The Infolinks Global Advertising Timeline Infographic

A couple of days ago, Mashable published an Infographic that Infolinks (a Goldrock portfolio company) designed. It is a brief history/timeline of advertising and its evolution. Starting off in ancient Egypt, explaining the first print ad in an English prayer book, to the reason for the billboard concept - all the way to today’s methods of advertising on the internet, some of the biggest and most interesting landmarks are documented on this fun and creative timeline. Interestingly, the first keyword ad was “golf”! 

Have yields stopped listening to economic releases? ......

I came across this very interesting graph this morning. In normal times and circumstances (whatever that may mean), bond yields are heavily influenced by how weak or strong the economies prospects are perceived to be. In the graph, the white line is the Citi economic surprise index, which is an index that shows the deviation of actual economic releases in comparison to the expectations. Clearly, the index has had a very strong move up in the latter half of the year, as US economic releases have generally been stronger than expectations. In the past, the yield (the 10 year - orange in the graph) would have moved up in tandem, as a better than perceived economy would have led to a movement from the fixed income market (lower prices higher yield) into the equity market.
But times are far from normal. Markets are absolutely terrified of PIIGS defaults. Thus despite stronger news emanating from the US, the awful news out of Europe has seen the Treasuries retain an unprecedented demand for the "perceived" safe haven status.

Surely though in unveiling Operation Twist, whereby the Fed is aggressively buying long dated bonds (to keep the yields low) and selling shorter dated bonds, that has been the determinant in keeping lower yields? I'm not so sure. If for some reason, somehow, the market became convinced that Europe was turning the corner, and that there was light at the end of the tunnel, wouldn't the yields be expected to rocket higher, Fed or no Fed?

Yields are at all time lows- yields are pricing in the risk that the market may not exist in a recognisable form in the not too distant future, with fears of defaults and a collapse of the financial system.

The 12 Keys to Employee Retention

Thanks to Jessica Ray of Openview for reminding us of the simple things that are key to creating the environment for a strong team.

In all the businesses we invest in it takes a huge effort from everyone at the company to create success. Fostering those efforts is not as complicated as one might think. Here are easy things to focus.

For the full blog and the 12 points please click through to Jessica's blog - http://blog.openviewpartners.com/the-12-keys-to-employee-retention/

If you have others, please add them in the comments!!

Israeli PE continues to grow

The latest Israeli Public Equity Report published by the IVC and Gross, Kleinhendler has been published.

Some key points:

• In the first three quarters of 2011, $1.98 billion was invested in 45 Israeli private equity deals, an increase of 20 percent over in same period of 2010
• The average deal size was $44 million,
• In Q3 the software sector accounted for 22 percent of the deals, mostly reflecting the $307 million buyout of IT services provider Ness Technologies by Citi Venture Capital International and Riverwood Capital's $110 million buyout of SintecMedia, an enterprise applications company.

http://www.iva.co.il/index.php?option=com_content&view=article&id=69&Itemid=86 

Happy Birthday to Sage!

Much has already been written about the fact that Sage has just reached the "grand" old age of 30.

I would like to focus on some of the drivers to success from a more personal perspective.

The backdrop to the founding of Sage by my Dad, Paul Muller, Graham Wylie and Phil Lever was the early days of Thatcher's rein, deeply depressing economic times, and continuing industrial unrest, with the printing industry being of specific relevance to my Dad. In the North East of England (Newcastle, where the company still has its HQ), there was a dramatic period of de-industrialisation, bringing unemployment and recession.

Specifically my Dad had been running Campbell Graphics, a smallish printing company, specialising in 3-colour magazines, a far cry from computers and hi-tech! Anyone who knows the printing business knows that it is mucky to say the least and somewhat un-glamourous.

I guess (other than marrying my Mum) the most momentous decision of my Dad's life was starting the process that lead to the founding of Sage, ie computerise some of the key elements within the printing process. Not the technology of printing, but the business of printing. For this he needed some outside brains, and by bringing a NASA boffin and computer undergrad (Paul and Graham) in as consultants, this could be solved.

Here is the key moment though: having solved it for his own company, he figured that there may be other David Goldman's who might find it useful. Thus it turned from an innovation into a business. Fortune favours the brave and this band of early eighties entrepreneurs found themselves selling the printing package in its entirety and investing the proceeds so that Graham could write a generic accounts package for small businesses.

Sage was born!!

Initially Sage Systems (as it was known at the time), sold systems (hint is in the name) which included the software and also relevant hardware (names from the museum such as Osborne, Apricot, Superbrain and others).

The next key decision was to withdraw from the hardware business and stick with software. For the un-initiated, margins for pure software vendors tend to be somewhat higher than hardware, not to mention the working capital requirements of building a hardware business from scratch.

Thus Sage Systems became Sagesoft!

This brings me onto one of the key fundamentals of the business in my Dad's eyes. It's all about the brand, not the technology, or in other words, Sage is just a marketing company that happens to sell software. The customer is the key, or perhaps the King, and keeping a very close ear to their requirements, problems, challenges etc is the key to understanding how to drive the business forward.

There were many other key milestones along the way; the realisation that Amstrad will change the world of computing for small businesses; creating and focusing on paid maintenance and software assurance; entering the business of bespoke stationery (ironic for Sage to have made so much money out of printing); first acquisition in the US and using it as a platform for multiple additional acquisitions (credit for this to Bernard Fisher, a non-exec at the time who pushed for this move), and of course these successes have continued since my Dad retired in 1997 and passed away in 1999.

I promised a more personal view and shall certainly make good!

During the early years of Sage the main driver for my Dad was to reach financial security for himself and family, a situation he had not experienced to that point. My Dad was no Marc Zuckerberg (in oh so many ways) and started Sage when he was already passed 40. Whilst never EVER complaining about it, my Dad grew up in difficult economic circumstances and worked hard for every penny he made in adult life. This is why reaching financial security was of such importance to him.

Having successfully floated the company in 1989, and reaching (for him) the crucial milestone of joining the ranks of the independently wealthy he set about the task of building Sage into a world beater with even more energy and ambition. I have often wondered why this is, and I have no scientific reasoning. Perhaps having "unburdened" himself of the need to reach financial security there was an unleashing of new energies which expressed itself in even greater ambition for the company, without the worry anymore of paying the domestic bills.

My Dad was very much a people's person. Frankly it didn't matter what type of person he met, be it Bill Gates or the caretaker. He treated everyone the same; polite, to the point, with respect, and with a unique brand of humility and humour. Success did not change my Dad. He believed that doing the right thing was also good business practice, and he did not have a different set of values for his personal and professional life. He loved to be surrounded by motivated, creative and young people, and indeed brought the average age of Sage up by a couple of decades! Even in the 80's technology was perceived as the domain of young people.

There was nothing my Dad liked more than to walk around the Sage offices and talk to as many employees as he could on an almost daily basis. Beyond the pleasure he took from shooting the breeze with the people he loved to work with, he also knew that their success was his success, and that businesses that want to grow and succeed can only do so if everyone feels part of the team. This was his way of showing it!

For somebody who could barely use a computer he did not do a half bad job building a software company. The irony is that had he been in love with technology he may not have had the success he did.

If I had to single out what I believe are the secrets of his and then Sage's success it would probably come down to two key elements:

1. Absolute dedication to the principle that the customer is King and that business must be driven by the desire to fulfill the needs of the market (rather than one's own fantasies). In the long run strong brands will prevail and to dominate a market requires continued investment in the brand
2. Absolute dedication to the idea that all companies (and especially tech companies) are only limited by the desire of the entire team to succeed and that leadership starts from the top. My Dad always made sure that everyone in the company felt part of the success, from Chairman to the guy shrink wrapping the software.

I am very proud to be the son of David Goldman and even to be associated indirectly with the success of Sage gives me continued pleasure. I also know that there are many extremely talented and dedicated people at the company who carry forward the basic ideas that my Dad laid as the foundations 30 years ago.

I wish Sage many happy returns (including investment returns!) and in particular that they claim their rightful position as a beacon of growth and innovation, both for the North East, but the UK in general. My Dad is a role model as an entrepreneur, and there is no reason why Sage cannot be a great role model as a company leading the way through the next thirty years!

Growth Capital vs. Venture Capital

In 2006, when we began speaking about a growth capital fund in Israel, people had no idea what we meant. Invariably the response was, "Like a VC Fund, right?" Wrong.

What we, and other growth funds like us, target are:

• Already successful businesses which can be made more successful;
• Management teams building real businesses and focused on old fashioned things like profit and loss; and
• Businesses for whom technology is a barrier to entry, not an way to create a new market.

Five years later the Israeli market now understands what we've been talking about. We see a steady stream of companies for whom growth capital is the right fit. And the VC-style companies tend to stay away.

The growth capital market is still in an expansion phase. But it isn't a huge market, and we don't expect it to become huge. VC will remain the predominant private funding market in Israel - and I expect that market to heal itself through a combination of reduced capital supply and a trend from consumer tech back to enterprise tech. But the growth market is a great niche market and an important addition to the private funding landscape in Israel.

Dodgy going ons in Italy!

Very very interesting. Indeed. Something smells rather fishy here. Earlier today Italy sold €5 billion in 1 year Bills at an average yield of 6.087%, the highest since September 1997, and almost 3% higher compared to a month ago, when it prices at 3.570%. However, what really catches the eye, is the fact that just before the auction, the 1 year was trading at a huge 7.75%, almost 200 bps ABOVE the auction. Who is prepared to receive a 6.09% yield in a new auction when they can receive a juicy 7.75% in the secondary market? Unless someone (read ECB) had alternative interests in forcing the yield lower. Now that certainly would be interesting, as the ECB is prohibited by law from intervening in the primary, auction market.

Once the Euphoria wears off.....................

Some initial thoughts from last weeks European party:

• 50% proposed haircut that the headlines were full of, actually closer to 16%. Why? Greek debt approximately EUR 350b. Of which approx. EUR 150b held by Greek and European central bank, which is not subject to any restructuring. Leaving us with about EUR 200b. Greek banks and pension funds own about EUR 85b. This is contentious and debatable, but if they take a 50% haircut, they will essentially be bust. Hence, they may well be absolved too. That leaves EUR 115b that will "voluntarily" take the haircut. 50% of which, is EUR 57.5b, or 16%.
• The initial reaction was euphoria, with PIGS bonds falling drastically. But once the euphoria wore off, Spanish and Italian bonds made a quick u turn, and are back to the levels they were trading at pre-announcement, dangerously close to the 6% level where other countries have required help. Why? Because EFSF doesn’t take a default off the table. It delays the time until default, by rolling maturities, but all it really does is shift who takes the loss. And Italy and Spain are too big for ANYONE to take the loss.
• The EFSF is leveraging EUR 440b 4 or 5 times, just 3 weeks after Merkel promised the Germans that it would not be leveraged. The leverage would use the EFSF AAA credit rating to enhance new debt and set up Special Purpose Investment vehicles to obtain the leverage. I.e. more of the problems of the 2007/08 credit crises.
• How does the leverage work? EFSF is like an empty box filled with promises of money- many of them from the very people who are most likely to need to borrow that same money. So should they need to borrow the money. They won't be able to fulfill their promise, so there will be less money for them to borrow. And then they've decided to leverage these empty promises of nothing.
• Who is going to buy into the new leveraged EFSF fund? Sarkozy seemed to imply if China WANTED to contribute, then Europe would probably be open to allowing them. However, Chinese Prime Minister said "Countries must put their own houses in order". A member of the Chinese central bank went on to say "It is in China's long term and intrinsic interest to help Europe because they are our biggest trading partner, but the chief concern is how to explain this decision to the Chinese people. The last thing China wants is to throw away the country's wealth and be seen as source of dumb money". China is extremely likely to invest in the EFSF, but on terms that are favorable to China.
• This was no solution. It’s a plaster for a long term problem. Don’t forget that at the last stress test, Europe's strongest bank was Dexia ……
• Also, the fact that these private investors were forced to take a voluntary haircut to the tune of 50%, does not create a credit event. I can't imagine the big banks who hold CDS's will take that lightly.
• And further, who is going to want to buy sovereign bonds now? At least beforehand, I can buy protections in the form of CDS's. Now that CDS's have been deemed worthless, why should I buy these EFSF bonds? Who is going to buy these bonds? Someone has to, otherwise Europe will blow up. And best case scenario, is that there are buyers, but too few of them, hence an - oversupply, a low price, rising yields ...... problem sounds familiar?

BusinessWeek: Israel Punches Above Weight as GDP Beats Developed World

Normally, we have our own proprietary articles, but I thought this time it is worth it to just post the following BusinessWeek article:
http://news.businessweek.com/article.asp?documentKey=1376-LRW4M01A1I4J01-2QDQJL3HHA3827O7MR2OENNQ8E

Sept. 22 (Bloomberg) -- Never mind the collapse in confidence in Europe, the Palestinian proposal for United Nations recognition and heightened tensions with neighboring Egypt and longtime ally Turkey. The Israeli economy just keeps growing faster than the rest of the developed world.

The International Monetary Fund this week raised its forecast for the country and cut its estimate for the global economy on the impact of the European debt crisis. Israel's gross domestic product will expand 4.8 percent this year, according to the Washington-based lender. That's up from an April forecast of 3.8 percent and triple the pace for the average of the 34 advanced economies.

Citigroup Inc. said on Sept. 18 it would establish a new Israeli research center and Standard & Poor's a week earlier raised the country's credit rating. It cited the discovery of two gas fields off the coast of Israel that hold an estimated 25 trillion cubic feet of the fuel. Mellanox Technologies Ltd., the 12-year-old Israeli adapter maker part-owned by Oracle Corp., says sales will grow 80 percent in the third quarter.

“The Israeli economy is very vibrant,” Finance Minister Yuval Steinitz said in a Sept. 20 interview with Bloomberg Television. “We enjoy very low unemployment and nice economic growth and this is mainly because we managed to develop very advanced high tech industries and very strong exports.”

Technology Capital

The stock market in Israel, whose population of 7.8 million is similar to Switzerland's, was upgraded to developed-market status by MSCI Inc. in May 2010, the same month the 63-year-old country was accepted into the Paris-based Organization for Economic Cooperation and Development. The country has about 60 companies traded on the Nasdaq Stock Market, the most of any nation outside North America after China and is also home to the largest number of startup companies per capita in the world.

Israel ranks third in terms of projected growth this year among MSCI's list of 24 developed economies, after 6 percent for Hong Kong and 5.3 percent for Singapore, according to the IMF.

“Israel's exports are high-added value exports like informatics and technology,” said Jean-Dominique Butikofer, a fund manager who helps oversee about $1 billion of emerging- market debt at Union Bancaire Privee in Zurich, including quasi- sovereign Israeli bonds. “They're not exporting Gucci bags. If there's a slowdown, these are the kind of assets that are good to have.”

Talent Pool

Venture-capital backed Israeli technology companies raised $364 million in the second quarter of this year, a 77 percent jump from the $206 million raised in the year-earlier period, according to PricewaterhouseCoopers LLP Moneytree report. Seventy-six companies raised funding in the three-month period, compared with only 60 last year, the report said.

“One reason that the economy continues to do well is the component of innovation and ability to adapt to a changing environment,” Citigroup Israel Managing Director Ralph Shaaya said in explaining the New York-based bank's decision to locate a research center in Israel. ‘There is a rich pool of talent in the high tech sector. The propensity for innovation is high.”

For Mellanox, orders are persisting even as global growth falters.

“In these situations people tend to look for products that do more with less,” Chief Executive Officer Eyal Waldman said in an interview on Aug. 29. “We still see the orders going in so we don't feel the macro waves coming.”

Shares of Mellanox have jumped about 28 percent in Tel Aviv trading this year, compared with a 21 percent drop on the benchmark TA-25 index. In New York, shares gained about 23 percent, compared with a drop of about 4 percent in the Nasdaq composite index.

Political and Economic

The good times may not last. After withstanding a Palestinian uprising in 2000 that frightened away tourists and deterred foreign investment and a credit crisis in 2008, Israel now faces troubles both political and economic.

Palestinian Authority President Mahmoud Abbas plans as early as tomorrow to ask the Security Council to recommend that Palestine become the world body's 194th member. The U.S. has threatened to veto any resolution in the Security Council.

Bank of Israel Governor Stanley Fischer, whose actions in 2008 helped the economy recover from the global financial crisis, this week voiced concern about the possible effects a prolonged global slump and geopolitical friction could have in coming months. His worry was reflected in the IMF forecast for 2012, which predicts a slowing to 3.6 percent.

Lowest Jobless Rate

Israel has emerged from economic turmoil before. In 2000, as peace with the Palestinians looked possible following the 1993 Oslo accords and the Israeli technology industry took off, growth was at 9.1 percent. Then, in December, the second intifada, or Palestinian uprising, broke out, just as the technology bubble burst on world stock markets. In 2001, Israel contracted by 0.1 percent and in 2002, by 0.6 percent.

By 2004, growth had returned to 5.1 percent; it reached 5.7 percent in 2006. Israel's unemployment rate declined to 5.5 percent in the second quarter of this year, the lowest level since at least 1985.

Still, next year's IMF outlook of 1.8 percent growth for the U.S. and 1.1 percent growth for the euro area, Israel's two main markets, is likely to moderate demand for the country's exports, one of the main growth engines of the $217 billion economy. The Palestinian statehood bid could give the new entity more legal clout or raise nationalism pressure should the Security Council vote to reject it.

Turkey Expulsion

Israel is also facing security threats as the so-called Arab Spring creates turmoil in its Middle Eastern neighbors. In Egypt, the pipeline that carries gas to Israel has been bombed four times since the January uprising against former President Hosni Mubarak. A cross-border attack by terrorists who came from the Sinai peninsula killed eight people near the resort city of Eilat in August.

Turkey, one of Israel's largest regional trading partners, expelled the Israeli ambassador and halted defense purchases after Israel refused to apologize for a commando raid last year on a Turkish vessel attempting to breach the blockade of the Hamas-controlled Gaza Strip that left nine dead.

Israeli five-year credit-default swaps, or the cost of protecting government debt against non-payment for the period, are at 190, the highest level in more than two years, according to data provider CMA. It is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

The shekel has weakened more than 5 percent this year, headed for its biggest annual drop against the dollar since 2005 when it fell 6.1 percent.

Investment Grade

“We weren't Switzerland to begin with,” said Yaniv Pagot, chief strategist for the Ayalon Group, a holding company with interests in insurance, the capital market, and real estate. “We've had the Lebanon War, the Cast Lead military operation in the Gaza Strip, and the economy has dealt with temporary situations. If the situation lasts longer, if it becomes permanent, that could have an impact.”

The economy may already be feeling the bite. Exports, excluding ships, aircrafts, and diamonds, declined for the fourth month out of five in August to their lowest since January, according to seasonally adjusted figures.

This didn't deter Standard & Poor's from raising Israel's credit rating earlier this month to A+, its fifth-highest investment-grade rating, just a few weeks after cutting the U.S. and before cutting Italy. S&P cited the two gas fields, Tamar and Leviathan, off its Mediterranean coast.

“You have a situation where the global economy is clearly running into a roadblock and having a tough time while the Israeli economy is going to bend but it isn't going to break,” said Daniel Hewitt, senior emerging-market economist at Barclays Capital in London. “We think Israel can maintain positive growth. Israel has a strong economy with a strong base.”

--With assistance from Louis Meixler and Jonathan Ferziger in Tel Aviv and Tal Barak Harif in New York. Editors: Anne Swardson, Andrew J. Barden

Its party time!!!

Since I last blogged, the market has been "mildly interesting", to put it mildly!!!

Last weeks rally was the first positive week in a month, and it continued yesterday with an impressive party in stocks all round. And yes, a rally was to have been expected, coming from horrendously oversold levels, at least in the short term, though its very interesting to see the relative winners and losers. And I'm not talking about the reward for lending money to various sovereign Governments around the world based on the risk you are taking on. Whether it’s the mouthwatering 44% on offer for lending to Greece, which has one foot in the grave. Or the 0.0000 miniscule number that you'd be getting for lending to the Japanese with its 200+% debt/GDP. Or to Europe, which arguably may or may not be around in its current states for much longer. Granted, the European balance sheet may look slightly more enticing now that the ECB have moved on from buying the worthless Greek debt to the dubious Spanish and Italian debt!!! Or the US with its $14 trillion and rising deficit? At some point, we'll learn the hard way that "safety" promised by the Governments, is a nonstarter.

Anyway. I'm not talking about all that- that’s the subject of a different post! Back to todays post! It was interesting to see the relative winners and losers. Despite the oversold conditions, and an expected rally, the outlook is not all that rosy. Turbulence continued in Libya, violence worsened in Syria, Israel/Arab tensions, hurricane in the US, plus the eagerly awaited Bernanke speech at Jackson hole (whose remarks were initially perceived as negative, but then markets recovered to finish strongly higher). With hindsight, come September, its possible that the post Bernanke rally was based on "hope". This time last year, when Bernanke spoke, he PLEDGED QE to combat deflationary pressures. This time around, he spoke about fiscal policy and gave his usual "range of tools that could be deployed", but there was very little talk about monetary policy per se. Nevertheless, markets rallied, on what? Hope? There was also the small matter of the first revision to Q2 GDP, which dropped from a preliminary 1.3% to a meager 1%.

However, the market more or less ignored all this, and rallied. And what rallied the hardest? Small cap growth. At least if you're going to party/rally, a rational market would presumably rally in the "safer" asset classes? Small Cap growth, the antithesis of a flight to safety, was up 6.7% for the week, whereas the large cap growth, the epitome of a flight to safety (within the equity space), was the worst performer at 4%. Further, the Utilities and health care stocks, the "boring defensives", performed almost as badly (relatively speaking), whereas the Industrials, the cyclicals, outperformed. However, it is also imperative to point out that the rally was noteworthy for its lack of leadership- the leaders are thinly traded. Additionally, unlike last year when QE2 sparked a massive move out of bonds and into equities with a huge rise in yield as investors sold bonds, this time round, the 10 year hardly moved. And generally, the bonds lead the equity market, and a sub 1% yield on the 5 year speaks volumes for the signal for the economic outlook.

Going back to the GDP report, as well as the downward revision, there is also the statistic that the real GDP year over year change has now fallen to 1.5%. And as can be seen from the following chart, courtesy of Bloomberg, since 1948, each time the real y/y change in GDP has fallen below 2%, the economy has subsequently entered into a recession.

In an uncertain, volatile environment, the one certainty, is that we are in for an interesting, volatile ride!!!

--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------LEGAL DISCLAIMER: The views mentioned above are purely that of the author, and does not necessarily reflect the official view of Goldrock Capital or employees. Unless of course the aforementioned view was a phenomenally good call, with exquisite market timing, in which case Goldrock Capital reserves the right to all credit!!!!!More Serious disclaimer:The financial advice offered on this site is of a general nature and may not be suitable for some people. No individual financial needs or goals have been taken into account in the advice offered on this site, you should always seek independent advice about specific financial decisions. Neither Goldrock Capital nor its employees makes or gives any representation, warranty or guarantee that the information it provides in this website is complete, accurate, current or reliable (including that it has been or will be audited or verified). Goldrock Capital and its employees shall not be liable for any loss or damage whatsoever (including human or computer error, negligent or otherwise, by one or more of the authorities, or incidental or consequential loss or damage) arising out of or in connection with any use or reliance on the information or advice on this site. The user must accept sole responsibility associated with the use of the material on this site, irrespective of the purpose for which such use or results are applied. The information on this website is no substitute for financial advice.

Is Sage a Listed Private Equity Firm?

I was wondering what the implication was for Sage having being beaten by Bain to the MYOB deal. MYOB (for those unfamiliar) is the equivalent of Sage in Australia.

Accepted wisdom among Sage watchers is that they are a very disciplined buyer and therefore tend not to get into bidding wars with private equity firms.

We have seen examples of this previously when they missed out on Visma (acquired by KKR from Hg Capital et al), and TeamSystems (acquired by Hg Capital, sold by Bain).

The problem with my opening axiomatic comparison between Sage and PE as buyers, is that in my experience the opposite is generally the case. We normally expect that strategic acquirers (Sage, Cisco, Oracle, SAP etc) tend to be able to justify a higher price than PE firms (Hg, Bain, KKR etc).

The reasons for this are fairly simple and boil down to the ability of strategic acquirers, particularly if they are global companies, to gain significant strategic synergy, rather than the pure financial synergy and financial engineering that you would expect from the private equity firms. These synergies might include consolidation of sales, products, core technology which cannot be achieved by a pure financial acquirer.

Perhaps then we need to rethink the category that we place Sage into. They are clearly a global player in the SME software market with important share in all of the key markets (excluding Asia). However when we look under the bonnet what we find is that the federated nature of the set-up gives it some of the characteristics of a more "financial" player. Without going into detail it is clear that relative to other global tech players Sage is really a collection of leading domestic businesses. There is little or no genuine global product range (Sage ERP X3 is a recent attempt) and certainly no integrated global sales and marketing operation.

I want to make clear that this is by no means a criticism. This federated view of the world has long been a pillar of the Sage strategy, mainly resulting from an early realisation that in the realm of small business accounts and business software, local knowledge, tax and regulation is absolutely crucial and has lead to a strategy of acquiring local market leaders and implanting to the extent possible the Sage model of high recurring revenues. The main synergy arising is based on the success of increasing the percentage of acquired customers to long term maintenance contracts, somewhat different to the story you will see when an IBM, Oracle or SAP carries out an acquisition.

On the flip side this is also the main reason why Sage has only on a very limited basis made "technology" acquisitions. Again in the IBM/Oracle/SAP world acquiring technology is done on the basis of the leverage they can achieve by taking a proven technology and using the global sales distribution to greatly accelerate the growth in the acquired company. On the basis that Sage does not have a globally managed sales and marketing operation, there is little point in paying inflated prices for technology, as they have almost no way of leveraging the acquired technology. Given that a high percentage of these acquisitions do NOT yield the expected strategic returns, it follows that this is not necessarily a bad thing for Sage and its shareholders.

There is some chatter in the financial markets that Sage's institutional shareholders showed cool interest in the MYOB deal, notwithstanding that management had not had a chance to present the pro's and con's. If true, then this in itself is a little disappointing and suggests that the company and the new management leading it have some work to do to establish confidence in their ability to execute the type of deal that MYOB offered. (Some 21st century investor relations might help!)

If we are to follow the thesis that Sage is a private equity firm, then I would suggest that they do what the great PE investors do, which is to sell assets as well as acquire them (well over 100 since the IPO in 1989). I am sure that there are a couple of operating companies that could be identified for sale without wishing to state the obvious and this would go some way to showing that Sage understands that value creation can be achieved by realising assets as well as acquiring them.

There are few companies in the UK tech environment that have managed the type of success that Sage has!! Their discipline has been a great asset and although it means that they will miss out on deals like MYOB, it also means that they have almost never disappointed their shareholders.

The press has quoted numbers for Bain's MYOB offer as 13.5x EV/EBITDA on a trailing basis. Sage currently trades in London at less than 8x EV/EBITDA. What can Sage do to garner something close to that valuation. Holding companies typically trade at a discount. Perhaps Sage needs to find a way to break this image that it has gained over the years.

How then does the group management leverage this asset going forward to keep it growing in the absence of financially attractive acquisitions? Answers on a postcard!

Congratulations to Goldrock Israel Growth on IDIT

Goldrock Israel Growth - our vintage 2009 growth equity fund in Israel - recently experienced its first exit with the sale of IDIT Technologies to Sapiens (Nasdaq: SPNS). Press article on the closing below:

Sapiens Closes Merger with FIS, IDIT

By Anthony O'Donnell       

July 21, 2011

Sapiens International Corp. (Rehovot, Israel) has signed a definitive agreement to merge with Cardiff U.K. life and pensions core system provider FIS Software and Beit Dagan, Israel-based IDIT Technologies, a provider of property/casualty insurance solutions. The deal brings Sapiens' global customer base to over 70 and will result in revenues reaching $100 million in 2012 -- double the company's 2010 revenue -- asserts Sapiens CEO Roni Al-Dor.

The deal brings Sapiens into the ranks of very few vendors with established core systems across the life/annuities/pensions, property/casualty and reinsurance sectors and brings important synergies to the component companies, according to industry analysts.

FIS brings Sapiens what the vendor calls a comprehensive, enterprise-level solution for life, pension and annuity, with a global client base across the U.K., Europe, Asia Pacific and North America. IDIT offers a full suite of solutions, constituting a single, end-to-end component-based, integrated solution for the P&C insurance market, with a focus on Europe, the U.K., Australia and the rest of the Asia Pacific region.

"Sapiens' move shows that it is serious about building a portfolio of insurance core systems offerings, both for the U.S. and internationally, across life and P&C," comments Matthew Josefowitz, principal of New York-based research and advisory firm Novarica. "Sapiens' success following the [2010] acquisition of Harcase, which has good momentum based on a recent implementation [of the vendor's RapidSure solution] at Philadelphia Insurance Companies [Bala Cynwyd, Pa.], indicates that it should be able to leverage these new acquisitions well."

The proof will be in the pudding, as integration of acquired companies can bring unforeseen complexities, notes another industry observer who declines to comment on the record. In a statement Sapiens has characterized the deal as promising that the company will "become a major global insurance solutions provider." The company has struggled in the past to succeed in the insurance software market but is on a comeback trajectory. Sapiens has turned around from operational loss and significant debt to three years of profitability and a positive cash flow.

Sapiens' merger with FIS and IDIT will bring a very positive result to the organization as it is now constituted, says Donald Light, a San Francisco-based senior analyst with Celent (Boston). Light characterizes the deal as positioning Sapiens for significant presence and growth.

"We see IDIT as a very strong solution in the European and Middle Eastern markets, and Sapiens has been taking some good steps forward to gain traction in the North American market with the acquisition of Harcase and its RapidSure [P&C] solution," Light comments. "The larger revenue base will play very well in the North American market."

"From a North American insurance company point of view, an important issue is whether a vendor is going to be around in five or ten years," Light adds. "This new organization will have a very positive answer to those types of questions."

Regarding the question of whether Sapiens would introduce IDIT to North America or whether RapidSure would be the foundation of the vendor's P&C policy administration efforts in that region, Light commented, "That's a big road map question that they need to resolve and communicate."

Sapiens CEO Roni Al-Dor clarified the matter:

"RapidSure is the P&C product we will continue to offer for the NA market," Al-Dor says. "It has been well accepted and has a growing customer base. We will now be able to further enhance it with billing and claims that we will bring from IDIT and adjust to the NA market. For life and pensions, we will continue to further develop and enhance the FIS suite as it has been gaining market awareness and acceptance."

Its time to learn from our mistakes ...... or is it?!!!

It seems to me that the credit rating agencies are try to "learn" from their past mistakes and spice up their tarnished public image …. But that they are barking up the wrong tree. Do you recall the notices from the rating agencies warning investors not to invest in the Fannies and Freddies of this world? No, neither do I. And these entities were assigned triple A status being backed by the full faith of Uncle Sam. How about the repeated warnings about Mortgage Backed Securities? Or the bonds of Lehman or AIG? Or sovereign debt of bankrupt countries?

So now lets learn from our mistakes. And repeatedly warn that the US faces a downgrade due to its debt ceiling fiasco. However, in attempting to being extra vigilant and super duper cautious, they clarified their warning of a downgrade by saying that their concerns would be lessened if the US reached some deal on the debt ceiling, or better yet, eliminated its self imposed debt limit altogether.

The US should have had a downgrade on their sheer quantities of debt a long time ago, and they should be lowered again if the ceiling is raised. The ceiling is there for a reason. To remove it altogether, is adding to the problem, rather than solving it. It is like adding wood rather than water to a burning hut. It should not lessen Moody's concerns, it should add to them.

The last 15 years have seen a bloated economy take on increasing amount of debt, live far beyond their means, all due to interest rates way below market level. Banks have been expanding the money supply based on accounting gimmicks, worsening the problem. We don't need the credit agencies coming to tell us that they would have lower concerns if the debt ceiling would be eliminated altogether. I cant see how that would solve any problem.

Sssshhhhh - did we just have good housing data?

With the markets currently wholly dictated to by to-ings and fro-ings on several debt issues around the globe, its largely gone un-noticed that the weekly/macro data is still ongoing and can give us some clues as to what is going on with the economy.

Yesterday's release included the Building Permits and Construction starts data in the US. As a reminder, the building permits is a monthly data that shows the annualized number of permits for new construction projects issued by the Government. Housing Starts is also released monthly, and shows the annualized number of new homes that began construction in the given month. Yesterday, the June data was released. Housing permits: 624,000 and housing starts 629,000.

So why is that good news?

The graph above shows the housing permits and starts over the last 10 years. The 2006 peak, 2009 trough decline of 1.5 million was of epic proportions, in the sense that it was the 3rd worst decline on a population adjusted basis in the last 85 years. However, we have seemingly been bouncing along the bottom since then. At the peak, the housing sector was a major source of growth for the economy; the decline since then has contributed in no small part to the weak growth and high unemployment. However, with the passing of time, slowly but surely it is no longer a drag on the economy. Its not much of a growth booster either, but at least its not a drag. We have been bouncing along the bottom, sort of in neutral territory. .

Remembering though that being that the data is a monthly reading, it is quite "noisy". If we were to zoom in to the housing permits since the end of 2008, but averaging the monthly reading to give a quarterly reading to smooth out the noise, we would get the following graph:

We can see that after an improvement of 125,000 between the beginning of 2009 and the beginning of 2010, most of that gain (100,000) was subsequently given back in the following year. Analyzing post world war 2 housing recessions, it is fair to state that it takes about a year to a year and a half for the full effect of a housing decline to ripple its way through the rest of the economy. With the most recent decline ending in June 2010, it is also fair to say that we may well be close in time for that decline to have been fully felt. With yesterdays, strong readings, the Q2 2011 housing permits and starts, will average over 600,000 (the above graph as taken from the Fed's website ends Q1 2011). That would make it the best quarter for over a year.

True, it may be a one off wonder. However, the difference with the 2009 advance, is that this one is without the artificial stimulation of a housing credit stimulus.

Yields on a one way journey

I have noted in previous posts that with the end of QE, the only way to go in terms of yields is up. The Fed was by far and away the dominant buyer of Tresuries, and in the absence of a different buyer to step up and take their place, price would undlubtedly fall (and yields rise).

Thats taking a look on the demand side. What about on the supply side? Since 16th May, total US debt has been flat at $14.345 billion, due to the restriction of the debt ceiling. Presumably, after much political fighting, the debt ceiling will be raised once more. At which time, the Treasury will not only issue as much debt as before, but massively more in the short term to catchup with the ongoing run rate. Ie it will need to plug a gap of over 2 months of accrued Tresaury issuance, and also to refund the retirement accounts it has been borrowing from to buy some more time.

SO we are looking at rising yields due to a decrease in demand, and a pretty hefty increase in supply.

We started seeing that last week, with the move in the 5 year the largest move in percentage points ...... EVER!!!

Perhaps the (temporary) rescue of Greece should convert the PIGS into PISA? I wonder who the A stands for ...... answers on a postcard!!!

Why now?

There has got to be more to last weeks move by the IEA to release an additional 60 million barrels of oil than meets the eye. At the time of the announcement, WTI crude oil was sitting at about $95 – approximately 20% beneath its recent peak. A very big price adjustment had already been made. Had oil been trading at $120, it would be more understandable. Its only the 3rd time ever the IEA has tapped into their reserves: the first time was during the Gulf War, next was after hurricane Katrina, and now a third time. Why?

· One of the reasons given, is the production loss due to Libya. This doesn’t make much sense, as the story is a good couple of months old. Why act now? And in any event, currently the production lost due to Libya has been offset by the loss of demand from Japan post tsunami.
· Another proposed reason, is to clampdown on the speculative longs. Again, this is unlikely, as there were far more speculative longs a number of weeks ago when the price was $20 higher, and there was no “imminent” correction. Plus, any speculative longs out there must have nerves of steel, as the recent macro data is painting a picture of a world in which China, the US, Europe and Japan are all slowing down.
· It’s unlikely too that the reason is to stimulate the economy, be it the US, China or Europe. The 60 million barrels would last for about 16 hours of global consumption- hardly enough to make any sort of impact on global supply and lasting impact on price. Indeed, you will probably find China licking their lips in glee, at the ability to buy up every single one of those barrels for their own reserves.
· The IEA’s strategic reserves are specifically held for “emergency situations”. The IEA has no choice but to replenish the released reserves at some future time. I.e. additional price pressure at some future point.

In my mind, the release of the oil should be considered the equivalent of a global coordinated rate cut. In the long run, oil is an inflationary headwind but the elevated prices at the moment is more of a consumption tax and price shock. Last week’s events may merely be temporary) but I think they will serve a psychological purpose. However, the timing of the announcement, despite being odd as to the necessity, is also a little bit on the short sighted side. As reported 2 weeks ago http://goldrockthoughts.blogspot.com/2011/06/crude-to-march-higher.html
OPEC had their worst ever meeting, and there is already evidence of a strong rift within the OPEC camp. Since that meeting, Saudia Arabia have seemingly been cast into the sidelines, and OPEC themselves do not seem to consider the Saudi’s as a part of OPEC.

Where’s the evidence? OPEC and the European Union are due to hold an energy summit in Vienna Monday that will be the first official meeting of producers and consumers since the IEA's move, and will provide a platform for OPEC members to express their disquiet over the stocks' release. However, OPEC's biggest player, Saudi Arabia, won't be present. There has to be at least the potential for the remaining OPEC countries to counteract the IEA’s move and cut output to offset the increased supply. A war in which OPEC cuts production and IEA offsets that with the release of strategic reserves, is not a situation that the global economy would like to get into right now. (Besides for China of course, who would happily build up its own strategic reserves).

---------------------------------------------------------------------------------------------------------------------------------LEGAL DISCLAIMER: The views mentioned above are purely that of the author, and does not necessarily reflect the official view of Goldrock Capital or employees. Unless of course the aforementioned view was a phenomenally good call, with exquisite market timing, in which case Goldrock Capital reserves the right to all credit!!!!!More Serious disclaimer:The financial advice offered on this site is of a general nature and may not be suitable for some people. No individual financial needs or goals have been taken into account in the advice offered on this site, you should always seek independent advice about specific financial decisions. Neither Goldrock Capital nor its employees makes or gives any representation, warranty or guarantee that the information it provides in this website is complete, accurate, current or reliable (including that it has been or will be audited or verified). Goldrock Capital and its employees shall not be liable for any loss or damage whatsoever (including human or computer error, negligent or otherwise, by one or more of the authorities, or incidental or consequential loss or damage) arising out of or in connection with any use or reliance on the information or advice on this site. The user must accept sole responsibility associated with the use of the material on this site, irrespective of the purpose for which such use or results are applied. The information on this website is no substitute for financial advice.

Greece

One of our avid readers (hi Mum!) pointed out how we have failed to comment on the main story currently hitting all the headlines …. that of Greece. That is correct- probably the main reason is due to the fact that the news flowing out of Greece, is so fast, that I would have undoubtedly got to the end of my blogging, by which point I would have had to write a whole new posting due to an updated newsflash! Often, the latest revelation is a full 180° from the previous newsflash, and that is no doubt significantly contributing to the increasing volatility we have been privy to, with investors being whipsawed from one side to the other! Risk on, risk off, threat of contagion, restructurings, haircuts ….. isn’t life exciting! The other reason for not writing about Greece, is that I would undoubtedly have to disclose that my main ECONOMICS tutor was Greek, and what does that say about my knowledge of economics/finance?!!! Truth is, he was also my Football Manager ……. And he was a darn sight better at football than at Economics!!!

What is clear, is that Greece has run out of money, again, and needs some form of bailout/restructuring. So far, Europe, the ECB, IMF and everyone else has responded to the problem by throwing more money at Greece, allowing them to "buy time". Nobody has used the downright rude and ugly term of "insolvent", with "liquidity" being the preferred terminology. Lenders have been willing to lend more money, because the problem is one of liquidity. They have been willing to lend more money to banks and Governments. And Greece for their part, have not once admitted the need for default or restructuring, and so the banking sectors have not been forced to write down any more debt and/or need to raise more capital. A win win for everyone.

This would have bought some more time. Time is a fantastic healer. However, the issue was not one of liquidity, rather one of insolvency-debt problems are unlikely to be solved by taking on more debt. As a minimum, investors will require a credible plan for the economy to return to solvency to become willing to fund the banks and public debt of the troubled economy in question. This does not seem to be the case though, with the general Greek population revolting (in the other sense of the word), then one has to wonder where that credible solvency plan is going to come from. What is clear though, is that of those included around the negotiating table, nobody but nobody is "allowing" Greece to simply default. A solution will seemingly be found to prevent Greece from "legally" defaulting- even if it means some quick changes to EU law, account rules or ECB operation guidelines.

Whats the big deal with a Greek default? Why are they working so hard to prevent it? The Eurozone debt crises, is not especially extraordinary- it is merely another credit cycle, whereby debt extends beyong the capacity of consumers and economies. Debt then contracts as uncollectable debt gets written down, and bad debt is purged from the system. Throwing more money at Greece is merely extending and prolonging the problem?

Although a default is a default, and from a value point of view it doesn’t make any difference whether it is the debt of Greece, Portugal, Azerbaijan or the US that is written down, from an economic point of view, it certainly makes a difference. If Greece are thrown another lifeline, both Ireland and Portugal will operate under the assumption that in the future, they will also get another bailout should they need it. Markets know that, and hence speculation will continue on the "Who's next path", and cause investors to demand additional premiums, causing yields to rise. Eventually, the larger economies will be targeted too. How do I know you wont default either Spain? And that will cause even more serious problems, as who is left to bailout the larger and more important economies?

---------------------------------------------------------------------------------------------------------------------------------LEGAL DISCLAIMER: The views mentioned above are purely that of the author, and does not necessarily reflect the official view of Goldrock Capital or employees. Unless of course the aforementioned view was a phenomenally good call, with exquisite market timing, in which case Goldrock Capital reserves the right to all credit!!!!!More Serious disclaimer:The financial advice offered on this site is of a general nature and may not be suitable for some people. No individual financial needs or goals have been taken into account in the advice offered on this site, you should always seek independent advice about specific financial decisions. Neither Goldrock Capital nor its employees makes or gives any representation, warranty or guarantee that the information it provides in this website is complete, accurate, current or reliable (including that it has been or will be audited or verified). Goldrock Capital and its employees shall not be liable for any loss or damage whatsoever (including human or computer error, negligent or otherwise, by one or more of the authorities, or incidental or consequential loss or damage) arising out of or in connection with any use or reliance on the information or advice on this site. The user must accept sole responsibility associated with the use of the material on this site, irrespective of the purpose for which such use or results are applied. The information on this website is no substitute for financial advice.

A contrarian view ......

Interestingly, after my last blog entry http://goldrockthoughts.blogspot.com/2011/06/taking-look-at-bigger-picture.html I saw that the 10 day smooth moving average for the put/call ratio was at its highest it has been since March 2009 when the S&P put in its 666 low.

As a reminder, the put to call ratio is a popular contrarian indicator based upon the trading volumes of put options compared to call options. The ratio attempts to gauge the prevailing level of bullishness or bearishness in the market. Obviously, there is always a buyer for every seller, otherwise the market wouldn’t clear. On days when the major averages perform strongly, the number of calls bought typically far outweighs the number of puts, so the ratio tends to be small. On days of market weakness, fear prevails and the number of puts purchased is typically much higher. The daily put/call graph is highly erratic, however, a moving average that smoothes out the data is an excellent contrarian tool that can help you avoid getting caught up in the prevailing market sentiment.




A 1 day rise in the indicator is typically a sign that investors are temporarily seeking protection against a market decline, an extreme high in the moving average reveals a more comprehensive sentiment build-up. The put/call ratio hit its highest level in the last 2 and a half years, higher than this time last year when the market first plunged on Greece, and higher than March 2009 when the market hit the 666 low.

I always like mentioning the other side of the coin too, and so yes, this is a favored contrarian tool, never before has the put/call ratio been at such extreme levels DESPITE the multi-trillion safety net in the form of central banks, and just 2 weeks prior to the end of the Fed stimulus program. Contrarian tools are a good bet against conventional wisdom. However, with Greece/Europe on the verge of bankruptcy, perhaps conventional wisdom (continued declines in the markets) will prevail after all!!!



---------------------------------------------------------------------------------------------------------------------------------LEGAL DISCLAIMER: The views mentioned above are purely that of the author, and does not necessarily reflect the official view of Goldrock Capital or employees. Unless of course the aforementioned view was a phenomenally good call, with exquisite market timing, in which case Goldrock Capital reserves the right to all credit!!!!!More Serious disclaimer:The financial advice offered on this site is of a general nature and may not be suitable for some people. No individual financial needs or goals have been taken into account in the advice offered on this site, you should always seek independent advice about specific financial decisions. Neither Goldrock Capital nor its employees makes or gives any representation, warranty or guarantee that the information it provides in this website is complete, accurate, current or reliable (including that it has been or will be audited or verified). Goldrock Capital and its employees shall not be liable for any loss or damage whatsoever (including human or computer error, negligent or otherwise, by one or more of the authorities, or incidental or consequential loss or damage) arising out of or in connection with any use or reliance on the information or advice on this site. The user must accept sole responsibility associated with the use of the material on this site, irrespective of the purpose for which such use or results are applied. The information on this website is no substitute for financial advice.

Taking a look at the bigger picture ,,,,,,,

I thought I’d take advantage of a quiet day in the office and catch up with some blogging ……. There’s not many people who can openly say that without fear of their employer giving them “the boot”- not only do I not have that fear, but I know I have my employer’s blessing ….. wow! I’d like to take a step back and see where we are. Not that one should only reflect on quieter days, but its certainly a good opportunity to do just that!

With the US markets currently down some 8% from the recent peak, with the Nasdaq in negative territory for the year and many other markets either share a similar fate or are fast approaching, there is certainly a lot of fear out there. What do we do now? Do we buy? Sell and wait for more certainty before getting back in? Wait and see? The first question that needs to be addressed is what sort of an investor am I? Many investors are currently wondering why they are not traders. The last decade has seen the markets go absolutely nowhere with a huge amount of volatility. Buy and hold has not worked in the main. One must remember though, that:

1. yes, your neighbor may have sold at the top, but if they didn’t get back in, then they are not necessarily better off.
2. You have many neighbors, many more of whom would have bought at the top ….
3. and it’s only the successful ones that will be shouting their stories!

Generally, trying to mix the trader and investor approaches does not work. If you would like some blend of the 2, you should allocate part of your money to each method as the rules and psychology are completely different. The trader MUST NOT care about fundamental values- his timeframe is far too short. The investor has to trade on fundamentals, without getting caught up by the emotive side. Indeed, the investor will typically be buying the stocks that are hated by the market in general and traders in particular.

The Markets have had a very negative tone over the last few weeks. This was to be expected. In Q1:
· Cyclical indicators reached historically high levels, and was tracking well above its normal level for the stage of recovery we were at.
· Consumer confidence was dented by a whole host of problems.
· High commodity prices were denting the consumers and putting corporate margins under pressure, but the weak consumer meant that companies were unable to fully pass on the costs.
· Wage costs are rising sharply in Emerging Markets.
· Productivity growth is unlikely to be strong due to the lack of investment over the last 3 years.
· Forecasts, which on the whole had been based on continued positive margin expansion was already at the highest since 1956, despite a tepid economy and surging input costs.
· Emerging Market Central banks have started on the monetary tightening route.

And we haven’t even begun to talk about outside factors, such as the end to QE2 and Fed induced liquidity, or the sovereign debt problems that have plagued us for 18 months and show no signs of letting up, or geopolitical tension in the Middle East/Africa, or natural disasters/tsunamis and their repercussions on global demand/supply, or a housing market is bobbing along at the very bottom, with 1 in 4 Americans in negative equity with potentially much more downside, or even the still weak labor market.

There is no doubt about it, the economy is definitely cooling off, as it was this time last year. However, now it is different. Last year, Mr Bernanke through the market a lifeline with a new round of liquidity expansion. Last week however, he delivered an even more sobering outlook, but this time without the lifeline (just yet anyway- I mentioned here http://goldrockthoughts.blogspot.com/2011/06/what-goes-up-must-come-down.html that the stock market, and Fed, and just about everyone in between is seemingly caught in a catch 22 situation: QE3 is seemingly being priced in by stocks ...... however for QE3 to actually happen, stocks would have to fall approximately 15-20% from their current elevated levels!!! I feel that QE3 was the main factor in propping up the market to such an elevated level, if there is no hint from the next Fed meeting (next week) as to the onset of QE3, we may be in for an interesting market- which of course would give the Fed the ammo needed for QE3!!!

Another interesting observation is that whilst the economists have been cutting their numbers, the equity analysts have yet to follow suit. If they do, then suddenly market valuations are not as compelling as they seemed.

All this sounds very bearish, and one can well understand the want/need to take some money off the table and wait and see. Weakness in the economic data was expected. In addition, the supply chain disruptions from Japan and consumer cutbacks from higher oil, was also expected, with consensus opinion that the tepid recovery will continue after these aberrations. There is always the worry though that the economic weakness is the sign of something much worse. This currently seems quite an extreme view, as even the cautious camp are predicting a slower rate of growth rather than an outright recession.

There are some real doom and gloomers too, who want to extrapolate to another lost decade plus. For me, the last decade was an exception. It started where demand and sales had been brought forward over fears of Y2k. This was an exceptional and unprecedented boom, which was only intensified by the onset of the internet. The decade ended with a financial crises of unprecedented proportions. We started with an atypical peak, and ended with an atypical trough.

For the investors out there, I would take advantage of the fear. Though I would imagine that there is still some more downside, I feel like the slowing economy story is fairly reflected in prices. Over the course of a business cycle, stocks are undervalued and trading below historic norms. Yes, China, and other Emerging countries are tightening, but this is a positive. They have already been appropriately tightening for a year now, and seem to be successfully navigating growth with manageable inflation. Incremental Emerging Market consumer spending eclipsed US consumer spending several years ago, with the Emerging Market consumer to drive global growth for years to come. And there are already indications that even those who have been hardest hit by the Japanese earthquake are almost operating close to full production.

Over the past few months, I have been saying how the market is not exciting, the risk reward is not compelling. The markets are now at their most compelling, valuation wise. Despite expecting some more down side, I would begin to close underweights and for the investors to build positions. The markets themselves seem quite healthy, in the sense of strong balance sheets, leverage as low as it has been for the last 20 years, banks more willing to lend, buisness climate indicators still close to their highs. By all means trade the fear, trade the exuberance. But don’t get caught up in it yourself. Stick to your system- if everything is within normal ranges, then there is no reason for alarm. And also be wary of the news. The news is about problems and potential disasters. If it’s the talk of the town, then it is already reflected in market prices. Look for the unexpected, or if something unusual is happening.

Happy Investing/trading!!!


For the record, S&P 500 currently at 1267!


---------------------------------------------------------------------------------------------------------------------------------LEGAL DISCLAIMER: The views mentioned above are purely that of the author, and does not necessarily reflect the official view of Goldrock Capital or employees. Unless of course the aforementioned view was a phenomenally good call, with exquisite market timing, in which case Goldrock Capital reserves the right to all credit!!!!!

More Serious disclaimer:

The financial advice offered on this site is of a general nature and may not be suitable for some people. No individual financial needs or goals have been taken into account in the advice offered on this site, you should always seek independent advice about specific financial decisions. Neither Goldrock Capital nor its employees makes or gives any representation, warranty or guarantee that the information it provides in this website is complete, accurate, current or reliable (including that it has been or will be audited or verified). Goldrock Capital and its employees shall not be liable for any loss or damage whatsoever (including human or computer error, negligent or otherwise, by one or more of the authorities, or incidental or consequential loss or damage) arising out of or in connection with any use or reliance on the information or advice on this site. The user must accept sole responsibility associated with the use of the material on this site, irrespective of the purpose for which such use or results are applied. The information on this website is no substitute for financial advice.

Thank you Stanley!!

I note that Stanley Fischer has put himself forward as a candidate for the top-job at the IMF.

As opposed to some of the Israeli papers who consider this to be almost treasonable, that he leave the job in the middle of the second term, I would like to wish him the best of luck!!

What an honour it would be if the next IMF head came direct from the Bank of Israel.

By the way, it ought not need saying, but he has done a great job as Governor and I thank him for that!!

Let's be a little gracious to our public servants (at least on the odd occasion when they do they job right!!)

Debt. Debt & more debt

The total amount of mortgage debt peaked in 2008 at $14.6 trillion, whilst the total amount of consumer debt, comprising of autoloans, credit card and student debt, peaked at $2.6 trillion during the same year. Today, mortgage debt outstanding stands at $13.8 trillion, while consumer debt stands at $2.4 trillion. WOHOO- the consumer has been delevaeraging ..... over the last 3 years outstanding consumer debt has fallen buy $1 trillion. If the story ended there, that would be great. However, that would require us to ignore the "trivial" fact that the banks have written off significantly more than $1 trillion in non performing loans.


The lower the debt/GDP ratio, the more powerful and stable the gains in GDP growth, as the growth in GDP can increasingly be financed within your own means, without resorting to outside debt. Not all debt is bad, but increasingly relying on it certainly is. Purchasing on debt is very much "short term gain for long term pain", both on the micro and macro level. Once the purchase has been made, and the loan taken out, the investor/purchaser has a short term benefit (as does the economy); however he has subjugated himself to a monthly installment for a (typically) depreciating asset.


The irony is, that the longer the scenrio plays out, and the more frequently people live out of their means, the more debt is taken on, and the more leveraged one becomes. Leverage increases as the the level of poorness increases in tandem. The following graph from the St Louis's Fed shows that the phenomena is not merely one unique to the individual consumer, it is true on a national level too:




























Deleveraging is a painful process. It is a long, and slow drawn out process. But with the Fed adding an debt to the tune of an additional $7 trillion to the nation's budget sheet since 2008, the problem is not going anytime soon. And with interest rates at all time lows, and can only go up from here, how is the debt to be serviced?

Gordon Gekko is not all bad!

I read Sophie Shulman's article this morning in Calcalist. I would have to say that it was not impressed. On the other hand Michael Eisenberg's blog put a smile on my face. He wrote earlier this week in response to Ze'ev Holtzman's somewhat unfortunate comments on the Israeli VC industry .

There is much discussion about the state of the VC market in Israel and whether it is "good" or "bad." In addition there is much popular debate about the concentration within the Israeli market of too many assets and businesses controlled by a small number of "tycoons."

I personally feel incredibly excited about the developments within the Israeli market, both on a wider level and also from my own personal perspective as an innovation driven investor.

Shulman complains that Gordon Gekko, the infamous corporate raider characterized in the two "Wall Street" films, is coming to town, with the obvious negative implication that this implies. The fact that major global financial investors in the form of their private equity arms are making investments in Israel is a real sign that the market here is growing and maturing. The fact that top investors, many mentioned by Michael, like Silver Lake, Bessemer, Battery, Greylock and others are building teams or dedicating resource to the Israeli economy is a GREAT sign that what we have what to offer the global markets is attractive to the highest quality investors globally.

As I have mentioned elsewhere the domestic Israeli VC industry will have to grow up and understand they are not competing with their peers in Tel Aviv and Herzliya, but their global peers at the best firms on the planet. I see this as a completely optimistic development rather than the opposite.

Their are several obvious implications:

• at a micro level, the Israeli economy is maturing, but will need to continue to aggressively innovate with technology and upgrade its people to continue to be attractive to both strategic and financial investors as the 21st century develops
• the local institutional funders (VC funds, PE funds, public investors etc) will need to adapt their business models as the local and global trends move dynamically. Competing for capital on a global scale is challenging and only the best will survive.
• Recycling of human and financial capital is a healthy process, crucial in enabling the economy to build and rebuild in the most efficient way possible. The continued entry of leading global investors will accelerate this process and should be greeted with open arms!
• Finally Apax, Citi, Permira, Francisco, Bessemer, Battery et al entering the Israeli market will keep the "usual suspects" (Dankner, Teshuva, Arison, Ofer etc) honest by increasing the financial competition for attractive Israeli assets.

We should be shouting from the rooftops about Israel as a great destination for the world's capital, at the same time as investing time, thought and money into readying ourselves for the challenges ahead. The financial community MUST mature alongside real industry, in order to provide relevant and financially efficient solutions for company building. It's not rocket science, but does require us to stop with the constant self-criticism, and replace it with a dynamic and realistic assessment of what is required to move forward.

Happy hunting!!