ImaginativePRO Blog

SECONDMARKET, A PRIVATE COMPANY STOCK EXCHANGE, COULD DO $1 BILLION IN TRADES IN 2011, AND MAKE ITS FOUNDER VERY RICH

Barry Silbert was born to trade.

By age 10, he was swapping baseball cards at collectors conventions. At 15, he plowed his savings into shares of Chromatics Color Sciences International Inc. — a penny stock that lost him $2,000. And as a 25-year-old banker for the creditors of Enron Corp., Silbert traveled the globe after the firm’s 2001 bankruptcy, flogging Enron assets, including fiber- optic cable and Bolivian pipelines.

He’s been a registered broker since he was 17, Bloomberg Markets magazine reports in its June issue.

Today, Silbert, 34, is the best-known player in a sizzling market: the trading of shares of private, venture-backed social- media companies such as Facebook Inc., LinkedIn Corp. and Twitter Inc. As chief executive officer of New York-based SecondMarket Holdings Inc., he is building the go-to forum for trading these boldfaced shares, some of whose prices more than doubled in the 12 months ended in mid-April.

Those rising stock valuations are turbocharging SecondMarket — and making Silbert rich. SecondMarket says it’s the world’s biggest broker of venture-backed private-company stock by the value of shares traded. The firm’s private-company transactions, which totaled $100 million in 2009, quadrupled by 2010 to $400 million.

Based on first-quarter results, SecondMarket could broker $1 billion in private-company shares in 2011, taking fees of from 3 to 5 percent on each trade.

Last year, prominent Asian investors bought a 10 percent stake in the firm for $15 million, valuing Silbert’s 35 percent stake at $52.5 million.

Changing the World

Silbert wears his sandy-blond hair brushed forward — and looks 10 years younger than his age. Like a lot of tech-driven entrepreneurs, he is certain his venture is changing the world.

“The money that we are freeing up is being reinvested in other venture-backed startups — and creating jobs,” Silbert says. “This market we’re building is critical to the whole capital-formation process.”

The shares of private companies have become a hot market — and a hot topic. The value of all private-share transactions was $4.6 billion in 2010, up from $2.4 billion in 2009, according toRye Brook, New York-based broker-dealer and research firm Nyppex Holdings LLC. The volume, the firm says, could climb to almost $7 billion this year. Silbert says much of that is coming SecondMarket’s way.

“We’ve heard expressions of interest from holders of stocks in thousands of private companies,” he says.

Hot Properties

Investors are eager to get their hands on the private stock of such companies as Facebook and Twitter in anticipation of big profits when they go public, and investment banks are scrambling to offer their clients the chance to buy in. Yet, the shares trade in a sometimes opaque market that is open only to a relatively privileged class.

In January, Goldman Sachs Group Inc. (GS) withdrew the U.S. portion of an offer to sell $1 billion in Facebook shares to clients because the media attention surrounding the offering “might not be consistent” with securities laws. Goldman, which had itself invested in the company, then sold the $1 billion Facebook stake to non-U.S. clients, giving the company an implied valuation of $50 billion.

Some Securities and Exchange Commission strictures may ease soon. On April 6, SEC Chairman Mary Schapiro, in a 26-page letter responding to an inquiry from California Representative Darrell Issa, said she was considering raising from 499 the number of shareholders a private company can have without making financial disclosures to the commission. Such a change could increase the market for private shares by broadening the pool of potential investors in any one company.

SEC Inquiry

The SEC also sent a letter of inquiry to private-share brokers, including SecondMarket, regarding pooled investment funds that sink money into private-company shares, SecondMarket spokesman Mark Murphy says. David Weir, CEO of SecondMarket rival SharesPost Inc., says his company also received a request for documents. Although Silbert personally owns stakes in a half-dozen Internet startups, none trade on SecondMarket, he says.

The regulators have yet to address what some analysts see as the fundamental issue: allowing private-company shares to trade in quasi-public markets without full disclosure. John Coffee, a professor of securities law at Columbia University, says participants in the private-share market face what he calls “informational asymmetries” — meaning that insiders in private companies are likely to have far more knowledge of corporate performance than outsiders buying in.

Sophisticated Investors

Silbert says his clients know they are taking chances.

“Institutional investors are sophisticated and understand the risks,” he says.

Second-Market’s most serious competitor is San Bruno, California-based SharesPost. Other rivals include Gate Technologies LLC in New York and Xpert Financial Inc. of San Mateo,California. Investment banks also buy and sell private- company shares for their clients, sometimes via SecondMarket. Venture-capital firms that want to buy or sell shares often use SecondMarket or its competitors, or trade informally among themselves and with employees or former employees of private venture-backed companies.

How much financial information do companies whose shares trade on SecondMarket have to disclose? As much or as little as they want. SecondMarket provides its customers only the financial data that firms are willing to provide.

‘Dearth of Information’

“There’s a real dearth of information about these companies,” says Larry Tabb, CEO of Tabb Group Inc., a capital- markets research firm. “Are investors trading blind? With illiquid securities, you almost have to be.”

SecondMarket is booming partly because fast-growth tech companies are shying away from initial public offerings. According to the National Venture Capital Association Yearbook 2011, there were 72 venture-backed IPOs in 2010, compared with 271 in 1999. The median interval between when such a company is founded and when it goes public rose to nine years in 2010 from just four years in 1999.

Two reasons are the onerous financial disclosure and additional accounting required under the Sarbanes-Oxley Act, passed after the accounting scandals of 2000 to 2002, says Alan Patricof, founder of venture firm Greycroft LLC. In addition, many of the smaller investment banks that used to underwrite tech IPOs have been bought by larger institutions. Analyst coverage of newly public startups has fallen, making investors wary, Patricof says.

Accredited Investors Only

The Securities Act of 1933 restricts purchases of private- company stock to what it defines as “accredited” investors. In the case of individuals, that means people with a net worth of at least $1 million or $200,000 in annual income. In Coffee’s view, inflation has made the standards less meaningful.

“It allows the middle class to enter into a dangerous world of limited information and fluctuating liquidity,” he says.

Silbert characterizes SecondMarket as an EBay for illiquid assets. Companies may opt for open trading in their shares or for quarterly or annual offerings. Most trading is initiated via phone or the firm’s website. The sellers are usually former employees and early-stage venture capitalists. The buyers are hedge funds, wealthy investors and other VCs.

Sellers can post their offering price and the number of shares they are selling. Buyers either agree to that price, make lower bids or use the site to set up meetings to negotiate offline. Companies publish whatever financial information they’re willing to disclose on a secure section of the website to which only participants in a transaction have access.

Beyond Ebay

Silbert wants to move beyond the EBay model by adding social-networking functions. Participants can now list their holdings, post strategies and create watch lists of those companies they’re most interested in. In the future, they will also be able to swap messages, Silbert says.

Coffee says markets like Silbert’s look better than they work.

“These private secondary markets give the illusion, but not the reality, of liquidity,” he says. “They are matching systems, and the broker does not function as a dealer committing its own capital. In a period of market distress, liquidity will vanish.”

Even today, days or weeks can go by without shares of even big private-company stocks changing hands.

A look at Facebook trades published by SecondMarket competitor SharesPost shows that private shares are a market of which buyers should beware. In January, investors agreed to trade a small lot of Facebook stock for $60 a share, more than twice the price that other investors agreed to pay the very same day. SharesPost CEO Weir says his company’s brokers now review price postings before they go live.

SecondMarket doesn’t disclose the price at which shares are bought and sold on its network.

53,000 Participants

In late 2007, a former Facebook employee approached the firm and asked whether it could help unload some shares. A separate private-company desk was created in April 2009. As of March, Facebook shares, which trade at weekly auctions, accounted for more than 40 percent of SecondMarket’s private- company transactions. In March, its Web-based network for traders of all of its asset classes had 53,000 registered participants, up from 35,000 in 2010, 6,500 in 2009 and 2,500 in 2008.

Facebook spokesman Jonathan Thaw says the company, co- founded and run by Mark Zuckerberg, effectively bans current employees from trading its stock.

“We implemented an insider-trading policy last year to better comply with insider-trading laws and to protect the interests of the company and its employees,” he says.

Private gaming company Zynga Inc. also forbids its employees from selling, except during designated trading windows.

Insider Trading Concern

“This policy is in place because employees have information about the company that’s not publicly available and might expose them to the risk of insider trading,” says Karyn Smith, Zynga’s deputy general counsel.

Silbert swiped a page or two from Facebook’s game plan in March, when SecondMarket vastly expanded its website. While investors could trade in just 50 stocks as of mid-April, SecondMarket also profiles on its website thousands of other private companies whose shares might trade in the future. That number is now 12,500, up from 550.

Participants flag those companies they want to keep tabs on, giving SecondMarket a crowd-sourced barometer of the interest in each firm. Site registrants can also state their willingness to buy shares — giving SecondMarket a tool with which to persuade companies to allow their stock to trade on its network.

Seller’s Market

In April, Facebook had 3,030 “watchers”; Twitter, 1,772; and Groupon, 1,617. Facebook had just 18 “holders” listed; Twitter, zero; and Groupon, 3.

It’s a seller’s market.

Silbert’s growing customer base has tracked the soaring price of Facebook stock. Buyers and sellers signed off on a trade of $10 a share in April 2010, implying a valuation of $22.7 billion, according to SharesPost. By mid-April of this year, the price had risen to $32.50 a share, or $73.7 billion — more than the real-world market capitalization of EBay Inc. (EBAY) or 3M Co. (MMM)

By that measure, the overseas Goldman clients who paid $1 billion for Facebook shares in January earned a 47 percent paper return in three months.

Lou Kerner, an analyst at Los Angeles-based investment bank Wedbush Inc., estimates that Facebook’s earnings before interest, taxes, depreciation and amortization were $1 billion in 2010 on revenue of $2 billion. Using a higher implied valuation than SharesPost, he concludes its stock was trading at 78 times Ebitda in mid-April.

$100 Billion

Bloomberg data showed Google Inc. (GOOG) and EBay trading for about 14 times Ebitda.

“People aren’t buying Facebook for its revenues in 2010,” Kerner says. “They’re buying it for what it’s going to be doing in 2015. We believe if it were public, it would be worth in excess of $100 billion.”

Other social media companies whose shares SecondMarket trades are also ablaze. SharesPost says prospective buyers and sellers of preferred shares of Twitter settled on a per-share price of $30 in March, up from $11.67 in April 2010.

In December, Chicago-based Groupon turned down a $6 billion buyout offer from Google, theMountain View, California-based search engine giant. Groupon, which sells coupons for goods and services after negotiating big discounts from merchants, is considering a public offering that values the company at as much as $25 billion, two people familiar with the matter said in March.

Leap of Faith

Investors using SecondMarket and SharesPost to load up on venture-backed private-company shares are taking a leap of faith, says Stephen Grant, a private-equity banker at Internet Securities Inc. in Oakland, California.

“From a fundamental standpoint, it’s ridiculous: There are no fundamentals, just a couple of P&L figures,” Grant says. Still, he says there’s a logic to the clamor to buy Facebook shares. “What people are buying is Facebook’s 600 million active users,” Grant says. “They are heading toward a billion, and that’s one-seventh of the world’s population as your customer base.”

Silbert says his role isn’t to judge whether social- networking stocks are a bubble — though he points out that plenty trade for far lower valuations than Facebook.

“It’s not up to us to determine what the fair market value is,” he says.

His mission, instead, is to get private companies comfortable with the idea of trading their shares.

‘Empowering’

“We work with issuers to arrive at a solution that works for them,” Silbert says in his 12th-floor office in Manhattan overlooking Bowling Green. “Companies are growing to realize that this kind of trading is empowering. It’s great for the employees and the company.”

Silbert lets each listing company decide how often its stock can trade, whether current employees can buy or sell and whether institutions such as hedge funds are allowed to buy. His 3 to 5 percent fee is split evenly between buyer and seller.

A SecondMarket registered broker called a market specialist vets the buyer to make sure he or she is accredited and meets with the approval of the issuer, which almost always has a right of first refusal on share transfers. A separate operations specialist ensures compliance with anti-fraud and money- laundering regulations. The broker shepherds everyone through the legal and accounting paperwork, ultimately overseeing the settlement of the transaction.

“SecondMarket has been the leader in standardizing the process — the vetting, the lawyering,” says William Martin, founder of Raging Capital Management LLC, a $125 million hedge fund that has used SecondMarket to buy social media stock, including Facebook. “They’ve succeeded in attracting the buyers and the sellers.”

Playing Foosball

Signs of prosperity abound at SecondMarket’s offices, whose walls are painted in bright colors of green, blue and orange. Last winter, the firm increased its office space from 19,000 square feet (1,770 square meters) to 26,000 square feet. It includes a game room where Silbert plays foosball with some of his 135 employees. He can also be found on Friday afternoons knocking back Stella Artoises at SecondMarket’s end-of-week parties.

Silbert has reeled in a diverse cast of enthusiasts, including college friend Jeremy Smith, 35, head of strategy for SecondMarket, and Adam Oliveri, 27, who joined in 2005 just after graduating from the University of Rhode Island and heads the private-company marketplace. Former Google product manager Dominic Preuss, 33, is SecondMarket’s technology chief.

Matching Game

Silbert’s success at matching buyers and sellers has made SecondMarket’s own private shares valuable. In February 2010, Singapore’s sovereign-wealth fund Temasek Holding Pte and Hong Kong-based Li Ka-shing Foundation Ltd., which helped bankroll Facebook, together bought a combined 10 percent stake in SecondMarket for $15 million, valuing the company at $150 million.

“SecondMarket fits into our theme of investing in emerging champions,” Temasek Managing Director Ang Pen Huat says.

Trading private-company shares remains a relatively small business. SecondMarket produced revenue of $16 million on the $400 million of private-company transactions it handled in 2010. Even if the transaction value surges to $1 billion, private- company trades would generate only $40 million in revenues.

“This is not a big asset class,” says managing director Hans Swildens of Industry Ventures LLC, a San Francisco-based investment firm. “It has been a niche business and will continue to be a niche business.”

Silbert says there is plenty of room for growth.

“Three-thousand companies are funded by VCs every year,” he says.

Eureka Moment

Silbert’s experience restructuring bankrupt companies gave him the idea that there was a business in finding buyers for hard-to-trade assets. Werbalowsky says he was skeptical, telling Silbert he would be tripped up by, for example, state and federal securities regulations.

“We can work it out,” Silbert would insist.

Silbert drafted a business plan for his company in 2004, calling it Private Company Stock Exchange. He laid out $2,000 for the Web URL PCSE.com, dubbing the company “the EBay of private-company stock.” A lawyer soon pointed out that he couldn’t call his operation an exchange unless he registered as one.

“I flushed $2,000 down the drain,” Silbert says.

Silbert tried again, launching a business with the help of a $300,000 investment from a former brokerage executive he declines to name on the record. The investor suggested it would be easier to trade restricted stock of public companies than private-company shares because holders are registered and prospective buyers such as mutual funds are easy to find, as they are required to disclose their holdings to the SEC.

Trading Restricted Stock

Such stock is awarded to executives as compensation and often can’t be sold for a period of years.

In late 2004, Silbert’s firm became Restricted Securities Trading Network, which he says made a profit in its first year, 2005, and every year since.

By late 2006, RSTN was e-mailing lists of restricted stock to potential buyers. Silbert soon set up a password-encoded bulletin board allowing sellers to post their holdings. Revenues hit $2.5 million.

In 2007, Silbert learned that Goldman Sachs was building its own system for buying and selling illiquid securities. Silbert decided he might need more money.

“I never wanted to look back and say, ‘If we had had that money, Goldman Sachs wouldn’t have crushed us,’” he says.

Venture Investor

By mid-2007, the early stages of the collapse of the market for securities backed by subprime housing loans was under way, setting in motion the crisis that would eventually spread to the larger economy. Lawrence Lenihan, CEO of FirstMark Capital LLC, saw Silbert’s company, by then called Restricted Stock Partners, as a play on the emerging crisis.

“We were looking for businesses that would benefit in an economic meltdown,” Lenihan says. “We knew there would be a lot of illiquid assets.”

FirstMark invested $3.8 million for a 25 percent stake.

Beginning in early 2008, the firm moved into the nearly frozen markets for auction-rate securities, typically bonds sold by municipalities whose interest rates were designed to reset periodically through bank-orchestrated auctions. In February, banks balked and the auctions failed. SecondMarket announced it would match buyers and sellers of auction-rate securities; it oversaw deals that had them trading for as little as 50 cents on the dollar. Still, bondholders rejoiced.

“We were getting flowers and chocolates,” Silbert says.

Bankruptcy Claim Market

Companies began running out of money, and in July 2008 the company started trading bankruptcy claims. It changed its name to SecondMarket in September.

In late 2008 and early 2009, hedge funds such as D.E. Shaw & Co. and Citadel LLC threw up so-called gates to keep investors from withdrawing capital. In January 2009, Second-Market set up a desk for investors to trade hedge-fund limited-partnership “interests.” Now, SecondMarket offers hedge funds the opportunity to monitor and manage the trading of their own partnership interests themselves.

“Honestly, there’s no one else who does what we do,” Silbert says.

In April 2009, SecondMarket started a desk for mortgage- backed securities and collateralized debt obligations — bundles of debt sliced into tranches with different yields and prepayment streams and sold by banks to investors. All told, SecondMarket has completed more than $14 billion of sales of structured products.

Silbert and his colleagues say there are categories of illiquid assets they have yet to tap. Kevin O’Connor, co-head of structured products at SecondMarket and a former head of JPMorgan Chase & Co. (JPM)’s auction-rate securities trading, says there’s enormous room for expansion.

‘Wood to Chop’

“There is plenty of wood to chop,” O’Connor, 44, says. “Our job is to find other areas that are underserved.”

The firm is now exploring markets in private real-estate investment trusts and shares of community banks.

Bigger volumes will come from bigger game: shares of large private companies such as Mars Inc., Bechtel Group Inc. and Koch Industries Inc., Silbert says.

“We’re talking potential markets in the trillions, not billions, of dollars,” he says.

SecondMarket’s most serious rival for trading venture- capital-backed company stock is SharesPost. Weir, 51, its CEO, is a former JPMorgan Chase investment banker and ex-CEO of OffRoad Capital Corp., a firm specializing in online private placements. Weir’s site has more registered participants than SecondMarket — 65,000 compared with 53,000 — and does less dollar volume. The average trade on SharesPost is about $200,000 with a $25,000 minimum, the company says, versus the average of $1 million to $2 million that SecondMarket claims.

Needling Silbert

Weir needles his East Coast rival.

“We come out of a Silicon Valley mind frame, using technology to solve the problems,” he says. “They are brokers with phones.”

SharesPost does its deals almost entirely online.

Silbert defends SecondMarket.

“Our model combines innovative technology with human support,” he says.

SharesPost deals exclusively in private-company shares — not any of the other illiquid assets that SecondMarket has cultivated.

“We are 100 percent dedicated to private-company stock,” Weir says.

SharesPost wants to raise money directly for venture-backed companies in the so-called primary market, instead of just chaperoning trades of existing shares.

Seeding Startups

Silbert, meanwhile, is seeding some startups himself as an angel investor. He’s invested about $500,000 to help bankroll half a dozen new companies, including New York-based RealDirect Inc., an online real-estate brokerage; Los Angeles-based ProFounder Financial Inc., which hosts a website that allows entrepreneurs to raise funds from their communities; and New York-based Send the Trend Inc., an online customized fashion accessory company. Silbert says what these companies have in common is that the people behind them all want to solve problems for their customers while upending the status quo in the process — something Silbert has been doing since he launched his new enterprise six years ago.

COMMENTARY:  Back on January 18, 2011, I profiled Barry Silbert the founder of SecondMarket, a stock exchange for the trading of shares in private companies like Facebook, Twitter, Groupon, Zynga, and other high-flying private startups whose shareholders need liquidity.

It was an amazing story how Barry Silbert, the boyish looking 34-year old founder of SecondMarket has parlayed a $300,000 angel investment into a business that could broker $1 billion in private company stock sales in 2011.

It's absolutely insane how a startup like Facebook, which has only been generating revenues since 2006, when it first began selling ads on its sites, and has been fine tuning its revenue model regularly, can be valued at 73 times its estimated EBITAD ($1.860 billion in 2010).  It always worries me when you base a valuation on future potential at the exclusion of established valuation methods and practices.  There is no discounting of earnings for potential risk and uncertainty.

If you use Facebook's gross revenues ($1.860 billion), the price multiple works out to 28.5 times revenues.  Google, the search engine giant, with revenues of $21 billion in 2010, had a PE multiple of about 21, but they have been around for a much longer time and have a far more predicable revenue model. More importantly, their revenue per user is about $24.00 compared to Facebook's $4.00 per user.  Essentially, Facebook's revenue model is not very efficient.

It's my belief for at least two years now, that the ad-supported revenue model for social networks, was a "quick and dirty" way for Facebook to generate revenues by selling advertising, is deeply flawed and has advertising revenues have reached a critical inflection point.   You can read about it HERE.       

Having said this, there are other reasons why I feel that the SEC's rules regarding the sale of stock in private companies should not be relaxed.   There is no transparency like a public company. There is no publicly available information about the startups operations, business risks, strategies, let alone their revenues and earnings are not published.  

Exchanges like SecondMarket and FirstShares only benefit a relatively few, mostly wealthy investors and venture capital firms, who are free to manipulate the startups stock prices, with huge swings in share values occurring month-to-month, all of it based mostly on hype, euphoria and a whole lot of greed.  The little people, like you and I, can never hope to own shares in these internet startups.   

One of the arguments that I keep hearing about private stock exchanges like SecondMarket is that they are serving the public good, a way for the shareholders of starups to attain liquidity during a volatile and unpredictable public stock market, and that they have no control over the values placed by sophisticated investors on the share values of those startups.   These investor's supposedly know best.  Who's kidding who.

Another problem that I have with startups like Facebook, Twitter and others, is that although they have revenues, those incredible valuations create what I call the "Facebook Halo Effect" driving the valuations of startups with even worse revenue models.  

Many VC's who have financial interests in many internet startups, claim that there is "No Bubble", that this is different than the Dotcom Bubble of 1999/2000, and that the general public will not be hurt because investor's are big VC firms and wealthy investors.  That's true, but mostly incorrect. If you are at an employee at one of these startups, and there is a Bubble, your entire sweat equity just got wiped out, and this will have a ricochet effect on other internet startups.  Furthermore, if you are a technology company that sells to internet startups, their stock prices could also take hit, because it would be perceived that they are selling their products to "flakey" businesses that might not be able to pay them back.

We seem to have forgotten what happened back on September 2008, when we had a financial meltdown due to speculation and greed, that proposed us into the Great Recession, which by the way, is not over.

Courtesy of an article dated April 27, 2011 appearing in Bloomberg

By TwitterButtons.com   

 

NASA WARNS THAT A MASSIVE SOLAR FLARE PREDICTED FOR 2012 COULD WIPEOUT ALL ELECTRONICS AND KILL ONE BILLION PEOPLE

NASA has forecasted super solar storms for 2012 and is sounding the alarm it could knock out the Earth’s entire electrical grid and kill 1 billion people. If proper precautions aren’t taken it could lead to nuclear meltdowns around the entire world.

Helium writes in a 2 page article titled NASA issues warning of solar super storm 2012

During a solar superstorm most communication will be blasted out of existence; power will fail. Cities will be left without light and water and food will run out. Civil unrest will surge as society collapses in a matter of days. The US federal and state governments will be hard-pressed to restore order amongst 300 million people as mass starvation sets in and sources of fresh water dwindle.

One billion could die

Restoration of the infrastructure could take years—even a decade or more. During the interim more than a billion people could die worldwide—more if warfare breaks out between countries desperate for scarce resources.

Michio Kaku adds his voice to the warnings

World renown American astrophysicist Dr. Michio Kaku, Professor of Theoretical Physics in the City College of New York of City University of New York and the co-founder of string field theory, is worried about a potential catastrophe and has joined in NASA’s warning.

Appearing recently on FoxNews, Kaku said, “We’re talking about a potential Katrina from space.”

But Kaku sees the disaster as 10 times greater than Katrina-perhaps even worse than that. “We’d be thrown 100 years into the past,” he explained. The transition to the 1800s would occur as quicly as flipping a light switch off.

COMMENTARY:   Back on February 5, 2011, I commented on NASA's warning about a once in a 100 years solar flare predicted to occur in 2012.  Dr. Kaku was also interviews for that article.  Dr. Kaku now describes this huge solar flare as a "Katrina From Outer Space" that could destroy all electronics systems on Earth--our electrical and communications grids and space satellites--and that this would turn back the U.S. over 100 years.  In 1859 a huge solar flare occurred and it wiped out the telegraph grid.

Back in August 2010, we had a huge solar flare, but NOTHING happened.  But, that storm was small potatoes compared to the Big Cahuna predicted for 2012.  

Could such a solar flare kill one billion human beings?   It's always possible.  Imagine all the electronics controls for the world's nuclear reactors or nuclear warheads going blink simultaneously.  However, we do need to control Earth's over-population, and this could be a possible solution.  Actually, I would welcome any solar flare that would wipe out all credit balances owed.  On the otherhand, this would also wipeout all bank balances.  Not good.  A moneyless society where payment is made using Facebook Credits. hehehe.

Imagine a world where you don't have any cellular, fax, telephone or internet service, no electricity to light your home, workplace or street or traffic lights, no juice to operate ATM machines or make stock trades, planes falling out of the skies, no silly iPads playing Angry Birds.  I actually welcome the latter, because I think mobile games are such a waste of time.  However, I will make the following exception to my mobile game viewpoint.

The above video depicts a huge solar flare "fireball" shooting out from the Sun and colliding with earth.  Lord, you have the power to prevent this, don't you?  Talk to me Jesus.  Could this be the Apocoalypse that many religious doomsayers have been predicting (or even hoping will happen)?  

I like listening to Dr. Kaku, a real honest to goodness astrophysicist, because he never holds anything back, and tells it like he thinks it is.          

Courtesy of an article dated April 26, 2011 appearing in Before It's News

By TwitterButtons.com   

 

IT'S OFFICIAL: FACEBOOK DEALS LAUNCHES TONIGHT & GROUPON DOESN'T STAND A CHANCE, BUT WAIT JUST ONE SECOND

Facebook will unveil its group deals program tonight in 5 US cities according to an embargo-breaking slip-up by the New York Times caught by TechCrunch. Facebook Deals launched 3 months ago in Europe. Tonight, according to reports, the feature will go live in Atlanta, Austin, Dallas, San Diego, and San Francisco. This, after learning from the early rocky roads traveled by competitors and Facebook's own tests in Europe.Update: Facebook PR contacted us and clarified two things noted below - and the updates are a little surprising to me.

Comparisons to the mega-successful (if dreadfully boring) services Groupon and Living Social are inevitable. But Facebook Deals is going to be much, much more interesting for everyone - especially for retailers who will offer deals. (Who likely won't have to pay a cut of the revenue to this deals platform at all.) If Facebook can execute this feature well (and there's no guarantee it can) then it's hard to imagine what some of today's fastest growing businesses on earth are going to do to compete. Look at what Facebook Deals has to offer, below. Groupon and Living Social are seriously at risk of being roadkill.

1. It may be free for retailers: Existing Daily Deals services make their money by charging retailers a cut from every discounted transaction. At least in Europe, Facebook Deals offered deals for free. Free! The giant social network could scale like crazy doing that, and then make its money when people decide to make their purchases with Facebook Credits. It's a Walmart-style move, but Groupon isn't as lovable as the Mom 'n' Pop corner store. Update Again! 12 hours after this story went live, Facebook PR (poor Facebook PR!) send yet another email saying this feature wouldn't be free after all - that's Facebook Check-in Deals, not Facebook Deals that's free!
2. Facebook Credits: Tonight's reports say you'll be able to buy Deals with Facebook Credits! They will be the first real-world, non-virtual goods that will be available for purchase with this new currency. Kids are going to burn through this stuff like there's no tomorrow. Load up with Credits with the intention of giving it to Zynga for Cityville crap and end up spending it at The Gap instead. Or vice-versa. When beloved national retailers start offering goods and lower prices to customers who pay with a new, virtual currency - that's when said virtual currency becomes a force to reckon with. Somebody call Congress and the Federal Reserve - it's time to start having some serious conversations. Update: Facebook PR contacted us and said that at launch, you will not be able to buy physical goods with Facebook Credits. Rather you will be able to get things like vouchers that you can redeem at events.
3.  Huge mobile app footprint: Facebook has some of the most widely downloaded mobile apps in the world. Hundreds of millions of people are already pulling it out of their pockets while they navigate around town, seeking to take photos, post quips, see updates, check-in to places. Boom - coupon. Groupon has only begun to offer a mobile app and it's nothing compared to Facebook Mobile. Update: Facebook PR pinged us and said that at launch, deals will not be offered on mobile. I find that a little shocking!

1. Multi-purpose newsfeed: Groupon and Living Social offer nothing but deals. Facebook puts deals in between pictures of your sister's baby. Which do you think you'll click through more often, all other things being equal?
2. Check-ins: Facebook probably has the biggest check-in network in the world. Simple as it is, millions of people publicly declare their locations to friends on Facebook already. Tie that in to Deals, as we heard last Fall when rumors emerged that some deals would be tied to checking-in to a place with multiple friends, and you're so golden it's ridiculous. "I was at the Starbucks in the mall with these 3 of my friends and we all got a coupon on a fappacino because I checked them in with me." That's a killer deals platform and judging from the Facebook Deals landing page pre-launch, that's going to be key. Check-in, check your friends in, redeem a deal and boom - not only does the retailer get 3 customers, it gets word of mouth marketing across all their friends' newsfeeds.
3. The Number One Killer Feature of Facebook Deals: Structured, verified, meaningful demographic and taste data. You think the retailers with whom you redeem a Facebook Deal aren't going to be shown your favorite music, TV show, your education level, some level of details about your friends and much more - at least in aggregate? You're kidding yourself. That info is gold and it's going to be the real killer for Facebook Deals. Not just scale, not just the world's greatest viral marketing platform - but valuable data about each and every customer that can then be used to retarget marketing efforts in the future. If Facebook can really deliver that well and at scale, it's going to have a much, much more compelling platform for retailers than Pretending to Live Social or Grey Poupon. It's going to be like your grocery store loyalty card, except it's going to work across retailers and it will be filled with info as valid as you tell your Facebook friends. Note: While emailing us tonight, it's notable that Facebook did not assert that this part was in any way incorrect.

Do Groupon and Living Social even stand a chance? Probably not with their existing products, they don't. Something's going to have to change radically.

COMMENTARY:   Group buying sites like Groupon and LivingSocial have an entirely different daily deals business model.  They split daily deals revenues 50/50 with the merchant.  That's a heavy price to pay, but Groupon is growing like crazy, so enough merchants are happy or they would not be coming back.  

If Facebook decides NOT to split revenues, but make their standard 30% commission off of the purchases paid with Facebook Credits (the virtual currency used for Facebook Deals), this could become a problem.  Here's why.  Let's say the merchant offers a 50% off deal on a $10.00 dinner special.  That would be $5.00 to the Facebook customer.  They pay with the equivalent in Facebook Credits, but are charged 30%.   So instead of saving $5.00 they are only saving $3.50 after the $1.5o commission ($5.00 x 30%).   That's a tricky scheme if there ever was, and a lot of people have complained about this.  In reality people, IT'S THE DEAL that counts.  The deal has to deliver the perception of real value.

With a 50% Groupon daily deal you know you get half off the regular price.  So long as enough people buy into the deal, then everybody gets that price. With Facebook, the merchant has no minimum, which means they may not reach their breakeven point on the total sales for that item.  Obviously, a lot will depend on the gross margin for each individual deal.

According to some unconfirmed estimates Facebook sold the equivalent $835 million in virtual merchandise (mostly games and apps) in 2010 that was paid with Facebook Credits. They took a 30% commission, so this generated Facebook Credit revenues of $250 million. Not bad for peddling virtual currency.  In the real world, you don't make anywhere near that in foreign currency exchanges trading dollars for Euros.   However, purchasing a game or virtual merchandise are something else, because they are for very small peddly amounts like $0.99 to $2.99.  So a 30% commission may not be worth bitching abount.  However, on a Facebook Deal for priced at $15.00 on something normally priced at $30.00, that's a commission of $4.50 (30% x $15.00).  That's real money hitting the consumer's wallet, and in reality you ended up saving only $10.50.   

Kids may jump on Facebook Deals because most of them are very poor with math, but young adults or Millennials are having it tough economically, and if they believe they are not getting their monies worth, may not purchase the deal.  With Millennials it is about value.  It's like paying for a four-course dinner, but getting only three courses.

Another problem which I see is from the viewpoint of the merchant.  If payment is made in virtual currency, do they get full value on redemption or will there be a fee for turning those virtual dollars into real greenbacks?  Also, how long do they have to wait to get paid?  The article doesn't address those issues, but not all the facts are out on the table yet, and we just don't know how those merchants will react to a payment system based on virtual dollars.     

I love the enthusiasm demonstrated by ReadWriteWeb's Marshall Kirkpatrick has for Facebook Deals. He seems to think it's going to this great thing and that it will all but doom Groupon.  I am simply playing devil's advocate, and nobody knows how Groupon and LivingSocial will react. Personally, I don't think they are going to sit there and take it lying down.  

Facebook may have those huge numbers, but this is a new market for them and they still have execute and develop a national marketplace.  They will have to sell Facebook Deals to real merchants.  This will take them at least 1 year to setup, plus they have a learning curve to deal with, something Groupon and LivingSocial have already overcome.   I do predict that Facebook will try to recruit Groupon and LivingSocial staffers, something they did with Google.

I am going to reserve final judgement until the end of 2011, before I call Facebook Deals the "Golden Egg" for Facebook.

Courtesy of an article dated April 25, 2011 appearing in ReadWriteWeb

By TwitterButtons.com   

 

NEW RESEARCH DISCOUNTS THE IMPORTANCE OF CLICKTHROUGH RATES AS A PRIMARY MEASURE OF AD PERFORMANCE

 

While marketers continue to rely on click-through rates as a primary measure of campaign effectiveness, new research suggests that the metric should be taken with a grain of salt -- or completely taken out of the equation.

Indeed, 99% of stable cookies examined by ad network and technology provider Collective show no evidence of clicks. The finding is even more pronounced than an often-referenced comScore study, Natural Born Clickers, which revealed that only a small minority of Web users make up the majority of click activity online.

To conduct its research, Collective said it examined the ad interactions of more than 100 million anonymous user profiles, and over 1 billion ad impressions served in the first months of 2011. In addition, it reviewed the action lift of 100 campaigns, and brand lift reported in 400 campaigns.

Jeremy Stanley, VP of Analytics at Collective says,

"We integrated an enormous volume of impression, user and performance data in our 'super-computer' from early 2011.  We then drilled down into this data to understand what fraction of users were clicking, what characterized those users, in what circumstances they tended to click."

Some interestings findings about CTRs were discovered: 

• Users who have clicked in the past are twice as likely to click again in the future. 
• Nearly 20% of ads that received any click activity received multiple clicks within the same impression, suggesting that these clicks were unintentional.
• Online gamers clicked 43% more often than non-gamers 
• Mobile device users clicked 123% more often.
• Clickers might not be attractive targets for advertisers, and tended to be lower-income, older and late technical neophytes. Users with incomes under $40k click 30% more often than users with incomes over $200k. Users with only 'fair' credit scores click 20% more often than users with 'excellent' credit scores.
• Late adopters of new technologies clicked 50% more often than early adopters. 
• Users who are economizing clicked 65% more often than users who purchase frequently online.

Many clicked ads did not materialize in terms of action or brand lift; Collective could not even find a discernible correlation between CTR and post-impression action.

Furthermore, the highest-performing CTR campaigns examined (top 20%) had a 150% higher CTR but an 8% lower post-impression action rate.

Similarly, a preliminary study of 100 campaigns showed no correlation between CTR and brand lift and purchase intent as measured by VIZU post-impression surveys. Collective suggests that optimization of campaigns to achieve higher CTR may, in fact, reduce brand ROI.

Stanley believes that marketers should stop using CTR to measure performance of their campaigns. "In fact, they should stop tracking CTR altogether," he stressed. "We believe that the CTR is not only a meaningless performance measure, but it can actually destroy value for brands if they optimize their campaigns to perform on CTR."

COMMENTARY:    Whether CTRs should be used as the primary metric to measure social media effective depends on your marketing goal.  If it's revenue, then CTRs are an important metric to measure.  If a brand's goal is engagement, then non-CTR metrics like number of users, wall posts, LIKE buttons clicked, retweets, time online, page views, etc are the metrics you should use.  

I don't think you can totally discount CTRs, especially if you are using targeted ads in your social media campaigns.   There are also non-quantifiable metrics that enter into the equation, like ad relevancy.  

It's also been demonstrated that the size of the display ad, time of day, and time of week, has a bearing on CTRs.

eMarketer conducted some very interesting research regarding clickthrough rates for Facebook and Google for 2009 and 2010. Here are their findings:

     

 

As you can readily see, social media clickthrough rates are terrible.  CTRs improve if they are targeted.  Google still beats Facebook by nearly a ratio of 9-to-1.   This is no surprise to me, as I have been saying for quite a while that social media is very ineffective media for revenue generation and that clickthrough rates are deplorable.  

Courtesy of an article dated April 25, 2011 appearing in MediaPost Publications Online Media Daily and an article dated February 23, 2011 appearing in Stream Companies' Advertising Agency Blog

By TwitterButtons.com   

 

 

 

HOW TIMES R&D LAB'S 'CASCADE', A 3-D VISUALIZATION ANALYTICS PROGRAM COULD UNLOCK THE SECRETS OF A TWEET

 

Cascade, developed in the Times R&D Lab by Jer Thorp and UCLA prof Mark Hansen, is a 3-D way of visualizing how stories spread across Twitter.

Up in the cloud-piercing reaches of the New York Times Building, Jer Thorp is breezing through the particulars of a grand experiment in data visualization, one designed to unpack the mysteries of social media for the Times and, potentially, newspapers everywhere. It’s ambitious stuff. But right now, what the experiment looks like, projected on a screen in the crisp white hallway of the R&D department on the 28th floor, is a giant galaxy of tweeting rabbis.

 

You’ve got @RabbiRuth, @RabbiGoldberg, and @velveteenrabbi (cute) speckled like intergalactic dust around rings that turn the Twitterverse into a stunning 3-D representation. The users are responding to a Times story by Paul Vitello about priest and pastor burnout. What you see here is a visualization of how the story has spread through one corner of Twitter, on a granular level (@RabbiGoldberg: “Another reason to take it easy on your rabbi”) and at a galactic scale.

This is the work of Project Cascade, and both the mining of the data and the artistic presentation could go a long way toward solving the riddle of how a story goes viral. That could have major implications for newspapers trying to cope in the social-media age. Says Michael Zimbalist, VP of research & development at the New York Times Company:

“Our hypothesis has been and continues to be that those organizations that can be responsive to data in real time and make business decisions surrounding that data in real time will be the organizations that prosper in the 21st century.”

Thus was born journalism’s most ambitious social-media data viz to date, one that already offers some surprising insights into how stories propagate on the web.

Unlike most Twitter visualizations, which present a fuzzy snapshot of Twitter’s reaction to something in the news cycle, Cascade is both dynamic and exceedingly detailed.

“What we wanted to do was see the sharing activity happening in a really active way,” says Thorp, a digital-arts whiz who developed Cascade as the Times’s official data artist in residence with Mark Hansen, a UCLA stats prof, and Jake Porway, the staff data scientist (and Hansen's former student).  In short, they wanted to show how readers engage with stories -- info that social-media editors and others could then use to program tweets to bolster their audience.

So Cascade takes an isolated social-media event, like a tweet, and shows the entire chain of reactions that results –- what Thorp and his colleagues call a Twitter “cascade.” It can do this in real time. And it can tell you not just that a story caught fire, but how, exactly, the story caught fire; how a tweet from a network scientist made the article "But Will It Make You Happy?" on cutting back one’s material possessions go viral. Says Zimbalist who's overseeing development Cascade:  

“We look at four different large data sets.  We look at our weblogs: all the stories on our website. Also: The events where people shorten our links. Then we look at how links are shared and propagate all through Twitter. Then we look at the clicks on the links. So we see this complete life cycle of how information spreads. All based on a single event –- a single tweet or a single link shortening.”

The tool lets you explore the data from various perspectives. A side view shows Twitter activity over time. A “radar view” shows the distance between Twitter conversations, for instance: how far removed the network scientist’s original tweet was from the Zappos.com retweet that sprang the story loose. But the really exciting view is in 3-D, which combines both the timeline and the degrees of separation for a strikingly clear image of something inherently complex: the complete eco system of a Twitter conversation. (To reduce some of the complexity, a “pruning” mechanism lets you hack away all but the most influential branches of the Twitter cascade.)

These cascades can then be picked apart and analyzed to glean all sorts of insight into reader behavior, which, in turn, could help theTimes better promote stories. The visualizations could, for instance, shed light on how best to word a tweet:

• Does a question work better than a headline? 
• Does a tweet from a story’s author have more traction than a tweet from, say Media Decoder? 
• Should tweets be timed meticulously, as if on a train schedule?

Cascade’s developers are quick to point out that the project is not designed to dictate how the newsroom approaches coverage.  Porway says, 

“We would never shape the content of the news around it."  

Says Zimbalist,

"Getting a clearer idea of how Twitter behaves, the theory goes, will help shorten the route stories take to find interested readers -- something newspapers have been doing at least since they puts kids on bicycles to chuck their product through your living-room window.  One thing we can pretty well anticipate is we’ll be able to recommend some best practices [on Twitter feeds]."

Cascade is still in R&D mode –- all data so far reflect just two weeks of news stories in August –- so the Times hasn’t reached any definitive conclusions yet. But they’ve already alit on some interesting findings.

•  Twitter isn’t as fleeting as it seems. As Zimbalist tells it, referencing the "But Will It Make You Happy?" story: “One of the first and biggest 'aha' moments in all of this was that there’s sort of this feeling among people that Twitter is ephemeral (lasts for brief period of time). But in that story, it was a day or beyond later that we got that burst of activity [through Zappos] of sharing. So one of the key questions is maximizing interest over time by pulling these levers we can control.”
• Twitter influence isn’t necessarily where you’d expect. As the cascades have pointed up, it’s often people with famous followers, not the famous people themselves, who have more sway. (One possible explanation is that people assume everyone’s seen an Ashton Kutcher tweet and don’t bother retweeting.) It’s also communities –- like the rabbis -– that gather around specific topics and news stories that help drive traffic. “Because we come back and see who reads the stories and not just who posts on Twitter like most other data visualizations, we can really identify who’s influential in a meaningful way,” Porway says. “Not just who spams a million followers or who sends out a lot of tweets, but who actually gets people to come back.” In the future, the Times could try to incorporate these influential tweeters into their coverage –- in effect, to leverage their power to spread the word.

The next step: “In the next few weeks, we’ll try to turn it into real-time information and give it to several internal constituencies who want to use it –- social media people in the newsroom and people in analytics and marketing,” Zimbalist says. If all goes smoothly, theTimes might extend the project to other New York Times properties like the Globe and Boston.com. It might even turn Cascade into a broader commercial venture. “Whether you’re a journalist or in the marketing department, increasing readership is the common aim of everyone,” Zimbalist says. “Hypothetically down the road we could think about whether this could turn into a useful tool [for other organizations] on how to use Twitter to maximize the audiences they’re aggregating.” Newspapers innovating on social media -- that’s a man-bites-dog story if there ever was one.

COMMENTARY:   Wow that really kicks butt.  The Times R&D Labs Cascade adds a new dimension in data visualization, which is something that I have championed when it comes to data analytics.  It's much more impressive and revealing to see the "shape" of the data--its breath and length over time--instead of just rows of raw data which require sorting and further analysis.  

I like Cascade's real-time data visualization in terms of pass along audience (the viral piece) and the ability to identify who the real influencers are.  Lady Gaga and Ashton Kuchter may post one tweet, but the follower's are really the ones that move that tweet along throughout the Twitter ecosystem. 

If you could extend that tweet visualization analysis to include the complete interactive ecosystem: the viral effect throughout the internet from forums to portals to blogs, that might be really tell the full story.  It would help answer the question:  Did this tweet have staying power throughout the digital realm, or just within Twitter?    Visualization could really get interesting at that point.  

It's too early to tell whether Cascade is a gamechanger in viral visualization analytics.  More testing needs to be conducted over several months.  The real value of data analytics is in future predictability. Will a tweet today resonate the same in similar future tweets?  You probably need to repeat your tweets, including lots of retweets from your followers, for a trend to take hold. Example: After @charliesheen was canned from "Two and A Half Men" by CBS, and he joined Twitter in early March, on his "Violent Torpedo of Truth" campaign, and his constant rants and lingo really caught on with the Twitter universe.  I'm really a follower.  The terms #winning, #tigersblood, #goddesses, #fastball, and so forth, were born and trended high, and they live today. It seems everybody uses them in their tweets.  @charliesheen trended high for about a week, then finally disappeared, so I agree with the ephemeral nature of tweets.  Tweets can "descipate" very quickly on Twitter.  Even this one.  

Courtesy of an article dated April 25, 2011 appearing in Fast Company Design

By TwitterButtons.com   

 

AN UNABASHED LOOK AT THE FEDERAL RESERVE'S RADICAL QUANTITATIVE EASING (PRINTING MONEY TO PAY DEBT) MONETARY POLICY

On Wednesday, November 3, 2010, Ben Bernenke, Chairman of the Federal Reserve announced that the Fed planned on a second round of quantitative easing (QE2) to stimulate the economy.  The Fed's plan was to purchase $600 billion of U.S. Treasury securities by the middle 2011.  The irony of this announcement is that it occured right after the November 2, 2011 General Election, and the majority of Americans missed it (or could care less) because the election took over the news headlines.  

I missed the Fed's November 3, 2010 quantitative easing announcement as well.   It does make you wonder about the timing of that announcement doesn't it?   It has taken nearly six months for me to realize the full repercussions of that announcement. Just too much work and other personal issues.  However, I cannot take it any long, and need to talk about it.

I am sure that many of you are asking just what the hell is 'quantitative easing'?   I looked up the definition of 'quantitative easing' on Wikipedia and it sounds suspiciously like a form of extreme "Voodoo" economics.  Here's what it says,

Quantitative easing (QE) is an unconventional monetary policy used by some central banks to stimulate their economy when conventional monetary policy has become ineffective. The central bank buys government bonds and other financial assets, with new money that the bank creates electronically, in order to increase the money supply and the excess reserves of the banking system.   

In short, the Fed authorizes the U.S. Treasury Department to "turn on the presses" and print money.  Figuratively speaking, no real currency is actually printed, but the Fed electronically credits each commercial bank.   Just the same, that money is used to purchase maturing U.S. bonds and treasury notes held by banks as part of their liquidity reserves.  The good news is that conventional banks cannot print their own currency (God forbid), but the Fed can and has been doing so with impunity even before the financial meltdown of 2008.  You will shit when you discover the full extent of the Fed's quantitative easing policy.     

In addition to the $600 billion quantitative easing announced in November 2010, the Federal Reserve announced that it will be "reinvesting" an additional $250 billion to $300 billion from the proceeds of its mortgage portfolio in U.S. Treasury securities over the same time period.  So that is a total injection of about $900 billion. 

One of the reasons I am writing this article is because quantitative easing has been aggressively pushed to the forefront by politicians, economists, banks and Wall Street as the mid-2011 deadline approaches, and all of them are wondering whether the Fed will announce a third round of quantitative easing or QE3.  

If the Fed believes that the economy is not growing fast enough, and decides more quantitative easing is needed, things will get very dicey in the financial community.  Truth be told, many economists believe that the Federal Reserve is already out-of-control and is relying too much on quantitative easing as the last resort to fix the nation's economic ills, and that results have been anemic at best.   If so, what does this mean for inflation, the stability of the world financial system and the future of the U.S. dollar?  Great questions that will be answered below thanks to the good people at Seeking Alpha. 

According to Fed insiders, Fed Chairman Bernanke believes that quantitative easing is working, and that additional quantitative easing may not be needed, due to a decrease in the nation's unemployment rate, employers are beginning to hire again (in certain sectors), rise in retail sales, increase in exports, and a robust stock market rally.  

Personally, the stock market rally is meaningless to me, since it is driven by higher corporate earnings created by downsizing, the practice of hiring mostly part-time workers and contractors, exporting jobs overseas, and the accumulation of corporate cash that is then used to buy back their own stock and raise earnings per share for the benefit of shareholders.   The stock market has created no real jobs, per se, but padded the pockets of the richest Americans and increased the value of your 401K.   

On the other side of the equation, the Nation is faced with economic ills which cannot seem to go away.  Home prices continue to decline, foreclosures are on the rise again, construction spending has seen several consecutive months of declines and inflation is on the rise.  The turmoil in the Middle East has driven oil prices to near record levels and gasoline prices now average $3.88 per gallon nationwide.   Finally, the catastrophic earthquake and tsunami in Japan, has severely impacted production of parts and electronic components for both the technology and automobile sectors. The full economic effect of Japan's earthquake is already being felt as the automakers temporarily close auto plants and furlough workers, and the technology sector scrambles to locate electronic components to keep pace with the heavy demand for computers and consumer electronic devices.

Many economists believe that QE1 and QE2 did very little to improve the economy and that any positive effects will be short-lived.  That sneaky $600 billion quantitative easing (QE2) announced in November 2010 came under considerable political pressure.  In the bigger scheme of things, that $600 billion barely kept pace with the government’s issuance of new debt, so in a sense QE2 has amounted to a wash.

The Fed's policy-making board prepares to meet on Tuesday and Wednesday, April 26 and 27 — after which the Fed Chairman, Ben Bernanke will hold a news conference for the first time to explain its decisions to the public — a broad range of economists say that the disappointing economic results show the limits of the central bank’s ability to lift the nation from its economic malaise.   One way or another, the financial community waits with baited breath whether further quantitative easing will be needed.  

From November 2008 to March 2010, the Fed bought more than $1.7 trillion in mortgage back securities and Treasury bonds, holding down mortgage rates and reducing borrowing costs for well-regarded companies by about half a percentage point, according to several studies. That is an annual savings of $5 million on every $1 billion borrowed.  Through quantitative easing the Fed has created a portfolio of U.S. bonds and treasury notes purchased from banks totalling more than $2.057 trillion at the end of May 2010.  Many economists believe that this may impede the Fed's ability to raise interest rates to curb inflation. Some of these critics view the rising price of oil and other commodities as harbingers of broader price increases.

To gain an understanding of quantitative easing, we must look at quantitative easing just prior to the financial meltdown of September 2008, and look at quantitative easing after the meltdown which began in force in 2009. 

The below graph shows the contraction of U.S. Treasury securities by the central bank in late 2007 and holdings remained flat through the rest of the financial crisis in 2008 until Agency Debt was purchased in late September 2008 resulting in an immaterial increase in quantitative easing of about $500 billion.  

In 2009 and 2010, the Federal Reserve began to purchase massive amounts of Fannie Mae and Freddie Mac Mortgage Backed Securities (MBS). The below graph shows the quantitative easing components during late 2008 through May 2010, when quantitative easing totaled $2.057 trillion. That's a swing of $1.5 trillion in about a year and a half.    

If the Fed fully implemented QE2, the total of QE1 and QE2 should tally about $2.657 trillion ($2.057 trillion balance at May 2010 and $600 billion announced November 2010).  The upward sloping curve in the above graph would go off the chart.

According to the FRB's Economic Letter of January 3, 2011 titled "Measuring the Macroeconomic Effets of the Fed's Asset Purchases" asset purchases from QE1 and QE2 will total about $2.6 trillion and remain at this level through mid-2012. This correlates exactly with my tally of $2.657 trillion. Asset purchase holdings will taper off gradually until they hit $1.5 trillion in early 2016. 

I had a look at the Fed's Tentative Outright Treasury Operation Schedule under QE2 announced on November 3, 2010, the total outright purchases of assets are $470 billion through the period ending May 11, 2011.  This would mean that the Fed has $13o billion to go, if they adhere to the above schedule. 

So did quantitative easing work?

It may have helped stabilize the economy in the short-term, but unemployment still remains high (8.8% at the end of March 2011).  Monthly U.S. home sales continue to come in at close to record low levels.  New construction units are at historic lows.  Banks have tightened their credit criteria and are lending very little.  In fact, as of January 2011, American banks had excess reserves of $1 trillion.  Individuals are borrowing less money.  Bankruptcy rates have been steadily increasing since 2005.  There is an eminent danger of a Student Loan Bubble as total student loans outstanding approach $1 trillion.  

One undeniable fact remains:  A strong and sustainable robust economic recovery cannot be attained through the monetary policies of the Federal Reserve.  Quantitative easing, is a last ditch effort if there ever was.  It appears that the Fed has divorced itself to an "economic recovery" based on new debt creation.

The fact remains that Americans lost $17 trillion in the stock market and real estate bubble just prior and during the Great Recession.  Anyone who believes that pumping $2.9 trillion into the banking system can overcome an estimated $50 trillion in overpriced assets (primarily mortgage debt obligations held by banks) and $10 trillion in uncollectible debt may well be disappointed.

In May 2010, economists at Goldman Sachs (biggest crooks on Wall Street) estimate that it would take a staggering $4 trillion in quantitative easing to get the economy really rolling again.   We have already gone through $2.9 trillion.   

So why should Americans be concerned about quantitative easing? The following are 10 reasons why quantitative easing is bad for the U.S. economy....

1. Quantitative Easing Will Damage The Value Of The U.S. Dollar -  Each time you add a new dollar to the system, it decreases the value of each existing dollar by just a little bit.  The Federal Reserve has pumped $2.9 trillion in funny money into the system and that is going to have a significant impact.  Bill Gross, the manager of the largest mutual fund in the entire world said, he believes that more quantitative easing could result in a decline of the U.S. dollar of up to 20 percent.   We have already seen large declines in the value of the dollar versus key foreign curries like the Euro 
2. Inflation Is Going To Hit Already Struggling U.S. Consumers Really Hard - Already, investors have been fleeing from the U.S. dollar and other paper currencies and have been flocking to commodities, precious metals and oil.  Gold hit an all-time high of $1,500 per ounce on April 22, 2011.  In flation is already increasing the price of food.  The record price increases in the cost of imported oil has increased the price of gasoline to near records.  This means that it costs more to produce goods and services and ship those goods. American family budgets, especially among the poor and middle class are being stretched. Discount coupons, daily deals and dollar stores have been big beneficiaries.
3. Once An Inflationary Spiral Gets Going It Is Really Hard To Stop - The Federal Reserve is playing a very dangerous game by flirting with inflation. Once an inflationary spiral gets going, it is really difficult to stop. Just ask anyone who lived through the Weimar Republic or anyone who lives in Zimbabwe today. If the Federal Reserve is now going to be dumping hundreds of billions of fresh dollars into the system whenever the economy gets into trouble it is inevitable that we will see rampant inflation at some point.
4. Inflation Is A Hidden Tax On Every American - Millions of Americans have worked incredibly hard to save up a little bit of money. These Americans are counting on that money to pay for a home, or to pay for retirement or to pay for the education of their children. Well, inflation is like a hidden tax on all of those savings. In fact, inflation is a hidden tax on every single dollar that all of us own. We have been taxed more than enough - we certainly don't need the Federal Reserve imposing another hidden tax on all of us.
5. The Solution To The Housing Bubble Is Not Another Housing Bubble - Today, approximately 40% of U.S. real estate is "underwater" or estimated to have negative equity. The Federal Reserve apparently believes that by flooding the system with cash that the banks will start making home loans like crazy again and home prices will rise substantially once again - thus wiping out most of that negative equity.  The inventory of unsold residential homes now exceeds 6.6 million units, or roughly two times worth of inventory in a good real estate market.  The spector of a second real estate bubble is a definite possibility, and several real estate experts and economists, and yours truly,  have predicted this.   
6. More Quantitative Easing Threatens To Destabilize The Global Financial System - We have already entered a time of increasing global financial instability, and the Federal Reserve is not going to help things by introducing hundreds of billions of new dollars into the game. Over the past two decades, bubble after bubble has caused tremendous economic problems, and now all of this new money could give rise to new bubbles. Already, we see financial institutions and investors pumping up carry trade bubbles, engaging in currency speculation and driving up commodity prices to ridiculous levels.
7. Quantitative Easing Is An Aggressive Move In A World Already On The Verge Of A Currency War - Quantitative easing will likely help U.S. exporters by causing the value of the U.S. dollar to sink, and this has already occurred.  However, this gain by U.S. exporters will come at the expense of foreigners.  It is essentially a "zero sum" game. So all of those exporting countries that are already upset with us will become even more furious as the U.S. dollar declines. Could we witness the first all-out "global currency war" in 2011?
8. Quantitative Easing Threatens The Status Of The Dollar As The World Reserve Currency - As the Federal Reserve continues to play games with the U.S. dollar, quite a few nations around the globe will start evaluating whether or not they want to continue to trade with the U.S. dollar and use it as a reserve currency.  Already there are some grumblings that the world economies may move away from the U.S. dollar reserve standard and to a basket of currencies consisting of the Euro, Swiss Franc, Chinese Yuan, and Japanese Yen.  In fact, a recent article on The Market Oracle website explained how this is already happening.
9. It Is Going To Become More Expensive For The U.S. Government To Borrow Money - Right now, the U.S. government has been able to borrow money at ridiculously low interest rates. But as the Federal Reserve keeps buying up hundreds of billions in U.S. Treasuries, the rest of the world is going to start refusing to participate in the ongoing Ponzi scheme.
10. The U.S. and Europe Face A Debt Crisis - Total U.S. government debt stood at $14 trillion at the end of March 2011.  The European Union owes nearly an equal amount.  The U.K. owes over $9 trillion.  European countries in emininent danger of default include, Ireland, Greece, Spain, Italy and Portugal.  Greece had to be bailed out by the EU and US in 2010 just so that it could pay its debts and government workers.   

Foreign countries are balking at U.S. government's quantitative easy policies, and the U.S. will either have to start paying higher interest rates on government debt in order to attract enough investors, or the Federal Reserve will just have to drop all pretense and permanently start buying up most of the debt. Either way, once faith has been lost in U.S. Treasuries the financial world will never, ever be the same.

Most Americans have absolutely no idea how fragile the world financial system is right now. Once the rest of the world loses faith in the U.S. dollar and in U.S. Treasuries this entire thing could completely unravel very quickly.

On April 19, 2011, Standard & Poors, a major debt obligations rating service for corporate and soverign debt, lowered its outlook for America's long-term credit rating to "negative" from "stable."  The change means that there is a one-in-three chance that S&P could downgrade the nation's "AAA" credit rating within two years. That would make it harder for the U.S. government to borrow money to fund its activities. This would have a devastating effect on the U.S. economy.

The Federal Reserve is playing a very dangerous game and they are openly threatening the delicate balance of the world financial system.  Keep tuned for the Fed announcement on Wednesday, April 27.

Wall Street investor's, once very bullish on stocks, have driven the DOW to new highs in 2011, but many stock market experts are recommending that investor's get out of equities.  The full effect of rising oil prices and the global economic effects from the Japanese earthquake will be felt in the 2nd Quarter 2011.  When corporate earnings reports for Q2 2011 are announced in July, the bad news is going to spook many investor's.  Many are already starting to hedge and slowly moving into commodities like precious metals like gold, valuable minerals, and oil.  

 

 

I do not want you to lose any sleep or give you nightmares.  My job was simply to inform and educate you.  Yet, there will be some of you, who still believe in the greatness America, and that the U.S. is just too big to fail.  That's the kind of extreme capitalism that got us into the Great Recession.  There is plenty of blame to go around.  We obviously need radical change, everybody will need to pay more taxes, and government spending needs to be cut.  I am all fore it, but let's not penalize the poor, middle class while rewarding the richest Americans and the big corporations, many of them are not paying their fair of income taxes while continuing to export jobs overseas.         

Courtesy of an article dated November 4, 2010 appearing in Seeking Alpha, an article dated April 24, 2011 appearing in The New York Times Economy, an article dated May 31, 2010 appearing in the Economic Crisis Watch Blog  

By TwitterButtons.com   

 

 

 

PRIVACY VIOLATION ALERT: BOTH APPLE IPHONES AND GOOGLE ANDROID PHONES REGULARLY TRACK OUR LOCATION ILLEGALLY

Apple Inc.'s iPhones and Google Inc.'s Android smartphones regularly transmit their locations back to Apple and Google, respectively, according to data and documents analyzed by The Wall Street Journal—intensifying concerns over privacy and the widening trade in personal data.

Google and Apple are gathering location information as part of their race to build massive databases capable of pinpointing people's locations via their cellphones. These databases could help them tap the $2.9 billion market for location-based services—expected to rise to $8.3 billion in 2014, according to research firm Gartner Inc.

In the case of Google, according to new research by security analyst Samy Kamkar, an HTC Android phone collected its location every few seconds and transmitted the data to Google at least several times an hour. It also transmitted the name, location and signal strength of any nearby Wi-Fi networks, as well as a unique phone identifier.

Google declined to comment on the findings.

Until last year, Google was collecting similar Wi-Fi data with its fleet of StreetView cars that map and photograph streets world-wide. The company shut down its StreetView Wi-Fi collection last year after it inadvertently collected e-mail addresses, passwords and other personal information from Wi-Fi networks. The data that Mr. Kamkar observed being transmitted on Android phones didn't include such personal information.

Apple, meanwhile, says it "intermittently" collects location data, including GPS coordinates, of many iPhone users and nearby Wi-Fi networks and transmits that data to itself every 12 hours, according to a letter the company sent to U.S. Reps. Edward Markey (D-Mass.) and Joe Barton (R-Texas) last year. Apple didn't respond to requests for comment.

The Google and Apple developments follow the Journal's findings last year that some of the most popular smartphone apps use location data and other personal information even more aggressively than this—in some cases sharing it with third-party companies without the user's consent or knowledge.

Apple this week separately has come under fire after researchers found that iPhones store unencrypted databases containing location information sometimes stretching back several months.

Google and Apple, the No. 1 and No.3 U.S. smartphone platforms respectively according to comScore Inc., previously have disclosed that they use location data, in part, to build giant databases of Internet WI-Fi hotspots. That data can be used to pinpoint the location of people using Wi-Fi connections.

Cellphones have many reasons to collect location information, which helps provide useful services like local-business lookups and social-networking features. Some location data can also help cellphone networks more efficiently route calls.

Google also has said it uses some of the data to build accurate traffic maps. A cellphone's location data can provide details about, for instance, how fast traffic is moving along a stretch of highway.

The widespread collection of location information is the latest frontier in the booming market for personal data. Until recently, most data about people's behavior has been collected from personal computers: That data generally can be tied to a city or a zip code, but it is tough to be more precise. The rise of Internet-enabled cellphones, however, allows the collection of user data tied with much more precision to specific locations.

This new form of tracking is raising questions from government officials and privacy advocates. On Wednesday, Rep. Markey sent a follow-up letter to Apple asking why the company is storing customer-location data on its phones.

"Apple needs to safeguard the personal location information of its users to ensure that an iPhone doesn't become an iTrack," Rep. Markey said in a statement.

Google previously has said that the Wi-Fi data it collects is anonymous and that it deletes the start and end points of every trip that it uses in its traffic maps. However, the data, provided to the Journal exclusively by Mr. Kamkar, contained a unique identifier tied to an individual's phone.

Mr. Kamkar, 25 years old, has a controversial past. In 2005, when he was 19, he created a computer worm that caused MySpace to crash. He pled guilty to a felony charge of computer hacking in Los Angeles Superior Court, and agreed to not use a computer for three years. Since 2008, he has been doing independent computer security research and consulting. Last year, he developed the "evercookie"—a type of tracking file that is difficult to be removed from computers—as a way to highlight the privacy vulnerabilities in Web-browsing software.

The Journal hired an independent consultant, Ashkan Soltani, to review Mr. Kamkar's findings regarding the Android device and its use of location data. Mr. Soltani confirmed Mr. Kamkar's conclusions.

Transmission of location data raises questions about who has access to what could be sensitive information about location and movement of a phone user.

Federal prosecutors in New Jersey are investigating whether smartphone applications illegally obtained or transmitted information such as location without proper disclosures, the Journal reported in April, citing people familiar with the matter.

A spokeswoman for the Office of the Privacy Commissioner of Canada said the office "had concerns" about using cellphones to collect Wi-Fi data and has expressed those concerns to Google. "The whole issue of the tracking capabilities of new mobile devices raises significant privacy issues," she said.

The business of collecting location information began in 2003, when Boston-based Skyhook Inc. launched and began the practice of "wardriving"—cruising around in cars to collect information about Wi-Fi hotspots. Comparing the names and signal strengths of nearby Wi-Fi hotspots against a database allows for a cellphone's location to be determined within 100 feet, in many cases, Skyhook says.

"For the first four or five years, people thought we were nuts," said Ted Morgan, Skyhook's founder and CEO. "We invented this whole concept of driving around and scanning for Wi-Fi and tuning these algorithms."

In 2007, Google began building its own Wi-Fi database, using the StreetView cars. Last year, Apple switched from using Skyhook and began creating its own database of Wi-Fi points for use on its newest phones, although it still uses Skyhook data for older phones and Macintosh computers.

Skyhook's Mr. Morgan says the company attempts to protect users' privacy by collecting data via cellphone only when a person requests location from its servers—for instance when they are actively looking at a map. Each time a user requests location, the information is encrypted and gathered without any identifying user numbers, Mr. Morgan says. That means Skyhook can't follow a person from one location to the next, he says.

Google seems to be taking a different approach, to judge from the data captured by Mr. Kamkar. Its location data appears to be transmitted regardless of whether an app is running, and is tied to the phone's unique identifier.

In its letter to Congress last year, Apple said that it only collects location data from people who use apps that require location. It doesn't specify how often a person must use the app for intermittent collection to occur.

Apple also said in the letter that it collects Wi-Fi and GPS information when the phone is searching for a cellular connection. Apple said the data it transmits about location aren't associated with a unique device identifier, except for data related to its mobile advertising network

Apple gathers the data to help build a "database with known location information," the letter says. "This information is batched and then encrypted and transmitted to Apple over a Wi-Fi Internet connection every twelve hours (or later if the device does not have Wi-Fi Internet access at that time)," the company wrote in the July letter to Congress.

The letter, which is available on Rep. Markey's website, became newsworthy this week in light of findings from two researchers who uncovered a file on iPhones that keeps a record of where the phone has been and when it was there. The file is unencrypted and stored by default.

The discovery of this location file touched off a furor among iPhone owners who could see for the first time a trove of location data about themselves stored on their phones. The researchers, Alasdair Allan and Pete Warden, said that they had no evidence that the file was being transmitted to Apple.

COMMENTARY:   If you have been following my blog posts, you know that I find any unauthorized tracking and privacy violations distasteful.   On December 28, 2010, I commented on an article about the investigation by The Wall Street Journal of 101 mobile apps that were tracking us and providing highly personal ID information to the mobile game company and being shared with their advertising agencies.  

On March 14, 2011, I commented on an article concerning Twitter's settlement with the FTC over privacy violations.  Twitter could've paid a huge fine of $16,000 per violations, which could'be put the site out-of-business, but the settlement placed Twitter on a 20-year probation. The settlement -- a 5 to 0 vote -- means the company must establish a stricter information security policy and have it audited every two years by an independent third party. Twitter will need to pick up the bill.

On March 30, 2011, I commented on an article about Google's settlement with the FTC over privacy violations.  Google was also placed on 20-year probation and is required to establish stricter information security policy have it audited every two years by an independent third party.

I was aware that the cellular service providers can track us.  That's almost a given, with the advent of GPS mapping and location-based check-in services, which require this in order to provide their services.  Those are opted-in services, but in my opinion Apple and Google are tracking us illegally. God only knows what they will use that data about us.  This definitely has the appearance of illegal search and seizure.   I don't need my personal whereabouts tracked.  That's my business, and I don't care if the cellular service providers have cut a deal with Apple and Google to provide them this information.  I want to know about it, and have an opportunity to opt-out of such tracking.  This is so disgusting to me, that my blood pressure is begiinning to rise again.

Google is already under the eyes of the FTC for privacy violatioins stemming from Buzz, a social networking add-on service to GMail, so find this development most troubling.  That 20-year probation was broken so quickly, it sort of reminds you of an alcoholic telling you he promises not to drink ever again.   

I am really going to look into the tracking activities of both Google and Apple, and try to determine exactly what information the cellular phone companies are providing them.   I sure as hell do not want my personal life tracked to this extreme.  I am glad that Congress is stepping in and looking into this matter.   In the meantime, if you feel the same way about this flagrant invasion of privacy, I urge you to contact your elected congressman or senator and let them know that you don't like it, wish to know what information about us is being tracked, how long this has been done, and if these practices are not ended, then the cellphone owner should have the right to opt-out of being tracked by Apple, Google and any other company invading our private lives.

Courtesy of an article dated April 22, 2011 appearing in The Wall Street Journal Technology

By TwitterButtons.com   

 

APPLE PREPARES LAUNCH OF ITS NEW ITUNES CLOUD MUSIC STORAGE AND STREAMING SERVICE

The race for the cloud is on and Apple could beat Google to it. According to a Reuters report Google's unannounced is said to be stalling, while Apple is already talking with labels ahead of release, fueling speculation that Apple would beat Google to launching its service first.

The iTunes cloud service will reportedly allow users to stream from a remote server song they uploaded from their computer, as long as they have Internet access. It's unclear whether this would work only with music purchased from the iTunes store, or if you would be able to use music manually added (like ripped CDs, or songs from third-party services).

The service is expected to arrive some point this summer, and Apple is yet to sign any licenses with music labels. In contrast, Amazon's music locker service launched last month ruffled some feathers because it didn't seek licensing agreements. But the difference between Amazon's and Apple's services seems to be that with Apple's system, you won't have to upload songs you purchased already, but rather just stream them from a master copy on Apple servers.

While Apple marches ahead with its cloud music service, Google's efforts are stalling, the Reuters report also says. Google's music service was supposed to launch alongside the Xoom Android tablet, but recent changes in Google management are allegedly to blame for the delay.  So instead of an iTunes-like cloud service, Google is said to have changed its mind and is now exploring a music subscription service.

HP is also looking into launching a cloud music locker service for its upcoming TouchPad tablet, set to arrive in June. The HP cloud music service would allow you to stream music that you don't own yet, and users would be able to stream music to HP smartphones as well, but it is unknown how this would actually work.

COMMENTARY:   Apple remains focused on Job's original Digital Hub Strategy, so this is a logical move for Apple, since iTunes already controls 85% of the music download market, and individual storing and streaming is a great value-added service.  However, a huge number of firms are offering or plan on offering a streaming music service, including Sony and Facebook, so things are going to get interesting.   Apple still has the upper hand, with its huge customer base of mobile devices from the iPod to the iPad.     

With so many internet users using cloud services for things like CRM, medical records management, project management and ERP applications, it was just a matter of time before individuals would use the cloud for storing and streaming their music.  This does this make sense, since music files can take up a lot of storage on mobile devices, and storing and streaming them makes sense for convenience and as a backup.  My cellphone gave out on me a few weeks ago, and lost all my apps, images, videos and music files.  It's a bummer.

Courtesy of an article dated April 22, 2011 appearing in PC World

By TwitterButtons.com   

 

 

 

GOOGLE LAUNCHES GOOGLE DEALS, A GROUPON-LIKE LOCAL DAILY DEALS OFFERING OF ITS OWN

Search Giant Follows Newspapers, Ad Networks and Two Well-Funded Players, Groupon and LivingSocial, Into Local Deals Game

Google has finally launched its Groupon competitor, Google Offers. At this point, Google is so late to the deals game that newspapers, magazines, coupon companies and a slew of other me-tooers have beat the search giant to the punch.

There are so many Groupon clones today, a new breed of ad networks and exchanges has grown up to satiate the ever-expanding appetite for deals. With so many media companies following Groupon and LivingSocial's lead into the daily-deals market, at least a dozen companies are providing the technology and manpower to sell to local merchants. After all, BAI/Kelsey Group estimates the deals market will reach $3.9 billion by 2015.

Google has had a relationship with one such company that's amassing a sales force and extra deals inventory, Adility. "In Portland, with their campaign for Google Places (its local business service), [Google] reached out to local merchants and used us and our elastic sales cloud to turn on reps for them in a certain markets," Adility founder-CEO Thomas Cornelius told Ad Age last month.

Google launched Offers yesterday with a YouTube video promoting the service. The beta test will first roll out in Portland, Ore., with more cities coming soon. While details are still slim, the service will launch with deals distributed via email. No mobile component appears imminent, besides an animated smartphone in the launch video.

 

A Google spokeswoman communicating via email said,

"Yesterday we launched a marketing campaign inviting Portlanders to sign up for a test of Google Offers -- to get great deals delivered right to their in-boxes. Offers is part of an ongoing effort at Google to make new services that give consumers great deals while helping connect businesses with customers in new ways."

 Google stressed this isn't a product launch, just a marketing push to get users to sign up; Google will have more details on what will make this product unique once it officially launches.

Meanwhile, since launching in November 2008, Groupon has already 60 million subscribers in more than 500 global markets with its email daily deals and has recently set its eyes on mobile deals with Groupon Now and its recent acquisition of location-based service Whrrl. Groupon and LivingSocial have raised a staggering $1.4 billion and $632 million, respectively, to expand globally as other well-funded competitors (ahem, Google) enter the space.

Reports that Google would launch a Groupon clone emerged in January, after the deals service spurned a $6 billion-buyout bid from the search giant.

COMMENTARY:  Let the Daily Deals War begin.  This is going to be very interesting.  On January 24, 2011 I commented on Google's planned Groupon-like daily deals offering, and thought this could have a negative effect on Groupon's planned IPO valuation, but I was so wrong.  Groupon's valuation went to $15 billion, and I understand that they might raise as much as $25 billion on their IPO.   On the other hand, I hate 'Me-Too" offerings.  Groupon and LivingSocial combined command approximately 90% of the total group buying or daily deals market, and they now have quite a war chest to defend their market positions.   Now that Google has entered the daily deals space, I have a feeling that this will accelerate a shakeout in the daily deals space.  There are just too many firms in this space, and something has to give.  I've been calling for a bubble for several months now, and this could cause one.   

Courtesy of an article dated April 22, 2011 appearing in AdAge Digital

By TwitterButtons.com   

 

 

 

VC FIRM INVESTMENTS FOR THE 1ST QTR 2011 WERE A 2-YR HIGH, $7.5 BILLION INTO 738 DEALS, BUT DARK CLOUDS REMAIN ON THE HORIZON

 

NEW YORK (TheStreet) -- According to  MoneyTree™ Report from PricewaterhouseCoopers LLP (PwC) and the National Venture Capital Association (NVCA)Venture capital funding is back to pre-recession levels, hitting an eight-quarter high as firms poured $7.5 billion into 738 deals during the first quarter of 2011, according to a new report.

VC/angel investment database CB Insights said that the $7.5 billion was a 15% billion jump in the number of dollars invested during the preceding quarter, which saw $6.5 billion go into 735 deals.

Increased funding in the Internet and clean-tech sectors helped boost funding during the period.

Venture firms sank $2.3 billion into 286 Internet deals during the first quarter, up from $1.3 billion in 221 deals during the same quarter last year.

Notable Internet deals during the quarter included Groupon's $950 million funding -- which CBI reflected roughly half of in its report -- Indianapolis-based Angie's List, which raised $54 million from investors, and weather insurance start-up WeatherBill, a San Francisco firm that captured $54 million from Google's venture arm and others.

Pictured above, Color is a photo-sharing application that pocketed $41 million last month before launching its product. The deal was one of the largest of the quarter, sparking debate from some investors that the tech start-up sector has entered into a bubble.

Clean tech start-ups saw a 46% increase in dollars invested over last year, with no noticeable change in deals. About $1.9 billion was sunk into 86 transactions.

While California attracted the most VC dollars and deals by a significant margin, New York managed to bypass Massachusetts, fueled by growth in digital media and advertising companies.

While this trend was first reported in the fourth quarter of last year, the gap between the two states has widened. New York's Silicon Alley saw 261 tech deals over the last six quarters with $1.6 billion invested, vs. 250 for Massachusetts with $1.44 billion dollars.

COMMENTARY:    1st quarter 2011 VC investments of $7.5 billion is quite impressive when compared to the 4th quarter 2010, but this begs the following question:  Can this level of VC investments be sustained into the remaining three quarters of 2011?  That's a great question, and I believe that the main reason that VC investments took such a spike in the first quarter 2011 was pentup demand.   VC firms were holding back making VC investments in the 4th quarter 2010 because of the uncertainty whether Congress would extend the Bush tax cuts another 2 years. Congress did extend the Bush tax cuts, but there are dark clouds on the horizon.  The Obama administration has already raised the spector of ending those tax cuts or reducing them substantially.  The Congressional fight will continue in May 2011, and there is also the question whether Congress will increase the Federal debt ceiling.  These are all complicated economic issues, which will make VC firms pause or put the breaks on VC investment during the 2nd Quarter 2011 and beyond depending on what Congress does.  

Another issue that will have a profound effect on VC investments going forward, and something that I have addressed in previous VC blog posts, is the level of VC funds outstanding.  VC funds are at their lowest levels in seven years. Let's look at the numbers for 2007 through 2010:  

• 2010 - VC firms raised $11 billion and invested $21.8 billion. 
• 2009 - VC firms raised $13 billion and invested $18.2 billion.  
• 2008 - VC firms raised $28 billion and invested $28.1 billion.  
• 2007 - VC firms raised $40 billion and invested $29.9 billion.    

Lack of funds is the main reason why nearly half of the VC firms went out of business between 2o07 and 2010.  At the end of 2010 there were only about 400 VC firms, down from 1,000 VC firms in 2007.  

I truly expect to see a slowing down of VC investments going forward.  How much is anybody's guess, so don't ask me.  

• Going Down - Some sector's are going to take a beating, including bioscience, pharmaceuticals, IT, and consummables and I would not be surprised to see a decline in internet investments too.  I think a bubble is in store for social media, LBSN's and group buying or daily deals, some social games, because all have reached the point of saturation.  I have been predicting this to happen since late last year, but 2011 is going to be the year. Write it down on your calendar. When the dotcom bubble hits, this will have a richochet effect on all internet investments. 
• Going Up - Cloud computing, mobile apps and education are the bright stars in digital. Cleantech will continue to raise globs of venture capital, that's just the way it is in cleantech. The turmoil in the middle east, spiraling oil prices and negative impact of the Fukushima nuclear reactor catastrophe on nuclear power means that both cleantech and alternative fuels will benefit and get the lions share of the funding.   My ace in the hole is the robotics sector which should get a lot of attention in 2011 and beyond. Both the manufacturing and social robotic sectors will experience incredible growth over the next three to four years, and beyond.  The U.S. has fallen behind in robotics, and needs to get its ass in gear.  That sector is pretty much wide open right now. 

If you are seeking venture capital right now, I would say got to R&F's first, and if you use VC's or angels, get as much as you can (if you can get it) because the pickings are going to be very slim, especially for seed and early stage startups.   Late stage startups and those in the above mentioned industries will grab the lions share.  What you will need to get funded:  1) filling a real need in the marketplace. 2_ successful business models and predictable revenues, 3) large markets with barriers to entry, 4) compelling value proposition and 5) strong management teams.  That's what VC's will be looking for.       

Courtesy of an article dated April 18, 2011 appearing in The Street an article dated January 13, 2011 appearing in SAI Business Insider and PBT Consulting

By TwitterButtons.com