Animal Spirits, Favoring Facebook, Tesla, and More-

With Berkshire Hathaway's acquisition of Heinz, the deal making environment looks like it is starting to do more than bubble up. Over the last month, Liberty Global has purchased Virgin Media, Oracle bought Acme Packet, and Dell is looking to take itself private. The current environment has interest rates at rock bottom so financing is incredibly cheap. Public companies have record levels of cash on their balance sheets, and investors are starting to put pressure on management teams to either return the capital or do something productive with it. From the perspective of a shareholder or investor, if a company is sitting on high cash levels and earning nothing on it, you have an unproductive asset. If the cash is held for long periods of time, investor's also lose because of the missed opportunity of using the cash on other potentially more productive assets. If you combine these factors with the fact that many large companies also have very productive cash generating businesses which can be used to pay off potential loans, if this is not a great situation for deal making, when would it be? Moreover, management groups also have a fiduciary responsibility to shareholders to try to increase shareholder value. One way is by purchasing other enterprises which can help their existing businesses. It could very well be we see a lot more activity in the merger and acquisition front over the next year.

Facebook has built a large business and could see many years of growth in front of it. It currently has about $10 billion dollars of cash on the balance sheet, and no debt. It currently made public it will probably pay zero tax to the federal government in 2012. Our president publicly has stated the government should look at closing loopholes many big businesses use to avoid paying their tax obligations. Not only that, specific industries, especially energy, are chastised because they receive tax breaks when they are clearly large and profitable and don't need that preferred status. I think if you are going to be considered even-handed, the government should refrain from criticizing one industry for using tax laws to their advantage, and then ignore others, like those in high-tech, for doing exactly the same thing.

I don't know how many of you have been paying attention to the Tesla Motor controversy with the NY Times. If you have not, it is pretty straightforward. A reporter from the NY Times who owned a Tesla automobile tried to go on a 200 mile trip on the east coast during cold weather. The vehicle he owns was bought for the bargain price of $100,000. The story documented many problems the reporter had during the trip as the car had to stop numerous times. Tesla now says the story was fake and the two organizations are trading barbs through the media. Many in the press have written about how wonderful these electric cars are from Tesla. I have read some investors opinions on how they believe Tesla is a transformational type company. The practical aspect of the idea of electric cars as a mainstream alternative looks more and more questionable, to say the least. People are not going to pay elevated prices for a car which is not close to being functional at all times and in all-weather types. You could also take this a step further and very much question the idea of alternative energy sources being a practical alternative to traditional carbon based solutions. You better believe you will see more and more questions about this issue in the months ahead.

Here is a nice summary of the merger and acquisition situationhttp://www.cnbc.com/id/100461022

If you want more details about the Facebook tax controversy, maybe take a look

http://www.businessweek.com/articles/2013-02-15/facebook-gets-a-multi-billion-dollar-tax-break#r=rss

Native applications are all the rage- here is an analysis of the emerging industry-http://techcrunch.com/2013/02/17/the-native-ad-movement-and-the-opportunity-for-web-publishers/

Gold and silver prices had a very tough week, but I wouldn't count them out- here is one writer's thought-

http://seekingalpha.com/article/1199661-it-s-gut-check-time-for-gold-and-silver

I hope all of you are having a great weekend and thank you for reading the blog.

Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital
. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.

TINA, Technology, and Justice-

It is starting to get a whole lot more interesting in the capital markets. You see, the talk of a great migration out of bonds and into stocks is starting to get institutions and some retail investors a bit nervous, or excited, depending on your positions. One of the web sites I started reading is thereformedbroker.com, written by ex-broker Josh Brown. In one of his daily links, a trader came up with the acronym which I think is very appropriate TINA. What does TINA refer to? TINA speaks to the asset allocation decision many investors have to now grapple with of staying in cash, bonds, or cd's and getting potentially beat up by inflation or rising interest rates, or moving a greater percentage of capital to stocks? As the 10-year treasury bond yield hovers above or close to 2%, more and more investors are starting to believe in the TINA answer: There Is No Alternative! With the global and U.S. economy potentially starting to accelerate, the question will become more and more important, especially if the expansion has arrived.

I don't think there has ever been a time for investors when technology is potentially so disrupting to established companies, and even entire industries. If you look at specific industries which might be vulnerable, certainly retail is one because of the fixed costs of rent, inventory, overhead, etc. My own opinion is a couple of others which are just as exposed would be education and government. Can you think of two other industries which operate so inefficiently and are ripe for a more effective approach? If you look at startup companies, many are focused on education, but very few related to government.

The Federal Government decided to sue Standard and Poor's for its role in rating mortgage and asset backed securities during the housing boom and bust. It is very possible they will also go after Moody's as well. The first investor who mentioned these issues was David Einhorn, of Greenlight Capital, a few years ago. Both of these stocks have fallen hard over the last week. What many people don't understand about the stock market is often times, it takes a long time for events to play out. It does not mean they will never unfold, just it takes time.

Bringing up the topic of time and the U.S. government, if the ratings agencies are fair game, what about CEO's like Jimmy Cayne of Bear Stearn's, Dick Fuld of Lehman Brothers, and Stan O' Neal of Merrill Lynch? Even five years later, These guys nearly brought down the entire financial system but not one charge has been brought against them? Justice and the sands of time....

Speaking of David Einhorn, he spoke out yesterday about the capital allocation policies of Apple by suing them because they wanted to eliminate the threat of issuing preferred stock. Capital allocation is a massive issue for companies as it gets to the heart of how they balance shareholder value and the pursuit of profitable growth. Using debt, internally generated cash, or issuing equity are all possibilities, but the art of knowing when to use the appropriate tool(s) is critical for the management of any public company.

A nice article by LinkedIn Founder Reid Hoffman about the threat to retail-

http://www.linkedin.com/today/post/article/20130208012431-1213-will-software-eliminate-physical-retail-not-quite

Google has been implementing changes to its advertising program-http://bits.blogs.nytimes.com/2013/02/08/google-changes-its-ad-program-to-try-to-solve-the-mobile-ad-riddle/?ref=business

Warren Buffett's son Howard says he is ready to take the job as if anybody could fill the man's shoes-http://www.bloomberg.com/news/2013-02-08/buffett-s-son-says-he-s-prepared-whole-life-for-berkshire-role.html

If you really don't like bankers-http://www.marketwatch.com/story/so-god-made-a-banker-2013-02-06

Thank you for reading, and I hope you have a great weekend and are happy and healthy.

Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital
. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.