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Transactional picture in the quarterly results

Quarterly numbers paint a picture, and a picture tells a thousand words. Behind the data, the guidance, the revisions and surprises, there is a message, and the message is roughly as follows. I paraphrase: “As the U.S. economy underperforms and its prospects remain uncertain, it is good for a business to have global operations, it is good to have cash, and it is good to improve cost efficiency.” More concisely: “As local revenue growth underwhelms, it’s good to find other ways to increase earnings.” And for good measure: “Better keep some cash nearby, just in case, to be on the safe side.”

The season started with Intel and has moved swiftly on with FedEx. Both companies gave the market a lift, and both noted the importance of overseas demand. There were countless examples of the same characteristic with similar statements in between, and as these corporate results were being posted, as their subjects were rewarded with stock price upticks, U.S. jobless claims continued to drift around recessionary levels. Chalk that up to next quarter’s improved profit margins, and chalk it up to cash preservation. This is all consistent with the paraphrased messages above.

I touched on possible Wall Street vs. Main Street consequences of such financial profiles and strategies in a previous article here. Between Wall and Main, however, around where the two streets intersect, there is another location called M&A. This connects to both streets and feels the traffic patterns on both sides. When earnings repercussions are considered by Wall Street, or more precisely, are considered by corporations with an eye on Wall Street, M&A will be considered in the same light. In turn, M&A strategies will impact Main Street through the transference of opportunity into or out of the local economy.

From the perspective of M&A, the picture of recent quarterly results confirms trends we had already begun to see. The message is more or less this: “The importance of cross-border deals has escalated, as has the importance of highly strategic, highly accretive, and efficiency optimizing acquisition targets (that could hopefully also drive some revenue growth).” These are some tall orders and quite a checklist to follow, a lot of qualities to fit into one deal, but such selectivity goes a long way to explain M&A volumes that continue to underwhelm, even as corporate earnings are growing.

And then there are balance sheet issues, and the value of cash balances as previously noted. Taken together with a relative unavailability of leverage capital to augment corporate cash in the consummation of transactions – as corporate credit, despite improved earnings, has not yet begun to freely flow – the mood for big deals, for bidding up, has been and is likely to remain tempered. In short, as long as economic conditions and financial priorities stay as they are, we should expect smaller deals to be prioritized, requiring a lesser tapping into savings balances.

The questions that still remain – sifting through these narrowly focused and often difficult to reconcile transactional parameters – have to do with the impact of these upon the broader economy. Deals focused on cost efficiency should reduce local job creation, as should a push towards overseas operations. On the other hand, a tendency to preserve cash and pursue smaller transactions could be a counterbalance to such tendencies. Taken as a whole, these two key aspects – job creation and cash preservation – stand at the center of an economic crisis that was triggered by excessive leverage and risk taking, and has been extended by lingering unemployment. These are the aspects that will be most important to watch in corporate deal patterns ahead, at the intersection of Wall and Main, where M&A lingers.

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By Dan Ramsden – July 27, 2010

It might get loud

This is the title of a music documentary that is also a movie about noise. It is about simplicity and style, in relation to their opposites. And on a more distant level, it is about facts that are increasingly more difficult to recognize, entrenched as these often are inside layers of complexity and nuance. I am reminded of matters less musical, such as economies, capital markets, business models, products, solutions… but I digress. We begin with Jimmy Page.

It Might Get Loud is a documentary about succeeding generations of musicians, about three guitarists in particular, who each – uniquely – defines his genre and is symbolic of his period. With Mr. Page we witness the birth of hard rock through the eyes of its leading pioneer, who rose to fame in an era of discovery and humor. Had he not gone the way of the Chicago Blues cum double-necked guitar played with a bow, he may have embarked on a career in biological research. He says so on live television, in black and white, age 15.

We proceed to the pop transformation, commercialization, and studio layering of rock music, as engineered by U2′s Edge. (Or is it the Edge?) The name itself seems as though run through a graphic equalizer, and here we are introduced to material that requires eighteen pedals, five synthesizers, a mainframe computer, and five hundred takes, in order to produce one sound. All the while, Bono is running in circles around the arena with a giant Facebook flag. (Not really, I made that up, because Bono is also a venture capitalist, and his fund owns a stake.)

Finally, we come to the meticulously choreographed, tortured, forced, and almost raunchy sounds of Jack White, whose art consists almost entirely of fitting, as it were, a square peg into a round hole. We watch Jack manufacture an electric guitar from a soda bottle and a wooden board with nails and hammer. We watch concert footage of a solo in which his fingers start to bleed. We see Jack ripping upholstery to shreds. Such hard work, such determined energy, such seriousness: Jack is an entrepreneur, he iterates.

In short, we see the music and its constituencies move farther and farther away from the purity and essence from which the genre began, as each generation adds its mark, and with each mark an added layer of distortion. But nothing in this documentary – none of the interviews, none of the interaction between the three symbols of disparate styles and historical periods – seems as genuine and is as profoundly touching as two scenes in which we are alone with Jimmy Page – present time – in two relaxed and private moments. In the first scene, he is in what seems like a small studio, although is not much more than a closet-size room, where he plays the guitar lines of “Ramble On,” lost inside the melody, without accompanying vocals, sound effects, overdubbing, or other instrumentation. And we sense that he could go on this way forever.

In the other scene, Mr. Page is in his music library, surrounded by shelves stacked with vinyl records and CDs. We notice the joy on his face and we feel his enthusiasm as he spins a couple of tracks on the record player, all the while providing commentary, play by play, and drawing our attention to special aspects in the playing. One track is Link Wray’s “Rumble,” a sequence of which actually causes our teacher to burst out laughing, as if at an inside joke. The other track is “Can’t Be Satisfied” by Muddy Waters. Mr. Page here points out that there are only two instruments in the recording – bass and guitar, both acoustic – as he demonstrates for us in the air.

There is beauty in simplicity, and there is simplicity in true things. That is perhaps the most important theme behind this documentary about music and electric guitarists. As times become more complex, and as the instruments we use more difficult to master, arriving at simple truths can be a nearly impossible task that requires heavier and heavier labor. I am, as I often am, reminded of Ludwig Wittgenstein, who wrote his Tractatus Logico-Philosophicus – a series of short blurbs that follows a logical sequence, and which has become the foundation of modern philosophy and so much else – in the chaos of a battle field. It begins with “The world is everything that is the case / The world is the totality of facts, not of things”… and ends with the following: “Whereof one cannot speak thereof one must remain silent.”

It might get loud. This movie is about more than music.

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By Dan Ramsden – July 25, 2010

Building trust to bridge gaps in venture capital

It has been something like tradition in the startup community that entrepreneurs should see the interests of venture capital as being at odds with their own. Rightly or wrongly, tradition is hard to overcome, and the perspective largely prevails. It is undoubtedly for this reason that VCs have been as attentive as they have been to public relations – to blogs, commentaries, and conferences – in which coziness and warmth are recurring themes. Cutting to the essence of favored subjects – the virtues of small rounds, long-term commitment to the founder, strategic value added over time, flexibility, all these and many others – the topic is always fundamentally the same: the entrepreneur’s happiness with a financial partner who is ideal. But as laudable as such demonstrations of love may be, the discourse evades a more important point to which entrepreneurs should be highly tuned in, and which will ultimately prove much more meaningful than romance. We should be mindful of the fact that the exit environment has changed, perhaps permanently, and venture returns have plummeted. The venture business, as a result, will probably need to change, and it is important for entrepreneurs to understand this and reset their expectations… and maybe also their business models.

A recent Wall Street Journal profile piece on venture capital drives this point home. The sensational headline notwithstanding, the article presents a sobering and realistic overview of a sector that is severely ailing. This is an unfortunate and dangerous condition, more so perhaps than many realize, because an economy in which jobs are lost is an economy in which entrepreneurship rises to greater prominence. Entrepreneurship is important in any economy, leading as it does to invention and the creation of small businesses, but especially so when starting a new platform is not only an inspired moment but a necessity. In order to blossom, entrepreneurship requires venture capital to blossom with it… and the traditional adversity won’t do at all. In this, the PR-minded VCs are absolutely right.

But the mode of operation – the communiqué - to my mind, is off. To bridge the gap between entrepreneurs and venture capitalists, to bridge any gap between disparate sides that don’t quite trust one another, what is most essential is to build trust. The best way to do so is with honesty and frankness. A good start along this path would be more in-depth discussion of venture realities and challenges. Much of the commentary I’ve noticed is focused instead on the VC’s appreciation for those of the entrepreneur. (That’s nice, but a little condescending, no? Coming from a segment that according to the Wall Street Journal is on the verge of extinction?) Sifting through standard venture capital commentary, one could easily believe that the only change in circumstance since late 2008 (i.e., the time of the “Sequoia Slides“) is that start-up costs have diminished… which, of course, is true. But there have been other changes to be sure, such as the virtually evaporated IPO alternative, the diminishing price tag of M&A, the continuing maturation of tech opportunities, the shrinking venture capital universe itself… to name the top few.

All this, however, is at best glossed over, giving rise to at least two undesirable outcomes. One is that some of the savvier entrepreneurs will wonder about the incomplete picture as the credibility gap remains unbridged. The other is an entrepreneurial segment that, unaware of (or choosing to disbelieve) venture capital’s constraints from the outset, feels slighted when outcomes don’t happen the expected way. And thus the tradition of adversity continues. Thus it could continue forever.

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By Dan Ramsden – July 21, 2010

Accelerating convergence

It was suggested, and extensively discussed in the comment section of this A VC blog post yesterday, that it would be a good idea to establish a tech accelerator dedicated to women entrepreneurs. The merits of an accelerator program – which is a platform to promote entrepreneurship through mentoring, management, networking, sometimes incubation, and other expert resources – have been proven out by pioneers such as Y Combinator and Tech Stars. Judging by the enthusiastic reaction to the referenced blog post, and by the entrepreneurial successes of three of New York’s four (arguably) most prominent recent startups – Gilt Groupe, Huffington Post, and Hunch, all founded or co-founded by women, (the fourth being Foursquare) – the concept rests on solid ground.

But it is also important, in my opinion, to take the idea one step further, and try to understand if there may in fact be a differentiating source of value behind the concept, assuming that gender is not in itself a determining factor.  In so doing, we might arrive at conclusions that, transcending gender, could be even more consequential. My thought process is not based on surveys or market studies, but rather on anecdotal evidence and occasional observation. I am thus sure that there will be countless exceptions to the generalization presented: I have noticed that – whereas the more technically oriented entrepreneurs tend to be male – women tend to come from backgrounds more closely associated with marketing, commerce, and management. If digital media entrepreneurship has to this point been dominated by guys, that may actually be a reflection of a start-up emphasis on technology. This scope is now broadening, perhaps substantially, and perhaps permanently.

While innovation will always be paramount, one could argue that we are entering a stage of transition for digital media, in which execution and profitability are rising to equal prominence with technical invention. It is probably no coincidence that the most successful digital startup of the past year has been Groupon, the technical sophistication of which is far outdone by its marketing savvy. It is also interesting that the previous leaders of the startup universe – Facebook and Twitter – both seem now supremely focused on revenues, while the champion of the prior generation – Google – is being penalized by financial markets for its diminishing revenue and profit prospects, even though its technical inventiveness is as strong as ever. Based on my isolated experience and the observations presented, an accelerator that is dedicated to female entrepreneurship would in important ways parallel the evolution of the sector.

In such a dynamic, while the older media platforms would perhaps benefit most from sophisticated technicians, the newer platforms would require marketing executives, seasoned advertising pros, and good operating management. Another way of saying the same thing is that the two segments – if such a separation still exists – need more and more to cross ranks. If so, then a valuable accelerator model, perhaps in addition to one defined by gender, would be one defined by sector background: a program fostering the entrepreneurship of former “traditional” media executives who are transitioning to a new world order. It will quite likely be the case that many, if not most, of these emerging platforms will be led by women.

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By Dan Ramsden – July 17, 2010

As the smartphone becomes a household appliance

There was discussion here a while back about the divergence between the national economy and national stock markets, as companies represented in the latter become increasingly international in their revenues, expenses, and capital sources. There was some discussion as well about the impact that such a disparity would have on the relationship between corporate shareholders and (actual or prospective) corporate employees, or, if you will, “Wall Street” and “Main Street.” The quarterly results posted by Intel, which were interpreted by Wall Street to be wildly positive and which likely presage similar results from Apple, Dell, and other vendors of computing and entertainment technology, may be an indication of another divergence in the making: the importance we assign to household hardware, and the impact of such prioritization on a global scale.

On one hand, there is the refrigerator, the microwave, the television set, the car, and on the other there is the intelligent device – the desktop or laptop or tablet computer, the smartphone, and, in support of these and other information receiving and transmission assets, the server farm and its growing “cloud.” Despite – or maybe because of – a soft economic environment, consumers and businesses seem increasingly willing, even anxious, to upgrade their modes of information management; and the latest digital communication tools are increasingly becoming a “necessary” rather than “discretionary” expenditure.

Granted, it is far cheaper to purchase the new iPhone than a new refrigerator, and there is no need to upgrade a refrigerator with frequency. But is there really a “need” to upgrade one’s smartphone or desktop unit often? And is the “need” for interactive information really as profound as that of preserving the edibility of food? We have not yet seen GE’s numbers, but based on Apple’s sales results and Intel’s quarterly release, the answer seems resoundingly affirmative. Based on the news conference that Apple considers necessary to address a minor iPhone antenna imperfection, this device is being taken by popular culture very seriously, much more so than a toy, and any real or perceived flaws are not to be dismissed as marginal.

In short, the importance of such devices and their related tools and applications to consumers and businesses have begun to – perhaps “dominate” is too strong a word – certainly escalate in the order of spending priority, to a point where these are now as non-discretionary as the television set or cable service. As this occurs, and as the strength of what used to be a specialized segment expands to mass market status worldwide, the boost to information technology could be significant. At the national level, the depicted trends could further the growth of media and associated innovation segments that, for a long time, have been for the United States areas of global leadership. Here we have been consistent exporters, and the continuation of popular and business trends exemplified by Intel and Apple could solidify this position or even extend it on the global stage.

And so, as we look internally to the possible divergence between Wall and Main, as noted, there may be another sort of divergence taking place on an external, international, level: that between the growing value of popular technology on one hand, (which is beginning to include alternative energy), and the commoditization or, in some cases, obsolescence of lower tech items. In this also, the consequences of divergence may not yet be fully understood.

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By Dan Ramsden – July 15, 2010

Old-fashioned private equity: a new venture framework for a new market

A finance scenario for successful ventures has been more or less as follows. When the business is not much more than an inspired moment and a slide deck, the entrepreneur raises a small “friends and family” round for, say, $50,000, to fund the incubation of the start-up. Once the business has been structurally established and is showing initial progress, even a little bit of traction in its target market, but is not yet sufficiently advanced to justify a full-fledged Series A venture raise, the entrepreneur continues with a “seed” round of, say, $500,000, to fund the company’s evolution to a point that is worthy of institutional attention. At that point, one raises a Series A venture investment – let’s call it $5 million – to hire and expand and become substantial. “Substantial” being a relative quality, and most web ventures burning cash throughout this growth phase, a Series B follows, and a Series C – each for varying sums of additional millions, or tens of millions – and maybe a headline grabbing Series D along the way, up to an exit in the M&A or IPO market.

Ah, the snows of yesteryear, those excellent days gone by… While the amounts required to launch and grow a digital media venture have diminished, in some cases substantially, so also has the venture capital available for such investments. The prospects of IPO exits are a faint shadow of their former selves, and M&A is smaller and more strategic. In short, the trajectory of $50,000 to $500,000 to $5 million to $50 million to $500 million is not what it once was, and the number of $5 billion industry-redefining sensations seems also to be trending down. Whether this trend will reverse, and if so, when it will, is a matter of guessing. Mine is that we are in a new era in which we are likely to find ourselves for a long time still, and I have previously described my reasons here.

If true – and regardless of what the future may be, the depicted market profile seems to be the case for now – entrepreneurs should adjust their models accordingly, and build businesses in keeping with this new corporate finance. Rather than aiming to justify the Series A and B and C that may never be raised, rather than architecting some blockbuster IPO or large M&A exit that comes with a diminishing probability, one should pursue a framework for a reliable cash machine. Perhaps a $500,000 seed round can produce annual profit of $100,000 or more? Perhaps $200,000? If such a business can be constructed, the need to raise venture money diminishes, and the exit strategy for shareholders is built-in: cash flow is itself the exit vehicle. Of course, the scenario is far less thrilling on its surface, but there have been too many failed ventures to count that on their surface were thrilling at the outset. And besides, the issue is only one of scalability: more substantial capital can always be raised, and at more attractive terms, when doing so is interesting but not essential.

I suppose that, on one level, what I am describing bears similarities to traditional media models. Is that old-fashioned? Maybe. But we must not forget that the Internet has always been a media business, and that many little media businesses that did not become Google or Facebook nevertheless became Comcast and NewsCorp and Disney. Some were consolidated into such or similar groups, and some are now grabbing headlines, independently, for the stability and cash flow production these have demonstrated. See, for example, this recent news from Netflix and EHarmony, or the recent success of Groupon and Zynga, arguably the two most successful venture-backed digital media “start-ups” in the sector. As the web matures, as capital markets are transforming, it may be time to look back to our elders for some important guidance and business building lessons. At the same time, venture capital may look to more traditional private equity and adjust its investment framework accordingly.

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By Dan Ramsden – July 13, 2010

Less like James and more like Jordan

This isn’t about NBA extravaganza, but rather about the economy. More precisely, it’s about capital markets as these link to the economy, of which the NBA is a part. And it’s about wild applause that is sometimes only an indication of vacuousness, or volatility. Ultimately, this is about fluff and substance.

We begin with two market drivers: fundamental value and liquidity. On one hand there is a core asset that produces substance, while on the other hand there is money. In theory, the two hands should grip one another tightly, but in practice there are bubbles that grow and burst. The two hands move apart – perhaps distantly – and come together again with a clap. When this happens repeatedly, there is applause.

When the tech bubble burst ten years ago, this was due to a core asset that did not support the financial valuation assigned to it by money flows. The fundamentals and the liquidity had moved far apart, and then… clap. When the credit bubble burst eight years later, it was the same thing. These two were louder claps in a series of lesser ones, during a longer span that continues.

The proposed fix after the more recent pop was to inject liquidity into the system, to drive up financial values again. While this did not directly address economic fundamentals, the idea was that fundamentals would follow. In keeping with this article’s motif, the two hands would thus come together in a positive way, not as a bubble bursting, but as the economic hand would rise up to meet the other: narrowing the gap between real value and that which liquidity supply would set. Fluff, thus, would build substance.

But substance is such a stubborn thing, and fundamentals so hard to prop with air. Unemployment, deficits, excessive borrowing, are symptoms of a weak platform, and we now see that record capital infusions have hardly made a dent in those. Even if the stock market sometimes says otherwise, at most this divergence signals a possible pop ahead.

(An alternative approach would be to tackle the issue from the other direction… beginning with a firm foundation. Rather than merely throw money at an issue for a rapid, albeit dubious, fix, we might try to resolve it the old-fashioned way… with improved efficiency, new invention, education, learning, better quality of output, better service. It is certainly not too late for any of that, and competitive forces may naturally take us there.)

In the meantime, this all brings me back to the belly turning spectacle that was the Miami Heat free agency act. A product, perhaps, of the times, this was a case of three superstars and a manager who, unable in their prior circumstance to lead their respective organizations to a winning formula, determined to fix the problem with money.

In other words, rather than working harder, improving aspects of their game or game-plan, trying to make their team-mates or rosters better through leadership, they found common ground in a platform that would, through money alone, cover up (or expose?) each other’s weaknesses. The result was rolled out with flash and smoke and wild applause, before a single game has been played, before any victory registered. Michael would not, and did not, act in this fashion.

Like I said, this article is not about the NBA, but the economy and market of which the NBA is a part. While the short run is often dominated by surface, in the long run the core underneath is what matters most. Fundamentals will always determine long-term value, and the origin of applause should always be scrutinized.

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By Dan Ramsden – July 10, 2010

More important than fund size and profile: liquidity and staying power

As the public markets are swinging in all directions with a downward bias, I am having flashbacks of the Sequoia slide deck that made the round less than two years ago, relating to private capital and venture capital in particular. Click here if you have forgotten, although it wasn’t long ago. Less than two years later, I am reminded about the turbulence that the segment went through when stumbling across a new batch of turbulence, of a very different sort but perhaps born out of the shakeup of 2008. I am referring to the public debates that are occupying venture investors, entrepreneurs, and all students of the venture capital business, about the optimal venture capital fund profile, investment size and terms: small funds vs. big funds, true seed funds vs. faux, raising big vs. little money, and the miscellany of subjects around the perimeter of this general core.

We haven’t heard about the Sequoia slide deck – RIP Good Times – since its initial sensation, but for a while there it really shook things up. It drew national attention to the direct influence of limited partners (LPs) – pensions, endowments, banks, insurance companies – upon a seemingly isolated and independent market segment. More precisely, it drew attention to the direct ties between public and private markets. We used to consider the influence of public markets upon the private mainly in terms of exit valuations and exit alternatives (i.e., IPOs), not thinking about the place that private LP interests hold in a broader portfolio of public holdings, and how turbulence in the public realm can limit the interest of LPs to hold private assets. In the fall of 2008, our perspective broadened.

Almost two years later, it is true that the system has done a great deal to work through the sub-prime credit bubble that burst, but now there is a sovereign debt issue on the horizon. Almost two years later, it is true that the stock markets have moved way off catastrophic lows, but more recently these have also moved way down from highs and are still moving. I would not suggest that the market is anywhere close to the state of freeze-out in which we found ourselves almost two years ago, but we were pretty shaken up back then and the memory lingers. Important lessons were learned, market consequences were experienced, and it isn’t easy to turn a blind eye less than two years later.

If one of the lessons learned at the time was that the losses of LPs are felt in ripple waves well into private markets, and ultimately by entrepreneurs and innovators who require venture funding, one should consider how limited partners will behave if the stock market should decline much further, if the economy should deteriorate a tad more, if the sovereign credit risk that looms should cast its shadow a bit wider. If there is a risk that limited partners should stir up ripples once again – and, evidenced by aggregate VC deal volumes since late-2008, it isn’t clear that prior ripples have completely faded – perhaps entrepreneurs and venture capitalists would be well served to plan ahead and strategize accordingly.

I am infinitely cognizant of the virtues of small funds and the integrity of seed investing, but the subject is beginning to feel a little bit passe, and a bigger point may be missed. The most important characteristic that entrepreneurs should look for in an investment syndicate, based on some of the issues noted herein, is staying power and the ability and willingness to keep up its support. This has nothing to do with small vs. big or true seed vs. faux, but with liquidity and commitment. In any environment, these are important qualities. In the current environment, even more so.

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By Dan Ramsden – July 7, 2010

A note for the musicians

Leafing through a paperback clearance-sale copy of Rolling Stone Interviews, picked up at Borders for almost nothing this Independence Day weekend, I was amused by the traditionalist themes of the experience. That this publication, for decades a leading presence of the anti-establishment, should be chopped up, repackaged, and delivered as a non-fiction item at a mass merchandise outlet, beside cookbooks, how-to-succeed brochures, and analyses of the sub-prime mortgage bubble, is a testament no doubt to how far counterculture has come. But this was only the beginning.

In all seriousness, the conversations selected for the volume – ranging from Johnny Cash to Truman Capote (interviewed by Andy Warhol) to President Clinton to Eminem – contain much that is not counter-cultural but, on the contrary, touching and inspiring. Among these, my favorite moments are ones when some of the subject interviewees describe their artistic influences. Here is Jerry Garcia of the Merry Pranksters waxing nostalgic about the significance of T.S. Eliot in his formative years; Patti Smith of CBGB’s standing firm against criticism of the avant garde because William Burroughs and Arthur Rimbaud are on her side; Bob Dylan of Greenwich Village reciting memorized verse from Rudyard Kipling, quoting Sun Tsu, and listing off examples of Chess Records street poets who still live inside his lines. It would be no different to hear a lawyer reminisce about a certain torts professor who had opened up the field for him or her, or to hear Steve Jobs paying tribute to Dave Packard.

Reflecting on these and countless other gems, I realized what it actually was that I found so touching, and so traditionalist, about these counterculture interviews: The professionalism of the performers, despite all of their documented flaws, showed through and was the pervasive theme of every conversation. The transcribed discussions were taking place with craftsmen who not only accept their job with dedication, but who demonstrate true love for the craft, and who, even well beyond their apprenticeship years, remain students of the trade. Here is Jim Morrison talking about chord changes, Keith Richards about twelve-bar blues variations, Joni Mitchell contrasting the instruments and rhythms, the production style and sound quality of her recordings.

It occurred to me to jot down these thoughts about professionals and the poetry of their dedication, their spirit and their pride, as America celebrates its 234th birthday as a nation of craftsmen. Let’s hope that staunch professionalism will always stay in vogue. Let’s hope this quality never becomes countercultural.

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By Dan Ramsden – July 5, 2010

Where markets and economies diverge, so may Wall and Main

Years of training can be habit-forming in the way we perceive certain things. Many analysts, commentators, and investors, still tend to monitor stock market performance as closely related to the national economy, or even as a proxy thereof. This was for a long time reasonable and appropriate, and in aspects it still is. When the correspondence was clear and direct, it enabled us to estimate lags and proportions between the two sets of data, and to assess the leading or trailing influence of one on the other. We were also able to evaluate individual assets in relation to broader indices, ascribing the under- or over-performance to measures within an enclosed national framework. The relationship is no longer strictly realistic, and as the analogy has been distorted by a variety of factors, a truer analysis becomes much more complex.

It is now stating the obvious that the national economy and stock markets are influenced by international variables to a far greater extent than before, but what complicates and distorts the relationship between these two most, is that the impact of globalization is uneven. Companies are increasingly prone to see their revenues and expenses, directly or indirectly, impacted by cross-border issues in different ways – different currency exchanges, tax laws, and economic currents on both the inflow and outflow side of the ledger – and investors in these companies, meanwhile, are increasingly likely to reside in international jurisdictions, (and trade on international exchanges), which too present different circumstances and parameters. These investors are going to evaluate international alternatives in relation to local opportunities and risks, and the pools of finance from such overseas jurisdictions are increasing in cross-border influence.

Thus, both the supply of capital and the economic value of it in terms of the U.S. stock market, in terms of the S&P 500 for example, are bound to see volatility that is shaped outside of domestic borders in different ways. And as this often inconsistent relationship between international influences takes its toll, the parallels between local stocks and local economies begins to break… so, for example, like certain companies post improved earnings as a result of mass layoffs – which in the broader economic sense is negative – so too international exposure may be a positive for the performance of a stock, but may or may not have much real impact on the local economy.

Because companies can exist in multiple geographies while individuals cannot, because stocks represent companies rather than individuals, and because economies represent individuals rather than stocks, the relationship between stock markets and economies is likely to be increasingly disjointed. As these and similar trends in finance continue to take shape, there may be an increasing divide between “Wall Street” and “Main Street,” with consequences and repercussions that we probably don’t yet understand.

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By Dan Ramsden – July 2, 2010