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PPO – PremInitial Public Offering
With the lack of pop in the Zynga (ZNGA) IPO there have been calls that the IPO market is now smart enough to avoid the whole bubble plague of the late 90s. I’d like to argue that it’s still there its just that the IPO is no longer the point from which you track bubble behavior.
So really the fundamental question is when is the true IPO? Yes there is the technical definition involving S1 filings and such but since the last bubble there has been the rise of the private company markets like SecondMarket and one could argue that Zynga amongst others started trading pseudo publically a long time ago. If you read the press on them in these markets they certainly behaved like the IPOs of yore. Zynga tripled in valuation in these gray markets in 2010/2011.
This is what lead to the valuations that look like non-bubble businesses. It really was public mania done in a semi public way that lead to these apparently stable non-bubble IPO valuations.
The problem is there is no term for this and if you can’t name it you can’t track it. So I would like to propose a name. When a private company begins trading on a private company “gray” market like Second Market it should be called a PPO – PremInitial Public Offering so that way we can still track it’s valuation pop and call it a bubble when price swings outpace fundamentals. It foresees the bubble before the IPO.
About Face(book) – IPO Now Means “Internal Private Offering”
So 50B (or 25 times current sales) is the valuation for Facebook (see Forbes for a sobering comparison to current public companies) What actually makes this even scarier is NOT the current valuation but the expected valuation. My guess is that when you invest in a “hot pre-IPO” stock your expectations for a total return probably range from 2 to 4 times the investment (there is a sexiness to the notion of “doubling your money” that is reserved for the big bet).
So given that the investors are expecting this stock to hit 50-100 times current sales. While it is true that sales will continue to grow its still sobering to see what the expected valuations are (100-200B total market cap). For reference Google as about a 200B market cap right now and at its peak was about 230B.
Secondly this is a very clever vehicle that gets the employees around the typical 6-month post IPO lock-up period. The truth is the vast majority of the money going into this offering is actually just being used to cash out insiders (VCs and employees). As a result they get their IPO (which now means “Internal Private Offering”) and the only ones with the lock-up are the current “market” investors and that lock-up is now 2 years.
The one hopeful note here for those that feel like the wealthy class have been taking advantage of the working class is that the only ones that get taken are the wealthy as not many working class individuals have 2 million to invest right now.
Very clever…
A Silicon Valley/Venture Capital Solution to the Housing Crisis
(Follow Me on Twitter at watchingmarcitz)
(Having problems with your Toyota. Learn how to get more for your troubles)
So President Obama has finally decided to do ”cram-downs” with taxpayer money. This is the idea that one should reduce (cram-down) the amount owed on a house to put it more in line with the new (reduced) value of that house so a person can refinance or won’t just abandon the property.
I am totally opposed to cram-downs (especially for those that are underwater because they chewed up their equity on cash-out refis for frivolous spending) but if Obama is going to do it let’s at least do it in a way that protects taxpayers, encourages the right kind of behavior going forward and isn’t just a handout to the unfortunate or financially ignorant or profligate. That lesson comes from the way venture capitalists invest in Silicon Valley startups and the answer is “cash for equity.”
Yes cash for equity has already been done with the money going to the banks but the valuation method has all been wrong. For housing cram-downs its very simple and it aligns everyones goals (at least the ones we want to support)
Take for example you have a house that has $600,000 in loans against it but it is now worth $500,000 . The owner is seeking to refinance it but can only do so for $500,000 so they need a $100,000 “cram down”.
If the government (or the bank ) provides it they should get a percentage of equity in the house equal to the cram down amount divided by the new appraised value of the house.
In this case that would be $100,000/$500,000 = 20%
Now when the owner goes to sell the house 20% of the proceeds immediately go to the entity providing the cram-down (government, bank, etc..).
Why is this fair? Well if you are going into foreclosure you have effectively lost the asset. Refinancing is a way to buy it back but to buy it back you need a partner to provide some of the financing. So, in this example, you are effectively asking someone for $100,000 to buy a $500,000 asset (remember $600,000 is irrelevent at this point in the game). They are putting up 20% of the money so effectively they own 20% of the equity.
Here’s why you do it this way:
- Supposedly preventing foreclosures will “save the market” so the taxpayer/bank investor should get to partake in the upside (and share the risk on the downside).
- If the goal is to keep people in their homes with our money then those people better damn well stay in those homes. This will make that likely because they’ll have to wait it out until either they have paid down the principal on their loan by the equity percent or the home has risen in value enough so they can sell the home and pay off the cram-down equity holder and the mortgage lender.
- This should also separate the real homeowner from the “flipper”. The “flipper” won’t want this “long term commitment” and will just give up the house. The real homeowner who is committed to staying will be much more agreeable because they truly plan on riding this thing out.
Administering this program is simply done by the IRS which is informed of all major income events and can act as a collection mechanism for this.
So PLEASE don’t do cram-downs but if we must lets do them right. It works for Silicon Valley to take cash for equity so why not let it work for the rest of the country.
Oh and don’t forget to email Timothy Geithner to tell him what a horrible plan this is.
(Follow Me on Twitter at watchingmarcitz)
(Having problems with your Toyota. Learn how to get more for your troubles)
Getting the Most Out of Toyota for your Troubles
(Follow Me on Twitter at watchingmarcitz)
(UPDATE 3/18/10: Toyota executive offices contacted me today, OK I actually contacted them first (310-468-4000), and offered to buy back the car. We’ll wait to see the offer before deciding whether they are trying to help or just get rid of me.)
(FURTHER UPDATE: In a conversation with one of their executive analysts today (a representative for Toyota Executives) they said to me “I feel you are trying to swindle us”. Not exactly a way to earn points for customer service. OH and then they “call-blocked” me (a strange badge of honor). No worries its simple to bypass, see below.)
Key Contacts at Toyota of North America
(If you call please tell them Marc sent you)
- Jim Lentz – President/COO – 310-468-6285
- Nancy Fein – VP of Customer Relations – 310-468-5277
You can also reach other executives by following these simple instructions to manage their voice mail system
- Dial their direct line at 310-468-4000
- Select “2″ from the first menu to dial-by-name
- You can find a list of key Toyota executive names on this website
- After finishing the message hit “#2#” to mark the message urgent and send it.
- You can then dial another extension by hitting “*t” and then hitting “*a” to dial by name, again
IF you get “call blocked” (you call and the call just mysteriously drops) you can either use another phone OR simply find out how to do one-time caller ID blocking of your phone number. For Verizon you dial *67 then the phone number then “snd”. So if you are trying to reach Mr. Lentz its *673104686285 (Send)”
The problems at Toyota (much like the Camry and Prius) are accelerating out of control and just can’t be stopped. Unfortunately the problems go from the ridiculous (stuck accelerator pedals, brief lack of braking control) to the sublime (body rattles and creeks and groans on brand new cars). My own 2007/2010 Camry Hybrid has spent 7.5% of its life until now at the dealership. My most recent trip to the dealership (my 17th one in 3 years) proved that all too true.
- A new 2010 Camry for $2,500 (to replace my 2007)
- $500 in dealer credits for service and parts
- A 2 year/25,000 maintenance warranty that covers all standard maintenance for that period.
- A free 15,000 mile tune-up
- Did I mention the new 2010 Camry for $2,500?
Here is the background on what has happened.
- If Toyota is unable to repair the same problem a number of times (the amount is dependent, I believe, on the type of the problem, for my rattles it was 7 repair attempts) you can request Toyota investigate and make a claim.
- If you are cleared under Lemon Law they will determine a “usage fee” (as dictated by the California law). That is a fee you pay EITHER to have your car replaced or money refunded. The fee is calculated based on the mileage on your car when you reported the problem for the first time. For example I had reported my car problem at about 3000 miles and had it repaired numerous times over the following 2 years. I opted to have my car replaced with a comparable 2010 model for a fee of $2500. If I returned the car and didn’t take a replacement they would have returned what I paid for the car LESS the $2500.
EVEN if you can’t get qualified under Lemon Law (or its just too soon) you can work with the Toyota Customer Experience Center (or your manufacturer’s customer satisfaction line) to get some form of retribution for your troubles as I have done above. Please note just having to have the rattle fixed once or twice won’t get their attention but if it goes 3 or more repair attempts you definitely have a credible gripe that they will find embarrassing and want to provide some form of compensation. The types of compensation that they are likely to do are:
- Some form of credit for further service at a Toyota dealership.
- A free service (e.g. free 15,000 mile service)
- If things get really bad a maintenance contract where they will handle all standard maintenance (oil changes, tune-ups, etc…) for a certain period of time or mileage (e.g. 2 year/25,000 miles)
So a few pointers:
- Report problems early and often so if you have to go to Lemon Law you will minimize the usage fee.
- Keep all service receipts FOREVER.
- Establish an ally at the dealer.
- Contact the Toyota Customer Experience Center (or your automotive manufacturer’s customer care line) at 800-331-4331 and tell them WatchingMarcitz sent you. Establish an ally there as well.
- For my own personal cause PLEASE when you are at the dealerships approach other like-minded Toyota owners and tell them about these tips. Also please forward them to me at watchingmarcitz@yahoo.com . I used to work in the auto industry (General Motors Corporate Marketing in the late 80s and early 90s) and I know how to pressure the automakers. More people singing from the same hymnal will help and I will gladly organize the choir.
- Please also keep me posted on your progress so I can gather all the information together.
Regrettably Toyota 2010 feels very much like GM felt back in the late 80s when they were presiding over falling quality and being overtaken by a foreign competitor. For GM it was Toyota. For Toyota it is now Kia/Hundai or Ford (both worthwhile considerations for your next car).
BONZAI!!!
Follow Me on Twitter at watchingmarcitz
Housing Wasn’t a Free Market
So there has been a lot of talk that the economic crisis, specifically the housing crising, was a failure of the free market. The housing crisis was definitely a failure but don’t think that what drove it was the free market. In fact a properly functioning free market would have actually prevented it. Also don’t think this is a new problem requiring new theories. There are hundreds of years of economic theory (recognized by no less than 5 Nobel prizes) that predicted and can explain all of this. Allow me to do that in one web page. (SPOILER ALERT: There will be economic terms used but it will be quick, mostly painless but very informative)
Lets first start with the assertion that for any market to work there is the underlying assumption that complete (if not perfect) information is available and that all participants act rationally. According to this article:
Complete information is a term used in economics and game theory to describe an economic situation or game in which knowledge about other market participants or players is available to all participants. Every player knows the payoffs and strategies available to other players.
Complete information is one of the theoretical pre-conditions of an efficient perfectly competitive market. In a sense it is a requirement of the assumption also made in economic theory that market participants act rationally.
Examples of the LACK of complete information in the housing market included:
- Buyers didn’t understand housing market risk.
- Buyers didn’t understand the true mechanics of the financial commitments they were making.
- Banks for giving out “No-doc” mortgages.
- Rating agencies provided bad information on ratings (either via ignorance or straight up fraud).
Without complete information you wind up with information asymmetry:
In economics and contract theory, information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. This creates an imbalance of power in transactions which can sometimes cause the transactions to go awry.
Examples of information asymmetry during the housing bubble include:
- The exotic and esoteric financial contracts that emerged. (asymmetry between the bank and the consumer)
- The questionable package of mortgages (loaded up with “no doc” mortgages) that also emerged. (asymmetry between the bank and the investor)
One of the outcomes of information asymmetry is adverse selection:
Adverse selection, anti-selection, or negative selection is a term used in economics, insurance, statistics, and risk management. It refers to a market process in which “bad” results occur when buyers and sellers have asymmetric information (i.e. access to different information): the “bad” products or customers are more likely to be selected.
Examples of “adverse selection” almost go without saying but here goes anyway:
- People bought houses they couldn’t afford.
- Most of those “no doc” customers got loans.
- Most of those questionable packages of mortgages were gobbled up by investors.
In short this was NOT a failure of the free market because the free market wasn’t even involved. If a proper free market was involved then there would have NOT been information asymmetry. Without information asymmetry there would have been no adverse selection and hence no bubble.
So what now? Well this is where another term gets misused and misunderstood and that is regulation. It appears to me that most view the term regulation as the way for the government to restrict certain activities so OF COURSE we should be against that (offering certain financial products, limiting speech, telling us what we can do in our bedrooms ,etc..) . I think, however, there is another form of regulation that is far more beneficial and more universally acceptable and that is requiring disclosure/transparency of information (AKA “complete information”). One successful example of this is warning labels on cigarettes. This did NOT restrict usage of cigarettes but allowed consumers to make more informed decisions (and replaced those ads where doctors told you smoking was good for you).
Regulation that provides greater “transparency of information” (e.g. disclosure of true financial costs of mortgages) is clearly a pre-requisite of the free market(see “Complete Information” above) as it prevents information asymmetry and thus adverse-selection.
So in the end the great irony here is that those that are supposedly the proponents of the free-market (fiscal conservatives) also seemed to be the most opposed to regulation (even of the information-transparency kind).
Well they actually do, inadvertently, have one point. Even if you make information readily available, if the general public is not properly educated to consume it, its a waste of paper to print it. So in the end if information transparency is provided it will still be useless without education. If you want to see a good piece on the importance of education then check this out.
Reduce your California Withholding NOW!!!
Sure tax season is 10 months away but you still can protect yourself now if you live in the state of California.
As you know, California is starting to issue IOUs to those that have lower priority on debt held against the state. The lowest on that totem pole are any taxpayers who are owed a refund. It is very possible that this IOU system will continue for some time, even as late as next calendar year when you are filing your 2009 taxes. Remember. April 15th 2010 is the next calendar year but it is within the current IOU-laden fiscal year for California.
What does this mean for you? If you are expecting any sort of tax return there is a chance that you will, instead, receive an IOU. As a result you should seriously consider (legally) reducing the amount of tax withheld to a point where you at least wind up break-even (or even owing a little bit) when you file your taxes for 2009. If the state owes you anything do not expect to receive it in a timely fashion. Better it be in your pocket than there’s.
Also remember you have paid half of your income taxes for the year so you’ll need to account for that as well.
This is probably extremely critical if fear you may be unemployed in the near future. You may find yourself in a situation where you would wind up with a tax refund but not see the much needed cash in time.
Please note that your situation may vary depending on your specific circumstances so you should ALWAYS contact a professional for the right strategy. I just contacted an accountant and wanted others to at least have the chance to do so as well.
Forewarned is forearmed.
Oh and be forewarned about the next major drop in real estate on the San Francisco Peninsula. Here is an article that shows why prices are due for another 30% drop.
Missed it by One Day…
Well in a previous article talking about my predictions for GM I said:
Now I’m ready to double down. GM goes into a pre-arranged bankruptcy by the end of May 2009.
Well I missed it by 1 day (forgot that May 31st was a Sunday). Did I mention we were using “The Price is Right” rules.
Heck I think that’s still pretty good 
Rearranging Deck Chairs on the Peninsula
With a good run on the stock market and even some good news about housing sales I think its time for an example before anyone gets too cozy that the worst is behind us.
Also as any real estate agent will tell you “location, location, location”. Well while prices have begun to level in the outskirts like Vallejo they haven’t really begun their fall in Silicon Valley and the Peninsula. Right now people here think “whew that wasn’t so bad” (only a 10% drop in value) but in reality what these market movements (dramatically falling median home prices) presage is a large fall coming to the Peninsula this year. Yes everyone is buying homes in the cheaper areas of the “bay area” which is what is driving down the median. That means less buyers on the Peninsula (in which you can’t find any homes close to the current depressed median). Its only a matter of time before it finally hits here.
Oh and lets not forget that the housing market is permeated by many myths that are proving to be quite untrue (and therefore won’t be there to save this market). For a detailed analysis of these myths please point your browser here.
Tooting My Own Car Horn…
On December 31st, 2008 I posted a sarcastic (and hopefully not too offensive) post about how GM’s Rick Wagoner could very well have been Jesus. In that I offered this little prediction:
- Rick (at least his job) will likely be killed by foreigners (the same ones who have been persecuting “his people” for years)…
- …and it will happen in the spring (end of Q1 2009)…
Well the end of Q1 2009 is March 31st and today March 30th Rick Wagoner resigned from GM. DAMN, I missed it by 1 day…
Now I’m ready to double down. GM goes into a pre-arranged bankruptcy by the end of May 2009.
Please make sure to reread some of my other GM commentary:
Its Time to Demote the General (from November 10th, 2008) in which I say (as a casual aside) that the AIG bailout will get larger and yet still fail (WOO-HOO, two-for-two)
An expose (of sorts) showing that many “Japanese” cars are actually more “American” than those made by GM, Ford or that company that begins with a “C”.
A humorous look at how GM can save not just auto industry but also retailers and home owners.
And, of course, the original is Rick Jesus article
One final thought:
Chrysler is already a Japanese company. Afterall who else but the Japanese would partner first with the Germans (Mercedes-Benz) and then the Italians (Fiat) in what will turn out to be a failed effort for world (economic) domination.
Thanks for listening. Do us all a favor and please buy cars made in America (by Toyota, maybe Ford).
Its time for homeowners to take responsibility for their actions
Representative Barney Frank was quoted in the Wall Street Journal today (9/23) as saying:
“I just think it’s inconceivable that people would say that the taxpayers should put some money at risk because of bad decisions made by people who then continue to be rewarded without any restrictions and, in fact, would be rewarded for their mistakes,”
While he was referring to financial executives this logic also applies to the individual homeowners when considering the “bailout” and “mortgage relief”. It is wrong to have taxpayer money going to reward, without any restrictions, the bad financial decisions of corporate executives or our neighbors. We have to remember that a large percentage of loans that are currently going bad were due to voluntary cash-out refinancings and NOT new mortgage originations.
According to RealtyTimes in 2006 (the peak of the bubble) 80% of all refinancings involved taking extra cash out against the growth in home equity to pay down consumer debt. In short many of the people the government is trying to help with the “mortgage relief” plan are those whoendangered their homes because of their consumer debt. Without that consumer debt they would not have refinanced and would have had an equity cushion to protect them in this type of market.
The net effect is the currently contemplated home-owner bailout is going in a large part (indirectly) to paying down consumer debt and rewarding consumers for profligate spending. Is that a proper use of taxpayer money? Not according to Mr. Frank
So back to Mr. Frank’s quote. What should those restrictions on homeowners be?
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Raise loan standards to pre-bubble norms (e.g. stringent payment/income ratios, down payment minimums, loan documentation)
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Limit loans/refinancings/modifications/relief to people that meet those proper standards.
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Offer loans based on current house appraisal prices and at standard market (NON-subsidized) mortgage rates.
There is no objective/reliable way to determine who deserves help and who doesn’t (did you lie on your app? were you lied to? blow your equity on a new car?) so why not just use the proper standard consistently as that would be fair, logical, and not reward people for their mistakes. If you cannot meet the standard there is NO REASON why you should keep your house otherwise we are doomed to repeat this over-and-over again.
Its time for everyone to take their medicine (banks, financial executives and, yes Mr. Frank, even individuals). Don’t fear the falling of prices, welcome the reshuffling of assets from those that cannot afford them to those that can. That’s how you build an engine for growth and a stable economy.
Also remember that saving a borrower who can’t meet the proper standards prevents another family who could meet those standards from buying a home and therefore prolongs this societal pain. You are hurting as many people as you help.