Brands

When you consider the market forces that drive most economic activity, it can be difficult to define consumer trends. Having a good product or the best product isn’t necessarily the way to be successful. Something about your product has to appeal to enough of the public to make you successful.
Of course ideally you have the “hot” product that is going to be hard to keep in stock because it is so popular. Sometimes you can be a “hot” company and everything you produce is popular. For example, Apple, that not all that long ago was considered an also ran company after initially being a “hot” company, returned to being hot with first the I-Pod, then the I-Phone and maybe the I-Pad. It helped that even when they were out of favor they maintained a corps of supporters. This base provided the ability for them to return to “hotness”.
Going in and out of favor can be tricky. If you consider companies that have had great surges in popularity, a lot of times it revolves around a particularly memorable ad campaign. If you are old enough, it’s hard not to remember the Wendy’s “Where’s the beef?” commercials. Sometimes a name can give you an advantage, Yahoo and Google have had their moments. Word of mouth, can be critical, if someone you trust tells you a product is good or vice versa, it probably will have a strong influence on you. That is why celebrity endorsements are so prevalent, because so many of us trust these people that most likely are complete strangers to us.
In the entertainment arena, there is a saying that all publicity is good publicity. It is sometimes more important to be known than it is to be admired. Now, when it comes to selling product, you have to be careful. Certainly, for a company just starting out, getting to be a household name can be important, however, not is you are known as a clunker. However, you may be able to gain market share even if your publicity comes across negatively, if it isn’t too bad.
It will be interesting to see how Toyota and Tiger Woods fare. These were two brands that were well regarded until they both disclosed serious flaws.

PE ratio

When you consider valuations, there is an underlying logic that is not exact but exercises a control. For example, if a stock earns $1 a share and has no other major known changes, it is likely to have a stock valuation approximating the effective P/E ratio for that industry. Now P/E rations have a number of components, first, what is the underlying T-Bill rate plus expected inflation plus a risk factor by industry and company. So, if the interest rate is 4%, inflation is 1% and risk is 1% you have a .06 or a P/E of 1/.06 or 16.6. Now, the odds that the stock will trade at that exact ratio is unlikely since other factors come into consideration, such as current market sentiment, rumors, market balancing etc. but the odds are very good that it will trade within a few points of where the P/E says it should.
Now, let’s assume the S&P earnings are projected to be $75. If you multiply that by a P/E of 15 you get 1125 which is not far off from where it is now. Of course 15 is a very nominal value and with interest rates as low as they are now, you could easily argue that a P/E as high as 18 would be appropriate. At 18 (5.5% return) the S&P could rise to 1350 and be in an area that fits its valuation.
Of course if you expect interest rates to rise the earnings return has to increase also and the valuation should be adjusted. However, the current valuation has basically nothing to do with where the S&P was a year ago. Even if you believe that the S&P was appropriately valued last March, the current increase since then is not a valuation factor. It may be interesting, but if your current valuations are supported, that is all it is, interesting. When I hear analysts saying that you can’t expect the rate of increase that we have seen since March continue, that statement has two attributes, first, it is probably correct since the rate of increase is probably going to change (it usually does) but it is also fallacious if it implies that the stock market cares what the rate of increase was.
Simply put, while there is still a lot of nervousness, American industry has figured out how to make profits while reducing staff and inventory. Some of our classic indicators, such as employment or inventory levels are not working right now, but the oldest indicator, company profitability is just as reliable as it ever was.

Money for nothing

There is a simple formula to prosperity that always works. If you have more wealth coming in than going out, you are prosperous. Now, as simple as that sounds, the complications arise when unlike Mama in “I remember Mama” we incur obligations that extend over time.
Now there is nothing wrong with this, if you are buying a car or a home and spread the payments over the expected period of use, you can ignore the fact that in the month of the purchase you appear extremely poor. So if you buy a $100,000 house and borrow the money to do so, as long as you have enough to cover the payment with interest and also pay your other bills you can still be prosperous. In fact the actual value of the house becomes immaterial as long as you continue to live in it.
However, in the last decade or so, we saw unprecedented appreciation in house values in many parts of this country and two things happened. Some people counted this appreciation as income and tapped the “equity”. This increased their debt and monthly payments in return for an immediate payout. Now, I’m not going to say this was wrong in general, but it wasn’t sustainable. Now some of those folks find that the various mortgages they hold exceed the underlying value of their house. They are in the parlance, “Underwater” and potentially better off walking away from their obligations then they would be paying them off.
The other thing that happened is that some people bet on the future appreciation of their house. If you could buy an asset now that was going to be worth 30-50% more in a few years, it would make sense to borrow money via any means possible. Now, we look at this behavior and say it was irresponsible. However, if you believe that values are going up and your broker and banker tell you the same thing, the behavior was extremely rational. It was almost as if you were getting something for nothing. Who wouldn’t sign up for that?

Extremism

Extremism is something that just gets in the way. Now, there are probably times when extremism has a place, but not very often. Things are just not black and white enough to be an extremist. Now, I can almost understand extremism when you talk about certain issues. If you believe abortion is murder, it is sort of hard to come up with a compromise position. So if you believe a murder is about to be committed, pretty much any action may be justified. Even if you don’t agree with the position, you can understand the motivation.
Most of us however restrict our strongest feelings to things that impact us directly. I read today about a man who got into a road contest with a trucker in Virginia and got out of his car and pumped bullets into the truck. Now, better the truck than the driver, although I’m not sure what he was aiming at. Even more absurd is that the driver had his young son in the back of his Jaguar. Not knowing enough to know how the incident developed I hesitate to jump to conclusions but generally my impression of Jaguar drivers is that they think they are entitled and if the trucker challenged his car, he would probably have a big crack in his paradigm.
Now, if you talk about public policy issues you have to draw some sort of line. For example, if a measure you opposed becomes the law of the land, aren’t all citizens now obligated to obey it and even more try to make it successful? Those who decide to make it fail are trying to prove a point. Now, don’t get me wrong, they can certainly try to repeal it or change it via the political process, but, threatening to kill those who voted for it is a bit much. Civil disobedience has a long tradition, but it needs to be conducted in a certain way. Violence is not the way. It gives civil disobedience a bad name.

Tea Party?

When you consider the Tea Party Movement you have to wonder why they chose that name. The original group that had that moniker were colonists who objected to the imposition of a tax on tea to pay for the debts from the French and Indian War. One could argue if the tax was in fact justified, but the position was that since the colonists had no say in the British Parliament they shouldn’t be taxed without representation.
Clearly, that is not the same as the current Tea Party members. They got to vote in the last election, assuming they exercised that right, and the people they wanted lost. Now they will get to vote again and maybe the people they want will win. What is missing in this case is the lack of representation. They lost and apparently want to use publicity and mob reactions to overturn the outcome.
I understand their position has more to do with what they perceive to be the increase in big Government and the perceived increase in taxation. Fine, they have the right to take any position they want and I certainly am not a fan of more taxes unless of course the taxes serve a worthwhile public purpose. I need to discuss taxes here at some point but right now I’m simple questioning this Tea Party label.

Where are the jobs?

How strong is the economic recovery going to be? With the housing market still problematic and jobs scarce, one might even wonder if we have a recovery at all. In any economy there are some who do well and some who don’t. In a macro sense, we consider the country in a recession if the GDP decreases over a couple of quarters. Now when we had such a massive downturn, like we did in 2008-2009, the end of recession is not the same thing as recovery.
Having seen economic growth return only means we have adjusted to the changed circumstances created by the housing and credit collapse. For any individual company, the adjustments they had to make were often painful and most likely permanent, assuming they survived and will continue to survive. While there were a number of changes the one that is part of a longer economic trend and which will most likely continue is the loss of certain jobs.
If you consider any country, it goes through stages. In America, the early country was dominated by farmers, because there really wasn’t much choice. However, as the country progressed and farming techniques modernized, we needed fewer and fewer farmers. The good news was that new jobs were being created in the growing manufacturing sector and these excess farm workers were absorbed into our growing industrial society as a source of cheap labor.
So the average worker in this country went from someone who tilled the ground to someone who worked in a factory. There are still farmers, but nowadays, unless you live in a farm community, you probably don’t run into them all that often. It is also becoming rare to be a factory worker.
We are turning into a nation of service and knowledge workers. Yes, blue collar labor still exists and always will, but between importing goods and automation of factories, there are fewer and fewer jobs. For a period of time, it looked like the service and knowledge industries could absorb the excess workers, but as artificial intelligence improves many of these jobs are being replaced by automation. How many switch board operators are left? Look at how many “Self Service” opportunities there are in today’s world. Tax Preparers are seeing more and more people using sophisticated programs to do the taxes themselves. There are software developers looking at almost everything we do to see if it can be simplified and automated into a self service program.
So what about the service workers? Well, we need fewer of them every year. Even worse, for those we still need, it is often cheaper to locate them in another country. So, low end service workers are finding work difficult to find. This makes companies more profitable, assuming there are people out there to buy their products.

Happy Day

Well, the congress has managed to pass a health care bill, and while it wasn’t easy and ran into a lot of opposition, change is always scary to many; it is the start of having this country step up to its responsibilities. There are only a few things certain in this world, the old maxim says death and taxes, but why should some die unnecessarily while others get the best possible care?
Is health something that should be traded on the open market? I predict that in a relatively short time, the days when so many went without adequate care will be viewed in the same way we view things like sweat shops and child labor, or perhaps even involuntary servitude. We have other issues in this society that are somewhat embarrassing if we are a modern civilized society, for example the number of homeless but the failure to provide health care, or the bankrupting of people who become sick is simply a barbarism.
You will hear some people continue to rant about socialism or how we can’t afford to pay for it, but of course most of those people have health insurance and it gets paid for somehow, usually with a subsidy that we all help with (what is a tax break after all?). They live in a fantasy world where there are these rugged individuals who don’t need help from anyone. Of course, even some of the best examples of this; say Bill Gates or Warren Buffet took every advantage of what protection society offered. Why do we interfere in intellectual property protection? Imagine Microsoft if its software could be copied and stolen with impunity. Why make companies file financial reports that have to pass certain criteria. Clearly, software is stolen and financial reports are fudged, but imagine what it would be like without rules and Big Brother.
Making Insurance companies insure people and creating pools for everyone to get better prices is hardly socialism. It is also clearly cheaper to prevent an illness then it is to treat it, and usually much more effective. I suppose those who believe people should be allowed to live without health insurance should also believe they should be allowed to drive without auto insurance. The lack of insurance becomes a problem when there is a major illness or in the case of automobiles a major accident. Outside of a very few extremely wealthy individuals, people can’t pay for this when it happens without insurance and the lack of insurance passes the entire bill to society. Yes, some lucky individuals may never have an accident or a major illness, but they all share the risk and should all share the insurance cost, because no one really knows who it is going to be.
Health care for all, we aren’t there yet but this is a happy day in America.

Health Care

A health care bill is likely to pass the house this weekend and then in order to get the votes needed a second act is likely to pass with amendments the senate will approve using a procedure that eliminates the possibility of a filibuster. Republicans are trying to make the most political gain they can out of this and while they certainly have that right, the question you have to ask yourself is when does the countries best interest come into play?
Now certainly there is plenty of room for disagreement in policy matters and people should vote their honest beliefs. In the health care debate, there is a fundamental question that has to be answered. In this day and age when medical advances have prolonged most people’s life expectancy, health care is clearly not optional. So should so many Americans not have it?
The idea that a free market system will provide for all is clearly not working. Every major industrialized country considers the providing of health care a necessity, not a luxury. Health care is one of those things that becomes more important either due to time or circumstance. It is also clear that if you insure the entire population, including young healthy people and provide more preventive care, you reduce the cost for the individual although of course total cost would probably go up.
So, do we as a country want to make sure that everyone has access to reasonably priced health care? Is almost seems like a no brainer, but, after a campaign designed to scare the average American into thinking that “Big Brother” was going to take over the system and make them lose benefits and pay more, we see a lot of opposition to it. I think that almost everyone, when provided the facts would agree that we need to expand health coverage. We also need to reduce cost, both from unnecessary treatments and abuse, but provide the best care we can to as many as we can at a reasonable cost.
Other countries have been able to do this, why can’t we?

Thoughts

In the bottom analysis, a company is successful if it makes money, and if it fails to make money it goes out of business. Now, clearly there can be periods, often at start-up, where the initial investment precludes profitability for a period of time. Of course there has to be a clear path to a money making future, even if that requires certain events to take place.
Of course a path to profitability that is dependent on external events has significant risk. The amount of risk or likelihood that the plan will work is what makes research so valuable. The old axiom, build a better mousetrap and they will buy it, is only true is it is, a lot better, or a lot cheaper and they know about it. Clearly there are times when the popular product is not actually the better product. Having good product does not guarantee success but I think ultimately having bad product will guarantee failure.
So who should you invest in? Value investors like companies with a proven track record of success, possibly selling at a discount. One could look at a company such as GE that has a number of successful divisions but which went out of favor because of its financial division. It would seem that ultimately, the profitable divisions will prevail and the financial division will be jettisoned or turned around. Of course, if you looked at the stock market a year ago and didn’t see some great value buys, you weren’t looking very hard.
Of course you can’t go back in time, so where is the value today? You hear people talk about how this has become a stock pickers market as opposed to I guess someone who just buys indices. With recovery continuing and no other good investments in sight, the odds are pretty good that the markets as a whole will continue to increase, although not in a straight line. So if you are patient, the S&P index or a sector index could be a good idea.
There is no certainly no certainty and there are those who are convinced all the gains of the last year are going to vanish as we explore that bottom and go even lower. I don’t see that happening, but a few puts could be a nice insurance policy, to protect profits, just in case.

End of the Oil Age

There was an article yesterday, I read it off a link from Yahoo so I'm not sure where it originated, that discussed the fact that economic growth is not resulting in the same amount of oil usage increase as it once did. In fact it predicted that we are coming to a point where overall oil usage will stop increasing and start declining. Now, the only thing about the article that I would question is the time frames.

There is no doubt that the world is leaving the oil age and moving on. Oil will remain plentiful and it is possible that as a reaction to this, prices will drop significantly and lead to short term trend reversal. However, I think the world has finally taken the Who to heart and "won't get fooled again". The use of alternative energy is growing and as it grows it starts to become more affordable. Further, more and more of our brightest will start to consider ways to improve the delivery technology.

The way major changes happen in most things follows a fairly predictable pattern. The beginnings of the change are very small changes in trend. Using these early indicators to predict the timing of the change is almost always wrong because the trends accelerate. Had you considered how long it would take everyone to have cell phones based on the early rate of adoption you would have predicted a much smaller number for 2010 than actually have them. As alternative fuel vehicles, heating systems, etc become more used they will becomes cheaper and more available leading to a spiral of adoption. It is happening and happening faster than most expect.

Magic Wands

Sometimes when I see how media and investors react to economic news, I sometimes think they are all firm believers in Magic Wands. The economy overheated and because of easy credit and some ill advised Government and non-government policy, we found ourselves in a situation where a great amount of apparent wealth disappeared, housing collapsed, companies laid off millions of workers and the Government, whether wisely or not is still to be determined, intervened to ward off total economic collapse.

Now, since the worst of the crisis things have improved, and with any luck we will see some job growth in the near future. Also, many companies (at least the ones that survived) will come out of the crisis leaner and meaner and will be more profitable than before (at least on a margin basis). However, we are not all going to wake up one day and discover it is 2006 again.

We have established a new baseline for the economy and we need to adjust to it. Growth will be from that baseline and it will take us years, baring another bubble, to get back to where we thought we were. Many of the jobs that were shed, are not going to come back due to enhanced productivity (think technology and foreign suppliers). The Government debt is going to be a drag on the economy especially if we don't figure out a way to pay it down at least a little.

The country has taken a heavy hit and it has gotten off the mat but it needs to be careful in how it proceeds. Recovery is happening, but not magically.

Jobs again

It almost a year since the low points in the Market in 2009 and the questions about the recovery and the pace of market recovery are still open. There is clearly improvement in the economy over what we had, but the real estate market, which fueled so much spending as prices appreciated, has not recovered. In fact, it isn't at all certain that prices are stable. So all that wealth is gone and not likely to come back, at least not quickly and all those construction jobs are also gone and will only come back slowly.

The economy needs a growth industry, and I've been saying here that our best hope is in the energy area if we really promote a switch from foreign energy to domestic energy. Would that by itself be enough? Well it certainly does a number of good things, creating some jobs and keeping some wealth in this country. Jobs, like everything else live on the margins. There is some number of jobs that will exist in almost any economy. These are pretty basic and may vary in number but certain levels of goods and services will always be needed and that represents the core level of jobs. There is also an upper cap on jobs, at least in this country, and that is the number of available workers. Now that number can vary as more workers can be drawn into the work force when jobs are plentiful and salaries are high.

Between those two numbers we have the actual number of jobs. What has to happen, and what seems to be happening, is that we need to create more jobs than we eliminate. If you add a new source of jobs, you have created a positive force without a corresponding negative one. Many of our new industries, especially technology related ones, come at the expense of brick and mortar industries. So an on-line shopping site creates jobs, but probably less jobs than get eliminated as less retail stores are needed. Over time, being more efficient is a great thing, but it can be painful in the short run. There is no doubt that the recession caused companies to really scrub the jobs they had and look for more efficient approaches. Their success will help the recovery but not create jobs as fast as they were lost.

We need to do that energy thing.