October 10, 2011
Dicey Days for the Risk Business
The venture-capital industry has just wrapped up the worst three-month period for fundraising from its investor base in eight years, according to data from the National Venture Capital Association to be released this morning. A mere $1.72 billion was raised in Q3, half the year-earlier number, even though the number of funds bringing in that capital was flat. That’s bad news for hungry entrepreneurs.
Another outcome: a shakeup is looming. True, venture funds with strong records can keep pulling in capital, but only as long as they hang on to their rainmakers. More important is the fact that if the trend continues, it’s going to be harder for the next Bezos or Jobs to get funding at all, or in the United States. So yet more economic gloom.
The culprit? Surprise, surprise, the volatile stock market makes it hard for venture funds to unload promising companies to the likes of you and me via IPOs. No wonder Mark Heesen, president of the NVCA, tells Risk/Return that limited partners are wondering: “Is it really worth being in this asset class at all at this point?” The only dim bulb at the end of the tunnel is that companies these cash-constrained venture funds do invest in are likely to be real winners for investors when it’s their turn to go public in 5 or 10 years.
Fallout from a Paulson Hedge Fund?
The hedge fund world also is giving investors some outsize headaches. Hennessee Group reported its index plunged 3.7% in September, one of the worst months on record, bringing it to a loss of 5.2% for the year – even worse than the 2.81 decline noted by Hedge Fund Research. A few may be bucking the trend, like Ken Griffin’s Citadel, but losers include legendary figures like Leon Cooperman. Rumored losers are even more numerous: traders note that nearly every major nosedive in stock markets is preceded by or followed by a rumor of forced selling on the part of hedge funds, or even fund liquidations. Reports that star manager John Paulson told shareholders on Friday that year-to-date losses are now around 47% at his Advantage Plus fund can be expected to unnerve markets still more on Monday, and even a planned conference call on Tuesday isn’t likely to help. “Two years ago [my clients] were thrilled when I could get them into the Paulson fund,” says one Florida-based financial advisor, who isn’t able to speak on the record about private investment pools like hedge funds. “Now they can’t decide which of us they hate more.”
J.C. Penney Pinched; Retail Outlook Hazy
William Ackman, founder of the activist firm Pershing Square, knows the pain of losing money. After all, he dropped a bundle on Target’s stock a few years ago. Since then he has bet big on Borders, which filed for bankruptcy earlier this year, and now has a big stake in J.C. Penney Co. So he’ll be one investor who is particularly eager to see what this week’s retail sales data look like. Although after a flat August, economists are expecting a 0.7% jump in September, that won’t be enough to keep Ackman happy.
While J.C. Penney investors will have to wait another five weeks for the full picture, the company announced late last week that its own September store results were dismal and that it was cutting its third-quarter profit estimates from 25 cents to 15 cents a share. It might be just as hard to get real insight into the outlook for retail sales as it is to understand the health of the opaque hedge fund world: while the International Council of Shopping Centers announced 5.5% growth in same-store sales (excluding Wal-Mart Stores Inc.) last month, the National Retail Federation is more wary about the holiday season than those numbers would seem to suggest. That group is calling for a sluggish 2.8% advance in sales this year, citing the still-dismal job climate.
Alcoa, Pepsico, Google, JPMorgan Chase
Brace yourself for some big earnings announcements this week, with Alcoa, Pepsico, Google and JPMorgan Chase all scheduled to report. That’s not to say that there’s any certainty about how the stock market, in its current volatile and borderline-irrational mood, will react to those numbers -- even if they beat analysts’ forecasts. Last week, Yum! Brands came in on target, but the stock slid as investors looked past the headlines and continued to fret about the impact of a Chinese slowdown on its business. Meanwhile, Express Scripts warned investors that its earnings will fall short of expectations, blaming stagnant demand and the costs of its ongoing effort to acquire Medco Health Solutions – but the stock soared an astonishing 11%. Analysts say the apparently bearish news replaced anxiety and uncertainty with at least a degree of clarity. With all the turbulence and uncertainty, it’s no wonder that Constellation Brands reported better-than-expected earnings last quarter: Perhaps the world’s largest winemaker is benefitting as traders and investors drown their sorrows in brands like Robert Mondavi and Constellation’s Svedka vodka.
Sprint’s Backfiring iPhone Deal
Be careful what you wish for. Sprint execs might have borne that in mind before jumping delightedly atop the iPhone bandwagon.
Even before Sprint execs met with analysts and investors Friday, the latter were already worried about the price Sprint had agreed to pay simply to become the latest vendor of the admittedly still-coveted devices. It was also clear that the company would have to raise new equity in order to build its 4G network. Wall Street pros were unanimous in raising concerns about the toll this would take on Sprint’s margins, and then the Sprint execs bungled the critical Friday meeting – badly. The message seemed to be “don’t worry; be happy,” and critical details were AWOL, attendees reported. At some points, BTIG analyst Walter Piecyk noted: “The CFO was actually laughed at. As for Sprint’s stock? Without more clarity on their finances and strategy, the stock is ‘uninvestable.’” No wonder Sprint stock plunged 20% or so to hit $2.41 a share on Friday. Don’t expect a quick rebound, especially when the market knows that more stock will come on to the market whenever share prices seem robust enough to support it.
Heady Times at the NYSE
If all this turbulence has an upside for anyone, it’s for the folks at stock exchanges and futures exchanges worldwide. NYSE Euronext, parent company of New York’s Big Board reported another big jump in trading volumes in September (average daily volume of global derivatives up 23.2%; U.S. options up 32.1%!). Despite those figures, Keefe Bruyette & Woods notes that the company is still more dependent on plain vanilla stock trading, which may not be as robust if investors continue to decamp from stock mutual funds and other asset classes they view as risky. In contrast, KBR analysts boosted their outlook for Knight Capital, whose market-making operations will benefit from high volatility levels, and CBOE Holdings, the company whose Chicago Board Options Exchange has the right to trade options contracts on the S&P indexes.