Is the biggest risk not taking one? Your Weekly Update

The size of some of the acquisitions taking place in today’s markets takes our breath away. Often, so too does the logic behind them.

This week’s Update takes a look at one of the largest events ever in the technology industry. We think you’ll enjoy the discussion of risk and reward involved this deal embodies.

And what it may bode for the future!

Best always,
Lee and Jeremy


This Week’s Quote:

“The biggest risk is not taking any risk... In a world that is changing really quickly, the only strategy that is guaranteed to fail is not taking risks.”
― Mark Zuckerberg, Facebook CEO, Billionaire

JL Davis Thoughts This Week:

Mr. Zuckerberg’s remarks remind us of a timeless maxim: “Nothing ventured, nothing gained.”

As if to provide his own evidence, Mr. Zuckerberg’s Facebook recently purchased a company with only one proven product, a smartphone application, for a jaw-dropping $16 billion in cash and stock. That’s a bigger acquisition deal than Google, Microsoft, or Apple has ever done. WhatsApp is (was) a five-year-old company with a total of only 55 employees that almost no one outside of the technology field had even heard of. But those under age 30 have. In droves, as we’ll enumerate in a moment.

First, however, did we mention that WhatsApp has never made a penny of profit? It hasn’t. So why would Facebook pay such a premium price, you ask?
WhatsApp is a mobile messaging application. A simple “app” for iPhones and Android with over 450 million users. Three quarters of those users are active every single day, 365 days a year. Those users share a mind-boggling 400 million photos each day. Facebook’s current user base already shares some 350 million photos daily, and Instagram, which Facebook recently bought for a mere $1 billion, shares 50 million photos. So with a chunk of cash and stock, Facebook just doubled their photo sharing capacity, an incredible feat for a company with that volume of users.

Connecting people is the business of the internet and deriving a profit from doing so has generated billions. Those who pause in the pursuit of growth, a la AOL/Time Warner and countless others, do so at their peril. They quickly become part of the past, not part of the future. Tech companies who embrace growth, like Google, for example, thrive. They position themselves to both connect and serve those among us who want to share details about our life and business with others.

Those same companies then sell their users (and their habits) to advertisers. Whether its photos, instant messaging, or simple internet search access matters not, the advertisers are happy to pay and pay big.

The profit trickles down quickly. Sequoia, a venture capital firm that invested around $8 million in WhatsApp only a little more than two years ago, may reap as much as a $3.5 billion profit from the Facebook deal. These types of returns are incredible. They are driving markets in 2014 and seem likely to continue to do so in the years to come.

At JL Davis, we like technology as a sector. When it’s appropriate, we don’t mind a little risk either, as part of a well-designed, diversified portfolio.
After all, nothing ventured, nothing gained.**

Lee and Jeremy
http://www.forbes.com/sites/ryanmac/2014/02/19/whatsapp-founders-become-billionaires-in-19-billion-deal-with-facebook/
http://dealbook.nytimes.com/2014/02/19/facebook-to-buy-messaging-start-up/?_php=true&_type=blogs&_r=0
http://timesofindia.indiatimes.com/tech/slideshow/facebook-whatsappdeal/Deal-bigger-than-any-Microsoft-Google-Apple-deal-ever/itslideshow/30740374.cms

Market Week: March 24, 2014

The Markets

The Fed taketh away and the Fed giveth: After domestic equities fell in the wake of Wednesday's Federal Reserve announcement, encouraging manufacturing data, also from the Fed, helped stocks rebound to end the week with a gain. The Dow, which has generally been bringing up the rear in recent weeks, led the pack, though it remained solidly in negative territory for the year, along with its overseas counterpart. Meanwhile, bonds took a hit because of questions about the timing of an increase in short-term interest rates.

Last Week's Headlines
• As expected, the Federal Reserve's monetary policy committee once again reduced its bond purchases by $10 billion a month. However, the committee's statement said that rather than focusing primarily on a 6.5% unemployment rate to determine when to begin raising its target interest rate, policymakers would look at a variety of economic measures. The statement also forecast that an increase wouldn't occur for "a considerable time" after the end of the bond-buying taper. When pressed about what that term might mean, new Chair Janet Yellen raised eyebrows by saying it could mean as soon as six months after tapering ends. A survey of Federal Open Market Committee members showed most expect the target rate, now close to zero, to end 2015 at 1%.
• Frigid weather across much of the country also seemed to freeze both new residential construction and sales of existing homes in February. According to the National Association of Realtors®, the weather plus ongoing low inventories and restricted credit availability cut home resales 0.4% during the month. And while building permits--an indicator of future activity--were up 7.7%, the Commerce Department said housing starts fell 0.2% in February.
• Food prices, especially those for food eaten at home, rose 0.4% in February, which the Bureau of Labor Statistics said accounted for roughly half of the 0.1% increase in all consumer prices during the month. The overall increase put the consumer inflation rate for the last year at 1.1%, approximately where it's been for most of the last seven months.
• Data from the Philly Fed manufacturing survey showed a strong rebound to a reading of 9 from February's -6.3. And while the Fed's Empire State survey showed little change in overall conditions, new orders and shipments were both up.
• Two major automakers hit speed bumps last week. General Motors issued its second major recall in two months, this one for 1.8 million cars; the company is already under investigation for ignition defects involved in a 1.6-million-car recall last month. Also, Toyota agreed to pay a record $1.2 billion criminal penalty to settle a Justice Department investigation of previous safety problems, and admitted it had misled consumers about a defect that caused cars to speed up when customers tried to brake.

Eye on the Week Ahead

After managing to shake off the Fed and the Crimean conflict last week, investors will likely pay extra attention to speeches by several members of the Fed's monetary policy committee to see if they shed additional light on last week's statements. Final U.S. GDP numbers for the fourth quarter and all of 2013 will be out, plus data on housing, manufacturing, and consumer spending.

Data sources: All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. News items are based on reports from multiple commonly available international news sources (i.e., wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: U.S. Treasury (Treasury yields); WSJ Market Data Center (equities); Federal Reserve Board (Fed Funds target rate); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold, NY close); Oanda/FX Street (currency exchange rates). Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

Prepared by Lee Davis** and Broadridge Investor Communication Solutions, Inc. Copyright 2014