What To Look For Next

SAN FRANCISCO - FEBRUARY 14:  A for sale sign ...Image by Getty Images via Daylife

The Treasury, the Fed, and Warren Buffet have been the only buyers in this meltdown and have been largely focused on financial companies. Meanwhile the rest of the market has gone down 30% year to date and very few, if any, stocks have been spared.

What do we look for next? Does the market just keep going down endlessly? What will bring this to an end? Clearly not government intervention. While possibly necessary (we’ll see), the splurge has clearly not put an end to selling in the markets.

We need to see more Warren Buffets stepping up. And my bet is they will eventually. And they will be corporations buying back their own stock, large private equity and buyout firms doing going private transactions with all equity cap structures, and possibly foreign companies seeking bargain acquisitions in the US.

What’s interesting, as Howard pointed out repeatedly on twitter yesterday, is that corporations have not yet stepped up to stock buybacks.

Microsoft announced last month that they plan to buy back $40bn in stock over the next five years. They have $25bn in cash and short term investments and are currently earning about $20bn per year in operating cash flow. Microsoft’s stock is trading at about 11x operating cash flow.  It’s market cap is $227bn and institutions own 60% of it, meaning there is about $130bn of $MSFT stock in the hands of institutions. If Microsoft wanted to, at the current price, it could purchase all $130bn of that stock from institutions with its current cash balance plus operating earnings over the next five years. If Microsoft is confident about its business prospects going forward, it should be an aggressive buyer of its own stock at these levels. And maybe it is. It’s stock is only down 3% in the past month while the S&P has been down 15%.

What about Google? $GOOG is down almost 50% year to date and the company is valued at $115bn. Institutions own roughly 60% of its stock, roughly $70bn of it. Google is earning about $7bn of operating cash per year and has $13bn of cash and short term investments on hand. So it would take Google longer to buy back all the stock institutions own, more like eight to ten years. But still, that’s a lot of purchasing power and the market is asking the same question Howard did yesterday.

The silence of $goog into this meltdown is just as deafening with all their cash.  I am not going to be run over.

In bad bear markets, like we are in, investors look to corporations to defend their stock and Google has not yet shown an interest in doing that. That’s something to look for. When you net out Google’s cash, it’s trading at $100bn, a mere 12x operating cash flow. That’s value territory.

Let’s look at News Corp. Rupert Murdoch’s company, the best managed media company out there, is down 56% in the past year and is now trading at a mere six times operating cash flow. News Corp is also about 60% institutionally owned. So that means Rupert could buy out his external investors with four years of his cash flow. But we have yet to see him do that.

I could go on and on. Apple is worth $67bn after you back out the $20bn of cash they have on hand. It earns over $5bn a year. That’s another value stock right there.

And those are some of the best US companies right there. The list goes on and on. Starbucks trades at 7x cash flow, Walmart trades at 10x cash flow, AT&T trades at 4x cash flow, and Comcast trades at 6x cash flow.

You could buy all of America’s best corporations for somewhere around eight to ten times cash flow. Someone is going to start doing this.

Maybe it will be the large private equity and buyout firms who have been stuck on the sidelines while the debt markets have been closed for the past year. If good companies get cheap enough, they can buy them with their cash, without debt, and own them for however long the markets take to work the issues out.

Or foreign companies will come in. I am particularly interested in the asian companies. Will a company like Dell be an attractive acquisition for an asian manufacturer flush with cash? It’s only trading at 5x cash flow after you back out the cash on hand.

I read this history of the panic of 1873 yesterday after seeing a twitter post by Mary Hodder that referenced it. It’s worth reading. There are two really interesting points in it. The first is that panic was precipitated in some measure by the US’ emerging prowess as a player in the global economy and a lower cost one at that:

Wheat exporters from Russia and Central Europe faced a new
international competitor who drastically undersold them. The
19th-century version of containers manufactured in China and bound for
Wal-Mart consisted of produce from farmers in the American Midwest.
They used grain elevators, conveyer belts, and massive steam ships to
export trainloads of wheat to abroad. Britain, the biggest importer of
wheat, shifted to the cheap stuff quite suddenly around 1871. By 1872
kerosene and manufactured food were rocketing out of America’s
heartland, undermining rapeseed, flour, and beef prices. The crash came
in Central Europe in May 1873, as it became clear that the region’s
assumptions about continual economic growth were too optimistic.
Europeans faced what they came to call the American Commercial
Invasion. A new industrial superpower had arrived, one whose low costs
threatened European trade and a European way of life.

But possibly even more interesting was who emerged as the winners of the panic of 1873:

The long-term effects of the Panic of 1873 were perverse. For the
largest manufacturing companies in the United States β€” those with
guaranteed contracts and the ability to make rebate deals with the
railroads β€” the Panic years were golden. Andrew Carnegie, Cyrus
McCormick, and John D. Rockefeller had enough capital reserves to
finance their own continuing growth. For smaller industrial firms that
relied on seasonal demand and outside capital, the situation was dire.
As capital reserves dried up, so did their industries. Carnegie and
Rockefeller bought out their competitors at fire-sale prices. The
Gilded Age in the United States, as far as industrial concentration was
concerned, had begun.

We have yet to see the Carnegies, McCormicks, and Rockefellers of China, India, Russia, and the Middle East emerge as capitalists on a global scale. But with prime assets like I mentioned above on sale at bargain basement prices, it’s just a matter of time until we will.

Eventually this market meltdown will be over and stability will return. But things will not be the same. There will be big winners and big losers. We have already seen many of the big losers emerge, but we have not yet seen the big winners emerge. I think we know where to look for them though.

Reblog this post [with Zemanta]
#VC & Technology

Comments (Archived):

  1. sean808080

    Thanks for this sober look at the likely paths that this financial storm will take. The media is a novel factor that adds to the s/n ratio. The panic and fear that are natural reactions to uncharted territories are only reinforced by the message that our Capitalist ship is sinking and something must be done NOW.

  2. jasonkolb

    They HAVE to clear the credit markets before growth can resume. This is a TRUST problem, NOT a liquidity problem. Nobody knows who’s solvent, so nobody will lend to anybody. That’s at the root of this entire mess, and it all goes back to not enforcing existing regulation and getting rid of Glass-Steagall.This means that they HAVE to force all the off-balance sheet stuff back onto the balance and not permit these Level III asset shenanigans. Our financial markets are the wild wild west right now, can you blame anyone for taking their ball and going home?

  3. abnerg

    Nice piece. My only worry is your assumption that 5 to 15x earnings equals value. Is that a ratio that has been historically consistent or one that might decline?

    1. fredwilson

      Its a proxy for the present value of future cashflows. And not an exact one. The higher interest rates are, the lower that ratio should goI really need to suggest a good corporate finance textbook but I am drawing a blank on the one we used at wharton. It was really good

      1. Druce

        brealey and myers?as a non-MBA I better not be the first one to answer LOL

        1. gruvr music map

          count me confused too – I’d appreciate a primer on it.From my recollection, what counted for value was multiples of earnings, not just cash flow, which sounds like bubblespeak ca 1999. Cant companies be profitable – or lose money – with pos cash flow?As for Google, they are so reliant on web advertising income that they are at huge risk right now. My sites have seen steady pageviews but a distinct dropoff in eCPM over the past month. I can well remember in 2000, how rapidly the bottom dropped out of online ad dollars. I had a site back then that was earning just fine and suddenly my advertisers all stopped sending checks, because nobody was sending THEM checks.Disclosure: short GOOG @399 http://twitter.com/ManFmNan…Conundrum: trying to teach HS-age son and kids about stock market. Need better tools; is CoVestor appropriate?

          1. Marc Vermut

            Actually, it’s all about cash. In simplest terms, the value of a company (or financial instrument) is the present value of its future cash flows. That’s because cash is (theoretically) distributable and a measure of wealth and value, and earnings is a measurement tool of performance.A multiple is the inverse of a discount rate applied to future cash flow (much more complicated in real practice). Different industries use different multiples as more accurate indicators of value (some use sales, some use EBIT, some use EBITDA).And, Fred, at Wharton, we used Brealey and Meyers, though my textbook is now very old, and sitting in my apartment.

          2. fredwilson

            I just went to look on amazon for Brearly and Myers and it is apparently outof printThat was an amazing text book

          3. gruvr music map

            sure, I can see how cashflow EBITDA matters more to an angel or VC ; they can envision taking an unprofitable co and via M&A scaling the infrastructure costs etc.But when I read ‘this is value territory’ – for the stock investor in the street or institution, is still thinking of the traditional P/E ratio, yes? http://en.wikipedia.org/wik…From that point of view, GOOG is still 22 P/E vs historical average where 15 (avg) and below is ‘value territory’. After the 99 bubble, investors returned to this definition of ‘value’, from what I recall, for a while. But financial memory is short.GOOG is 60% institution owned, but it’s regularly ‘gapping down at open’, e.g. opened at 330 today, a -10 drop overnight. This can mean institutions are selling overnight or at least not supporting it. Institutions (big blocks) don’t seem to be supporting on the Level II trading view, either. Anyway the important thing is not to *lose* money, that’s what stop-losses are for!

          4. fredwilson

            I think reported earnings are an accountant’s mirageI like to stick to the amount cash is increasing, periodThe numbers I posted were “back of the envelope” because I try to write my posts in 30 mins or lessAnd from what I hear from inside $goog and what I see in the comscore numbers, google’s business is hanging in there better than most other advertising businesses I have visibility into

          5. Jamie Lin

            Yeah! I never get the idea of accrued earning and asset amortization. It brings more uncertainty than predictability, while most valuation models require backing these non-cash items out of the picture. What’s wrong with straight up cash-basis reporting?One interesting fact is that if you pull out 1-mo chart of goog yhoo and nasdaq:http://finance.google.com/f…They’ve basically moved together, which means the market has beaten them down indifferently out of fear. But I do believe goog is going to do better than its peer like Fred said. That’s the case, shorting yhoo to long goog might be an even better move than betting on goog alone?

          6. fredwilson

            Short yahoo, long googHmm?

          7. Jamie Lin

            there’s 1 risk though — yhoo might get acquired. so i’d long some cheap way out-of-money call options to cover that up!

      2. Jamie Lin

        My corp finance Professor, Damodaran, from NYU Stern has a great valuation book:http://www.amazon.com/Inves…You can also download his class materials and watch his web casts for free on his website:http://pages.stern.nyu.edu/…He’s one of the best professors I’ve had!

        1. Damon

          +1 to the Damodaran books and site. Best practical finance stuff that I’ve seen. Makes me wish I went to NYU.

          1. Jamie Lin

            thank you! the beauty of his site is you don’t need to go to nyu at all to learn (almost) everything he has to offer!

        2. Margaret Mountains

          Valuation has nothing to do with it at this point.

  4. Druce

    lack of buybacks? there’s the mother of all a cash crunches going on.Since the Lehman and Wamu (parent not bank) debtors got wiped out, anyone who needs access to their money in the next year is putting it in an FDIC-insured bank (not a money market mutual fund), or Treasurys (not commercial paper).a CFO who suggests buybacks had better be really flush with cash, or the CEO better question his judgment.and if you’re really flush, it is king baby. might lots of interesting things you might be able to buy other than your own stock too. and the odds of someone coming after you due to your low stock aren’t too high.look for not just a splurge but ‘shock and awe’ including giant rate cut (which is symbolic pushing on the string at this point).http://www.nytimes.com/2008…or if not, a depression style credit contraction. then, stock up on gold, guns and bullets and canned goods.btw Buffet’s talk on Charlie Rose is recommendedhttp://www.charlierose.com/…transcript, apparently taken by a partly deaf non-native English speaker -http://everythingwarrenbuff…

    1. fredwilson

      I agree with your first points but not your last one. I may be naïve but I am not stockpiling anything

      1. Druce

        I’m not stockpiling either because if I trust Helicopter Man to do anything it’s bail out early and often, especially considering the alternative.I’m not really LOLing either, because the alternative is financial collapse, less liquid companies not being able to make payroll, having no idea who will be next to go belly up, all financial markets totally freezing/collapsing.

      2. Tom Krieglstein

        Didn’t you just stock up on Google > http://twitter.com/fredwils…Update – whoops reading further and saw you mentioned it below and will buy some more at current levels.

        1. fredwilson

          Yup and plan to buy more when I get around to it

  5. Ed

    Very insightful. I’d wager you do have a good grasp on where to look for them.But I also think the key indicia will be seen by recognizing who has remaining leverage to manipulate Washington, albeit behind the curtain, to structure and thus control variables,thereby making mass buy backs of their own stock a more sure bet. It may be the catalyst, as usual, for the tier below Buffett.I just hope it’s not another orgy that leads to this point again.

  6. infoarbitrage

    Fred, the problem with your analysis is that you are assuming static levels of cash flow applied to sharply lower share prices. What the market is saying is that it expects these companies’ operating cash flows to plummet. Now one can take issue with the severity of the stock price decline relative to the likely drop in operating cash flow (OCF), but using today’s OCF as a yardstick by which it could internally go private is not correct.Will we see buybacks emerge from cash cow companies who view an investment in their stock as the highest IRR project in which they could invest? Yes. Will this become a major phenomenon? No. Most companies, in my opinion, will conserve cash, and use it to fund operating projects, not stock buybacks. They will use their resources to continue to expand their platforms cheaply when most things around them are vulnerable and crumbling. Will huge winners emerge from the detritus? Absolutely. But even they will be cautious until it is clearer how much their OCF will decline during the global recession.

    1. andyswan

      Ratio contraction precedes earnings contraction……the role of markets as forward looking appraisers πŸ™‚

      1. fredwilson

        And markets often overshootThat’s all I am sayingRoger is right about current cash flow not being equal to future cash flow for everyoneBut there are companies ($MSFT, $AAPL, $GGOG) that could actually grow cash flow in this downturnI am not saying they will, I am just saying it could happen

        1. andyswan

          Totally agree. They are overshooting right now…. http://andyswan.com/blog/?p… gives my idea on why.Agree opportunity is here and growwing….be picky!

    2. aarondelcohen

      Fred and Roger: Your respecitve anaylses are really just positions on a continuum relative to the relationship between OCF and how the market is currently valuing the stock. Fred the companies, you mention are highly established blue-chip companies. I think the bigger issue we collectively face is what happens to the smaller companies, particularly the companies who cannot get to profitablity in an advertistng recession. I lived through the last bubble as an internet executive and think it was a healthy contraction in which many companies that really had no sustainable business model and extremely high operating costs were closed.While our industry has become more disciplined and there we have seen the operating costs plummet (particularly regarding technology), I fear sales costs have either increased or companies who can’t afford sales operations are losing significant percentages of revenue to networks/aggregators.Take Yelp as an example. Yelp has had the courage to try and create a new local advertising sales category by building a large sales infrastructure with their most recent financing. Can they hope to get traction in the current climate? Right now, we have issues with timing for these early stage companies. Fred, a few days ago you posted that the companies that have venture partners may have a better chance to survive this cycle by raising additional capital. This is certainly true, but you made no comment as to what the cost might be to the entrepreneur in terms of dilution. These could very well end up being down rounds. USV and its collective portfolio is best served by avoiding down rounds. But down rounds hurt entrepreneurs more than their investors in terms of absolute returns.I think its vital that boards and executives talk about what could happen well in advance and that entrepreneurs (particularly those that have not lived through a downcycle) do some scenario planning. This will help the Etsy, Covestor, BuddyMedia teams weather the storm as teams and not adversaries.

      1. infoarbitrage

        Aaron, I had dinner last night with a group of respected VCs and entrepreneurs where we discussed exactly what you are suggesting. The VCs are still looking at deals but, without question, are focused on supporting their existing portfolio companies. A big question on the table was whether or not VCs spend too much time and resources on mediocre companies and not enough on top performers that can do even better. Another key theme was that financings are getting done, but generally with successful companies that require additional growth capital. Big deals, big valuations, but definitely companies in growth mode and well beyond the start-up phase.

    3. fredwilson

      Good points roger. But you are assuming the markets are rational in their assessment of future cash flows. I can assure you that the markets are anything but rational right now. And in that disconnect lies opportunity

      1. infoarbitrage

        Fred, I am assuming nothing of the sort and nothing in my language implies that. I have no idea if the market is rational or not with respect to the projection for future cash flows. My point is that you are using metrics that are in themselves flawed, e.g., Comcast and News Corp at 6x is not correct, because the denominator is wrong. How wrong I don’t know and nobody does. I just know it is wrong. You think it is less wrong than the market is perceiving it, and that is fine. But you are taking a very distinct view that contains very significant risk, and you and everyone else should know that. The fact that your bet might be right is neither here nor there with respect to my comment.

    4. Kenosha_Kid

      Exactly right.To take this one step further, the absence of stock buybacks in the market is evidence that CFOs are themselves concerned about future operating cash flow, and probably do not believe their stocks to be overvalued.

      1. Jamie Lin

        Plus, by conserving their dry powder, they’re also leaving the option open to snap up smaller competitors at a steal! EBAY/YHOO/AMZN at $10B, anyone?

  7. andyswan

    I think it’s difficult for anyone to step in with a big bucket of cash here given the uncertainty of our Government. Right now we do not know:1) Will the Government of the United States be printing even more money in a “splurge #2”?2) Who will be the leader of the Government of the United States?3) What will the tax rates likely be on my investment 3-5 years from now?4) Is the Government of the United States going to come in with a heavy hand in regulating the business I’m looking at?This is why it’s important for our government and especially our leading candidates to stop talking about Keating/Ayers and start talking SPECIFICS about what they each plan to do if elected.The last thing we need here is paralysis because of unknown GOVERNMENT intervention/policy risk

    1. curmudgeonly troll

      Indeed the root of our recent malaise is that the market cannot discount unforeseeable events such as elections, bailouts, etc.Fortunately Congress is hearing daily from many concerned citizens like yourself urging them to desist from such unseemly activities, and to do absolutely nothing.God bless them, God bless the perfect free market, and God bless America!

  8. AndyFinkle

    I concur with inforarbitrage’s comment… Companies will hoard their cash, not buy back their stock in larger volumes then they had in the past. Microsoft NEEDS to buy back massive amounts of stock given that they give their employees stock options as if they were dispensing tic-tacs. I would be shocked if there was not between $60-$100BILLION in employee stock options out there. Were MSFT not to buy back their stock, this would be highly dilutive. Regarding the other “smart” buyers – Bufffett? Buffett is specifically NOT interested in buying here, Buffett instead bought YIELD. Recall that he passed on AIG’s assets, as well as every other bank. Foreigners? They have a history of buying at market tops, not bottoms (Witness as just a few examples Saudi’s purchase price for their 10% stake in Citibank, or as another, the Japanese in the early 90’sheight of the commercial real estate bubble). For that matter, companies tend to buy other companies with their high priced stock – hence most corporate deals are done at market tops, not bottoms.How will this play out? I believe we have bottomed (meaning even if we have one more bid down, or some sort of testing process, we have bottomed in the market already). All the signs are out there:1) Yesterday’s selling reeked of “panic” and PUBLIC selling, unlike the forced (hedge fund) redemption selling we HAD been seeing over the past months.2) Cramer (of CNBC fame) told his cramericans to sell yesterday *perfect contra indicator as this guy is never right3) Technical indicators support a bottom extreme VIX (50+)and back to back TRIN (sub 65)4) Fund outflows at extreme levels (I backward looking indicator, but always biggest outflows at market bottoms)5) Markets broke key technical supports (the BEST bottoms are when even the technical guys point out breakdowns, and in turn turn bearish). Should we go down once more and make a token new low and reverse on VOLUME, that would be ideal.6) Borrowing money has never been cheaper (credit markets are locked up, but when they do unlock, the money there is cheap7) Market down 30% from highs (look back at history and the average bear market has been 20-30% DOWN…WE ARE ALREADY 30% DOWN8) No one can point to ANY fundamental reason for the market to rally, and this is exactly when markets bottom 9) They just shot the Generals (AAPL,RIMM,GOOG,AMZN) and the generals are always the last to fall.People should be buying companies with the best balance sheets, Buy yield, stay away from agri/commodity/industrials. Tech is ok, but only very selectively. Keep in mind that individual stocks will bottom before you see the index’s bottoming. Now is the time to buying, not selling.www.twitter.com/A_F

    1. Ted Murphy

      Regarding Microsoft’s outstanding employee-held options — they had, as of 6/30/08, 517 mm ($12.9 billion) in vested and unvested employee options and employee-held SPSAs. That’s about 6% of outstanding common shares.That’s according to their 2008 10k.

    2. fredwilson

      I said this in another comment, but if $MSFT is protecting its stock and market cap with its balance sheet and $GOOG is not, then there will come a day when $MSFT can afford to make a bid for $GOOG

  9. Christian Cadeo

    Fred,Any thoughts on why with everything crashing of all things the dollar is so strong? Is it a flight to safety?For me, I am interested in buying as yesterday seemed to be a capitulation with the VIX at a astounding 50 level. Unfortunately, but held back by the simple fact that all of my cash is in a foreign denomination that has depreciated vs. the dollar. So in order to put money to work, I would have to take the hit from converting to dollars. It is a tough decision as do I convert now when I am convinced this dollar rally is short-lived or wait it out but with the possibility that this may be the low of the market.converting to dollars. It is a tough decision as do I convert now when I am convinced this dollar rally is very short-lived or wait it out but with the possiblity that this may the be the low of the market.

    1. Druce

      it’s going to be a race to the bottom in terms of throwing money at crises, and while the US is winning, people just realized Europe will be a player too

    2. fredwilson

      I think the dollar rally is short lived and don’t understand it but I am not an expert in currencies

      1. Tom Evslin

        When cash is king, the question is what is cash? If it’s not stuff in a mattress and it’s not gold(because we have deflation) and it’s not bank deposits and it’s not money funds, for the moment at least the world seems to have decided that it’s Uncle Sam’s IOUs despite the fact that this has sometimes been touted as the final crisis of American strength. With real short-term treasury bill yields below zero, we’re being paid to hold the world’s cash. More at http://blog.tomevslin.com/2… in a post inspired by this one.

  10. bobroth

    Great post, Fred. Thank you for writing it.

  11. JH

    I think Paulson just ran a bad media campaign to describe the meltdown. Goldman has a large distressed desk and he should have known how emotional the whole bankruptcy process can get especially with stay bonuses etc.One needs to look at the operations of distressed bankers/advisors or DIP lenders to see that this kind of stuff is done on a daily basis – finding distressed assets, value them, creditors take a haircut on debt and “make up” value in a proportional amount of equity based on future earnings and get a good return on the DIP lending. That is what Buffet did and in a way that is what the Fed is doing. This is an investment and not a bailout and chances are that the government will make some good money out of this. The media needs to educate themselves and put a halt to the panic in the markets. The word investment needs to replace bailout – which may start another debate but at least it will be directionally correct.

    1. Andy Freeman

      > The media needs to educate themselves and put a halt to the panic in the markets.”need”? Why does the media “need” to do this?The panic talk satisfies media goals. It will continue as long as they believe that to be true.

  12. CoryS

    Isn’t this exactly why tech companies hoard cash? I thought having billions on the balance sheet to fend of the bad times was why AAPL and M$ justified why they did such a thing. To suggest these companies should rely upon the stock market for liquidity seems like a bad bet for one reason: short sellers. Fred, I’d love to have you get a guest blogger on the topic convince us that shorters add value in the stock market beyond their investors and the brokerage houses that support them. Shorting banks that have equity coverage ratios + mark to market requirements seems like bullying and gaming, not clarifying a misunderstood valuation.As a CFO, the forces of shorting now create an added source of stock supply with no interest but to see the company go bankrupt or close to it. As Keynes said, the markets can be irrational longer than any investor can stay solvent, so why would GOOG, AAPL, et al try to fight that cause v. acquiring (start ups) for growth, investing in innovation and growing share in this down market?

  13. A T

    Good article and good points. Yes and the winners will be the guys that orchestrated this mess in the first place along with the corporations in the know. It’s not time for them to pounce yet but they will if the government doesn’t buy everything first. Can you say Oligopoly and Dictatorship? The wise know that it’s best to preserve capital and probably in other currencies until this collapse is orchestrated. They can then come back in (converting their foreign currencies into the new one or into ultra cheap assets) and buy on the cheap.

  14. Ted Murphy

    It sounds like the long-term opportunities will be over in China and India, if the analogy to the 1873 panic holds true (ie Europe then is US now, US then is Asia now). Should we include Brazil and Russia? Certainly Brazil.Also, from the 1873 analogy, one would be better off not dumping a bunch of capital into US-focused businesses. That panic initiated a four year economic downturn that, among other things, brought the terms bum and tramp into our lexicon — terms coined for former soldiers who were unemployed.

  15. hardaway

    That’s pretty scary Fred. What it means is that they are keeping their cash for themselves, thinking something terrible is going to happen, or…in the case of Google, a young company…they don’t really know what they should be doing. I have a lot of faith in the future of MSFT and less in the future of GOOG.

  16. howardlindzon

    My buyback argument is well refuted here but thats what twitter is for, to put out thoughts. It was eerily quiet yesterday.BUT, its a sign of these times that lots of cash in the corporations was used up on the WAY UP as retailers and other growth ideas used cash to buy back stock on the way up. a product of the private equity boom as well.

  17. Chris Dodge

    I think this was covered already in the comments, but I still have a wait-and-see attitude regarding operating results of some of these companies that you mention. Because of the positioning of the current situation as the “worst event since the Great Depression”, I think consumer products are going to get hammered by consumers reducing spending.Remember, the AdWords/CPC model of advertising of Google has never been Recession test. In reference to yesterdays posting, I think many internet companies – startups and established firms – have been over-optimistic about ad-support services. I’ll be looking forward to Google’s Q3 and Q4 results.Anyone have a sense on how Google’s revenues are holding up?

    1. RacerRick

      Google’s revenue’s won’t hold up. But they’ll do better, comparably to their peers. That might be enough.My bet is that they’ll look so much better than their competitors that the share price will hold up in the 400s.

      1. Chris Dodge

        Well, GOOG is down about 4.5% (at 11:20AM) which is below the market average right now.When does GOOG normally report their 10Q’s after end-of-quarter? Do they typically issue warnings (if the need to)?However, I think Q4 results will be the real canary-in-the-coalmine.

        1. gruvr music map

          GOOG will announce on Oct 16th, here’s a webcast link:http://www.businesswire.com…The way GOOG is moving down heading into a news cycle can indicate either apprehension about earnings, or that ‘smart money’ already knows something the public doesn’t. Investor relations will often compose a few positive-souding ‘news releases’ heading into earnings to shake out shorts as well. The absence of such IR activity could indicate confidence internally. The risk-averse individual will be covering any shorts a week in advance, and not holding GOOG long OR short over earnings.

  18. RacerRick

    If you have cash in this market, you’re going to kick ass.But there’s no reason to start. In fact, you can always just wait a bit and get what you want at a better price.

  19. Don Jones

    According to the Economist, Japanese corporations have $600 billion at their disposal, after years of good earnings and savings. The yen has also done well as a currency, making it the strongest against the dollar.

  20. Charlie Crystle

    Microsoft’s buyback is the absolute LEAST creative thing they can do with their cash.So it’s a very strong statement about the business

  21. gruvr music map

    Until there is some regulation that ties our currency to a value, this long term trend will continue.In other words, the source of the asset inflation and eventual credit crunch cycle is artificial manipulation ofthe money supply and credit rates by the fed, who is not answerable to anyone.Suze, here’s an example of the kind of thing I think of as ‘printing’ money – creating it by magichttp://www.nytimes.com/2008…Read about halfway down:The Treasury will provide money to the Federal Reserve Bank of New York to support the new program, the Fed said. Fed officials would not say how much but believed it would be substantial. The money would not come from the $700 billion package…They will just ‘provide money’ – ‘massive’ amounts – think about it… from where? The truth is, they can ‘provide money’ not backed by anything – the fed and treasury don’t answer to anyone, never have. I’m not sure whether it’s better or worse to for it to be ‘backed by’ debt, really. Either way, wehand our children mountains of debt or vastly inflated prices and weak dollars…Note how the media just pases this info along without much remark… are they being obliging or conspiring or justignorant? This happens regularly in smaller but unknown amounts, since they stopped publishing the M3 stat.PS I hope you got stopped out of $GOOGhttp://www.nytimes.com/2008…

    1. gruvr music map

      … that was a bit ramblesome…Look. IMHO the root of the problem is ‘EZ credit’ and printing money from thin air, in misguided attempts to ‘stimulate the economy’. And how are they trying to ‘solve’ this problem? More EZ credit….

  22. Tristan Louis

    Fred,Don’t you think that the reason those companies are sitting on their hoards of cash instead of buying their own stock back is precisely in line with what the Carnegies, McCormicks, and Rockefellers would have done. One of the thing that does not convince me in your argument is the double challenge of companies having both vast pools of cash AND pretty strong cashflow due to existing near-monopoly positions (Google in search/ Microsoft in the OS and office suite market).Why wouldn’t they sit on the sideline, wait for other players to get weak and then swoop in to buy those players at fire sale prices. It seems to me a more prudent strategy. Why isn’t anyone looking at the quiet from companies like Microsoft and Google as a sign that they are just taking a wait and see attitude before swooping in?

    1. fredwilson

      Because they need to defend their market caps as Microsoft is doing and Google is notWhat if $MSFT stays at $225bn and $GOOG drops to $100bnThen $MSFT makes a hostile bid for $GOOG at a 50% premium ($150bn)Google can’t let themselves get into that spot

      1. Tristan Louis

        But couldn’t they buy their own shares out at that point (granted, at a much higher price) as a defensive move then. Or would a buyback reflect the fear of such scenario (hostile takeover) happening, therefore putting more downward pressure on shares.What if the reverse happened? Also, if MSFT bough shares back, they might have less liquidity to make such a hostile takeover (unless you assume that the hostile deal would be stock-only), don’t you think?

  23. chrisco

    RE “What to Look for Next”: Just read Nouriel Roubini’s articles and blogs as they come out. Today’s is “Radical Policy Steps Necessary to Avoid a Systemic Meltdown: Interview with the Council on Foreign Relations.”RE the stock market: Cash is king. No smart corporation is wasting valuable cash buying anything they don’t need to right now. True, there will be amazing buying opportunities soon… and the ones who can benefit from them will be the ones with cash…. like Google and any other cash machines. Speaking of Google’s cash machine, which is AdWords, just like every other recession, advertising budgets will, overall, go down. That means quantity and bid price. Effective and positive ROI direct response advertising will continue to be made, of course, and online rules there, as you can measure and optimize very well.Anyway, every night has its dawn… plus a lot of good things happen at night! Last proverb is that risk = opportunity, and right now risk is present and increasing, which means opportunity is present and increasing.

  24. WillyNillyTheSkyIsFalling

    Ok, so “cash is king” right now, but what currency should that cash be denominated in for the next 1-2 years (assuming that’s the correct time horizon) to buy stuff on the cheap?

    1. fredwilson

      The dollar has been amazingly strong through all of this but I have tobelieve it will be the biggest loser in the long run

  25. shareme

    What might be interesting is that it places a shift or more focus on license costs in certain key high tech areas.Let me give you an example..LiMo foundation charges $400,000 per year for access to modify and distribute their Mobile Linux OS for cell phone devices.. Remember the biggest growth is not US cell but Asian Cell and that smaller players in the US markets are looking for low cost alternatives.That means there is a small lucrative programming services play here in Mobile Linux OS customization say using OpenMoko. True, its no the biggest market but its growing..:)

  26. Kashif

    Recession leads to War. That happened in the ’30s when global recession led to WWII and it could happen now as well.

    1. Kenosha_Kid

      My biggest fear… although not talked about much by the punditry, as it would weaken their candidate’s popularity.

    2. chrisco

      The US is already in a war (that it started, of course). Multiple wars.

  27. Seth Lieberman

    How about we only use programming languages and tech speak to describe the current situation. Here’s my code in Basic:10 PRINT “Credit Markets are Imploding, Economy is Sinking”20 GOTO 10Run

    1. fredwilson

      That got a chuckle out of me

  28. anon

    This was a very thought provoking post, but I have a question: When you quote a price to cash flow ratio (e.g. Comcast) are you talking about free cash flow (which I believe subtracts off cap ex)? Seems to me the cap ex is an essential part of their operating business.Could you show an example of how you calculated these ratios so we can understand?

    1. KidCroesus

      Question: When you state MSFT has 25 billion in cash, or GOOG has 13 bil in cash, is it really in cash? Or is it invested? Honest question, I just have no idea what public corporations are allowed to report as cash.

      1. fredwilson

        It’s “cash and short term investments” so its not exactly cash but it should be very liquid and safe to be classified that way

    2. fredwilson

      I just took market cap less cash and divided by “operating cash flow” from google financeThese are “back of the envelope” numbers not meant to be preciseI use them just to make a point

      1. anon

        Thanks, and I understand.I just think that operating cash flow is problematic for companies like Comcast, for example. It’s a large effect that would strongly impact even a back of the envelope calc.

  29. Guest

    The markets are baking a severe recession. Whether they are right or not is probably a judgement call, the data is not there. If they are right, though, these prices don’t look all too good. Sometimes it’s hard to say. Look at the financials: TPG, who are a smart bunch of people, thought WaMu at $8 was a good deal…What seems to be working is non-cyclicals. ImClone, the most mismanaged company in the history of biotech, was able to get a bidding war going for it and sell at $5.6B. Effective, non-cyclical, and badly-needed product trumps a history of mismanagement and the worst financial crisis in a century…

  30. jackson

    Gary Shandling, appearing on the Bill Maher show last week, made an astute observation. He siad that Bill Clinton should have sold the country back in 99 while we could still get a good price for it.

    1. fredwilson

      Nobody could have afforded us back then!

  31. scottfromshanghai

    “We have yet to see the Carnegies, McCormicks, and Rockefellers of China, India, Russia, and the Middle East emerge as capitalists on a global scale.”Not sure I agree with that, guess it depends on your definition of global scale.For the Indians I’d certainly argue that Ratan Tata has achieved this via Tata which is a huge global conglomerate, they have already picked up western companies/brands like Tetley Tea, Landrover, Jaguar, Good Earth etc. Lashmi Mittal’s (who recently joined Goldman’s board) Arcelor Mittal has been the global consolidator in the steel industry buying amongst others Corus which was the rebranded British Steel – as good an example of reverse-colonialism as I’ve ever seen! The two Ambani brothers at Reliance are also flexing their muscles globally, witness Anil’s $1.5bn recent deal with Spielberg and Dreamworks. Vijay Mallya’s UB group is the world’s 2nd largest Spirit’s group (and a major airline), foreign deals include the purchase of Whyte & Mackay Group and his Formula 1 Team. Naresh Goyal is building a global airline with the Jet Airways brand and whilst others such as Mittal at Bharti have been mainly domestically focussed he has built up partnerships with the likes of Vodafone, Singapore Telecom, AXA, Walmart, Del Monte etcRussian Oligarchs (none of whose names I can spell) have also been consolidators in the world of natural resources.For China whilst there aren’t necessarily individuals who are have yet built global empires, there are certainly Chinese companies who have built global and regional businesses in many domains, Lenovo is the obvious example but there are many others, just look at the natural resources industries in Africa, Latin America etc many of these are owned by Chinese.Finally in the Middle East don’t forget that given the political structure of these companies the Sovereign Wealth Funds are in most cases personal investment funds for the countries’ leaders. Funds from Dubai, Abu Dhabi and Kuwait have invested heavily in Western Financial Institutions and taken major stakes in assets as diverse as P&O, Cirque de Soleil and Manchester City Football Club.I do agree with you though that the current meltdown in valuations will probably see more players emerge and the existing ones become more aggressive and more aquisitive, assuming of course the Western economies do not head down the path of protectionism…

    1. fredwilson

      Thanks for this scottThe indians are really interesting to me as potential big winners in thiswhole affair

  32. Mike

    Can I just say that the black bar floating at the bottom of the screen scrolls with the content and covers the article I am trying to read… hugely annoying.

    1. fredwilson

      I’ve heard that from a few of my readers but honestly less than five.It’s not any different than the bottom frame of the browser.It just shrinks the browser window a bit

  33. James Adams

    Bear in mind the ratios are based on yesterdays earnings, the world has changed.I disagreed with you a few weeks ago when you said that Google was “cheap” at the time. I see you’re still keen on them which I understand, going forward they look great strategically, but catching a falling knife is risky. A safer play might be go long Google, short Microsoft as I think that fits in better with where you see the world in 5-10 years time.

    1. fredwilson

      That’s why you are a good public market investor and I am not!I do think google is a good long term buy. I nibbled at $400. I’ll buy somemore at $350. And even more at $300.I do know a lot about what’s going on at google and I think their businessis going to make it through this downturn better than most

      1. chrisco

        Doubling down… usually not a good thing (at the card table or with a stock).

        1. andyswan

          Bite your tongue! Doubling down is part of USA DNA……remember the alamo! πŸ™‚

  34. Peeters

    Abu Dhabi investors participating in AMD ?

    1. fredwilson

      I am glad this post was titled “what do look for next”

  35. JMargolin

    Yes. I agree that looking at what firms are buying back their stock is a positive indicator, but it doesn’t logically follow that NOT buying back stock is a negative indicator.Why assume anything like a consistent-with-present future cash flow? People who are struggling to begin with are increasingly choosing to forego medical care and heat. People who aren’t struggling but who would be in dire straights if someone lost a job are hoarding cash.

    1. Dave Olverson

      The fact that Google has 2 voting share classes might explain why they aren’t defending their market cap. The shares held by the founders and CEO have 10 voter per share if I remember correctly. I suspect they feel they have all the votes necessary to defend any hostile takeover bid.

      1. fredwilson

        That’s a good point

  36. Tom Evslin

    Good point about the cash but buybacks are boring and uncreative. Is this the time when the nouveau cash rich high tech industry supplants traditional indebted smokestack industries even though the two aren’t usually direct competitors? Does Google become AT&T’s banker? Does Intel make the guts of eco-cars while MSFT develops operating systems for them?Your post got me thinking which means blogging of course http://blog.tomevslin.com/2

  37. Mayson

    $MSFT doesn’t have the chance of a snowball in hell of taking over $GOOG, unless Schmidt, Brin, and Page agree to it.”By their ownership of 86,753,907 shares of Class B common stock, three of the company’s executives (Eric E. Schmidt, Larry Page and Sergey Brin) controlled 66.2 percent of the total voting power of all the company’s shares…even though they owned only 31.3 percent of the total shares outstanding,” the proposal says, according to Google’s filing with the U.S. Securities and Exchange Commission.

    1. fredwilson

      Good point

  38. Mark

    You should read Greg Mankiw’s post from today. He addresses the idea of “more Warren Buffetts” stepping in. The idea of more Buffetts has nothing to do with what the economy needs.http://gregmankiw.blogspot….

  39. je

    GOOG at 300, coming up — sell and take the lossI’m waiting this one out a bit more.Yikes.

    1. fredwilson

      Or buy moreWhich I am doing this morning via a limit order I just placed

  40. Dror Gill

    Hi Fred,Great post – in fact, I liked it so much, I wrote a song about it. See http://blog2song.blogspot.c…Bye,Dror.

    1. fredwilson

      I love itJust left a comment

  41. Ralph Parks

    Why are you using ‘cash flow’ to make your point that these companies could buy back shares?They cant eat their own body and survive. Maybe they know their expenses and plans will use most of it..