I’m not calling for a Bear Market or a “pop” of a proverbial bubble – because the truth of the matter is, we’re not in a raging Bull market, and we’re definitely not in the middle of a bubble situation comparable to the late 90’s.

However, there are certain key indicators that are telling us that we could potentially be heading into a hairy situation in the market, and as prudent investors, we need to have our guard up.

The reason I got into this business in the first place was to help people avoid the mistakes most folks made back in the “bubble days”.

One of the biggest indicators I’ve been seeing that’s getting me a bit concerned – not nervous just yet, but definitely concerned – is the amount of venture capital deals being done lately.

As you know, most technology start-ups aren’t usually financed by taking out a small-business loan from a local bank.

No, sir ... Most of today’s technology outfits are financed through one or more rounds of multi-million dollar Venture Capital financing.

Venture Capitalists are that hard-charging bunch of guys who scour the earth for the “next big thing” and hope that by investing early (like the guys who first invested in Yahoo!, Google, etc.), they can reap huge rewards down the road.

For instance, if I found a great little tech start-up that I thought could do very well five years from now, but knew that the company desperately needed money today, I could invest now and probably acquire a decent portion of the equity (as opposed to investing in it five years from now, after the company had all of its ducks in a row).

Then, I’d hope that the company either:

a)    Got acquired
b)    Or went public

If one of those two things happened, I’d have what’s known as a “liquidity event” on my hands – because before that time, the stock I owned in this private company would’ve been considered “illiquid,” meaning I couldn’t sell it and take cash out.

So Venture Capitalists, or VC’s as they’re more commonly known, are always hoping (and, in most cases, pushing) for a liquidity event.  This way, they can see some type of return on the money they invested.

Now, if you can think back to the sheer number of start-up technology companies that went public back in the late 90’s, and how that triggered much of the hype and mania around the tech sector, then it’d be good for you to know that it was the Venture Capital firms that pushed most of those companies to go public.

They were investing billions of dollars into technology start-ups, not because they thought that every single one of their businesses would work in the long term, but rather because they knew these businesses were very marketable as public companies at the time.

They knew that they could get an investment bank to come along and take the companies public, and the VC’s would be able to cash out at a much higher price than what they invested at.

All told, from the first quarter in 1999 through the first quarter in 2000, over $23 billion was invested into early and seed stage companies.  The number dramatically decreased afterwards and has remained level ever since.

That is, until we look at the five quarters from the 4th quarter, 2005, to the 4th quarter, 2006 ...

During this time, over $6 billion was invested into these early/seed stage companies.

While this amount is significantly smaller than the numbers seen in the late 90’s, it’s the first time in five years that we’ve seen significant growth in this type of VC investing.

It’s pretty obvious, too, when we look at how many new web start-ups are popping up and how many mega-deals we’ve seen in the tech space this year – YouTube was only 18 months old when Google (Nasdaq: GOOG) acquired it for over $1.6 billion.

Skype was acquired by eBay (Nasdaq: EBAY) for over $2 billion, and the business was only slightly older than YouTube.

This is making some VC’s get a little too excited again as they hunt for Google riches and caviar dreams ... and if we’re not careful, they could hurt us in the process.

So, what you need to be on the lookout for is a rash of technology IPOs – now that the VC’s are putting their money back on the table, you can bet they’ll be exercising their influence behind the scenes, as well, when they try to get some returns on their investments.

Also watch out for VC investing statistics.  You can get quarterly updates at the following website:

www.pwcmoneytree.com – the site is run by PricewaterhouseCoopers and the National Venture Capital Association.

We’ll be approaching a critical juncture in the market if these deals don’t slow down a bit – and if they don’t, your best bet is to shore up your cash, because we’ve all seen how this story ends.

Until next time ...




Wayne Mulligan
Chief Investment Officer
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Tuesday, August 7

8:30 - Productivity-prel (for Q2): Consensus 2.0%

Big Picture: Cyclical productivity growth has softened with the slower pace of output growth.  Meanwhile, compensation costs are volatile and present the wildcard for unit labor costs -- the Fed's key read on labor-based inflation pressures.  The big picture is that trend productivity growth plus trend labor force growth equals potential GDP growth -- what some call the economy's longer term speed limit.  Labor force growth runs near 1% annually.  If structural productivity growth is 2%, potential GDP growth is 3%.  Over the long term, strong productivity growth is a win/win situation resulting in weak unit labor costs and the stronger wage growth allowed through the increased output produced.  Strong productivity comes with a cost to near term employment (labor) demand and benefits in lower inflationary pressures and a higher standard of living.

Implications: Nonfarm productivity and costs provide measures of the productivity of workers and the costs associated with producing a unit of output.  During times of inflationary concern, the unit labor cost index in this report can move the market.  If productivity is falling, unit labor costs may be rising faster than hourly earnings and other labor cost measures.  Because productivity can be quite volatile from one quarter to the next, and because the previously released GDP report will give a good indication of productivity growth, this report seldom has a significant impact on the market.

15:00 - Consumer Credit (for June): Consensus $7.0B

Big Picture: Tax cuts and cash out mortgage refinancing provided consumer funding in past years, as 6% yoy income growth and equity gains now provide the means outside of credit.  Credit cards (revolving credit) make up 37% of total consumer credit, which stands at $2.4 trillion.  Nonrevolving credit helps finance auto purchases, tuition (including Sallie Mae), vacations and other forms of consumer borrowing.  Annual growth of 4.7% has shown acceleration from the 3.4% yoy decade low of a year ago.  Consumer credit includes household non-mortgage loans.

Implications: This monthly measure of consumer debt is volatile and subject to massive revisions.  It is also released well after every other consumer spending indicator, including weekly chain store sales, auto sales, consumer confidence, retail sales, and personal consumption.  For these reasons, the market almost never reacts to the consumer credit report.


Wednesday, August 8

10:00 - Wholesale Inventories (for June): Consensus 0.4%

Big Picture: Wholesaler inventories growth of 7% yoy is below the 9% annual growth in sales.  The inventory to sales ratio is at a new record low 1.11 months, as the correction over the last half year is past.  The recent inventory draw down was quick for wholesalers but continues for manufacturers and retailers.  Longer term trends reflect comfort at those I/S lows as technology allows for continued improvement in just-in-time inventory management.  The smaller inventory swings from rebuilding and draw downs leaves a steadier pace of domestic growth.

Implications: The wholesale trade report includes sales and inventory statistics from the second stage of the manufacturing process.  The sales figures say close to nothing about personal consumption and therefore do not move the market.  Wholesale inventories sometimes swing enough to change the aggregate inventory profile (aggregate inventory is the sum of inventory at the manufacturing, wholesale, and retail levels), which may affect the GDP outlook.  In that event they can elicit a small market reaction.  More often than not, however, this release goes unnoticed except by market economists.


Thursday, August 9

8:30 - Initial Claims (for 8/04): Consensus NA

Big Picture: Initial claims can be somewhat volatile, but the 4-week average has remained in a lower 300K to 320K range for eleven weeks after topping 330K in mid April.  Aberrations are watched for clues on the labor market and economy, as the recent levels reflect an even tighter labor market.  Continued claims are showing more lift than initial claims as the 4-week average nears the year and a half high of early March.  Claims provide a nearly real time read on layoffs and the labor market as the low 4.5% unemployment reflects the broader read of layoffs and hiring.

Implications: Initial jobless claims measure the number of filings for state jobless benefits.  This report provides a timely, but often misleading, indicator of the direction of the economy, with increases (decreases) in claims potential signaling slowing (accelerating) job growth.  On a week-to-week basis, claims are quite volatile, and many analysts therefore track a four-week moving average to get a better sense of the underlying trend.  It typically takes a sustained move of at least 30K in claims to signal a meaningful change in job growth.


Friday, August 10

8:30 - Export Prices ex-ag. (for July): Consensus NA, Import Prices ex-oil (for July): Consensus NA

Big Picture: Import prices are decelerating, partly due to the effect from petroleum prices and the prices from the Pacific Rim which show small declines from a year ago.  Export prices are running with stronger growth than imports as agricultural (19% yoy) reflect the increased demand for grains that are now being increasingly used as alternative fuels.

Implications: Though not a market-moving release, export/import prices are a useful indication of inflation pressures created by changes in foreign exchange rates.  For example, when the dollar is strong, import prices tend to be under downward pressure.  If an item in Japan costs 500 yen and the exchange rate is 100 yen to the dollar, the US$ price $5.  If the dollar then strengthens to Y120, the US$ price falls to $4.17.  Because US exports must compete with foreign goods, there is also downward pressure on export prices when the dollar is strong.  Economists typically look at import prices excluding oil and export prices excluding agricultural.  In each case, the category in question is excluded because prices for those items are volatile and the swings are unrelated to foreign exchange rates.  Oil prices tend to swing in response to OPEC decisions, and agricultural prices are often affected by weather, neither of which say much about long-term trends in traded goods prices.

14:00 - Treasury Budget (for July): Consensus -$32.5B

Big Picture: Strong tax receipt growth continues to leade a path toward lower deficits given the strong (ex-housing) economy, profits and income growth.  Spending remains stronger than desired as fiscal discipline is needed.  The FY05 improvement sliced away a quarter of the record $413 bln FY04 deficit as FY06 sliced away another $71 bln.  FY07 has already sliced $86 bln through June as the last quarter of the fiscal year may leave a smaller FY deficit than the current 12 month total of $163 bln.

Implications: The monthly Treasury budget data follow strong seasonal patterns which produce huge month-to-month fluctuations in the deficit.  These fluctuations tell us little about long term budget trends.  To the extent that the market analyzes the monthly Treasury data, the focus is on year/year changes in receipts and outlays, since the data are not seasonally adjusted.  Only in April, the most important month for tax inflows to the Treasury, does the market pay any attention to this report.  The data can be predicted with reasonable accuracy by using daily data in the Daily Treasury Statement.


Source:  www.Briefing.com