Google finds growth and cash in the third quarter

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Google (NASDAQ: GOOG) increased both sales and income in the third quarter. The giant of online search, which issued its earnings release after the bell on Thursday, is saying what a plethora of companies are also saying: the worst of the economic downturn may finally be over.

According to, sales, after traffic acquisition costs are taken into account, rose about 8%. On an adjusted basis, profit grew almost 20% to $5.89 per share. Our earnings preview article stated that expectations were for $5.38 per share. Google did a good job of giving the world a reason to believe that the rallies seen in the major market indexes should be taken seriously.

Continue reading Google finds growth and cash in the third quarter

Google finds growth and cash in the third quarter originally appeared on BloggingStocks on Fri, 16 Oct 2009 08:00:00 EST. Please see our terms for use of feeds.

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Fizzback Raises £1.6 Million

Fizzback, a UK-based operator of a cross-channel platform for real-time dialogue between businesses and their customers, has raised £1.6 million in Series B funding. Nauta Capital led the round, and was joined by return backer Advent Venture Partners.


• Fizzback has secured £1.6M million of Series B funding led by Nauta Capital. The round also includes the participation of existing investor Advent Venture Partners.

• Fizzback is the only cross-channel platform (sms, email, voice, web) for real-time dialogue between business and its customers at their points of experience.

• Nauta Capital is a Venture Capital firm with offices in Barcelona and Boston, and is specialized in investing in early stage technology companies based in Europe and the US.

• Advent Venture Partners is a Venture Capital firm based in London and specializes in investing in technology and life sciences businesses in Europe and the US.

London, UK October 15, 2009 – Fizzback, Nauta Capital (Nauta) and Advent Venture Partners (Advent) today announced that Fizzback, a company offering a highly differentiated Customer Engagement Platform based in London, UK, has completed a capital increase of £1.6 million. This second round of funding has been led by Nauta. Advent had led the previous £2.5 million round in October 2006.

This second round of funding will allow Fizzback to further consolidate its leadership position in helping consumer companies to drive customer engagement at the point of experience, by continuing its expansion into Continental Europe and the US. Fizzback has to date been commercializing its platform within sales, distribution and customer service centers across sectors, with a particular focus within the Retail, Telecommunications, and Contact Centre verticals with clients such as Tesco, T-Mobile, The Carphone Warehouse, Phones 4u and Marks & Spencer. Large companies are increasingly taking on a more customer centric strategy for sustainable growth, realizing that improving customer satisfaction will increase customer advocacy, customer retention, and ultimately spend and share of wallet. Additionally, Fizzback offers a powerful proposition in its ability to drastically reduce the latency and cost of traditional customer insight, tapping into the multi-billion dollar markets for business intelligence, CRM and market research, driving process improvement by aligning KPIs with customer feedback.

Rob Keve, Fizzback’s founder and CEO declares: “I am delighted to welcome Nauta Capital into the Fizzback fold. Selecting the right partner at this important juncture for Fizzback was crucial. Nauta Capital brings a powerful combination of sector expertise and industry contacts, alongside their funding, which is already providing access to new market opportunities. Advent Ventures’ follow-on investment, builds on our already close partnership, and is a testament to their belief in our ability to continue to build a highly successful business.”

According to Jordi Viñas, General Partner at Nauta Capital, “We share great enthusiasm for the project along with its CEO, Advent, and the rest of investors and team at Fizzback. Fizzback is uniquely positioned to take major consumer companies to a new level of customer centricity by allowing them to listen to and act upon customer feedback in real-time.”
Mike Chalfen, General Partner, Advent Venture Partners said: “Fizzback is incredibly innovative and commercially successful. Its mission to address a large market while continuing to be capital efficient is how great technology companies should be built. We’re pleased to have introduced Nauta to the company as they share this vision and have already added value to the company.”

About Fizzback

Fizzback helps brands to engage with their customers. The Fizzback™ service solicits instant customer feedback at the point of experience and employs a unique artificial intelligence engine to understand the nature, sentiment and tone of comments. Tailored responses are generated and delivered in real-time, driving meaningful conversations. Relevant employees are intelligently alerted, enabling companies to resolve customer issues quickly; and an interactive dashboard, including KPIs and verbatim customer feedback, helps senior management drive their business by voice-of-customer.

Fizzback™ is being used by companies determined to innovate and differentiate themselves through a superior customer experience. In practical terms it is like being able to walk the shop floor 24/7, listening to what your customers are saying and acting upon their insights. Offering a SaaS business model and a strong ROI, based upon improved customer retention and service, its customers include some of the largest retailers and Telecom companies in Europe, including T-Mobile, Tesco and Marks & Spencer.

Headquartered in London, Fizzback is privately owned and backed by Advent Venture Partners and Nauta Capital.

About Advent Venture Partners

Advent Venture Partners is one of Europe’s most established venture and growth capital firms, investing in world-class technology and life science businesses. We seek out remarkable companies that want a pragmatic and well-connected partner by their side. We are dedicated to executing a balanced investment strategy delivering consistent returns for our investors.

Top tier growth equity and venture investors, Advent’s technology team backs leading European technology-driven businesses in Internet, digital media, software and services, telecoms, and cleantech. Some of our investments include: Cartesis, a growth capital investment sold to Business Objects for $300 million; Qype, Europe’s largest local search and review site; The Foundry, Academy Award winning global visual effects software vendor for the post-production industry; and, Echovox, leading global mobile payments solutions provider for media companies.

About Nauta Capital

Nauta Capital manages three Venture Capital entities, Nauta Tech Invest I, Nauta Tech Invest II and Nauta Tech Invest III with a total of €165 million under management. Nauta has offices in Barcelona and Boston and invests between €0.5M and €7M in companies in the Technology and Telecommunications sectors. Nauta’s target companies for investment are in their very early stage of development (Seed Capital) and until more advanced stages of development (series A and series B financing rounds). Nauta actively invests in Western Europe and the US. Its current portfolio is composed of 14 companies, 4 of which are based in the US, 2 in the UK and 8 in Spain.


Technorati Raises $2 Million

Technorati Inc., a San Francisco-based search engine for the blogosphere, has raised $2 million in new Series D funding. The company had held a $7.5 million first close in the summer of 2008. TechCrunch reports that the extension came from return backers Draper Fisher Jurvetson and Mobius Venture Capital. No mention of existing shareholder August Capital. Technorati had previously raised $30 million.


Syneron Medical Buying Primaeva Medical

Syneron Medical Ltd. (Nasdaq: ELOS) has agreed to acquire Primaeva Medical Inc., a Pleasanton, Calif.-based developer of a minimally-invasive RF device for the treatment of skin wrinkles and laxity. The deal includes a $7 million up-front payment in cash, plus up to $23 million in earn-out payments. Primaeva Medical had raised around $14 million in VC funding, from Affinity Capital Management, Delphi Ventures and Frazier Healthcare Ventures.

Syneron Medical Ltd. (NASDAQ: ELOS) today announced it has signed a definitive agreement to acquire Primaeva Medical, Inc., an aesthetic technology firm based in Pleasanton, CA. Primaeva developed a minimally invasive RF aesthetic device for the treatment of skin wrinkles and laxity. The proposed acquisition is subject to customary conditions and is expected to close before the end of calendar year 2009. Syneron expects to introduce the non-surgical skin tightening Primaeva technology in 2010.

The Primaeva product, which has already received FDA clearance for wrinkle treatment, employs an innovative micro-needle electrode array housed in an advanced single-patient use applicator tip to deliver bipolar fractional radiofrequency (RF) energy directly within the reticular dermis. Its fractional treatment patterns and unique energy delivery mechanism have demonstrated noticeable skin tightening, with minimal downtime, in a multi site clinical study which included more than 100 patients.

“The Primaeva system is a leap forward, utilizing fractionated RF energy to target the dermis in a selective and predictable manner. It has undergone rigorous scientific studies, with consistent physician and patient satisfaction,” said Syneron CEO Lou Scafuri. “The team at Primaeva is developing a non-ablative application for dermal remodeling and skin laxity improvement that we expect will complement our other aesthetic technologies such as the recently introduced eMatrix system for Sublative Rejuvenation and Vela Shape II body shaping technology. The Primaeva acquisition adds to our platform of innovative products and is well suited for our dermatologist and plastic surgeon customers,” added Scafuri.

“The Primaeva technology has been studied by key opinion leaders in the aesthetic medical area, and is the subject of three published papers and one paper pending publication in a leading peer-reviewed aesthetic journal,” said Scafuri. New York dermatologist Macrene Alexiades-Armenakas, M.D., Ph.D., P.C., presented the findings of the Primaeva clinical trials at this year’s American Academy of Dermatology annual meeting. According to Dr. Alexiades-Armenakas, Primaeva’s results on the face “surpass any other device I’ve seen in terms of tightening for a single treatment. And there’s no reason it could not potentially be used elsewhere on the body, like the jowls or the abdomen.”

With the Primaeva system, treatment temperature is preselected and energy is delivered directly within the dermis using proprietary, patented technology that seeks to eliminate the uncertainty previously associated with the location of energy delivery and tissue temperature control. Its Intelligent Feedback System (IFS) is designed to ensure precise dermal targeting, via sensors embedded in the applicator to provide real-time feedback of skin temperature and tissue impedance within the treatment zone.

As part of the agreement, Primaeva founder and CEO Bankim Mehta will join the Syneron management team. Mehta brings broad experience in the medical aesthetic industry. “I am excited to join Lou Scafuri and the Syneron management team that is establishing itself as a leader in aesthetic technology,” said Mehta. “Syneron with its expanding distribution network will ensure that the Primaeva technology is rapidly introduced to the broadest possible customer base.”

Syneron recently announced its agreement to acquire Candela Corporation. With the acquisition of Primaeva, Syneron continues to develop and broaden its industry-leading portfolio of superior technologies and applications for the aesthetic physician.

Syneron will acquire Primaeva for $7 million in cash, with potential additional consideration of up to $23 million in cash contingent on the achievement of commercial milestones.

About Primaeva Medical, Inc.

Based in Pleasanton, CA, Primaeva was founded in 2005. The company has developed a patented, minimally invasive technology for aesthetic application. Their development of the company’s first product is complete and it is intended to improve aesthetic results by increasing the efficiency and control of sub-dermal RF energy. Previous investors include Frazier Healthcare Ventures, Delphi Ventures and Affinity Capital Management.

About Syneron Medical Ltd.

Syneron Medical Ltd. (NASDAQ: ELOS) manufactures and distributes medical aesthetic devices that are powered by the proprietary, patented elos combined-energy technology of Bi-Polar Radio Frequency and Light. The Company’s innovative elos technology provides the foundation for highly effective, safe and cost-effective systems that enable physicians to provide advanced solutions for a broad range of medical-aesthetic applications including hair removal, wrinkle reduction, rejuvenating the skin’s appearance through the treatment of superficial benign vascular and pigmented lesions, and the treatment of acne, leg veins and cellulite. Founded in 2000, the corporate, R&D, and manufacturing headquarters for Syneron Medical Ltd. are located in Israel. Syneron has offices and distributors throughout the world, including North American headquarters in Irvine, CA, and Asia-Pacific headquarters in Hong Kong, which provide sales, service and support. Additional information can be found at “”


J. C. Flowers’ Secret Love: “Mrs. Merdle”

Bank-investing guru J. Christopher Flowers revealed one of his secret weapons Thursday.

After being introduced at a speech by an old colleague, the head of private-equity firm J.C. Flowers & Co. acknowledged a story about him using one calculator so often in his early banker years that the keys in the middle bent from overuse.

“I love that calculator,” Flowers said of the HP-12c he named “Mrs. Merdle” after a car in Dorothy Sayers’ detective novel series. (The car in turn was named for a character in Charles Dickens’ “Little Dorrit.”)

Investors might want to use their own calculators to determine the right level of pay on Wall Street, but Flowers said that the government should keep its hands off.

“I don’t think compensation should be set by the government,” Flowers said in remarks at the Japan Society in New York. He said he understands the politics of wanting to set pay at taxpayer-rescued firms, but he argued the recent focus on lowering pay “is in conflict ” with the government’s goal of maximizing the return on its investments .

Flowers’ $10 billion investment firm and others like it have the right incentives to keep pay reasonable, he continued. Overpaying for mediocre talent leads to underperforming investments, after all .

On other topics, Flowers gave a cautiously optimistic outlook on banks despite an expectation that more small banks will fail over the next two or three years. Looking back, he noted the rapid speed of U.S. banks’ downturn in 2008 compared with Japan’s banking problems a decade earlier. Flowers considered investments in struggling financial firms Lehman Brothers Holdings and American Inernational Group Inc. during the crisis, passing on Lehman and making a bid for an AIG stake that wasn’t accepted.

Mr. Flowers also divvied up blame, calling out regulators, lenders, borrowers, and most prominently, rating firms that put top marks on bonds that suffered “truly appalling“ losses. Assigning Triple-A ratings on complicated mortgage products, Flowers said, showed that rating firms in assessing debt had traded in “judgment” for “computer -generated models.”

Turns out Mrs. Merdle can’t do it alone.

Operation 1100

The following is the morning research note from a  major trading desk in NY


During options expiration week, the dealer community’s desire to “pin” the market to certain key levels renders all other thoughtful analysis moot. Options traders, like all traders, seek liquidity, and liquidity is in the big round number strikes – SPX 1100 for example. (Why buy SPX 1095 calls – or SPY 109’s – when any kind of size is going to move that market adversely?) Dealers typically have a hedged book but if they do have exposure it’s at the big round numbers. Pinning the market at those levels (which is a collective act, and doesn’t necessarily imply untoward activity) is a profitable enterprise for them, with investors taking the losses.

During expiration week it makes sense to step back from the news flow and remind ourselves that the stock market is not just a marketplace in which buyers and sellers meet to exchange interests in businesses. It is a den of speculation and the goal is profit – the shorter term the better. Of course, it isn’t only the stock market in which these games are played. How else could one explain Goldman Sachs’ $6 billion in revenues last quarter from Fixed Income, Currency, and Commodity (FICC) trading alone? As a final thought, keep in mind that SPX 1100 lines up almost perfectly with the downward sloping trend line formed by the October 2007 and May 2008 weekly closing highs. (source: Bloomberg)


I won’t pretend to have gone through all the earnings this week with a fine-tooth comb, but my friend Scott Frew at Rockingham Capital pointed out that investor reaction to the heavyweight reports has been pretty underwhelming. The S&P 500 has risen 3.7% since Alcoa reported earnings, but look at how the heavyweights have fared following their results so far: Alcoa is up 1.1% since reporting; Intel is up 0.9%; Johnson & Johnson is down -2.5%; JPMorgan is higher by 3.3%; Goldman Sachs is down -1.9%, and, Citigroup is lower by -5%. There have been bright spots away from the really big boys (CSX Corp; Abbott Labs), and JPMorgan’s results were by all accounts stellar. There is a temporal inconsistency in comparing one or two days of trading results for, say, Citi and Goldman, to six days of performance for the S&P 500. Nonetheless, it’s a dynamic that bears watching (let’s see how Google and IBM and AMD perform today).

I noted a few weeks ago that the market’s perception of “how earnings season went” would likely dictate trading sentiment into the holiday period. Some were saying that this earnings season would be judged not by the bottom line (the margin story is a Q2 story), but by top line growth. At the moment, despite the broad market’s embrace of a bullish narrative, I have not seen many impressive top line beats outside of the TBTF banks. I look ahead to next week’s regional bank-dominated earnings (if you don’t think there’s going to be some hair on those puppies, you haven’t been paying attention) with some trepidation. (source: Bloomberg)

Something To Learn From

We are headed from the North Rim over to Zion today, I'll have regular internet access after we check in to where we are staying in Kanab. For today though something that a friend posted on Facebook that I pasted below verbatim.

An old Native Grampa sat in his lodge on the reservation, smoking a ceremonial pipe and eying two US government officials sent to interview him. "Chief Two Eagles, you have observed the white man for 90 years. You've seen his wars and ...his technological advances. You've seen his progress, and the damage he's done." The Chief nodded in agreement.

The official continued, "Considering all these events, in your opinion, where did the white man go wrong?"

The Chief stared at the government officials for a minute and then calmly replied ... ... Read More
"When white man found the land, Indians were living here. No tax, No debt, Plenty buffalo, Plenty beaver, Women did all the work, Medicine man free, Indian man spent all day hunting and fishing, All night having sex."

Then the chief leaned back and smiled... "Only white man dumb enough to think he could improve system like that."

Warburg Completes Webster Financial Injection

Webster Financial Corp. (NYSE: WBS) has completed its sale of $115 million worth of newly-issued common stock to Warburg Pincus.


ebster Financial Corporation (NYSE: WBS) today announced that, following receipt of regulatory approvals, Warburg Pincus, the global private equity firm, has completed its previously announced $115 million investment in Webster. In accord with the previously announced agreement, the investment includes a direct purchase of newly issued common stock at $10 per share, non-voting perpetual participating preferred stock, and warrants.

Warburg Pincus invested $40.2 million on July 27, 2009 and today invested the remaining $74.8 million in Webster to purchase 3 million shares of common stock; 44,570 shares of non-voting perpetual participating preferred stock that, following the receipt of shareholder approval, will convert into 4.5 million shares of common stock; 6.8 million seven-year A-Warrants, Series 2, which initially have a strike price of $10.00 per share, with the strike price increasing to $11.50 per share on October 15, 2011 and to $13.00 per share on October 15, 2013; and 4.3 million seven-year B-Warrants, Series 2 with a strike price of $2.50 per share which will only become exercisable and transferable if shareholder approval is not received by February 28, 2010. The B-Warrants, Series 2 will expire immediately upon receipt of shareholder approval.

Supplemental information regarding the $115 million investment from Warburg Pincus is available on our website at

About Webster Financial Corporation

Webster Financial Corporation is the holding company for Webster Bank, National Association. With $17.5 billion in assets, Webster provides business and consumer banking, mortgage, financial planning, trust and investment services through 181 banking offices, 492 ATMs, telephone banking and the Internet. Webster Bank owns the asset-based lending firm Webster Business Credit Corporation, the insurance premium finance company Budget Installment Corp., Center Capital Corporation, an equipment finance company headquartered in Farmington, Conn., and provides health savings account trustee and administrative services through HSA Bank, a division of Webster Bank. Member FDIC and equal housing lender. For more information about Webster, including past press releases and the latest annual report, visit the Webster website at

About Warburg Pincus

Warburg Pincus is a leading global private equity firm. The firm has more than $25 billion in assets under management. Its active portfolio of more than 100 companies is highly diversified by stage, sector and geography. Warburg Pincus is a growth investor and an experienced partner to management teams seeking to build durable companies with sustainable value. Warburg Pincus has a successful track record of long term investments in the banking sector particularly in periods of market dislocation going back to the 1980s. Historic bank sector investments include The Bowery Savings Bank, Mellon Bank, Dime Bancorp, TAC Banc-shares, HDFC, Kotak Mahindra and ICICI Bank. Founded in 1966, Warburg Pincus has raised 12 private equity funds which have invested more than $29 billion in approximately 600 companies in 30 countries. The firm is currently investing Warburg Pincus Private Equity X, L.P., a $15 billion fund, and has offices in Beijing, Frankfurt, Hong Kong, London, Mumbai, New York, San Francisco, Shanghai and Tokyo. For more information, please visit


Record Quarterly Foreclosures: Up 23% from Q3 2008

foreclosure map
via CNN/Money


I meant to touch upon this yesterday: Foreclosure filings — default notices, scheduled auctions and bank repossessions — have surged to record highs — in Q3, there were 937,840 properties. That is a quarterly increase of 5%, and a year over year gain of 23%.

During Q3, one in every 136 U.S. housing units received a foreclosure filing — a record high. This quarter was the worst 3 month period since the great Depression.

In yet another astonishing data point, just 6 states account for 62% of US total foreclosures:  California, Florida, Arizona, Nevada, Illinois and Michigan are the leading states in terms of receiving foreclosure filings. As the chart above shows, California, Florida, Arizona, and Nevada have the greatest foreclosure activity.

States with the greatest foreclosure activity have also seen the most significant price decreases, leading to increased purchases.


See also:
US Foreclosure Activity

RealtyTrac Otober 15, 2009

Foreclosures: ‘Worst three months of all time’
Les Christie
CNNMoney October 15, 2009

Before the bell: Stock futures lower after GE beats, BofA reports loss

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U.S. stock futures were mixed and barely moved Friday morning after Google (NASDAQ: GOOG) and International Business Machines (NYSE: IBM) beat analyst estimates late Thursday and as results came in this morning from General Electric (NYSE: GE) and Bank of America (NYSE: BAC), with the first also surpassing Wall Street expectations. [Update 8:45 a.m.: Futures turned negative after the large Dow companies didn't perform quite as well.]

The Dow Jones Industrial Average managed to close above the 10,000 mark Thursday, for the second day in a row, despite earlier weakness following some financial sector results. But a jump in oil prices helped oil stocks move higher and the Dow maintain that important psychological mark.

Continue reading Before the bell: Stock futures lower after GE beats, BofA reports loss

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Andy Xie: For Economic Stimuli, a Revolving Exit Door

Can interest rate adjustments, currency devaluation and zigzag policymaking help unwind economic stimuli? It depends.

Australia recently raised its policy interest rate 25 bps, becoming the first major economy to do so since the financial crisis a year ago prompted all major economies to rapidly cut interest rates to historical lows.

Financial markets had been chattering about economic stimuli exits for about a month before Canberra’s move. The consensus was that central banks would keep rates extremely low through 2010, and possibly beyond, on grounds that the economic recovery is still shaky.

Central banks also have been discussing the subject. Their messages are, first, that they know how to exit and will exit before inflation becomes a problem and, second, that they don’t see the need to exit anytime soon. They try to assure bond inventors not to worry about their holdings, despite low bond yields, while trying to persuade stock investors they need not worry about high stock prices, as liquidity will remain strong for the foreseeable future. So far, central banks have made both groups happy. But Australia’s action is likely to raise concern among financial investors who hold expensive stocks and bonds.

Each economy will exit at its own pace, according to local conditions. First, the United States and Britain, where property bubbles have burst and could not be revived through low interest rates, will increase rates next year at a pace in line with the speed of inflation expectation. Their goal is to keep real interest rates as low as possible to support financial institutions still sitting on mountains of bad assets. They don’t want to stop inflation, but want to limit the pace of its increase. Through low real interest rates, their economies could decrease debt leverage. I think the Fed would raise interest rate by 100 bps in 2010, 150 bps in 2011, and 200 bps in 2012. The United States could be stuck with an inflation rate of 4 to 5 percent by 2012 – and for years to come.

Second, China’s stimulus program will zigzag mainly through its lending policy. China’s currency will be pegged to the U.S. dollar for the foreseeable future, which determines the end point for China’s monetary policy. Its inflation and interest rates will likely be similar to those in the United States.

Third, due to their strong currencies, countries in the euro zone and Japan will have higher real interest rates, lower nominal interest rates, and lower real economic growth rates. They will raise interest rates more slowly than the United States, and will have lower inflation rates as well.

My central point is that the global economy is cruising toward mild stagflation with a 2 percent growth rate and 4 percent inflation rate. This scenario is the best that the central banks can hope to achieve; it combines an acceptable combination of financial stability, growth and inflation. But this equilibrium is balanced on a pinhead. It requires central banks to constantly manage expectations. The world could easily fall into hyperinflation or deflation if one major central bank makes a significant mistake.

In modern economics, monetary stimulus is considered an effective tool to soften the economic cycle. While there are many theories about why monetary policy works, the dirty little secret is that it works by inflating asset markets. By inflating risk asset valuation, it leads to more demand for debt that turns into demand growth. In other words, monetary policy works by creating asset bubbles.

It is difficult to reverse this kind of stimulus. A complete reversal requires that household, business and government sectors decrease debts to pre-stimulus levels. This is why national ratios of indebtedness-debt to GDP have been rising over the past three decades while central bankers smoothed economic cycles through monetary policy. It led to a massive debt bubble that burst, leading to the ongoing slump.

The current stimulus round is different in terms of its effects. Despite low interest rates, household and business sectors in developed economies have not been increasing indebtedness; falling property and stock prices have diminished their equity capital for supporting debt. The public sectors have rapidly ramped up debt to support failing financial institutions and increase government spending to cushion the economic downturn. Neither is easy to unwind.

By some estimates, US$ 9 trillion has been spent to shore up failing financial institutions. A big chunk of that money was borrowed against illiquid and problematic assets on bank balance sheets. As the debt market refused to accept that collateral, governments and central banks stepped in. Today, it is impossible for banks to liquidate such assets without huge paper losses. Hence, if central banks call the loans, they are likely to go bankrupt.

Of course, central banks can suck in money from elsewhere to substitute money that’s tied up in non-performing loans. They are unlikely to do so, however, as it would depress a good part of the economy in order to support the bad. And that could easily lead to another recession.

The bottom line is that, regardless what central banks say and do, the world will be awash in a lot more money after the crisis than before — money that will lead to inflation. Even though all central banks talk about being tough on inflation now, they are unlikely to act tough. After a debt bubble bursts, there are two effective options for deleveraging: bankruptcy or inflation. Government actions over the past year show they cannot accept the first option. The second is likely.

Hyperinflation was used in Germany in the 1920s and Russia in late 1990s to wipe slates clean. The technique was essentially mass default by debtors. But robbing savers en masse has serious political consequences. Existing governments, at least, will fall. Most governments would rather find another way out. Mild stagflation is probably the best one can hope for after a debt bubble. A benefit is that stagflation can spread the pain over many years. A downside is that the pain lingers.

If a central bank can keep real interest rates at zero, and real growth rates at 2.5 percent, leverage could be decreased 22 percent in a decade. If real interest rates can be kept at minus 1 percent, leverage could drop 30 percent in a decade. The cost is probably a 5 percent inflation rate. It works, but slowly.

If stagflation is the goal, why might central banks such as the Fed talk tough about inflation now? The purpose is to persuade bondholders to accept low bond yields. The Fed is effectively influencing mortgage interest rates by buying Fannie Mae bonds. This is the most important aspect of the Fed’s stimulus policy. It effectively limits Treasury yields, too. The Fed would be in no position to buy if all Treasury holders decide to sell, and high Treasury yields would push down the property market once again.

The Fed hopes to fool bondholders or lock them in by quickly devaluing the dollar. Foreign bondholders have already realized losses. The dollar index is down 37 percent from its 2002 peak. A significant portion of this devaluation is a down payment for future inflation.

I think Britain is pursuing devaluation for the same reason. Among all major economies, Britain’s is the most dependent on global finance. It benefited greatly during the global financial boom that began in the mid-1990s. The British currency and property values appreciated dramatically, pricing out other economic activities. But now that the global financial bubble has burst, its economic pillar is gone. Other economic activities cannot be brought back to Britain without major cost cuts. But it can’t cut taxes to improve competitiveness, as fiscal revenues depend on the financial sector and already face a major shortfall. Another option is to let property prices fall, as they have in Japan. But that choice might sink Britain’s entire banking sector. Hence, devaluing the pound is probably the only available option for stabilizing the British economy.

Some may argue that Britain is not expensive anymore. The problem is that being less expensive is not good enough. Prices have to be low enough to attract non-financial economic activities despite a rising tax burden. The pound’s value must be very low to achieve that goal. Five years ago, I predicted the pound and euro would reach parity. It seems the day is finally here. But I’m not sure parity would be enough; the pound may have to be cheaper.

Of course, the euro zone is a mess, too. With high unemployment rates, a stagnant economy and imploding property markets in southern Europe, shouldn’t the euro’s value decline, too? Yes, it should. But it won’t. The European Central Bank was structured solely to maintain price stability. With so many governments and one central bank, ECB is unlikely to change anytime soon. Hence, it won’t respond to a strong euro quickly. A strong euro and low inflation could form a self-generating spiral, as we see in Japan. Even as interest rates in other economies rise, the euro zone’s real interest rate could be higher still, supporting a strong euro.

At some point, euro zone monetary policy may change. It would require governments in the zone’s major economies come together and change the ECB. That may come in three years, but not now. The trigger could be one country threatening to exit the euro. Italy and Spain come to mind.

Meanwhile, Japan is an enigma. It has been locked in a vicious cycle of economic decline with a strong yen and deflation. Most Japanese people have a strong yen psychology. Politicians and central bank leaders reflect this popular sentiment, which is based on an aging population. Wealth is concentrated among voting pensioners for whom a strong yen and deflation theoretically improve their purchasing power. But I think various theories that explain Japan’s behavior are not good enough. The best explanation is that Japan is run by incompetents, and some are downright stupid. They have locked Japan in an icebox and refuse to come out.

Japan is a giant debt bubble. Its zero interest rate, supported by a strong yen and deflation, has turned the debt bubble into an iceberg. You don’t have to worry — until it melts. Unfortunately, when the temperature reaches a critical point, the iceberg will melt suddenly, all at once. That turning point will come when Japan begins to run a significant current account deficit. The day may be near.

For Japan to avoid calamity, it should deal with deflation and skyrocketing government debt now. The only way forward is for the central bank to monetize Japanese Government Bonds. That would lead to yen devaluation and inflation. Pensioners will complain, but it’s better than a complete meltdown later.

Japan’s new ruling party DPJ has no vision like that. It doesn’t have the guts to go against popular preference for a strong yen. Without a growing economy, though, the DPJ has little to play with. The whole country has sworn to debt, led by a government with a massive fiscal deficit. The DPJ may only reallocate some spending, which would make no difference for the economy. It seems Japan will remain in the icebox until the day of reckoning.

These snapshots of Britain, the euro zone and Japan suggest everyone needs a weak currency. Those that don’t have one simply don’t know yet. They’ll come around eventually. One outcome could be rotating devaluations and high inflation for the global economy.

Developing countries with healthy banks have a different problem on their hands. By responding to falling imports with stimuli, they inflated their property markets. China, India, South Korea and Hong Kong have inflated property bubbles in spite of slower economic growth rates. The contradictions between a property bubble and a weak economy can lead to zigzags in policymaking.

As China is one-third of the emerging economy bloc — and exerts a great deal of influence over commodity prices that other emerging economies depend upon — its monetary policy has a big impact on global financial markets. Its monetary stimulus in the first half of 2009 went disproportionately into property, stock and commodity markets. As profitability for the businesses that serve the real economy remain weak, little monetary stimulus went into private sector capital formation.

The state sector ramped up investment somewhat for policy, not profit, concerns. Thus, China is experiencing a relatively weak real economy and red hot asset markets. Government policy is being pushed by both concerns. Cooling the asset bubble would cool the economy further. Not to cool the bubble could lead to a catastrophe later. Monetary policy zigzags, shifting according to concerns that arise, has the up hand.

It seems limiting credit growth is the current policy focus. But if the economy shows further signs of weakness in the fourth quarter 2009 and first quarter 2010, the policy may revert to loose bank lending again. The zigzagging will stop when China’s loan deposit ratio is high enough, i.e. when increased lending increases interest rates. As the yuan is pegged to the dollar, China’s monetary policy would become much less flexible after excess liquidity in the banking system is gone.

I think Australia is raising interest rates ahead of others for a unique set of concerns. Australia has been experiencing property and household debt bubbles similar to those in the United States and Britain. Its bubbles are probably larger than America’s. But because its commodity exports have performed well, its economy has fared better than others. Hence, its property market has seen less of an adjustment. A relatively good economy could embolden Australia’s household sector to borrow more and continue the game. This is why it needs to increase interest rates — to prevent the bubble from re-inflating. The United States and Britain don’t have this problem; their household sectors are convinced that the game is finished and they must change.

A review of unique factors and institutional biases around the world shows that exiting a stimulus would be quite different in different economies. The United States and Britain, the euro zone and Japan, and China and India are three blocs that face varying challenges and will handle stimuli exits in different ways.

Most analysts think a benchmark for exiting a stimulus is robust economic recovery. That’s not so. Loose monetary policy cannot bring back a strong economy due to the supply-demand mismatch formed during the bubble. Re-matching takes time, and no stimulus can bring a quick solution.

The main purpose of monetary policy ahead is facilitating the deleveraging process, either through negative real interest rates and-or income growth. Preventing runaway inflation expectation is a key constraint on monetary policy. One key variable to watch is the price of oil, with its major impact on inflation expectation. If oil prices take off again, the Fed could be pushed to raise interest rates sooner and higher than expected.


For Economic Stimuli, a Revolving Exit Door
Andy Xie
Caijing Magazine, 10-12 09

ACON Acquires Fairway Outdoor

ACON Investments has acquired Fairway Outdoor from Morris Communications Co., for an undisclosed amount. ACON will merge Fairway with Magic Media, an existing portfolio company that also focuses on the outdoor advertising space.


ACON Investments, LLC (ACON) announced today that it has successfully completed the acquisition of Fairway Outdoor (Fairway) from a subsidiary of Morris Communications Company, LLC (Morris). Fairway will be combined with Magic Media (Magic), ACON’s existing outdoor advertising company, to form Fairway Magic Outdoor, LLC (FMO). Terms were not disclosed.

At closing FMO is one of the largest privately owned outdoor advertising companies in the United States with over 19,500 billboard and poster displays located in 22 states. ACON will be the control shareholder in FMO, however Morris will continue to retain an important minority stake. FMO will be led by Mark Moyer, the current CEO of Fairway Outdoor, who has held this position since 2000. Mr. Moyer is also the Chairman (Ex Officio) of the Outdoor Advertising Association of America and is a Director of the Traffic Audit Bureau of America.

Commenting on the transaction, Mr. William S. Morris III, Chairman of Morris, said, “While the sale was consummated in conjunction with the financial restructuring of our newspapers, we are excited about partnering with ACON to more fully exploit the growth opportunities available in the outdoor advertising industry.”

“We believe this transaction will be a critical growth outlet for both Magic and Fairway,” said Ken Brotman, a Founding Partner of ACON. “The combined company will have the increased scale and balance sheet strength needed to prosper in the current macro-economic climate, but more importantly, it will be able to continue providing customers with a cost-effective advertising medium for them to bolster and improve their bottom line as the economy turns.”

“New advances in technology, which include digital technology and audited traffic counts, have made this an opportune time to invest in the outdoor advertising space,” said Mr. Moyer, the CEO of FMO. “Building on the success that both Fairway and Magic have achieved to date, we believe that we are well positioned to capitalize on these and other future growth opportunities.”

RBC Daniels served as an advisor to Morris. ACON funded the equity from its US middle market-focused ACON-Bastion Partners II and ACON Investment Partners investment fund vehicles.

The acquisition was completed in connection with the broader financial restructuring of the Morris Publishing Group, LLC (Morris Publishing), the newspaper publishing affiliate of Morris. On September 25, 2009, Morris Publishing announced that it had reached an agreement with certain holders of its 7% Senior Subordinated Notes due 2013 (the Existing Notes) on the terms of a restructuring of the indebtedness of Morris Publishing. In connection with the restructuring, an affiliate of ACON and affiliates of Morris Publishing have acquired a portion of the Senior Secured Loan. ACON’s portion of the Senior Secured Loan will remain senior to the Existing Notes and, upon consummation of the restructuring of the Existing Notes, Morris Publishing affiliates have agreed to cancel certain indebtedness.

ACON Investments

ACON Investments is a Washington, D.C.-based private equity investment firm that manages private equity funds and special purpose partnerships in the United States and Latin America. Founded in 1996, ACON and its principals have managed over $1.5 billion of capital. ACON pursues a theme-based investment strategy by focusing on industries and businesses at key inflection points in their development and pursues these opportunities in close partnership with established management teams. ACON has offices in Washington, Los Angeles, Houston, Madrid, Mexico City and Sao Paulo. For more information, visit

Morris Communications Company

Morris Communications Company, LLC is a privately held media company with diversified holdings that include newspaper publishing, visitor guide publishing, outdoor advertising, magazine publishing, radio broadcasting, book publishing and distribution and online services. For more information, visit the company’s restructuring website at


Mary-Laura Greely Joins McDermott Will & Emery

Mary-Laura Greely has joined McDermott Will & Emery LLP as a Boston-based partner in the firm’s corporate department. She previously was head of the private company practice at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo.


McDermott Will & Emery LLP today announced that Mary-Laura Greely has joined the Firm’s Boston office as a partner in the Corporate Department. Ms. Greely was formerly a partner and Chairman of the Private Company Practice Group at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

Ms. Greely brings to McDermott twenty years of sophisticated transactional experience advising private and public companies in the areas of mergers and acquisitions, venture capital, private equity, corporate governance and commercial lending, as well as the general representation of early-stage and privately-held companies. She will continue to focus her practice counseling clients in a wide range of industries, including manufacturing, health care, information technology, financial services and retail and consumer products.

“We are very pleased to welcome Mary-Laura to the Firm,” commented Mark Stein, head of the Firm’s Corporate Department in Boston. “Mary-Laura’s range and depth of experience, and her knowledge across so many industry sectors will further strengthen our capabilities. Her practice will contribute significantly to the resources we can provide to our clients across our global platform of offices in the U.S., Europe and Asia.”

“I am delighted to be joining McDermott. The Firm’s experience across such key practice areas as tax, labor and employment, employee benefits and intellectual property, as well as the Firm’s international platform will be enormously valuable to my clients,” added Ms. Greely. “I look forward to working with this outstanding team of lawyers and having the benefit of the stellar resources they bring to bear in advising clients on both transactional matters, as well as day-to-day operations. I am confident that McDermott’s many strengths as a full-service firm will powerfully resonate with my clients.”

Ms. Greely’s legal skills and accomplishments have been widely recognized. The recent transaction involving the sale of her client, eScription, to Nuance Communications, Inc. was selected for the Mass High Tech’s 2008 Tech Dealmaker Award by Mass High Tech, The Journal of New England Technology and The Association for Corporate Growth. Ms. Greely has been named in Lawdragon’s 2007 list of “Top 500 Leading Dealmakers in America.” Women’s Business Boston has named Ms. Greely three times to its list of “Top 10 Women Lawyers.” Ms. Greely has been a guest lecturer on various panels at Massachusetts Continuing Legal Education (MCLE) and Babson College. She has also authored a number of articles, including “Has ‘Say on Pay’ Had its Day?” and “Making the Best Deal out of an Acquisition.”

Ms. Greely received her B.A., cum laude, from Wellesley College, her M.A. from Harvard University and her J.D. from Boston University School of Law. She is a member of The American and Boston Bar Associations and The Harvard Business School Women’s Association.

McDermott Will & Emery is a leading international law firm with a diversified business practice. We represent a wide range of commercial, industrial and financial enterprises, both publicly and privately held. Our clientele include some of the world’s largest corporations, investment funds, small and medium-sized businesses, and individuals.


Recently Priced Corporate Deals

rbs    6.40   19  traded  +282        +300
ctfitz 7.875  19  455/445             +455
abibb  3.00   12  135/130             +160
4.125  15  168/163             +185
5.375  20  187/182             +210
6.375  40  183/178             +220
de     4.375  19  104/99              +110
5.375  29  110/105             +120
abx    4.95   20  160/155             +175
5.95   39  193/187             +195

Brown Brothers on Sterlng and Yen

The sterling has had a stellar week.  The pound is by far the strongest of the major currencies against both the dollar and the euro this week although it is still one of the worst performers on the quarter. Conflicting comments about quantitative easing with the most recent comments suggesting the improvement in the economy could provide a platform for taking a pause in Q/E appear to have acted as a catalyst for a large short squeeze rather than the start of a shift in trend.  (Using the IMM as a proxy for overall speculative positions, speculators held record short sterling positions in the latest reporting period and were already vulnerable to a correction.)  The comments from MPC member Fisher have led to a backing up in UK rates including a sharp sell-off in the longer dated short sterling futures.  While the yield on the Mar10 contract is flat on the week at 88 bp and the Jun10 yield is up 3 bp at 1.35, the Sept10 and Dec10 contracts have gained 7 bp and 11 bp respectively and are now yielding 1.86% and 2.36% respectively.  We continue to favor the euro against the pound and while the back up in yield is a risk, we regard this week’s pullback in the euro as an opportunity to go long the cross above the 50% retracement of the cross’s gains since Sept 11 (50% retracement comes in around 0.9070.  Similarly, the pound has traded around the 50% retracement of its fall from the Aug highs around $1.6375 with further resistance around $1.6450 (near the downtrend line drawn off the Aug 5th highs).

Like the British pound, the Japanese yen has reversed course this week. While a correction in the pound made cable one of the strongest currencies on the week, a reversal of the yen has made it one of the weakest against the dollar.  The fundamentals do favor a weaker yen.  The BoJ’s upgrade of the economy this week (the government assessment was more pessimistic) does not alter the view that BoJ rates will remain extremely accommodative for an extended period making the yen a primary funding currency.  The dollar broke above the downtrend line (around JPY89.90) drawn off the dollar’s Aug peak after establishing a base around JPY88.00 and now the 5- and 20-day moving averages have crossed to the upside.  Yen losses are likely to shake out momentum traders that took advantage of the yen’s August and September rally.  With the yen uptrend abating, momentum traders, who pay to be long yen against higher yielding currencies, are likely to trim positions triggering further yen losses.  A break above JPY91.70 opens a move to JPY92.90.

Credit Suisse on Commodities

What is gold telling us.

Garthwaite remains overweight gold and makes the argument to remain this
way. In summary his arguments are;

1.    The real Fed funds rate looks set to stay below 2%
2.    BoJ and ECB could try to cap currency strength
3.    Gold is effectively an insurance policy
4.    Central Banks under own gold
5.    The real gold price is still well below its previous highs
6.    Gold remains under owned by non central bank participants.
7.    Technical picture for gold remains supportive

Commodity Inventory; can demand save the day? a reality check

Commodities inventory is hard to quantify. There have been
worries over inventory build that could negatively affect commodity
prices if demand does not recover as expected. The bottom line is that
it is almost impossible to estimate the “actual” size of the inventory
in the system, as available data usually refers to inventory in the
hands of producers. But how much is kept in the storage facilities of
distributors and speculators is difficult to predict.

Basic materials’ demand should improve. Steel and coal are the
sectors that appear to have excess supply or inventory build and the gap
as a percentage of market demand in July-August has increased by
5-7%.However, the gap is expected to shrink in 4Q09, due to improving
demand and stable supply. Besides, it is only around 3-7% of market
demand which is not significant, in our view. For other basic materials,
such as aluminium and copper, we also expect stronger demand and
therefore a more negative gap (destocking) between demand and output.

Oil and polymers could be a concern. We expect to see demand
falling 10-13% in 4Q versus in July-August this year. Therefore, we
expect the demand/supply gap as a percentage of market demand to widen
by 9-15% which could cap product prices.

Trichet steps up the US$ rhetoric

In likely the most pointed, direct message given to the US government in a while on the direction of the US$, ECB Pres Trichet said yesterday, “It is extremely important that the US authorities, including the Treasury, the Secretary of the Treasury and the chairman of the Fed would pursue policies that take into account the fact that a strong dollar is in the interest of the US.” He’s basically telling us that the burden of having the reserve currency of the whole wide world deserves better behavior and we better start acting more responsibly as the policies currently pursued that is resulting in the “excess volatility” of the US$ “is an enemy from the standpoint of the stability and prosperity of the global economy.” My updated earnings scorecard has 86% of companies beating EPS estimates with only 57% exceeding revenue forecasts. IP, consumer confidence and TIC data are all out today.