VCs Prepare for Winter

Out here the VC market is slowing. After a flurry of VC funds raising money, the pace has slowed. Private equity (buyout funds) are booming. Pension funds are switching to private equity. After a pickup of investing in ventures last year, the pace of venture investment has slowed. Silicon Valley has a sense of hunkering down for winter ie. a dry period of no IPOs and no M&A for venture-backed companies, for several years. Time to husband the capital and ride out the storm.

As an indicator of this mood swing, today's Private Equity Wire asks the question:"Why did buyout-backed IPO volume soar in the first half of 2005, while VC-backed IPO volume stalled?" They reject the argument that the public markets are disinterested in tech companies - some of the IPOs this year have been tech "companies like Rackable Systems, New Skies Satellite Holdings and Kenexa, ... and the largest buyout-backed IPO of Q2 was a $605 million offering from NeuStar, which provides technology services to the telecom industry." Instead, the 'culprit' seems to be "that today's public market buyers are most interested in basic company characteristics like size, profitability, maturity, etc. In each of these cases, the average buyout-backed company (turnarounds-in-process excluded) is preferable to a VC-backed company. The old paradigm of underlying assets vs. underlying vision."

This darkening mood is consistent with broader market trends, in that we are in the part of the four year Presidential cycle when equities take a dive. Further, Greenspan has so pumped in liquidity to fend of the Kondratieff Winter he has gotten us into the There Be Dragons part of the financial map. The next 10 years may be very rough, with a little bubblet in the middle (2007-2009).

Comments

[Achal]

Sorry to stray from the topic on hand:
Gold is read bearishly by both STU and Neely in the long term (they both expect a price below 200 before a bull market Wave 5 appears).

I have followed STU for 2 years and know that they have been wrong - has anyone followed Neely's analysis during that period and can enlighten me as to their success/failure in analyzing it?

DD(Yelnick), do you have any opinion/analysis on this issue independently?

[No bear yet]

Achal, there's a near perfect NEoWave "Diametric" pattern forming in monthly Gold....

http://homepage.mac.com/neowave/.Public/Monthly%20GOLD.pdf

Under NEoWave a pattern with waves similar in time and complexity can ONLY be "Diametrics". (Normally Flats and Zig-Zags MUST vary in "time and complexity", which Gold hasnt done.)

High probability Gold should selloff here soon.

[No bear yet]

Here is a nice W.D. Gann/Welles Wilder take on Gold confirming a move down into Feb 2006...

www.321gold.com/editorials/rosen/rosen062105.html

Watch out for a Delta ITD point #3 low which could hit next week though ideally July 20th. (Standard deviation Jul 6 - Aug 3.)

[No bear yet]

Yelnick wrote: "Kondratieff Winter"

Here's a copy of July 2000 Elliott Wave Theorist where Prechter calculated the MAJOR final K Wave Winter to end in 2003 with MAJOR bottom...

http://marketswing.com/Reading/large%20cycle.pdf

Neely also says the 2003 bottom is major low, anyone know why Prechter has changed his tune when he was right the first time?

Just about every fibonacci and Elliott study says the K-WAVE Winter ended in 2003. (Next market correction will only correct latest up moves, never take out the S+P lows of 790.)

Yelnick, which evidence are you citing that says we are still in K-WAVE winter.

[EN]

If we are not still in the K Winter, then why is gold set to plunge into 2006 and the credit bubble set to pop in 2006? K winter is about purging the debt and with the current real-estate mania with 60 year no interest mortages, there is little doubt this thing is going to end in a purging of consumer debt, although it does not mean that the October 2002 lows in the SPX must be taken out.

[librex]

It's possible that the S&P won't dip below 800 for fifty years. It's possible that it will dip below 50. Anything's possible. The past 75 years seem anomalously productive in modern history but nothing's to keep the anomaly from growing. Debt levels are certainly very high by most measures. Savings is low. Consumption is high. The internet helps productivity in some regards but I think it's mostly porn, stock quotes, other gambling, and other masterbatory activities like sharing half-baked economic observations like I'm doing now. The US still makes pharmaceuticals, weapons, and entertainment for the world. But we do seem similar to GB in the 20s, perhaps in worse shape. Who knows?

[librex]

I wrote "productive" but "optimistic" might be the better word.

[No bear yet]

Here's a quote (paraphrased)from "Elliott Wave Principle by Frost Prechter 4th edition 1984"

Prechter writes: "Kondratieff wave is a 50-54 year cycle of catastrophe. As we interpret the Kondratieff cycle.....the economy should collapse in the mid-1980's and should be followed by three to four years of depression and a long period of deflation through to the trough year 2000 A.D. Kondratieff noted that "trough wars" result in economic recovery. 2000 A.D. trough scenario fits our scenario like a glove for the next Supercycle decline to end."

He was right (only off 3-4 years on the final 2003-5 trough which he later corrected in his July 2000 EWT.) Savings and Loan collapse began around 1986. 3-4 year depression lasted into 1990 and we've already experienced mass deflation in the 1990's with crude collapsing to near $11.72 a barrel in 1998, Soybeans at $4 in 1999, Interest rates approaching 1% etc. Commodity deflation is already over, we have entered a NEW inflation perdiod and a NEW Kondratieff Spring.

EN wrote: "If we are not still in the K Winter, then why is gold set to plunge into 2006 and the credit bubble set to pop in 2006?"

2006 is the Kitchin Cycle not the Kondratieff. The Kitchin cycle is indeed about to pop, but will not be very severe. 2006-2009 stock lows are only the first corrections of this new Kondratieff Spring.

Trough wars and stop/start action trying to get a footing for the next 50-54 year cycle are the behaviour of Kondratieff Springtimes.

Kondratieff if alive today would smile and recognize 2004 as a new turn beginning for his cycle. It just doesnt get any clearer.

[No bear yet]

"2003-5 trough" is typo. Should have said 2003-4.

[librex]

Certainly possible but that was a pretty mild depression if it was a depression.

[librex]

Kondratieff was not much of a smiler. He would have scowled or glared or maybe screamed. He might have reluctantly shaken your hand and, sadly nodding his head, walked back to the lab. See Freddy Kondratieff's memoirs.

[No bear yet]

Kondratieff waves ending in 1788 and 1896 were mild also. There's no rule that says every Kondratieff will be a 1932.

There is a general rule however that when cycle lows are mild, the next cycle ups are even greater.

2054-58 will be the real disaster Kondratieff not this one.

[No bear yet]

librex wrote: "Kondratieff was not much of a smiler."

:)

Well maybe you're right. How about he'd wear lighter shade of brown lab coat and comb his hair with extra lard.

[halstead]

1896 might have represented a turning point but the years preceeding it don't seem much like the last twenty-five. I see our era as closer to the roaring 20s but with more, and more ominous, vulnerabilities. Both were periods of relatively easy credit and confidence and few firewalls. But we've got a greater degree of corporate welfare --mainly in the form of defense spending. We've got record current account deficits, record low savings, and record private and public debt levels. We've got record public involvement in the stock market and strong knee-jerk cult of "capitalism," where "capitalism" is often the antithesis of shareholder vigilance and entrepreneurship. The salaries CEOs and upper management command is unbound from accountablity, unbound from supply and demand. Think of Eisner, Ovitz, Iococca, Welch... These people took on no risk but were compensated as if they had. We've experienced the steady transfer of individual risk to systemic risk (Chrysler, S&Ls, Mexico, LTCM, etc) thus insuring that, when some debtor is finally too big to save, everyone goes down with it. It's a game of chicken, like nuclear deterrence. Society is becoming more polarized politically and economically. The public school system is fast deteriorating. Internationally, we generally compete on price and not quality, a vicious cycle with an unhappy ending. Special interests for blocs and corporations shape crappy trade policy and laws that crush entrepreneurship and innovation. Maybe this can go on for decades. I doubt it. But I know that when it does end it will not end well. I can't help but feel like "investing" today is like picking up pennies before an oncoming steamroller. It's purely greater fool and the bottom, when it drops out, is far below.