Saturday, April 18, 2009

Venture Investments and Corporate Profits Cliff Dive…

All this talk of printing (QE), stimulus, bank rallies, mark-to-fantasy accounting changes, stock markets can’t go down SEC rules, not to mention global coordinated action has the inflationistas shouting from the hilltops.

The truth is much different from inflation. Three consecutive months of negative inflation data, ramping unemployment, stagnant to falling wages, crashing residential and commercial real estate, an IMPLODING tax base, and debts that are not being allowed to clear… but Nate has it covered for you, I’m manning the watchtower as your politicians and media most certainly are not.

Times like these are not kind to startup business. This point in the cycle is the time that is supposed to wash away malinvestment, and is generally not a time of flourishing innovation.

The numbers here, again, are historic in scope. These are certainly not inflationary types of numbers.
Venture Capital Investments Plunge 61% Amid Frozen IPO Market

By Joseph Galante and Tim Mullaney

April 18 (Bloomberg) -- U.S. venture capital investments fell 61 percent to $3 billion in the first quarter, the lowest level in 12 years, as the financial crisis chased away funding for technology and clean-energy deals.

Funding of clean technology -- coming off a surge of investments in 2007 and 2008 -- plunged 87 percent, the National Venture Capital Association said today. Total venture investments dropped 47 percent from the previous three months.

The freeze in initial public offerings kept startups from getting funding because investors weren’t sure how they would earn a return, said John Taylor, vice president of research at the Arlington, Virginia-based association. Venture capitalists are devoting more attention to companies they already own.

“We are in a very difficult, stressed time,” Taylor said on a conference call. “Everyone is trying to figure out what is going on.”

Venture capitalists are now wary of the large financial commitments needed to commercialize technologies such as solar power and ethanol, said Noubar Afeyan, chief executive officer of Flagship Ventures in Cambridge, Massachusetts. The investments don’t seem to provide a quick payoff, he said.

“A lot of that money came in expecting a short-term exit, which didn’t happen,” Afeyan said.

The IPO market showed signs of thawing this week, with two companies going public. Bridgepoint Education Inc., a provider of college courses, began trading April 15. Shares of language- software maker Rosetta Stone Inc. debuted on April 16.

Still, the deals probably won’t open the floodgates, said Stephen Harrick, general partner at Institutional Venture Partners, a backer of the Twitter Inc. microblogging site.

“We have companies we think are ready or could be ready, but there hasn’t been any interest from the capital markets,” Harrick said.

The average size of a venture-capital investment fell to $5.5 million from $7.8 million a year ago, the NVCA said. Most of the investments are going to later-stage companies.

And for those who think that hyper-inflation is immediately upon us or that stocks are going to rally to the moon in Alice In Wonderland never ending growth fashion, please take a look at corporate profits as reported by the St. Louis Fed…

Those who have Spent some Time with the Good Dr. Bartlett know that parabolic cures eventually crash under their own weight. Martin Armstrong correctly describes the fact that curves in markets, and in nature, do not form a perfect bell shape like the ones found in the textbooks at school! Parabolic curves start off with the prospect of never ending small growth rates which turn into ramping growth rates that eventually go through a phase transition into a parabolic blow-off top.

While the climb up the front side of the curve may resemble the first half of a bell, the backside of such curves do not. They resemble a cliff! And here’s a good example, this is a chart of Corporate Profits After Tax:

But what’s truly stunning is the rate of change. Again, these numbers and charts are historic in nature – frame them and put them on your wall, you will not see charts like this again in your lifetime.

Here is Corporate Profits After Tax year-over-year in billions:

Here is Corporate Profits with Inventory and Capital Adjustments:

And if you think that the loss of profits is all due to the financial industry, here is a chart of NonFinancial Corporate Businesses Profits After Tax:

Does any rational analyst really believe that this type of cliff diving is going to cure itself in a matter of months with nothing but hokey games of hide the sausage from our government? Stress test? Oh yeah, that’ll bring the profits back.

This data confirms the cliff dive in corporate tax receipts as I pointed out in my article U.S. Budget Disaster Strikes...

Are you "looking past the vally" at those "greenshoots" on the other side? I hope you have good binoculars, man, because that vally looks decades wide to me - perhaps there's too many people in the financial, political, and media worlds that are smoking those "greenshoots?" Plowmen dig Jimi's herb?

Jimi Hendrix – All Along the Watchtower:

Lyrics written by Bob Dylan:

There must be some kind of way out of here
Said the joker to the thief
There's too much confusion
I can't get no relief

Business men they drink my wine
Plowmen dig my herb
None were level on the mind
Nobody of it is worth

No reason to get excited
The thief he kindly spoke
There are many here among us
Who feel that life is but a joke

But you and I we've been through that
And this is not our fate
So let us stop talkin falsely now
The hour's getting late

All along the watchtower