy generation projects. In the first half of 2009, venture capital and private equity firms forked out $3 billion globally for clean energy companies — a 56% drop compared to the same period last year.”

To read the full story, click here.

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Here is a commentary from Warren Buffet on the economic crisis.  It is a reworked piece from “The Swamp”, Chicago Tribune´s Washington blog, written by Mark Silva.

“We have not come off the bottom yet,” Warren Buffett says.

“Buffett, the multibillionaire oracle from Omaha and informal adviser to President Barack Obama, says the actions that the federal government is taking today raise the “probability” of “very significant inflation down the road,” but they are necessary and “appropriate.”

“What we’re doing raises the probability significantly of very significant inflation down the road –not this year or next year or the year after that.. But we’ve taken actions and they were appropriate actions,” Buffett said in an interview with FOX Business Network’s Liz Claman.

“It will have consequences, and nobody knows exactly what they will be and how effective we will be at draining a system we’ve been flooding, but the probability of significant inflation has gone up,” Buffett said. Asked about the possibility that the U.S. is issuing too much debt to pay for all the bailouts and economic stimulus underway, he said: “Well, it’s doing what it has to do. And it was appropriate.”

With unemployment already clocked at 9.4 percent last month and expected to surpass 10 percent in the months ahead, the CEO of Berkshire Hathaway – its legendary stock down to the $86,000-per-share range since the recession took hold – said of the jobless rate: “It’s going higher — business has not bounced back. We have not come off the bottom yet…

“It will work out in the end,” Buffett said. “Since 1776. it’s been a mistake to bet against America. America solves its problems. How soon, nobody knows. But we have not come off the bottom yet. And it will work out in the end.”

Read and see the full interview here.

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Here is a excellent analysis from Willem Buiter´s blog at FT.com.

“The too big to fail problem has been central to the degeneration and corruption of the financial system in the north Atlantic region over the past two decades. The ‘too large to fail’ category is sometimes extended to become the ‘too big to fail’, ‘too interconnected to fail’, ‘too complex to fail’ and ‘too international’ to fail problem, but the real issue is size.  The real issue is size.  Even if a financial business is highly interconnected, that is, if its total exposure to the rest of the world and the exposure of the rest of the world to the financial entity are complex and far-reaching, it can still be allowed to fail if the total amounts involved are small.  A complex but small business is no threat to systemic stability; neither is a highly international but small business.  Size is the core of the problem; the other dimensions (interconnectedness, complexity and international linkages) only matter (and indeed worsen the instability problem) if the institution in question is big.  So how do we prevent banks and other financial businesses from becoming too large to fail?”

Mr Buiter suggests a series of meassures in his article, to read the analogy, please see link below.

  • Become too big to save
  • Restore narrow banking or public utility banking
  • Create mono-product central counterparties and providers of custodial services, central wholesale and securities payment, clearing and settlement platforms
  • Keep a lid on the size of investment banks
  • Tax bank size
  • Use competition policy
  • Restrict limited liability to prevent excessive risk taking and reduce the size of banks
  • Create effective special resolution mechanisms for all systemically important financial institutions

He concludes:

“In banking and most highly leveraged finance, size is a social bad.  Fortunately, there is quite a list of effective instruments for cutting leveraged finance down to size.

  • Legally and institutionally, unbundle narrow banking and investment banking (Glass Steagall-on-steroids).
  • Legally and institutionally prevent all banks (narrow banks and investment banks) from engaging in activities that present manifest potential conflicts of interest. This means no more universal banks and similar financial supermarkets.
  • Limit the size of all banks by making regulatory capital ratios an increasing function of bank size.
  • Enforce competition policy aggressively in the banking sector, by breaking up banks if necessary.
  • Require any remaining systemically important banks to produce a detailed annual bankruptcy contingency plan.
  • Only permit limited liability for narrow banks/public utility banks.
  • Create a highly efficient special resolution regime for all systemically important financial institutions. This SRR will permit an omnipotent Conservator/Administrator to financially restructure the failing institutions (by writing down the claims of the unsecured creditors or mandatorily converting them into equity), without interfering materially with new lending, investment and funding operations.

The Geithner plan for restructuring US regulation is silent on the too big to fail problem.  That alone is sufficient to ensure that it will fail to result in a more stable and safer US banking and financial system.

In the UK, the otherwise enlightened head of the FSA, Adair Turner, does not see a problem with banks of huge size and with a staggering range of unrelated or conflicted activities.  Of all the parties that matter, only the Governor of the Bank of England, Mervyn King, is clear that ‘too big to fail’ is at the heart of the financial crisis we are trying to exit and will be at the heart of the next financial crisis that we are preparing so assiduously.

The Chancellor of the Exchequer, Alistair Darling takes the cake in the bigger is better stakes.  He appointed “Win” Bischoff, the former chairman of Citigroup (appointed interim CEO for Citigroup in December 2007 after Chuck Prince bit the dust), to co-chair the writing of a report on UK international financial services – the future, published on May 7, 2009.  That’s rather like asking the Ayatollah Ali Khamenei to write a report on who won the Iranian presidential election.  It really is the most ridiculous appointment since Caligula appointed his favourite horse a consul.  You will not be surprised to hear that the report does not consider the size of UK banks to be excessive.

International cooperation is necessary if we are to solve the too big to fail problem.  I am not holding my breath.”

To read the full article, click here.

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John Mauldin is the President of Millennium Wave Advisors, LLC (MWA), which is an investment advisory firm registered with multiple states. To contact directly, please find him at: JohnMauldin@InvestorsInsight.com

To read the full article and view all charts, please go here.

A Tale of Two Depressions
By Barry Eichengreen and Kevin O’Rourke

This week’s Outside the box looks at some very interesting research done by two economic historians, Barry Eichengreen of the University of California at Berkeley and Kevin O’Rourke of Trinity College, Dublin They give us comparisons between the Great Depression and today’s downturn. They continue to update their data from time to time, the link to their work is at http://www.voxeu.org/index.php?q=node/3421. I have not previously heard of www.voxeu.org, but it is a collection of the work of well regarded international economists that seems quite interesting for those who enjoy readings in the dismal science.

This week’s OTB will print long, but it is primarily charts. Please note that I have re-arranged some of the new charts to cut down on space because of some duplications. Word count is not all that much and it reads well. I will be referring to their work in future letters as well. Have a great week! John Mauldin, Editor

A Tale of Two Depressions

New findings:

  • World industrial production continues to track closely the 1930s fall, with no clear signs of ‘green shoots’.
  • World stock markets have rebounded a bit since March, and world trade has stabilized, but these are still following paths far below the ones they followed in the Great Depression.
  • There are new charts for individual nations’ industrial output. The big-4 EU nations divide north-south; today’s German and British industrial output are closely tracking their rate of fall in the 1930s, while Italy and France are doing much worse.
  • The North Americans (US & Canada) continue to see their industrial output fall approximately in line with what happened in the 1929 crisis, with no clear signs of a turn around.
  • Japan’s industrial output in February was 25 percentage points lower than at the equivalent stage in the Great Depression. There was however a sharp rebound in March.

The parallels between the Great Depression of the 1930s and our current Great Recession have been widely remarked upon. Paul Krugman <http://krugman.blogs.nytimes.com/2009/03/20/the-great-recession-versus-the-great-depression/>  has compared the fall in US industrial production from its mid-1929 and late-2007 peaks, showing that it has been milder this time. On this basis he refers to the current situation, with characteristic black humour, as only “half a Great Depression.” The “Four Bad Bears <http://dshort.com/charts/bears/four-bears-large.gif> ” graph comparing the Dow in 1929-30 and S&P 500 in 2008-9 has similarly had wide circulation (Short 2009). It shows the US stock market since late 2007 falling just about as fast as in 1929-30.

Comparing the Great Depression to now for the world, not just the US

This and most other commentary contrasting the two episodes compares America then and now. This, however, is a misleading picture. The Great Depression was a global phenomenon. Even if it originated, in some sense, in the US, it was transmitted internationally by trade flows, capital flows and commodity prices. That said, different countries were affected differently. The US is not representative of their experiences.

Our Great Recession is every bit as global, earlier hopes for decoupling in Asia and Europe notwithstanding. Increasingly there is awareness that events have taken an even uglier turn outside the US, with even larger falls in manufacturing production, exports and equity prices. In fact, when we look globally, as in Figure 1, the decline in industrial production in the last nine months has been at least as severe as in the nine months following the 1929 peak. (All graphs in this column track behaviour after the peaks in world industrial production, which occurred in June 1929 and April 2008.) Here, then, is a first illustration of how the global picture provides a very different and, indeed, more disturbing perspective than the US case considered by Krugman, which as noted earlier shows a smaller decline in manufacturing production now than then.

World Industrial Output, Now vs Then (updated)

Similarly, while the fall in US stock market has tracked 1929, global stock markets are falling even faster now than in the Great Depression (Figure 2). Again this is contrary to the impression left by those who, basing their comparison on the US market alone, suggest that the current crash is no more serious than that of 1929-30.Updated Figure 2. World Stock Markets, Now vs Then (updated). Another area where we are “surpassing” our forbearers is in destroying trade. World trade is falling much faster now than in 1929-30 (Figure 3). This is highly alarming given the prominence attached in the historical literature to trade destruction as a factor compounding the Great Depression. The Volume of World Trade, Now vs Then (updated)
Sources: League of Nations Monthly Bulletin of Statistics, http://www.cpb.nl/eng/research/sector2/data/trademonitor.html <http://www.cpb.nl/eng/research/sector2/data/trademonitor.htmltarget=>

It’s a Depression alright
To sum up, globally we are tracking or doing even worse than the Great Depression, whether the metric is industrial production, exports or equity valuations. Focusing on the US causes one to minimise this alarming fact. The “Great Recession” label may turn out to be too optimistic. This is a Depression-sized event. That said, we are only one year into the current crisis, whereas after 1929 the world economy continued to shrink for three successive years. What matters now is that policy makers arrest the decline. We therefore turn to the policy response.

Policy responses: Then and now
Figure 4 shows a GDP-weighted average of central bank discount rates for 7 countries. As can be seen, in both crises there was a lag of five or six months before discount rates responded to the passing of the peak, although in the present crisis rates have been cut more rapidly and from a lower level. There is more at work here than simply the difference between George Harrison and Ben Bernanke. The central bank response has differed globally. Source: Bernanke and Mihov (2000); Bank of England, ECB, Bank of Japan, St. Louis Fed, National Bank of Poland, Sveriges Riksbank. Figure 5 shows money supply for a GDP-weighted average of 19 countries accounting for more than half of world GDP in 2004. Clearly, monetary expansion was more rapid in the run-up to the 2008 crisis than during 1925-29, which is a reminder that the stage-setting events were not the same in the two cases. Moreover, the global money supply continued to grow rapidly in 2008, unlike in 1929 when it levelled off and then underwent a catastrophic decline.Figure 5. Money Supplies, 19 Countries, Now vs Then Source: Bordo et al. (2001), IMF International Financial Statistics, OECD Monthly Economic Indicators. Figure 6 is the analogous picture for fiscal policy, in this case for 24 countries. The interwar measure is the fiscal surplus as a percentage of GDP. The current data include the IMF’s World Economic Outlook Update forecasts for 2009 and 2010. As can be seen, fiscal deficits expanded after 1929 but only modestly. Clearly, willingness to run deficits today is considerably greater.

Government Budget Surpluses, Now vs Then
Source: Bordo et al. (2001), IMF World Economic Outlook, January 2009.[They added some country data in their revision that I put here, hence the two figure 5’s, but they are labeled as such on the website and I did not change their labellling – JFM]New Figure 5. Industrial output, four big Europeans, then and now New Figure 6. Industrial output, four Non-Europeans, then and now. The facts for Chile, Belgium, Czechoslovakia, Poland and Sweden are displayed below; New Figure 7: Industrial output, four small Europeans, then and now.

Conclusion
To summarise: the world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the US leads one to overlook how alarming the current situation is even in comparison with 1929-30. The good news, of course, is that the policy response is very different. The question now is whether that policy response will work. For the answer, stay tuned for our next column.

John F. Mauldin
johnmauldin@investorsinsight.com

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Here is a story from reuters.

BOSTON/NEW YORK, June 19 (Reuters) – Fidelity Investments, the world’s biggest mutual fund firm, said on Friday it will shut down its small private equity unit next month because the financial crisis has made it difficult to access new capital.

The two-year-old unit controlled about $500 million in assets, a fraction of the $1.25 trillion managed by its privately held, Boston-based parent.

Fidelity spokeswoman Anne Crowley said the decision to close the unit, Fidelity Equity Partners, was made because debt financing had become very difficult to obtain.

In the last two years the unit made acquisitions in four companies, and Fidelity plans to retain those ownership stakes.

The unit took stakes in imaging solutions company Picsolve International, financial data management companies Complinet Group and Asset Control Inc, and oil and gas equipment company Production Control Services Inc.

The unit employed 14 people, with half working in the United States and the other half in London.

Fidelity was a very small player in the $1 trillion private equity industry, but its problems are shared by others who faced difficulty finding financing.

The unit did not invest client money, Crowley said.

Fidelity’s venture capital arm, Fidelity Ventures, is not affected. “This group remains active and is seeking new investments,” Crowley said.

Rob Ketterson, who oversees Fidelity Equity Partners and Fidelity Ventures, will continue to be in charge of Ventures. (Reporting by Svea Herbst-Bayliss and Anupreeta Das; Editing by Jason Szep and John Wallace)

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