M Partners: 2011 Year-end Review and Outlook for 2012

We have had some great reviews from clients on this year-end recap and 2012 outlook for small cap technology stocks, so I thought it would be a good idea to share it here.


Communitech is doing a great job in Kitchener-Waterloo

I just returned from a meet-and-greet arranged in Kitchener by Communitech to connect early stage technology companies to potential investors. Although tonights event felt a bit like an awkward high school dance, I think that the efforts being made by Communitech in K-W are exceptional. Although there were a few wonky concepts, I was impressed by the general quality of the ideas, the execution, and the people passionately fronting them.

Communitech did a solid job screening the opportunities for potential investors, and there was a nice cross-section of potential capital for entrepreneurs. We will be back. And this is important. The more that Communitech facilitates access to capital, skills, and connections, the more vibrant the K-W technology community will be.

I think that Communitech should be held up as an example for other communities of how to establish a cultural core for a vibrant centre of entrepreneurial excellence. More of this needs to be done in order to support intellectual ecosystems and innovation.

Next step is to get these beautiful little startups to maturity.


Where is my representative?

I find it disturbing how extreme opinions and actions have hijacked the political and economic discourse worldwide since the beginning of the 2007 recession. Since that time the world has seen the polemic rise of the Tea Party and then Occupy Wall Street. A presidential candidate has threatened physical harm to the Chairman of the US Federal Reserve and there have been violent uprisings worldwide from Cairo to Athens and all the way to Oakland. And of course, everyone hates bankers.

Through all of this I feel more isolated and strangely deceived. Reasonableness has been subsumed by anger. Optimism has been darkened by the shadow of fear. People seem to hate more now than they did prior to the recession.

Maybe its the way media has evolved. With 24-hour cable news and millions of notes published every week somewhere on the web - opinion is pervasive. Expert or not. And every opinion published by a credible expert seems to be commented on by increasingly random angry people. It must be exhausting to be so angry. But anger begets drama and drama attracts viewers, which makes money. And the anger has permeated all facets of politics, resulting in an ugly extremism that I can no longer relate to. As a fiscally conservative person with moderate views, I feel lonely.

So I thought that I may take this opportunity to list 22 things that I believe to be true. Is there anyone out there that aligns with my less-than-extreme views?

1. Capitalism, with all of its warts, is essential to the human condition and the only economic model of hope. There is no alternative approach.
2. Capitalism operates with game dynamics, which means that it needs specific rules and impartial, transparent enforcement of those rules by independent third-parties in order to operate effectively. Rules and referees with whistles.
3. There is no "invisible hand" of capitalism because it should all be measurable and transparent.
4. Public service unions are the antithesis of service and withold value from taxpayers and citizens for their own gain.
5. I am not religious, although I have friends that are religious. I respect that they are religious and they respect that I am not religious. But I don't want their views and morals imposed on me through social legislation.
6. Democracy and capitalism are not mutually inclusive or dependent.
7. Representation without taxation is as morally reprehensible as taxation without representation.
8. Ayn Rand was a fraud.
9. TARP was not about bailing out the banks but about preventing a worldwide financial meltdown.
10. Dogma like anti-tax pledges will destroy the future of America.
11. investing in infrastructure is a no-brainer - Barack Obama is right.
12. Investing in education is a no-brainer - as long as there is accountability - Jeb Bush is right.
13. The world needs collaboration and creativity to solve our endemic financial problems. There are too many purists who refuse to compromise. There are too many intractible positions like "Austrian school", "Chicago school", and "Keynesian". We need to find ways to examine the policies of all economic schools of thought.
14. Until there is real campaign finance reform, the United States policy is doomed to serve the narrow interests of corporations at the expense of most people.
16. Most of the wealthy that make over $1m per year are not "job creators". Typically, they are occupiers of positions in large multinational organizations that are not creating jobs. These organizations are hoarding cash and not necessarily hiring.
17. Those that are hiring are small businesses with great ideas. This is the economic engine of America.
18. America's economic engine is being starved of its fuel - skilled creators. Too many Americans attend university with skill deficiencies and graduate with useless degrees.
19. The Federal Reserve has been essential to preventing a worse financial crisis in the United States.
20. I believe in Modern Monetary Theory
21. I believe in science
22. Regulation does not work well because it has been compromised by special interests to be ineffective. To be effective, regulation needs to be clear, concise, and easy.
23. I think the "war on drugs" is mostly a waste of money that promotes criminality.
24. The US should focus defense spending on cheap things that work like drones and exit places like Germany and Japan.
25. there is too much inequality in the United States, which if left unattended could ruin the greatness of the country.

So based on these items, extremists from either end of the spectrum would likely label my views viciously. I guess I'm more Jon Huntsman with some Barack Obama and a touch of Ron Paul. In Canada, ultimately I am what was once described as a Red Tory - a fiscal, practical conservative that strives for success but is compassionate about the plight of fellow citizens.

Is there anybody out there that thinks this way?

Is there some type of political entity that represents this viewpoint?


Six Obvious Steps to Prevent the United States from Becoming a Banana Republic.

To most reasonably informed Americans, there are some really basic things that its representatives in government should do, but lack the political will to execute. Without real reform, the middle class will continue to decline, forcing entrepreneurs to go to other markets, and the concentration of wealth in the hands of an increasingly smaller minority of people will accelerate the decline of the American Empire. Here are a few obvious steps that should be taken:

1. Campaign Finance Reform. It is well known to most Americans that powerful lobby groups control discourse in American politics. It's been a problem for decades. Some attempts were made recently to tweak campaign finance rules have had recent unintended consequences such as shadowy "arms-length" financiers like the Koch brothers that increasingly control the agenda.  Here's the problem: currently, a Presidential Campaign costs $100M or more.When raising this much money, how do you build your war chest without big influential donors?

2. Tax Reform: Nobody wants to pay taxes. An entire industry has been built around finding loopholes in an increasingly complicated tax regime influenced by the lobby groups and shadow leaders that finance Senate and Congressional campaigns. A simple flat tax rate with no exceptions and no loopholes combined with a consumption tax should accelerate revenues, and help stem the decline of the middle class, which is the primary problem for the long-term growth prospects of the US economy. Tax reform is unlikely without campaign finance reform.

3. Cut all departmental spending in concert with tax reform. No sacred cows like Defense and Medicare, and no targets like the old and the poor. Eliminate entire government agencies that do useless things like the "War on Drugs".

4. Eliminate useless banking regulations, vigorously enforce obvious banking regulations, and improve transparency. In a word, simplify and enforce. This should help move the US banking industry back to where it actually contributes to the growth of the US economy. The cannot happen without campaign finance reform. Stop wasting time talking about the foolish gold standard.

5 Kill all corporate subsidies.

6. Focus budgets on growth oriented activities such as education, infrastructure, and health.

Of course, none of this will happen because the Tea Party is intent on turning the United States into a banana republic while the middle class gorges itself on religion, prescription drugs and inane reality TV. Richard Koo is right and Rand Paul is crazy.


Consensus earnings growth does not justify share price for AAPL, AMZN, NOK, VMW, or CRM

 We have been seeing a lot of price justification related to AAPL’s recent climb to near the $300 level. Arguments abound that despite trading at a P/E multiple of 25.3x, AAPL is cheap on a fundamental basis due on its growth trajectory and its cash position. Based on comparative multiples, this may be a flawed argument. A classic method to test whether the market is pricing appropriately for future growth is to calculate the PEG ratio (price-to-earnings-growth). If a stock had a PEG ratio of 1.0x, investors should consider future earnings growth to be fully priced into the stock, and that its growth trajectory is “fairly valued”. Below 1.0x, there is a gap between the stock price and future earnings, and there is a buying opportunity. A PEG ratio above 1.0x infers that the market is overpaying for earnings growth.


The New Normal: 10 Themes and Their Implications on the American Economy (Part 3) Media Saturation

On September 17th I introduced 10 themes that we see as having significant impact on the future of the US economy. Along with the a description of the theme, I include what "The New Normal" could look like, along with the possible risks and opportunities for investors. Here is the third theme of ten.

3. Media Saturation