From time to time, it’s good to take the pulse of the economy across different sectors so we can make an educated guess on market direction. Let’s look at four relevant “pulse points”.
Recently, the minutes of the Federal Reserve Board’s April 2011 meeting revealed that the Fed was in no immediate rush to raise interest rates in order to encourage business investment, and to foster economic growth.
U.S.businesses are well-aware of this incredible window of opportunity to raise cash at rather low interest rates, because they know that this will soon give way to higher borrowing costs. As a result, many cash strapped and cash rich firms are rushing to raise capital.
Even Google – with a cash hoard of $36.7 billion – decided to get in on the action. In May 2011, it announced a public issue of corporate debt with three interest rates 1.25% notes due 2014, 2.125% notes due 2016 and 3.625% notes due 2021. What Google will do with that extra cash on top of its existing stash, no one really knows. My guess is they’ll invest it, make more than the interest due, and juice profits further even though they state that the cash will be used “to repay outstanding commercial paper and for general corporate purposes”. Yaa, right!
LinkedIn’s IPO Surge Sets Stage for More Internet IPOs
It’s not 1999, but May 2011 almost felt like it – with Microsoft buying Skype for $8.5 billion and LinkedIn shares surging on its Initial Public Offering. LinkedIn’s IPO was a major test of investor demand for a new wave of fast-growing social Web companies. And investors passed the test with flying colors!
Professional networking firm LinkedIn went public in May 2011 and on the first day of trading, its shares opened at near double their offering price of $45, giving the company a market capitalization of almost $9 billion – 584 times fiscal 2010 earnings and 37 times fiscal 2010 revenue.
“If LinkedIn is worth $10 billion, you got to think, what is Facebook worth?” remarked Peter Falvey, a managing director at Morgan Keegan.
How LinkedIn will grow to justify this super-lofty valuation, God only knows. Can it achieve such super-charged growth and profitability as it faces competition from Monster.com and CareerBuilder.com? Time will tell, but I somehow doubt it.
While the strong pop in shares is great for LinkedIn shareholders, it could ultimately be an albatross for the company and for investors that bought-in at lofty valuations.
Non-distressed homes… signs of moderate recovery?
According to Citigroup’s May 2011 report, the prices of homes in certain non-distressed sectors may actually be rising. Citi divided the market into two categories: distressed and non- distressed.
Aggregate prices for all houses sold dropped about 1½% in March 2011. However, prices of non-distressed properties actually increased by about 1%. Citi further states that its analysis does not support bearish predictions that housing could drop another 10% to 20%.