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Company Valuator

An exclusive monthly news report for private company CEO's
August 27, 2005
Sign of the Times
Did You Know
Ask the Expert
Market Stats
Helpful Links
Quote of the Month:

"Money isn't everything, but it sure keeps you in touch with your children."

---J. Paul Getty

Sign of the Times

A monthly market commentary

“Dog Days of Summer”

Ah, summer...white sand?beaches, blue green warm?waters,?tropical drinks, outdoor dining,?sand in the toes, tops down on convertibles, the good life.

The only exception to that might be if you happen to live and work in San Francisco, which I do. August. Wet, cold beaches, fog,?ice cold choppy waters, hot coffee to get warm, shoes and socks, top up on convertible, dreaming of the next warm weather vacation. We even had a forecast for snow on Fillmore Street this Saturday 8/27 until the city pulled the plug. Jonny Moseley was scheduled to ski jump in celebration?of his 30th birthday--complete with MTV doing the filming. The city and Mayor Gavin got a bit nervous and yanked the permits. Oh well, I'm going sailing instead.

Still, summer is summer, and it's a great time to break out those books you've been meaning to read--regardless of where you are. While it's always smart to be opportunistic when others are lounging, for a lot of people laying on beaches?this time of year, the primary activity is doing nothing. Sometimes the best ideas are created while doing nothing.

1776 by David McCullough takes a topic most Americans believe?they know inside and out and writes a book that is so interesting you'll find yourself speeding through it like it was a great mystery novel. Once you read this book you will see?how unbelievable it is that the United States actually came into existence. Fate played a huge hand. You will also get a glimpse of the magnificent leadership demonstrated by George Washington which is truly breathtaking.

The Kite Runner by Khaled Hosseini is one of the most popular fiction books in years. You see it everywhere--for good reason--and it has been out for almost 2 years. Hosseini accomplishes what very few contemporary authors are able to do. He manages to provide an educational and eye-opening account of a country's turmoil--in this case, Afghanistan--while also developing characters whose heartbreaking struggles and emotional triumphs that will certainly resonate with any reader. Somewhat contrived at the end, but hey, it is a fiction book.

The World is Flat by Thomas Friedman does what Friedman always does best--his remarkable ability to articulate complex issues in a very simple manner. What Friedman means by "flat" is "connected": the lowering of trade and political barriers and the exponential advances of the digital revolution have made it possible to do?business instantaneously with billions of other people across the planet. Globalization 3.0, as he calls it, is driven not by major corporations or giant trade organizations like the World Bank, but by individuals: desktop freelancers and innovative startups all over the world (but especially in India & China) who can compete--and win--for the highest-end research and design work. He wants you to get caught up in how exciting this new world is, if only for the fact that you are likely to get trampled if you don't keep up with it.

A good beach read is Blink: The Power of Thinking without Thinking by Malcolm Gladwell. Blink is the sequel to Gladwell's enormously influential book The Tipping Point. The gist of Blink is that you can often make better decisions from first impressions if you just let your mind work. Trust your instincts.

Now, for an excellent?movie....and a great love story at that...March of the Penguins. This masterful documentary narrated by Morgan Freeman tracks the Emperor penguins for one year, from going back to the places of their birth, to finding a mate, to having a baby and back again. It's truly an amazing and inspirational film.

Yes, I realize none of this has anything to do with what is going on in the market, but rest assured, in a couple of weeks, everybody will be going full blast. Get your last summer licks in. ?See you after Labor Day.

Did You Know

“IRS to Focus on S Corporations”

The Internal Revenue Service is planning to conduct special audits of about 5,000 closely held businesses as part of a wide-ranging research program to help combat tax evasion and improve compliance.

These audits, scheduled to begin this year, will focus on returns filed by S corporations. These corporations "continue to be the single most popular corporate entity choice," the IRS said, and their total assets are huge. The obvious advantage of the S corporation is the avoidance of the double taxation of C corporations where income is taxed at both the corporate and personal level.

IRS officials said the S-corporation audits, based on returns for tax years 2003 and 2004, will be the first of their kind in nearly 20 years. The audits will focus on the extent to which income, deductions and credits are reported properly not only by the corporations themselves but also by their owners. The returns will be selected randomly among S corporations of various sizes.

This project represents another stage in a major IRS research program launched more than 5 years ago. The project, known as the National Research Program, is designed to help the IRS improve overall compliance and do a better job of selecting which returns to audit. Senior officials say too many audits of taxpayers have resulted in no change in the amount of tax owed, thus representing a waste of time and energy for IRS agents. I'm assuming the IRS would concede in those instances that it is a waste of time, energy and resources?for the taxpayer as well!

Results to date with the National Research Program suggest sthat the IRS has a lot of work do in properly assessing and combating cheating. A couple of main areas they are focusing on now is a major crackdown on "abusive" shelters, or transactions they say have no real business purpose other than to dodge taxes. And they have intensified scrutiny of tax lawyers, accountants and other professionals.

One group that is clearly unhappy about the S corporation audits is the National Federation of Independent Business. "The IRS's actions are likely to reap little more than another set of hoops that small companies must jump through in the regulatory jungle of the federal government," said Dan Danner, the group's executive vice president.

Ask the Expert

“Why is Google Selling Stock? Answer: For the $4 Billion Cash”

A lot us will remember well the answer Billy the Kid gave when they asked him why he robbed banks: "That's where the money is". Like George Mallory and Mount Everest, Google is taking the money "because it's there."

Google's decision to issue $4 billion in new stock has been greeted with surprise and stupefaction by the army of analysts who are overpaid to divine happenings within the Googleplex.

It is an impenetrable mystery, they say. The company already has $3 billion in cash; why does it need more? Are the Googlers planning to build a global wireless network? Dive headlong into Internet telephony? Construct an elevator into space? And why, oh why, the strange numerology--selling exactly 14,159,265 shares, which every educated 13-year-old recognizes as the digits to the right of the decimal point in the mathematical term pi.


Let's try a little test. If I offer you $100,000 for your Honda Civic, how would you respond? Here are your choices:

a) "No, thank you, my checking account is already full."

b) "Maybe, but let me look around first to see if there is another car I'd like to buy."

c) "Here are the keys."

If you answered a) or b), you have the makings of a Google analyst.

There is no mystery here, folks. When companies think their stock is undervalued, they buy it back. The Googlers are in the opposite fix. Their stock is overvalued, so what do they do?

Sell more. Quickly. Before sanity returns to the marketplace.

Now there are certainly a number of hypothetically smart people out there who think that at $285 a share, Google is still a bargain. But it is a credit to Larry Page, Sergey Brin and Eric Schmidt, the trio who run Google, that they aren't drinking this intoxicating Kool-Aid. How would one know that to be the case? Watch what they do, not what they say.

In recent months, the top Googlers have sold off nearly $3 billion of their own holdings. These insider sales have all been on the up and up and diversifying their riches in this way would be a wise strategy for the Google boys under any circumstances. But it is particulary wise if you suspect your stock has a touch of hot air.

They have also been changing their compensation plans, moving away from reliance on stock options, which become worthless if the stock drops. Instead, they have started using restricted stock that takes four years to vest, but will continue to hold value even if the share price swoons.

If that isn't evidence enough that Google is preparing for the bubble to burst--or at least deflate a bit--then the new stock offering should be. The company says it has no specific plans for the cash. "The principal purpose of this offering is to obtain additional capital". Sweet!

In an earlier age--think Steve Case and America Online--the Google boys might have cashed in by swapping their inflated stock for that of a more traditional company--think Time Warner. No savvy chief executive wants to go down as this generation's Gerald Levin. So instead of selling its stock to another company, Google is selling to the public.

None of this is to suggest Google is anything other than a very good company. But will revenue from their gold mine increase indefinitely at the 35%-a-year gallop as implied by current valuations? Doubtful. More importantly, the Googlers themselves seem to doubt it. And they are smart guys.

Credit to Alan Murray, Wall Street Journal

Market Stats

“Own Residential Rental Property? Good News for Landlords...”

Rents are rising again across the country, squeezing tenants who are already coping with high gasoline prices and improving returns to landlords after a deep five-year slump.

The turnaround appears to be another sign that the boom in house prices and sales is finally slowing, as homes have become so expensive in many metropolitan areas that some people have decided to rent instead.

A government report yesterday also offered new evidence that the housing boom could be reaching a peak. The median price of a newly built home fell to $203,800 in July from $219,500 in June, after having risen in the winter and spring, the Commerce Department said. Economists noted that there is still a chance this slowdown could turn out to be a pause.

But rents have clearly changed direction, even if the increases have been relatively small. Rents in about 85% of large metropolitan areas have climbed in the last year, according to Global Real Analytics, a research company in San Francisco. Late in 2003, rents were falling in 85% of markets.

In Northern California--where average rents dropped about 25 percent after the dot-com crash, according to RealFacts, a research firm there--prices have reversed direction. Some apartment owners have raised the effective rent on their apartments by cutting back on concessions while keeping the announced monthly rent roughly the same. Other landlords have become pickier about which tenants they accept, no longer signing leases with those who have spotty credit records or who must stretch to afford the rent.

Helpful Links

“CEO Express"...Connecting Busy Executives to Information that Matters" as their motto "Connecting busy?executives to information that matters" and it does a marvelous job of doing just that---it really delivers an incredible amount of useful information---all on one page.

CEO Express offers click on opportunties for the best and most popular areas of interest: eg., under Daily News you are able to click on a horde of newspapers such as the Boston Globe, New York Times, Washington Post, Newsday, USA Today, Chicago Tribune---the list goes on an on.

A partial list of other areas it supports are: Business Magazines where you simply "click on"?such publications?as Business Week, Forbes, Fortune, and?Economist. International News, Business News, Internet Search, Financial Markets, Company Research, Online Television News, Health, it goes on and on. Don't take my word for it---check it out !


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