The Corporate Profit Plunge And Venture Capital Victors
Tuesday, January 20, 2009
by Martin Denholm, Managing Editor, Smart Profits Report
Dear Smart Profits Report Reader,
What a difference 10 months makes…
A story in Bloomberg this morning states that back in March, Wall Street analysts projected a 55% rise in fourth quarter corporate profits.
I’ve heard of being full of the joys of spring, but that’s ridiculous. The seeds of the financial sector crisis and credit crunch were planted well before then. And March was essentially the month that then brought the severity of the problem into the public eye when once-massive investment bank Bear Stearns collapsed under a sea of bad debts.
Today, those same analysts, who Bloomberg says underestimated the profit drop of S&P 500 companies by an average of 7.7%, now project a 28% slump in fourth quarter profits, with nine out of ten industries recording a decline.
Hot on the heels of a fourth quarter that likely saw the worst GDP growth contraction since 1982 (5%), first quarter profits are now expected to drop by 17%, light years away from the 35% growth predicted back in May.
Speaking of the S&P 500, coming off the back of its worst year since 1937, the index just got off to its second-worst start to a year since 1928.
Having dropped by 6.5% over the first 11 trading days of 2008, the S&P just followed that up by shedding 5.9% this year.
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Dry In The Venture Capital Valley… But These Sectors Are Still Cashing In
With economic growth and corporate profits down significantly, costs slashed, and employees being shown the exit door, it’s no surprise that venture capital funding is also struggling mightily.
According to the National Venture Capital Association and Thomson-Reuters, firms raised a total of $3.4 billion during the fourth quarter - a massive 71% plunge from the $11.7 billion raised in Q4 2007 and 59.5% lower than the $8.4 billion generated during the third quarter. It was a number not seen since the ugly days of the dotcom bubble fallout.
For the full year, venture capital fundraising tumbled by 21% and the figure is expected to fall between $3 billion and $5 billion in 2009.
Despite the downturn, there were sectors that bucked the trend. Energy and utilities enjoyed a doubling of investment in 2009 to $3.6 billion - up 111% from the $1.7 billion in 2007, as the number of deals rose by 23%. More notably, renewable energy deals made up 86% ($3.1 billion) of the total.
Still, the main problem for venture capitalists right now is that with the economy in such bad shape and money so tight, it’s become much harder for their startup firms to launch onto the stock market. That means their venture capital partners are forced to hold onto them and support them for longer than usual. Many have encouraged the firms to cut costs.
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Can 4.8 Trillion Save Japan’s Floundering Economy?
“Worsening rapidly.”
That’s the verdict on the current state of Japan’s economy, as a sharp slump in export growth threatens to result in more layoffs and send the unemployment rate rising even higher than the current 3.9% level.
For the fourth straight month, the government revised down its economic outlook, with exports and industrial production - both of which fell at a record rate in November - largely to blame for the problems.
Prime Minister Taro Aso wants to implement a 4.8 trillion yen ($53 billion) spending package proposal to jump-start the economy, but the plan is currently stagnating in the opposition-controlled parliament. Two trillion yen of it includes “handout” money for Japanese households - a measure that has proved as unpopular with lawmakers as with the people themselves.
That’s it for today’s edition.
Martin Denholm
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