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Thursday, 18 July 2013
Is Elon Musk getting Hyperloopy?
Investors can't seem to get enough of Elon Musk, but the Tesla CEO's announcement failed to generate much excitement on Monday.
Will publish Hyperloop alpha design by Aug 12. Critical feedback for improvements would be much appreciated.—
Elon Musk (@elonmusk) July 15, 2013
Musk has been talking about the hyperloop, an idea for a rapid transportation system, for about a year now, but details have thus far been limited. At the recent D11 conference in May, he said that it would be three or four times faster than a bullet train, would never crash, and is immune to weather.
While a design could reveal a lot more about Musk's idea, the announcement didn't seem to capture the attention of investors. Shares of Tesla (TSLA) opened at a all-time high but quickly fell into the red. That's fairly rare for Tesla's stock, which has nearly quadrupled in value just this year.
Related: Tesla joins the Nasdaq-100
Traders on Stocktwits, where Tesla is a fan favorite, were particularly critical.
jrgallaghr
$TSLA Musk sounds a little ummmmm koo koo
traderjflaw
$TSLA MUSK "projecting" into the future is based on his hopes and dreams...without the credits...his company has 0 profits.
To be fair, the 10-year old Tesla did report its first ever quarterly profit in May, and blew past analyst expectations. But analysts aren't expecting another quarter in the black. Tesla is on tap to report results next week and is forecast to deliver an 82% drop in earnings per share for the second quarter.
Some traders suggested that investors may be taking a step back before next week's earnings news, given that Tesla has been on such a solid streak.
SR5Group
$TSLA probably trends lower all week ahead of the E/R. People takings some profits after a parabolic run Bearish
CDA
A 10% correction would be healthy. Timing is bit odd considering listing status. Earnings next week will quickly bring a rally. $TSLA
But others don't think Tesla needs any kind of break. Citing the recent rise in gas prices, they think electric cars are looking even more attractive.
thescientist
The longer oil is over $100 you can expect $TSLA sales to go up. Bullish
Arbitrage_Drama
$TSLA Is any even watching Gas prices spike again? Just add another 1000 units for every dollar crude spikes... and oil is just at $105.
Despite protests, you still can't sue your broker
Brokerage customers must resolve most disputes through mandatory nonjudicial arbitration.
In April, state securities regulators and members of Congress urged the SEC to end Wall Street's practice of forcing customers to resolve disputes through nonjudicial binding arbitration rather than by a lawsuit.
Riling them up was a ruling in March to let Charles Schwab extend the longtime ban on individual court actions to also forbid customers from joining class-action suits.
Critics say Schwab's move, likely to become industry practice if it stands, would unfairly shield brokerages from paying damages if they were liable for small-scale losses among a large number of customers.
Related: Sallie Krawcheck on trusting Wall Street again
While some SEC members are sympathetic, commissioner Elisse Walter said in May they won't address the issue this year, Reuters reports. In any case, protect yourself by saving records and documenting conversations with your broker, says Los Angeles securities lawyer Ryan Bakhtiari.
Verify all fees, and vet your broker carefully using brokercheck.finra.org. 
First Published: July 12, 2013: 5:59 PM ET
Capital market climate change
By Ben Horowitz
"Hope that you feel this
Feel this way forever
You can plan a pretty picnic
But you can't predict the weather."
--Outkast, Ms. Jackson
FORTUNE -- If you run a startup and are currently raising money, you probably planned for a somewhat different fundraising environment than the one you find yourself in today. You probably thought that valuations would be roughly the same as they were the last time you raised money. But they most certainly are not. Perhaps you are caught in the "Series A crunch" or perhaps you are a consumer company and expected that you would be valued on users rather than revenue like the last time. Or maybe you are a lucky enterprise company and are pleasantly surprised -- this time.
How could this be? What about the efficient market hypothesis? Aren't markets rational? Won't we just return to the "normal" environment that we experienced before? To find out, let's look at the Price/Earnings (P/E) ratio of all S&P 500 IT companies at various points over the past 18 years. If markets behave rationally, one might expect the ratio of price to earnings to be reasonably stable over the period. One would be wrong:
3/31/1995: 21.0
3/29/1996: 22.3
3/31/1997: 23.3
3/31/1998: 30.8
3/31/1999: 49.7
3/31/2000: 73.4
3/30/2001: 26.3
3/29/2002: 82.5
3/31/2003: 44.6
3/31/2004: 31.6
3/31/2005: 22.8
3/31/2006: 22.8
3/30/2007: 22.6
3/31/2008: 19.1
3/31/2009: 14.5
3/31/2010: 18.8
3/31/2011: 15.4
3/30/2012: 15.5
So, the average company on the S&P 500 IT index with $10 million in annual earnings would be worth $210 million in March of 1995, $820 million in March of 2002, $310 million in March of 2004, and $155 million in March of last year. And those are big companies with real earnings, so you can imagine how a private company's valuation might fluctuate.
If you have no imagination, consider my experience. In June of 2000, I raised money at an $820 million post-money valuation. By the end of the year and despite more than doubling bookings, I could not raise money at any price in the private markets and was forced to take the company public at a $560 million post-money valuation. Things change because markets are not logical; markets are emotional.
Now that we've established that climate change is real, what should you do if the current environment is much worse than you expected?
In some sense, you are like the captain of the Titanic. Had he not had the experience of being a ship captain for 25 years and never hit an iceberg, he would have seen the iceberg. Had you not had the experience of raising your last round so easily, you might have seen this round coming. But now is not the time to worry about that. Now is the time to make sure that your lifeboats are in order.
Before we begin doing that, let's understand the depth of the problem. First, if you did not understand how radically the fundraising environment might change, then there is no chance that your employees would have understood it. In fact, if you are like most companies, your managers probably implied to your employees that your stock price would only rise as long as you were private. They might have said something ridiculous like: "Based on the current price of the preferred stock, your offer is already worth $5 million." As if the price could never go down. As if the common stock were actually the same as preferred stock. Silly them. As a result, if you raise money at a lower price, your people will likely not only freak out, but possibly believe they were lied to. Note that they may very well have been lied to. As Scooby Doo once said, "Ruh roh."
Now about those lifeboats.
If you are burning cash and running out of money, you are going to have to swallow your pride, face reality and raise money even if it hurts. Hoping that the fundraising climate will change before you die is a bad strategy because a dwindling cash balance will make it even more difficult to raise money than it already is, so even in a steady climate, your prospects will dim. You need to figure out how to stop the bleeding, as it is too late to prevent it from starting. Eating shit is horrible, but is far better than suicide.
When you go to fundraise, you will need to consider the possibility of a valuation lower than the valuation of your last round (i.e., the dreaded down round). Down rounds are bad and hit founders disproportionately hard, but they are not as bad as bankruptcy. Smart investors will want the founders and employees to be properly motivated post-financing, so there may be a way to a reasonable outcome for both you and your people. Make sure that you figure out what kind of deal is better than bankruptcy, and be sure to communicate to both your existing and potential new investors what you think makes sense. In this situation, it's better to start low and get one bidder that may lead to many and the market-clearing price than have no bidders and the dream of a high price.
Once you begin your process, keep in mind that you are looking for a market of one. You don't need every investor to believe that you can succeed. You only need one. If 20 investors tell you "no," that does not mean that there is no market for your deal. You just need one to say yes, and she will erase all 20 no's.
After, God willing, you successfully raise your round and it's a down round or a disappointing round, you will need to explain things to your company. The best thing to do is to tell the truth. Yes, we did a down round. Yes, that kind of sucks. But no, it's not the end of the world. We can probably re-price your options. If we took too much dilution, we will work with our new investor to make sure that every employee is still highly financially motivated. We are the same company that we were yesterday, and if you believed in that company, then you should believe in this one.
If your managers intentionally or accidentally lied, then you will need to address that too. Find out what happened, and deal with the damage as best as you can. Do not ignore these things or stick your head in the sand, as you cannot afford to lose any more trust than you have already lost.
If you by some miracle make it through this process, then the most important thing to learn from your experience is this: The only surefire antidote to capital market climate change is positive cash flow. If you generate cash, investors mean nothing. If you do not, then your success will depend upon the kindness of strangers.
Ben Horowitz is co-founder and partner of Andreessen Horowitz. He was co-founder and CEO of Opsware (formerly Loudcloud), which was acquired by HP, and ran several product divisions at Netscape. He serves on the board of companies such as Capriza, Foursquare, Jawbone, Lytro, Magnet, NationBuilder, Okta, Rap Genius, SnapLogic, and Tidemark. Follow him on his blog and on Twitter @bhorowitz.
Higher interest rates: A bitter pill for banks
By Cyrus Sanati
FORTUNE -- Higher interest rates may not translate into fatter profits for the big banks -- at least not just yet.
Banks have been bemoaning the low interest rate environment for years as it has translated into scant profits from lending and writing mortgages. But with the Federal Reserve signaling that it might finally be ready to hike rates, there is concern that the banks may be in for a rude awakening.
That's because the prolonged low interest rate environment seems to have made the public extremely sensitive to rate hikes. If this sensitivity continues, it could translate into a steep drop in overall loan demand, which, in turn, would wipe out any incremental gain the banks earn from fatter spreads -- possibly, even more. The only way to assuage the public's concern in a rising rate environment is to convince them that the economy is booming -- which seems like a tall order.
Reading over one of the big banks' quarterly earnings reports can be mind-numbingly painful. That's because the banks have over the years become complicated labyrinths of disparate business activities -- ranging from broker dealing to mortgage lending. But new rules are set to come into force that will eventually bar depository banks from engaging in activities that stray from what is essentially the "traditional" bank model, which is to simply make loans and take deposits. Lending hasn't been the biggest moneymaker for the big banks in decades. Indeed, banks branched out to find ways to boost profits for that reason. It worked well, until it didn't -- i.e. the financial crisis.
MORE: Green Mountain looks beyond coffee
But if the government wants the banks to return to the traditional deposit-and-lend model, they sure haven't made it look enticing. That's because the Federal Reserve, through a series of convoluted actions, has managed to keep core interest rates super-low for a long time in a bid to stimulate the economy. As a result, the banks' net interest income -- which is the difference, or spread, between what a bank earns on making loans and what it pays depositors -- collapsed, making it hard for banks to make money the traditional way.
By the first quarter of this year, things had gone from bad to worse for the banks on this issue. The net interest margin, which is net interest income as a percentage of a bank's total risk-weighted assets, at the large depository banks (Citibank (C), Bank of America (BAC), JPMorgan (JPM), and Wells Fargo (WFC)) fell, somewhat significantly, compared to where they were in fiscal 2012, according to analysis by SNL Financial.
By lowering rates, the Fed hoped that loan demand would grow and that the banks would lend more as a result. But the risks associated with lending to borrowers with less-than-stellar credit seemed too much for the banks to deal with. After all, this is how they got in trouble in the first place. The government thought they were countering that risk by forcing the banks to hold more capital on their books. But in doing so, the banks had less money to lend out.
In May, the banks got their wish -- the Fed indicated that it would allow rates to float up by the end of the year. Share prices of the big depository banks took off like a rocket in anticipation that the higher rates would lead to an increase in profit.
But bank share prices weren't the only things that jumped up on the Fed news; so did yields on 10-year Treasury bonds: from 2.19%, before the Fed announcement, to 2.57% as of July 11. This has pushed mortgage rates up from a near-historic low of around 3.35% at the beginning of May to around 4.45% at the end of June. At the same time, commercial loan rates also jumped on average for nearly all borrowers.
The bump in mortgage rates and commercial loan rates means that the banks will probably see a bump in profit as their net interest margins expand. But the flip side is that they could also see a decrease in loan demand. Whether they make or lose any money is based on which comes out ahead.
Now, rates are still so low that one would think that loan demand wouldn't taper off too much. But that assumes two key things: 1) that people think that the economy will grow over the medium- to long-term and 2) that the housing market is booming. If the economy is growing, people will want to invest more and so they will be willing to pay the higher interest to borrow from banks. At the same time, if the housing market is booming then people will be more apt to pay higher interest rates to snag that dream house.
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But things don't look so good for the banks, at least at this point. It turns out that 80% of the banks' mortgage lending activity last year focused on people refinancing their existing mortgages as opposed to creating new mortgage loans. Refinancings obviously don't do well in a rising rate environment, so some decrease in refi activity was expected. In the last two months, mortgage applications have collapsed 43.5%, according to Contingent Macro Advisors, far worse than anybody had anticipated. That is more than the 32% increase in average mortgage rates during the same time period. Refis now make up 67% of mortgage applications, still the anchor in the market despite the sharp increase in rates.
People aren't going to buy a house unless they feel as if the asset price is sound, and it's possible that people still think that housing prices remain inflated. The government hoped historically low interest rates would cause people to jump back in the market, and it did to a certain degree. But now that rates are on the rise, we are seeing a huge pushback from buyers -- at a time when house buying should be at its peak for the year, just before school begins at the end of summer.
If the banks want to make up for the decrease in interest rates, they need to lower their credit standards to attract the people who would have never qualified at sub 4% interest rates. It is unclear if they are willing to do that. But if they don't, they might come to regret ever pushing the government to raise rates.
China says GlaxoSmithKline ran huge bribery web
Chinese police have detailed allegations of bribery by GlaxoSmithKline, saying the pharma group used a network of more than 700 firms to transfer funds.
The Xinhua news agency, citing Chinese police, said four senior Chinese executives working for the U.K. pharmaceuticals group had been detained and would be charged once preliminary investigations are complete.
Since 2007, GlaxoSmithKline (GLAXF)used the network to channel hundreds of millions of dollars to government officials, medical associations, hospitals and doctors with the aim of raising drug sales and prices, media reported.
The state news agency said the transfers totaled nearly $5 billion while other media said the figure was a tenth of that.
GlaxoSmithKline declined to comment on the number of employees held by Chinese police but said it was deeply concerned by the "shameful" allegations. It is reviewing its ties with all third-party agencies and will cooperate with the investigation.
"We have put an immediate stop on the use of travel agencies that have been identified so far in this investigation and we are conducting a thorough review of all historic transactions related to travel agency use," a spokesperson said.
China's Ministry of Public Security first accused GlaxoSmithKline last week of orchestrating a campaign of bribery and corruption in some of the country's biggest cities.
International companies operating in China often have a valuable edge over local competitors in terms of public trust, but a recent spate of allegations relating to price-fixing, quality control and consumer rights has forced some of them to defend their reputations.
Related story: Rolls-Royce in China corruption probe
Aircraft engine maker Rolls-Royce (RYCEF) said late last year it may face prosecution in the U.K. over allegations of corruption in China and elsewhere.
China claims that wrongdoing by GlaxoSmithKline executives included the falsification of tax forms in order to facilitate the payment of bribes. In addition, executives are also suspected of taking bribes and kickbacks from business partners. The security ministry said last week that the suspects had admitted to the crimes.
The GlaxoSmithKline spokesperson said the company's head of China -- Mark Reilly -- remained in his post, but declined comment on his whereabouts. Some reports say he left China last week and has not returned.
Corruption is thought to be endemic in wide swaths of Chinese industry and is perceived by many as a cost of doing business in the country.
The ruling Communist Party is sensitive to allegations of bribery after several high-profile members were caught in scandals in recent years. Former President Hu Jintao warned that failure to tackle corruption could be fatal for China.
It's not yet clear whether the GlaxoSmithKline allegations are tied to a probe of price setting practices at 60 pharmaceutical companies announced last month by authorities.
The National Development and Reform Commission is investigating 33 drug companies over pricing and a further 27 over input costs. GlaxoSmithKline is among the companies targeted, along with Astellas (ALPMF) and Sandoz.
Drugmakers are under pressure to reduce costs in China as the country's population grows older, a trend that is straining the country's medical system and care facilities.
Goldman Sachs profits double
Goldman CEO Lloyd BlankfeinFORTUNE -- Goldman Sachs's profits in the second quarter more than doubled from a year earlier to $1.9 billion, propelled by a surge in stock and bond offerings. Trading revenues were up as well from a year ago, but down from the first quarter, perhaps showing how the recent rise in interest rates prompted clients to retreat.
"Client risk appetite definitely fluctuated during the quarter," Goldman's CFO Harvey Schwartz told analysts and investors on a conference call about the bank's earnings. "Our clients are assessing whether improvements in the U.S. economy will offset the slowdown elsewhere."
Goldman itself appeared to be able to capitalize on the improving U.S. economy and the rising stock market. Fees from stock market underwriting and trading rose 55% and 25% from the same period a year ago. Bond market underwriting fees were also up 40%. And Goldman's own equity investments, some of which are in private companies, generated an additional $500 million in gains in the quarter.
MORE: Interest rates 101: Why the party on Wall Street is over
In all, Goldman's earnings translated to $3.70 per share. That was far better than the $2.82 analysts had expected the firm to earn. Revenue was up 30% from a year ago to $8.6 billion. And the big bottom-line jump happened even though Goldman (GS) appears to have decided to up the pay of its already richly rewarded employees. So far this year, Goldman has booked a compensation expense, which includes benefits and salaries as well as yet-to-actually-be-paid-out bonuses, of over $8 billion to pay 31,700 employees, equal to $252,366 each. That's up from $226,006 in the first half of last year.
But Goldman's bottom line also showed how volatile the business of Wall Street remains nearly five years after the financial crisis, and almost three years after Congress passed landmark financial reform that was supposed to limit the risks that the largest U.S. banks could take. Despite being up from a year ago, nearly all of Goldman's businesses were down from the first three months of the year, when the company earned $4.29 a share.
That volatility, and the fear that rising interest rates will continue to temper investor activity and hamper deals, appeared to spook investors. Goldman's shares, which had been up nearly 30% this year, closed down $2.76 to $160.24, following the firm's morning earnings announcement.
MORE: Goldman Sachs: IPOs and M&A activity should increase
What's more, a good portion of Goldman's profits continue to come from the unit that invests the firm's own money. Goldman says much of this so-called proprietary trading will still be allowed after the Volcker rule, which is supposed to limit risky trading at the big banks, and other Dodd-Frank reforms are fully implemented. But how much the final rules will curtail these profits is still in question. It also adds, as you would expect and regulators worry, to Goldman's profit swings.
Revenue from prop trading fell by nearly a third in the second quarter from the first three months of the year to $1.4 billion. But that was up 590% from the $200 million Goldman made from the same business the second three months of 2012.
At the same time, Goldman's second-quarter earnings also showed how the firm is trying to remake itself into more of a traditional bank. Goldman generated $658 million from lending and debt market transactions. That was nearly triple the $222 million the firm made in the same area a year ago. Goldman, however, declined to detail how much of those revenues were from collecting interest payments, and how much was from bond trading.
Indeed, Goldman's tight-lipped culture came out in a conference call with investors following the earnings release, creating some contentious moments.
MORE: Goldman stays mum on risk weighted assets
A number of analysts asked Goldman's CFO Schwartz about a recently proposed regulation that would require the nation's largest banks to have available enough capital to cover at least a 5% drop in the bank's overall assets. Banks with a large amount of deposits might have to hold capital equal to 6% of their assets. JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC) have all given rough estimates about what their so-called leverage ratio would be. Some have estimated that Goldman would have to raise as much as $5 billion in order to meet the proposed capital rule.
Schwartz, though, declined to put a number on Goldman's leverage ratio, only saying he was "comfortable" with what it is.
Credit Agricole analyst Mike Mayo, one of a number of analysts to bring up the new regulation, said, "Comfortable appears to be the word of the day. But what you are saying is trust us we'll be there, and not disclosing a number that all of your peers have done. On a disclosure basis, you are behind your peers. Can you give us a number that you are above or below?"
"You are looking for shades of grey on comfortable," Schwartz replied. "I would say pretty comfortable. I'm not trying to be flippant with you."
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