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Sept. 21, 2011, 12:01 a.m. EDT

Grantham: ‘No market for young men’

Market veteran blasts income inequality, buys blue-chip stocks

By Jonathan Burton, MarketWatch
SAN FRANCISCO (MarketWatch) — Hey, Young Turks on trading desks, up-and-coming money managers and Wall Street stock jockeys: You want the truth about the global markets today?
Listen to Jeremy Grantham, chairman of Boston-based investment manager GMO LLC: You can’t handle the truth.
“This is no market for young men,” Grantham said. “At least us old men remember what a real bear market is like, and the young men haven’t got a clue.”
Women, too, for that matter. And at 72, after 40-plus years in the investment business, Grantham can make this claim unchallenged, but his point is more about the lessons of experience than the limitations of age, and an investor’s ability to build on the former and overcome the latter.
With Greece on the verge of default, and economic growth in even the healthiest developed markets stuck in slow gear, Grantham reserves his harshest words for the leaders of central banks, big money-center banks and governments. The fittest global companies, meanwhile, are getting his firm’s client’s money.
Policymakers and politicians have acted like “children at play,” Grantham has said. As he sees it, they’ve created a tower of debt and an illusion of wealth, and have not been held responsible for their frivolous actions.
“No one has been prepared to make tough decisions,” Grantham said in a recent telephone interview. “Where have the Europeans been for 10 years? None of these things came out of the woodwork two weeks ago. No one attempted to blow the whistle and make tough decisions in a timely fashion.”

Targeting income inequality

“Kicking the can” on deficits and spending delays the reckoning, but only makes it more painful when it comes. Had “grown-ups” been supervising the financial system, the problem might not have gotten out of hand, Grantham noted.
To put the debt crisis in perspective, Grantham suggested imagining multiple stacks of building blocks, “fairly precarious and fairly tall,” each set uncomfortably close to the other. If one falls, it could either take down several others or fall neatly between them. The trouble, Grantham said, is that there’s really no way to know.
Financial markets nowadays are faced with this hit-or-miss scenario, and buyers don’t like the odds. Said Grantham: “We have these basically distinct problems joined only by a general fragility of the financial system. So you can’t know for sure that if China stumbled it wouldn’t set off something else, or if the U.S. goes into a double-dip [recession], it won’t set off a European bank failure.”
Especially worrisome to Grantham is the gulf between wage earners in the U.S. The top 10% of U.S. workers currently receive about half of the nation’s total income, with half of that going to the top 1%. The last time this country saw a wage gap so extreme was just before the 1929 stock-market crash and the Great Depression. By comparison, in the late 1970s the top 1% garnered about 9% of all earnings.
“You can’t run the economy on BMWs alone,” Grantham said. “If the average person is in a pickle, how do you have a healthy economy?”
For starters, he said, you tax the richest more than they’re paying now. Said Grantham: “We have actually made the tax structure friendlier to the top 10%.”
Grantham contends that income inequality at these levels takes a real toll on ordinary workers and society as a whole. To bridge this gap and give average workers a bigger slice of the pie, Grantham advocates investing in education, training, and to “change the tax structure to make it equitable.”

Value stocks, rich market

Grantham also doesn’t approve of Federal Reserve Chairman Ben Bernanke taking steps that he said essentially have put savers in a box. Keeping interest rates low, and stating that rates will remain in the cellar for at least a couple of years, forces people to take more risk with their money if they want yield and capital appreciation.
“You’re transferring money away from retirees” who must either delve into stocks, gold or some other higher-stakes investment, or languish in savings accounts and low-yielding bonds, Grantham said. “They could use that money. They would spend every penny.”
Instead, Grantham said the Fed’s policy puts money “in the hands of people who aren’t spending it — people who only buy BMWs and don’t support Wal-Mart.” This creates a vicious cycle in which, Grantham said, individual savers are penalized and restrain spending, while the beneficiaries are “bankers and corporations that can build factories all over the place — except they won’t because consumption is too weak.”
Accordingly, Grantham sees this path coming to no good end over the short-term. He said he expects another leg down for the U.S. stock market, one where shares could stay low-priced for years while U.S. economic growth plods along at maybe 2% annually instead of the relatively more robust historical average of around 3.4%.
But Grantham is an investor, not a politician, so his job is to hunt down opportunities in bull or bear markets. Nowadays, he’s finding more stocks that fit GMO’s strict value-investing discipline.
“If we adjust earnings to normal and apply an average P/E, you can finally build a decent portfolio today of global equities at a respectable long-term return,” he said.
The potential for gains is “modestly higher” outside of the U.S., he added, other than “high-quality blue-chips.” Mostly, he said he prefers discounted plays that are surfacing in Europe and emerging markets.
“In stocks you will eventually do OK at these prices,” Grantham said.
“The real danger is one or two of these building blocks falling over,” Grantham said. “You can buy a whole portfolio of slightly cheap global stocks, and the risk you take is that you get sandbagged by some of these major problems.”
Indeed, Grantham said that since there’s a “decent chance” of stocks becoming even cheaper, GMO is positioned slightly below normal in equities “because the risk profile of the world is way over normal.”
At the same time, he’s not jumping on the long-term-bond bandwagon. “One day we will have more inflation and our bonds will bleed like a pig,” Grantham said. “The only reason for buying long bonds is short-term or as a desperate haven for terrorized investors. But the potential to make longer-term real money is naught.”
Grantham runs a personal, non-profit foundation dedicated to the protection of the environment. For the foundation he has invested heavily in agriculture, commodities and natural resources. Timber is a favorite, as are fertilizer companies. He’s not a big fan of gold. “I own some myself as a pure speculation,” Grantham said — “just enough to mute the irritation of watching gold [prices] rise.”
For others, Grantham advised taking a page from GMO and buying shares in companies with strong finances and which produce goods that people need, as opposed to luxury items. Look for dividend-paying opportunities in emerging markets especially. “I would own emerging and EAFE (the MSCI Europe, Australasia, and Far East Index), including Japan,” Grantham said.
“In the end everything comes down to value, and they have suffered a lot more recently,” he said of non-U.S. markets. “Yes, it can get whacked in the next 18 months if the wheels come off, and the possibilities are likely, but if you hang in anyway you’ll make a respectable return.”
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Grantham: ‘No market for young men’ – Jonathan Burton’s Life Savings – MarketWatch

Humala Victory Won’t Derail Colombia-Peru Exchanges Merger, Echeverry Says – Bloomberg

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HTC, founded only in 1997 and for the first 11 years of its existence was a little-known contract manufacturer for other brands, was valued at $33.8bn after the close of trading in Asia on Thursday,
HTC’s market value is also bigger company than either Sony or LG Electronics, according to Thomson Reuters data, but it remains smaller than Apple or Samsung Electronics, although unlike those two companies, the smartphone is the Taiwanese company’s sole business.
HTC shares are now a third higher than they were at the start of the year, while Nokia’s shares have fallen by a fifth over the same period

HTC overtakes Nokia in market value / Telecoms – By Robin Kwong in Taipei
Published: April 7 2011 12:54 | Last updated: April 7 2011 12:54

Taiwan’s HTC has overtaken Nokia to become the third most valuable maker of mobile phones, highlighting the speed with which touchscreen-based smartphones have become a mass-market product in Europe and the US.
The growth of HTC, which was valued at $33.8bn after the close of trading in Asia on Thursday, also highlights the slide in value of Nokia which has failed to innovate in the new smartphone market.
The problems facing the Finnish mobile phone maker, which had a market capitalisation of $33.4bn based on Wednesday’s closing prices, were highlighted by Moody’s on Thursday.
The credit agency downgraded Nokia’s debt rating from A2 to A3, citing the company’s weakened market position and uncertainty over its transition to Microsoft’s Windows Phone software.
HTC’s market value is also bigger company than either Sony or LG Electronics, according to Thomson Reuters data, but it remains smaller than Apple or Samsung Electronics, although unlike those two companies, the smartphone is the Taiwanese company’s sole business.
HTC shares are now a third higher than they were at the start of the year, while Nokia’s shares have fallen by a fifth over the same period.
Nokia remains the world’s biggest producer of mobile devices by volume, with a 28.9 per cent global market share at the end of last year, according to Gartner.
But Nokia has fallen behind rivals in the smartphone market where Apple’s iPhone and Android-based phonemakers such as HTC have taken market share.
Nokia’s failure to compete culminated in a high-profile management reshuffle last year, with Steven Elop becoming the first non-Finnish chief executive of the company in its 145-year history.
Mr Elop, who joined Nokia from Microsoft, likened the company’s predicament to a man on a “burning platform” as he outlined a plan to transform the company and make it more competitive.
The American is now seeking to reinvent Nokia as a provider of premium smartphones based on Microsoft’s Windows Mobile platform.
HTC’s rapid rise reflects the speed with which touchscreen-based smartphones have become a mass-market product in Europe and the US.
Its sales last year was T$278.8bn ($9.6bn) and it shipped 24.7m units last year, according to Gartner, compared with 46.6m units of iPhones shipped last year.
While growth is expected to slow this year compared with 2010, the global smartphone market is still expected to grow by 50 per cent, according to IDC.
Unlike HTC, which was positioned from the start to take advantage of this trend, many other mobile phonemakers were caught off-guard by this rapid change.
HTC was founded only in 1997 and for the first 11 years of its existence was a little-known contract manufacturer for other brands. But since it made the world’s first Android-based phone for T-Mobile in 2008, the company has proved quick to adapt to the market’s changes.
HTC took advantage of the 18-month period in which it was the sole producer of Android-based phones to grow quickly in size. C.K. Cheng, analyst at CLSA, the equity brokerage, says that HTC’s scale means that “in times of tightness in the supply chain, such as now after the Japan earthquake, all the suppliers are going to ensure that Apple and HTC get their orders filled first rather than Motorola or Sony Ericsson”.
The rally in HTC’s shares also reflects the fact that it has been quick to fill the nascent market for phones running on much faster, fourth-generation networks. In the US, HTC’s Evo Shift, for Sprint’s network, and its Thunderbolt, for Verizon, are the only two 4G smartphones available on the market, although competing devices will soon be launched.
“Even if it is just a one or two-month lead, it is still a significant advantage,” Mr Cheng said.
However, some analysts, such as Morgan Stanley’s Jasmine Lu, worry that HTC will face increasing headwinds as competitors catch up, and may see its profit margins fall if low or mid-ranged smartphone models grow in popularity at the expense of premium models.

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Vivendi to Buy Vodafone SFR Stake for $11.3 Billion

Vivendi, the French media conglomerate, announced on Sunday
that it had taken full control of SFR, a large cellphone
service provider, buying Vodafone’s 44 percent stake in
the company for $11.3 billion in cash.

The deal gives Vivendi full control of one of its biggest
business units, a longtime goal for the company. SFR is one
of the biggest cellphone carriers in France. It earned
nearly 4 billion euros in profit last year and had about 20
million mobile service customers as of Sept. 1.



LinkedIn’s IPO to test appetite for Facebook

LinkedIn CEO Jeff Weiner talks during an interview during the Reuters Technology Summit in San Francisco, California May 17, 2010. REUTERS/Robert Galbraith

NEW YORK/SAN FRANCISCO | Thu Jan 27, 2011 10:21pm EST 

NEW YORK/SAN FRANCISCO (Reuters) – LinkedIn Corp announced plans to go public this year in what could be a test of investor appetite for social networking websites ahead of a highly anticipated Facebook offering.
LinkedIn announced its intention to go public on Thursday, setting the stage for the company co-founded in 2002 by ex-PayPal executive Reid Hoffman to become the first social network to plant a flag on Wall Street.

But many investors will be watching LinkedIn’s IPO to gauge the appetite for Facebook, now valued at $50 billion as the world’s most dominant social network, and other Internet IPOs.
“Facebook has definitely escalated people’s interest in the sector and I think there’s a lot of demand (for more Internet IPOs),” said Rory Maher, an analyst with Hudson Square Research.

The number of shares to be offered and the price range have not yet been determined, according to the form S-1 registration statement that LinkedIn filed with the Securities and Exchange Commission.

Investor interest and valuations are surging for privately held Web companies like Facebook, Zynga and Groupon. LinkedIn revealed its plans a day after newly public Internet company Demand Media Inc saw its shares jump roughly 33 percent in their first day of trading.
Just this week, Groupon Chief Executive Andrew Mason said the company was considering an IPO and was in talks with bankers.

Facebook, the world’s No. 1 Internet social network, recently raised $1.5 billion in funding in a deal that valued the company at $50 billion.

Facebook said recently it planned to publicly disclose its financial results by April 2012, a regulatory requirement triggered by the company’s number of shareholders and a move that some believe could lead to a public offering.

LinkedIn’s net revenue nearly doubled to $161.4 million in the first nine months of 2010, with $1.85 million in profit, according to the filing.

In contrast, Facebook, which has far more users worldwide, had $1.2 billion in revenue in the first nine months of 2010 and $355 million in profit, according to a Goldman Sachs prospectus pitching the company earlier this month to investors.

LinkedIn, which caters to professionals, has 90 million users, compared with the more than 500 million users of Facebook’s mainstream social networking service.

Morgan Stanley, Bank of America and JPMorgan are among the book runners for the LinkedIn offering.

A portion of the shares will be issued and sold by the company, while a separate portion will be sold by certain stockholders of LinkedIn, the filing said. No specific details were disclosed.
LinkedIn’s investors include Greylock Partners, Bessemer Venture Partners, Goldman Sachs and Sequoia Capital, a venture capital firm that has backed Yahoo, Google, Apple Cisco Systems and Oracle.

(Reporting by Nadia Damouni in New York and Alexei Oreskovic in San Francisco; Editing by Bernard Orr, Gary Hill)

LinkedIn’s IPO to test appetite for Facebook | Reuters

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The Value of a Piece of Facebook

September 28, 2010, 3:00 am

Mark Zuckerberg’s donation of $100 million to the troubled schools of Newark made waves last week, but now it’s time to look a gift horse in the mouth, The New York Times’s Andrew Ross Sorkin writes in his latest DealBook column.
The $100 million is coming as shares in Facebook, a company that has yet to go public, whose books aren’t open for the world to see, and whose stock can only be traded on the obscure secondary market. So Mr. Zuckerberg’s noble act has prompted another round of that cherished parlor game of the tech world: How much is Facebook worth? And how many shares will it take to make $100 million?
While recent transactions in Facebook shares suggest a market value of $33 billion, judging by minority stakes can skew estimates of a company’s total worth, Mr. Sorkin writes.
Read the column here, or after the jump.
The Value of a Piece of Facebook
Yep, it was another deal hatched in Sun Valley.
During Allen & Company’s annual mogul-fest in the Idaho mountains in July, Mark Zuckerberg, the founder of Facebook, devised a plan with Mayor Cory A. Booker of Newark to donate a $100 million challenge grant for the city’s troubled schools.
The gift, announced with much fanfare Friday on “The Oprah Winfrey Show” (with all the requisite swooning over the 26-year-old Mr. Zuckerberg’s desire to give anonymously), attracted $40 million in matching gifts so far by Monday from the likes of William A. Ackman, the hedge fund manager, and John Doerr, the venture capitalist.
But Mr. Zuckerberg’s donation has some scratching their heads.
How is he going to pay for it? After all, Facebook has yet to go public. In Silicon Valley’s parlance, Mr. Zuckerberg is “paper-rich, cash-poor.”
While Mr. Ackman and Mr. Doerr are probably making their charitable gifts in cold hard cash, Mr. Zuckerberg is doing something different. He’s giving away $100 million worth of Facebook shares to Startup: Education, a new foundation he has started and on whose board he will sit. The foundation, in turn, will sell the shares for cash in what’s known as the “secondary market,” a nebulous world where big-time investors buy into companies before they go public — through the back door.
It turns out that there is a robust market for Facebook shares, even though most people can’t buy them. The going price has been about $76 a share, The Financial Times reported last month, implying a market value of $33 billion. Dozens of employees have sold their shares in the secondary market.
Elevation Partners, the buyout firm that counts Bono of U2 as a partner, paid $120 million for Facebook shares in June at an implied valuation of $23 billion. If the secondary market is accurate, Elevation has already made a pretty penny.
And Yuri Milner, a Russian entrepreneur, has managed to amass a 10 percent stake in Facebook largely through the secondary market. His Digital Sky Technologies paid $200 million for a 2 percent stake, then raised that amount by buying up shares from employees.
The party may soon be ending. Once more than 500 individuals or institutions own shares in Facebook, securities laws mandate that the company go public. Google staged an I.P.O. in part because it hit that same threshold.
But all this share counting raises a new question: Is Mr. Zuckerberg’s $100 million donation really worth just that?
Facebook isn’t saying how Mr. Zuckerberg, or the New Jersey school system, plan to value his shares. (Cynics have suggested that the donation is a publicity stunt to polish Mr. Zuckerberg’s image ahead of Friday when “The Social Network,” a fictionalized story of Facebook’s founding, opens in theaters. Give the guy some credit, he just gave $100 million to a needy school system.)
People involved in the donation process say that the Facebook shares pledged will be worth $100 million based on the company’s own internal valuation, not the value assigned by the secondary market.
It’s probable that Mr. Zuckerberg’s valuation of the shares will be much lower than that of the secondary market. As a result, the donation might ultimately be worth even more than his initial pledge once the foundation seeks to sell those shares, possibly over a period as long as five years.
And indeed, a look at the secondary market suggests that shares frequently trade at a premium to their real value — because there are so few of them.
The topic has ignited quite a bit of debate on the Internet, including on sites like GigaOm.
“Minority investment evaluations aren’t real,” David Heinemeier Hansson, a partner in the software developer 37Signals, contended on his blog, adding that Facebook’s secondary market valuation was “entirely based on what starstruck minority investors have paid for a tiny slice of the company.”
That prompted Joel Spolsky, another software developer, to reply that Mr. Hansson’s post was “so economically bizarre and incorrect that I don’t even know where to start. It’s like you wrote a blog post arguing that it is incorrect to refer to a five-foot-tall boy as five feet tall because he’s often sitting down. Every single day every single public company in the world is valued by the last share traded, usually for a tiny fraction of the company.”
In truth, Mr. Hansson is probably right. With so few shares available, it’s hard to extrapolate Facebook’s real market value. Microsoft directly invested $240 million for a slice of Facebook two years ago, valuing the social network at $15 billion. That might have been accurate — or might not have been. After all, Microsoft’s deal was partly a defensive move meant to block Google from forming a strategic alliance with the company.
Of course, one of the secondary market’s great disadvantages is that a company like Facebook doesn’t have to disclose its financials, so all these valuations are a bit of a guessing game.
But every stock sale in the secondary market has to be blessed by Facebook: it has the right of first refusal to buy the shares itself, and has used that provision to prevent shares from getting in the wrong hands, according to a person briefed on one such transaction.
What Facebook will ultimately be worth — $23 billion? $33 billion? $3 billion? — is anyone’s guess. But given the immense interest in the company, it’s hard to imagine that Mr. Zuckerberg wouldn’t be able to find $100 million in cash for some of his shares. The question is, how many will he have to give up?
Go to Column from The New York Times »

Sorkin: The Value of a Piece of Facebook –


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