Groupon Has Called Every Business In The United States
I believe this could be a true statement by the end of 2011 if it was Groupon’s intent to do so (which it may not be).
It’s very simple math. Many industry sources put the number of Groupon sales reps at 3,000+. The high end of the range is 4,000.
A typical rep using an auto-dialer will probably call 250–300 companies a day. You have to use an auto-dialer to get those kinds of numbers, which I have to presume Groupon uses.
Usually of those calls, the rep connects with a live person 40–50 times per day. Most of the calls result in a short conversation leading to a hang-up, but that’s the life of an inside sales rep.
Figure that there are 225 business days in a year when you subtract out weekends and holidays.
So the math is: 3,000 reps x 40 connects/day x 225 business days = 27 million businesses called.
According to business databases like Cortera and the US Census, there are about 27 million business establishments in the United States. This is a generous number as only about 7.4 million businesses have payroll – but either way you look at it Groupon could very well call every company in the US this year, if they wanted to.
The Great Divide In Technology Stocks
There is a great divide taking place in the land of technology stocks. The “New Guard” of technology companies have a cloud computing, recurring or transactional revenue story with promotional leaders and great spin. The “Old Guard” of technology companies have big brands and huge presence among customers, but are viewed by some as stodgy and tired. Here’s how the public markets are valuing these two sets of companies from a P/E ratio perspective:
The New Guard
- Salesforce.com – 259
- VMware – 136
- Rackspace – 107
- RedHat – 91
- F5 Networks – 77
- Amazon.com – 74
- Netflix – 72
- Akamai – 60
Median P/E ratio of “New Guard” Companies: 84
The Old Guard
- Oracle – 23
- Cisco – 15
- eBay – 14
- IBM – 13
- Dell – 13
- Microsoft – 12
- Intel – 11
- Hewlett-Packard – 12
Median P/E ratio of “Old Guard” Companies: 13
Is it fair for the New Guard to trade at a median P/E ratio that is 6.5 times higher than the Old Guard? I don’t think so – it will not last. It’s not to say that the Old Guard is undervalued, but eventually, the New Guard will come back to earth. Eventually, the New Guard companies will trade at less than a 25 P/E ratio – it’s the law of gravity in stocks (consider that even Apple trades at a 23 P/E). Given that, in the case of Salesforce.com, that means its P/E ratio will decline by 90% from where it is today. The question is whether that multiple compression happens because earnings actually grow by 10 times, or because investors get more valuation conscious, or both. Only time will tell.
Which Is More Important – The Stock Market or The Bond Market?
This topic was raised to me today in a meeting, and after thinking about it, doing some research, and trying to put aside my biased interest in stocks – I think a stronger case can be made that the bond market is more important than the stock market. There are a number of reasons for this, most notably starting with size.
The global bond market is about $82 trillion. The global stock market hovers around $40–$50 trillion. So, on pure size alone, the bond market is almost twice the size of the stock market. That’s a substantial difference. Point – bond market.
The bond market has a broader set of issuers as you have different segments: corporate, government & agency, municipal, mortgage backed, and funding. Whereas the stock market is a construct for a limited set of corporations – for example, the US has 17,000 public companies. Point – bond market.
The stock market is arguably more influential on sentiment. What’s the key indicator of the stock market? My guess is most would say S&P 500 or Dow. What’s the key indicator of the bond market? Probably most don’t know (e.g. indexes like Merrill Lynch Domestic Master). That, in and of itself, gives the stock market a broader reach and voice. Point – stock market.
That being said, and this may be a reach, but I think the bond market is more influential on the stock market than the other way around. The primary reason is that the returns on bonds are more predictable due to the fixed yields. If yields are very high, there’s no reason to invest in stocks. The comparative risk-reward isn’t there. But, if yields are low, that’s an incentive to move into risk assets like stocks. It doesn’t work as seamlessly the other way around because returns on stocks are less predictable and more volatile. Point – bond market.
This is hardly a scientific analysis, but based on just off the cuff research, what’s more important – the stock market or bond market? I’d probably have to go with the bond market.
Just How Profitable are Healthcare Insurers?
After reading this blog post on healthcare and hearing the rising volume against healthcare insurers – I wanted to understand more clearly the profitability of healthcare insurers. So, I went to Google Finance, searched for Aetna, got a list of their competitors – and researched their net profit margins. Here they are:
2009 Net Profit Margin of Healthcare Insurers
- Aetna: 3.7%
- Wellpoint: 7.3%
- Cigna: 7.1%
- United Health: 3.7%
- Humana: 3.4%
- Healthnet: -0.3%
- Healthspring: 5.0%
- Coventry Health Care: 2.3%
- Molina Healthcare:0.8%
- United American Corp: 2.7%
- Unum Group: 8.4%
- Median: 3.7%
I’m not here to defend or attack healthcare insurers. But, 3.7% median net margins seems relatively pedestrian to me – not obviously indicative of an industry gouging its customers. For example, if you look at the profitability of Google and its competitive set, here’s what it looks like:
2009 Net Profit Margin of Internet/Tech Companies
- Google: 27.6%
- Yahoo: 9.2%
- Microsoft: 24.9%
- Baidu: 4.8%
- Apple: 19.2%
- AOL: 7.6%
- Nokia: 3.0%
- Adobe: 13.1%
- Sohu: 28.6%
- Median: 13.1%
Given all of the noise around healthcare insurers being the bad actor in the healthcare delivery equation – I would have thought they’d be more profitable. But, to be fair, profitability margins are only one variable in the complex analysis on our healthcare challenges. We hope that our portfolio companies like Redbrick Health and Ventana can help be part of the solution.
U.S. Stock Performance Over 50 Years
How well have US stocks performed?
With another decade in the books, here’s the quick compounded annual return of the S&P 500 for 50 years:
- Last 10 years: -2.9%
- Last 20 years: 6.1%
- Last 30 years: 8.3%
- Last 40 years: 6.5%
- Last 50 years: 6.2%
Here’s the compounded annual return of the Dow Jones Industrial Average for 50 years:
- Last 10 years: -0.5%
- Last 20 years: 7.0%
- Last 30 years: 9.0%
- Last 40 years: 6.7%
- Last 50 years: 5.8%
And finally, the compounded annual return of the Nasdaq Composite over 30 years:
- Last 10 years: -5.7%
- Last 20 years: 8.4%
- Last 30 years: 9.5%
People used to say that stocks generate about 8%+ annual returns over the long-run. It seems fairer now to say that stocks generate 6%+ annualized returns over the long-run. That type of return doesn’t blow my mind given inflation and capital gains tax though it’s still better than a lot of things. I also have to think that the next 10 years will be better than the last 10 years.
What’s Worse: Hyperinflation or Deep Recession?
I thought this was a poignant observation by Fareed Zakaria in his book, The Post-American World:
“Hyperinflation is the worst economic malady that can befall a nation. It wipes out the value of money, savings, assets, and thus work. It is worse even than a deep recession. Hyperinflation robs you of what you have now (savings) whereas a recession robs you of what you might have had (higher standards of living if the economy had grown). That’s why hyperinflation has so often toppled governments and produced revolution. It was not the Great Depression that brought the Nazis to power in Germany but rather hyperinflation, which destroyed the middle class by making its savings worthless.”
The Case For Gold & The Case Against Gold
I’ve been looking unsuccessfully for an article that succinctly lays out both sides of the debate on whether gold is a good asset to own. So, I’m here to ask for your assistance in pulling together an article that outlines the key points on both sides of the debate. I have some ideas, but I’m sure you have more. Just leave any points of view, good articles or predictions in the comments an they will be added to the article. I hope that this article proves to be useful to readers regardless of your current point of view on the topic. If you’re formulating your own opinion on a given topic, hopefully it’s helpful to get the full spectrum of opinions on the topic. And, if you already have a strongly held point of view, surely it’s good to pressure test your convictions with an opposing view every once in awhile. So, here we go:
The Case For Gold
- The devaluing of fiat currencies around the world through unprecedented fiscal stimulus will cause an increase in the price of gold.
- Gold is a safe haven currency that tends to rise in precarious economic times like these.
- International governments will diversify out of their US dollar reserves and buy gold thereby driving demand.
- Hyperinflation is on the horizon – and that drives gold prices.
- The growth of institutional and retail investment demand for gold.
- Lack of growth in the supply of gold from mines.
- Fiat currency has no intrinsic value.
- Others?
The Case Against Gold
- Gold doesn’t pay interest.
- Gold goes up when there’s inflation, and deflation is the far greater risk today.
- A safe haven asset like gold goes up when Armageddon hits, and we have avoided that.
- Over the long run, history shows that gold is not an appreciating asset.
- Asset prices are inflated by the dollar carry trade – gold will come crashing down
- Too much hype – sell high, buy low.
- Gold has no intrinsic value.
- Others?
The Price of Gold/Oz.
- $1,141.70 (11.19.09 – date of post)
Gold Articles
Give Me A Dollar and I’ll Give You 90 Cents Back
This is the purest business idea of all time – give me a dollar and I’ll give you 90 cents (or something less) back. Ridiculous, right? Yet, it happens in so many different forms that it’s somewhat surprising. Why would anyone in their right mind give someone a dollar just to get less money back? And, I’m not talking about you giving someone a dollar so that they give someone else 90 cents back. That’s money movement. I’m talking about a direct trade – you give someone money just for the privilege of getting less money back. It happens a lot and we’ve all participated in it.
Here are some ways this model exists in business – and I’ll rank order them by the models that give you the most money back to the ones that give you the least. I’m going to spend a little extra time on the last business which I think is the most onerous of them all. Here we go:
1. ATMs. The most obvious model – you give the bank a dollar, and they give you 98%-100% of it back every time you withdraw it from the ATM. Their service: accessibility and interest.
2. Travelers Checks. We all know that companies like American Express have made a great business in taking your money, and giving you 96%-99% of the value back in the form of a less liquid travelers check. What’s the embedded service? Insurance.
3. Check Cashing. Companies like Western Union will take your check and give you cash worth about 95%-99% of the value. Their value: liquidity, especially to the unbanked.
4. Currency Exchange. Companies like Travelex have made a great living taking your money, and giving you 90%-98% of the value back in the form of another currency. The implied service: local purchasing power.
5. Coinstar. These guys own the kiosks you see at the grocery store where you put in a bag of coins and they give you 90% of the value back in the form of cash. It’s an amazing business to say the least. What’s their underlying service? Money portability.
And last but certainly not least:
6. Gold Buyers. These companies allow you to trade in your gold jewelry, and they give you cash for the gold. Not a fair example you say? I think it’s very fair – gold is a currency and so are the dollars you’re getting in return. Their true service: liquidity.
Here’s why I think the gold buying services are truly the worst economic deal of them all. There are two compounding issues. First, these companies are not giving you anywhere close to value of your gold, dollar for dollar. While the above businesses give you 90%+ of the value of your dollar, some people who have used these gold buying services have calculated that they have received 17%-18% of the value of their gold. That’s an 80%+ tax right there. (UPDATE: This CNN report that came out today says gold buyers pay between 18%-60% of face.) But, let’s not stop with that. There’s a second compounding issue that can be material. Gold is an appreciating asset. The US Dollar is a declining asset.
Here’s the historical price of gold:
Here’s the strength of the US Dollar over the same time period:
[UPDATE: Just a note – past performance is not indicative of future returns. Either currency could go up or down from here. It’s unlikely that any currency fluctuation up or down would make up for the initial 80% tax though.]
Here are the real economics: let’s just say you sold your gold jewelry in 2003 where the actual gold value is $100. Let’s say you got $18 for that $100 of gold. And then let’s just say you held that cash until now. The purchasing power of that $18 has declined to ~$14 since 2003. Meanwhile, if you just held the $100 of gold in the form of the jewelry, it would now be worth over $350. I’m not exactly sure how to properly index two bifurcating currencies, but in a nominal sense, you traded something worth $350 for $14. You got paid 4 cents for your dollar. Instead of saying “We Pay Top Dollar” – these companies should say we pay you cents on the dollar.
[UPDATE: This is what happens when you whip together a blog post late at night. Since the gold is priced in dollars, the depreciation of the dollar is embedded in the gold price. So, I didn’t need the second chart so I double counted the impact of the dollar depreciation.]
Now to be fair – most gold sellers probably don’t hold their cash so the separation from gold’s appreciation and the dollar’s depreciation may not actually have time to play out. The seller gets the value of instant liquidity and they probably use it. In addition, the gold buyers do need to have infrastructure to appraise, melt, and monetize gold if they do it themselves. Nonetheless, the tax these companies charge to give you your money back is pretty onerous no matter how you cut it. But, it just goes to show, there’s always ways to get people to give you money in exchange for less money back.
What Option Grants Tell Us About The US Dollar
Let’s start with the obvious. When you receive an option grant in a private company, you are told a number of options. The absolute number of options you receive is not as relevant as the percentage of the company it represents. Your option grant is the numerator, but the denominator is key. The denominator is the total number of shares outstanding in the company. Obviously, if you are granted 10,000 options and there are 1,000,000 shares outstanding, you have been granted 1% of the company. You are probably a direct report to the CEO. If you are granted 10,000 options and there are 100,000,000 shares outstanding, you have been granted .01% of the company. You are probably in an entry level role of some capacity. It’s the percentage that counts.
The more a company raises money by issuing more shares, the larger the denominator grows, and the lower your percentage gets presuming your option grant does not change. It’s basic math: if the numerator stays constant, and the denominator keeps getting bigger, the resulting percentage keeps declining. This effect is called dilution – which is never a positive word in our world. No shareholder wants to be diluted. For the readers of this blog, I suspect this principal is relatively obvious since many of you have worked within or around private companies. OK, enough with the obvious.
This very same principal applies to the value of currency which is why it surprises me when people are nervous, they decide to keep their money in cash (US Dollar). In the world of currency, your numerator is the amount of US Dollars you have in the bank. People feel safe because they have $x in the bank. That’s the equivalent of people feeling properly compensated because they have 10,000 options. It’s an incomplete equation. You need to know the denominator. In the case of the US Dollar, the denominator is the money supply. The money supply is the “total amount of money available in an economy at a particular point in time.” Just like in the option example, if you have a certain amount of cash in the bank, but the government keeps ”printing money” to expand the money supply, your percentage of the money supply is declining. It’s the currency form of dilution. And here’s what’s happened to the US money supply:
If I told you you could hold a fixed number of options in one of two companies: (A) a company that had to raise a ton more money and issue a ton more stock to do so, or (B) a company that is profitable and has to raise no more capital and therefore issue no more shares - all other things being equal, you’d take Option B every single time. You’d take it because your ownership in the company would not be diluted. But, why is the answer less obvious in currencies, when the principal is largely the same? The US government is printing money and is the national equivalent of Option A. It would seem more logical to look for the national equivalent of Option B and keep your money invested in that currency.
Now there are lots of exogenous factors. You can’t discount the fact that the US still has the strongest military on the planet. And you certainly can’t discount enough the fact that I’m no economist and am probably missing many obvious points. And, certainly, do not take this as investment advice. This is just an exercise in thinking aloud which is what this blog is about.
What If The Federal Government Was An Average Household?
I’m not an economist. So, it’s hard to make sense of the trillions of dollars that are thrown around when it comes to the federal deficit and national debt. So, I thought I’d just normalize the federal income statement and debt statistics against a typical household since it makes more intuitive sense to me. Here we go:
Federal Government (2009 Fiscal Year)
- Income (Receipts): $2,104,613,000,000
- Expenses (Outlays): $3,521,734,000,000
- Surplus/(Deficit): ($1,417,121,000,000)
- National Debt: $11,874,664,000,000
Now we take that data and normalize it against a household with $50,000 in income (which is the US median HH income):
- Income: $50,000
- Expenses: $83,667
- Deficit: ($33,667)
- Debt: $282,110
Now normalized against a household with $100,000 in income:
- Income: $100,000
- Expenses: $167,334
- Deficit: ($67,334)
- Debt: $564,221
Now normalized against a household with $250,000 in income (top ~2%):
- Income: $250,000
- Expenses: $418,335
- Deficit: ($168,335)
- Debt: $1,410,552
Looking at it this way, I have a couple of intuitive observations. The $100k household is spending $14,000 per month. Let’s just say they have $4,000/month in mortgage/auto interest expense. That means the husband and wife are each running up $5,000 per month – each – on their credit cards if they charge everything. That’s an average of $167 charged per day per person on their credit cards. That’s hefty spending especially if you presume only modest savings which is probably a fair assumption given our near negative historical savings rates.
Prior to doing this analysis, I thought the normalized debt number would be outrageous. It’s probably ~2x what it should be. A $100k household through most mortgage calculators can probably afford a $300k-$350k mortgage. So, $564k in debt for a $100k household is clearly too high, but not by several orders of magnitude which is what I though it would be. Anyways, food for thought…
19 comments