Archive for September 17th, 2008

Lessons from the financial crisis

September 17, 2008

Excerpted from WSJ: “We Need Better-Capitalized Institutions”, Sept. 17, 2008

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That which does not kill us makes us stronger. Nietzsche may not have been aware of credit default swaps and subprime mortgages when he formulated that worldview, but so it will be with the current crisis. Like the 12 steps of recovery, the financial system is now purging itself of years of excess. How sad that it should have to come at such enormous human and institutional cost.

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Important Lessons

First, these losses were foremost a consequence of poor investment decisions. These decisions, driven by a virulent new strain of irrational exuberance, caused theoretically highly sophisticated firms to put hundreds of billions of dollars of poorly conceived and inadequately collateralized securities onto their balance sheets.

In a sense, that’s no different than other bouts of investing euphoria that ended badly, like the dot-com bubble. So for investors, this episode is an important reminder to stay true to conviction rooted in dispassionate analysis and avoid being swept along with the hype, even when it seems painful to watch others making money that you’re not.

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Second, risk management was equally poor. These financial institutions are (or were) in many ways giant hedge funds, except that they used far more leverage than almost any hedge fund (and made worse investments).

Stunningly, even with all the warning signs, the most fragile institutions shirked from sufficiently tough medicine — taking in ample new capital, selling off divisions, even merging their firms — that might have preserved value for their shareholders.

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Third, the systemic failure extended far beyond government oversight. Apart from experienced and highly paid in-house management, these institutions were each watched over by a flotilla of outside auditors, credit and equity analysts, and rating agencies. Virtually none of them accurately gauged the dangers.

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The market is loudly signaling that it wants larger, better-capitalized financial institutions. Even the vaunted Goldman Sachs and the venerable Morgan Stanley may prove too small to remain independent.

For those which emerge, both management and oversight will need to be far tighter. That will be reinforced by a dramatically changed business model.

Instead of highly leveraged banks providing a commodity — money — at razor thin margins, we will have less leveraged institutions providing a scarce resource — money — at more profitable pricing.

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Full article:
http://online.wsj.com/article/SB122161101467645853.html

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Taxes: Playing small ball (very small ball)

September 17, 2008

Boiled down to its essence, Senator Obama’s complicated tax plan reduces to the  redistribution of over $100 billion in income each year by taking an average of about $20,000 in additional annual income taxes from about 5 million people, and redistributing the loot to 200 million others — about $500  per person in annual refundable tax credits.

Momentarily tabling the philosophical aspects of the redistribution plan,  I have a practical question: is the pain worth the gain?

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A noticeable difference ?

The $500 may give some psychological reassurance that Uncle Sam cares, but will it materially change anybody’s life or lifestyle?

The simple arithmetic: $500 works out to be less than $10 per week, a little over $1 per day, and about 25 cents per hour worked for a  full-time worker.  Hardly a life- or game-changer.

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95% get tax relief.  Really ?

Obama says that 95% of voters will get tax relief under his program.

Huh? Right now, 40% of adults have zero tax liability or qualify for a refundable credit (i.e. a negative income tax).  Since these folks aren’t paying income taxes now, they certainly aren’t getting income tax relief.

So, they must be getting payroll tax relief — an offset to their Social Security and Medicare contributions — in effect, making the first $6,500 of wages payroll tax free.  (Note: employers would still have to pay their 7.65% on those wages)

But, about about half of the 40% who don’t pay income taxes have no reportable income.  For these folks, there’s either no tax relief at all and Obama’s claim is overstated.  Or, their refundable tax credit will be even less than the $1 per day.

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Or is it 25 cents per day ?

Reports indicate that the majority or recent Economic Stimulus payments were used to pay off consumers’ debts.  That’s legit, but what’s the impact? 

Well, assuming that the money  paid down a high interest credit card balance, paying off $500 would save about $100 per year in interest charges —  adding about 25 cents per day to the spending pot.  Not exactly a game-changer.

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Bottom line: Obama’s income redistribution scheme may be well intended.  But, it sure doesn’t seem (to me) like the pain is worth the gain.

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The sky is falling … or is it ?

September 17, 2008

Excerpted from Washington Post: “Quit Doling Out That Bad-Economy Line”,  Donald Luskin, September 14, 2008

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In the past two months, the Post alone has written no fewer than nine times, in news stories, columns and op-eds, that key elements of the economy are the worst they’ve been “since the Great Depression.”

That diagnosis has been applied twice to the housing “slump” and once to the housing “crisis,” to the “severe” decline in home prices, to the “spike” in mortgage foreclosures, to the “change” in the mortgage market and the “turmoil” in debt markets, and to the “crisis” or “meltdown” in financial markets.

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Overall, the pessimists are up against an insurmountable reality: In the last reported quarter, the U.S. economy grew at an annual rate of 3.3 percent, adjusted for inflation. That’s virtually the same as the 3.4 percent average growth rate since — yes — the Great Depression.

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Why, then, does the public appear to agree with the media? A recent Zogby poll shows that 66 percent of likely voters believe that “the entire world is either now locked in a global economic recession or soon will be.” Actually, that’s a major clue to what started this thought-contagion about everything being the worst it has been “since the Great Depression”: Politics.

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The Mortgage Bankers Association (MBA) database, which allows rigorous apples-to-apples comparisons, only goes back to 1979. It shows that today’s delinquency rate is only a little higher than the level seen in 1985.

According to the MBA, 6.4 percent of mortgages are delinquent to some extent, and 2.75 percent are in foreclosure.

Moreover, MBA data show that today’s foreclosures are concentrated in that small fraction of U.S. homes financed by subprime mortgages. Such homes make up only 12 percent of all mortgages, yet account for 52 percent of foreclosures.

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It is flat-out wrong … that “the personal savings rate is now the lowest it’s been since the Great Depression.” The latest rate, for the second quarter of 2008, is 2.6 percent — higher than the 1.9 percent rate that prevailed in the last quarter of Bill Clinton’s presidency.

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According to the latest report from the National Association of Realtors, the median price of an existing home is up 8.5 percent from the low of last February.

And according to the U.S. Census Bureau, the median price of a new home is up 1.3 percent from the low of last December. Home prices may not be at all-time highs — and there are pockets of continuing decline in some urban areas — but overall they’ve clearly stopped going down and have started to recover.

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According to the FDIC, there have been a total of 13 bank failures in 2007 and so far into 2008. There were 15 in 1999-2000, the climax of the celebrated era of Clintonian prosperity. And in recession-free 1988-89, there were 1,004 failures — almost an order of magnitude more than today. Since the Great Depression, the average number of bank failures each year has been 94.

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From all-time highs last October, the S&P 500 has fallen 20 percent. But that’s nothing by historical standards. Stocks have often fallen more than that over comparable spans of time. Even the present 20-percent loss isn’t what it seems. The damage has been heavily concentrated in the financial sector — banks, investment firms and mortgage companies. If you exclude the financial sector, stocks are off 14.8 percent.

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Whatever the political outcome this year, hopefully this will prove to be yet another instance of that iron law of economics and markets: The sentiment of the majority is always wrong at key turning points. And the majority is plenty pessimistic right now. That suggests that we’re on the brink not of recession, but of accelerating prosperity.

Full articel:
http://www.washingtonpost.com/wp-dyn/content/article/2008/09/12/AR2008091202415_pf.html

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Clorox: Certified “Natural”

September 17, 2008

Excerpt from WSJ “Beauty Game: Being Viewed as Natural” September 10, 2008 

Proving that your brand is more authentic than the competition’s is always difficult for marketers.

For the increasingly crowded category of “natural” beauty products, that task is particularly challenging. That’s why Burt’s Bees, owned by Clorox Co., and a handful of other brands that try to minimize their use of synthetic ingredients have developed a certification process by which they can officially claim their right to call their products “natural.”

In August, Burt’s Bees products…began hitting store shelves affixed with a Natural Products Association seal. The sticker promises that at least 95% of ingredients are natural or derived from natural sources, that they have no “potential suspected human health risks” and that development processes haven’t significantly altered the effect of the natural ingredients, among other criteria.

Mike Indursky, Burt’s Bees’ marketing chief, led the brand’s involvement in the certification…Below, he discusses shoppers’ confusion with natural products..

WSJ: Why does Burt’s Bees need its naturalness certified?

Mr. Indursky: …97% of women told us they want some sort of regulation. We felt we had a responsibility to explain to people what natural is, and what natural isn’t, so they can make the most informed choice. We worked with the Natural Products Association and our competitors to develop the criteria.

WSJ: Since the standards are devised by the participating companies rather than a government agency, isn’t there a risk that this seal could be perceived as even more marketing hype?

Mr. Indursky: That would be risky if it weren’t for the National Product Association’s leadership over it, and their use of third-party certifiers. The brands have no inclusion over the certification process.

WSJ: As a marketer, how do you balance your brand’s natural stance with your parent-company’s brand, which is synonymous with bleach?

Mr. Indursky: There’s nothing to balance. Burt’s Bees is doing what it has always done, regardless of Clorox owning us. Clorox has been a fantastic supporter of ours, and our levels of sustainability and natural ingredients have only increased since we’ve been acquired.

Edit by SAC

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Savvy consumers are likely to be skeptical of companies that create their own certification programs.  One also has to wonder if consumers recognize the stark differences between brand ideologies within a company such as Clorox.  Unilever has received criticism for the opposing ideologies of two of its brands, Axe deodorant spray and Dove.  Clorox also owns “Green Works,” a line of environmentally friendly cleaning products. Both Burt’s Bees and Green Works offer brand promises of green and natural, while the Clorox namesake represents bleach, chemicals and environmental harm. 

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Full article:
http://online.wsj.com/article/SB122099934231816811.html?mod=todays_us_marketplace

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Brands – The Power of Authenticity

September 17, 2008

Excerpted from Fast Company, “Who Do You Love”, Dec. 19, 2007

Juan Valdez … the fictional coffee-growing icon … has been featured in ads for decades, helping establish “100% Colombian coffee” as a global brand.

Juan’s appeal: humble but uncompromising, dedicated to the hard work of raising coffee by hand. “Juan Valdez taps into a fundamental human truth … that the things we savor the most are the hardest earned.” People emotionally connect with Juan because he seems authentic, and authenticity is a priceless commodity.

In an increasingly shiny, fabricated world of spun messages and concocted experiences … “Authenticity is the benchmark against which all brands are now judged. ”

Overloaded by sales pitches, consumers are gravitating toward brands that they sense are true and genuine. Hunger for the authentic is all around us. You can see it in the way millions are drawn to mission-driven products like organic foods.

Playing the authenticity game in a sophisticated way has become a requirement for every marketer, because the opposite of real isn’t fake–it’s cynicism. When a brand asserts authenticity in a clumsy way, it quickly breeds distrust or, at the very least, disinterest.

Each brand must build its own primary source code for the authentic. Still, there are some larger lessons (and pitfalls) that anyone charged with overseeing a brand would be wise to consider.

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What does it take to be authentic?

It is a brand’s values — the emotional connection it makes — that truly define its realism.

A strong point of view. Authenticity emerges from “people with a deep passion for what they are doing.” So Martha Stewart is perceived to be authentic in large part because her ambitious recipes for Perfect White Cake and Chocolate-Strawberry Heart-Shaped Ice-Cream Sandwiches stand in the face of a world where food is mass-produced and preparation for the average dinner is measured by the number of minutes it takes to microwave the thing.

Serving a larger purpose. Every brand is governed by an ulterior motive: to sell something. But if a brand can convincingly argue that its profit-making is only a by-product of a larger purpose, authenticity sets in. “Just as there are purpose-driven lives … there are purpose-driven brands.” (Think Whole Foods)  “When a brand changes its story to better capture its customers’ dollars, it’s basically a poser … and people sense that right away.”

Integrity. Authenticity comes to a brand that is what it says it is. In other words, “the story that the brand tells through its actions aligns with the story it tells through its communications,” posts about Wal-Mart, the deception elicited a torrent of rebuke.

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How do you stay authentic even as you get big?

Ubiquity might not be toxic to authenticity, but it certainly dilutes it. When a brand spreads far beyond its home turf, its branches almost invariably (though not inevitably) weaken.

No business has confronted this challenge more urgently than Starbucks. As chairman Howard Schultz lamented to upper management in a bluntly worded missive on Valentine’s Day, the company’s rapid growth has “led to the watering down of the Starbucks experience,” and the company’s stores “no longer have the soul of the past.” .”

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Can you be authentic when you’re trying to be authentic?

Authenticity is necessary, but it cannot be compelled. Coerced by corporate fiat, their “warmth” can wear out its welcome and feel contrived. 

And therein lies an authentic paradox: A brand doesn’t feel real when it overtly tries to make itself real. To the hypertargeted consumer, baldly billboarding a brand’s message smacks of insincerity.

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Can you be cool and still be authentic?

“Fortress brands” are deeply rooted in their heritage and values, they are inflexible, unmovable, and ultimately stuck in time. “That’s the problem with a dogmatic, static brand … the competition will outflank it, and the world will pass it by.”

Levi’s, for one, is a brand that appears to have slipped into the fortress category. The king of denim, whose founder stitched and riveted the world’s first pair of jeans in 1873, has lately missed out on the fast-changing trends of an industry that it created.

To maintain its integrity, a brand must remain true to its values. And yet, to be relevant–or cool–a brand must be as dynamic as change itself. An authentic brand reconciles those two conflicting impulses, finding ways to be original within the context of its history.

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Full article:
http://www.fastcompany.com/magazine/115/features-who-do-you-love.html

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Posted in Mktg - Brands | 1 Comment »

Uh Oh – Higher text message prices …

September 17, 2008

Excerpted from AP:  “Senator examining rising text messaging rates
09.09.08

The Senate Judiciary Committee is asking the nation’s top four wireless carriers to justify the “sharply rising rates” they charge people to send and receive text messages … it is concerned that rising text messaging rates reflect decreasing competition in the wireless business.

(Reportedly) consumers are paying more than 20 cents per message, up from 10 cents in 2005.

All four of the (wireless) companies appear to have adopted identical price increases at nearly the same time. “This conduct is hardly consistent with the vigorous price competition we hope to see in a competitive marketplace”.

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European Commission regulators are threatening to impose a cap on roaming fees for text messages sent by Europeans traveling outside of their home nations.

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Full article:
http://www.forbes.com/feeds/ap/2008/09/09/ap5405763.html?partner=alerts

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Models Caught with Cookies

September 17, 2008

Excerpt from BrandWeek “Cookie, Toothbrush Invade Fashion Week” September 8, 2008

You expect to see MAC or Tresemme at Fashion Week, but a Kraft cookie brand?

You won’t see Kraft’s Le Petit Ecolier school boy cookie doing his thing on the runway, but the food giant will offer complimentary samples of the sweet to visitors inside its LU Lounge during Fashion Week…Kraft sees the event, known for its stick-thin models, as the perfect venue to publicize its premium biscuit line.

Kraft isn’t the only brand that has a tenuous link to the industry to glom onto Fashion Week. DHL, American Express and T-Mobile all have sponsorship stakes in this year’s Mercedes-Benz Fashion Week…

Procter & Gamble…is taking both its Tide and Oral-B brands straight to the catwalk…Models wearing clothes washed several times with the new Tide Total Care line walk the runway this morning; and tomorrow, Dash/Smooch presents its latest pajama collection in conjunction with P&G’s new slim, rechargeable Oral-B Pulsonic toothbrush…

The presence of such supermarket-friendly brands makes Fashion Week look increasingly accessible. Critics say that could pose a problem…

Many brands see the event as a way to bask in the glamorous halo of New York’s premiere fashion event. In the case of Tide, P&G is trying to use the brand’s new Total Care line as a crossover from “fabric care to fashion care,” said company rep Kash Shaikh… Oral-B, on the other hand, is going after the consumer who wants a toothbrush that not only delivers whiter teeth, but is aesthetically appealing as well.

Evian was among the first brands outside the rag trade to see Fashion Week’s potential. Evian has been the event’s bottled spring water of record for 10 years straight (1993-2003). After a five-year hiatus…Evian reemerged as the venue’s official H2O sponsor this year. 

Edit by SAC
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As if the Kraft cookies weren’t enough, the Oral-B runway placement included models carrying toothbrushes down the catwalk and then pretending to brush their teach as they danced next to backup singers that performed during the show.  An equally odd pairing between McDonalds & the Olympics helped increase McDonald chicken sandwich sales this summer. Maybe models carrying chicken nuggets is the next unlikely pairing we’ll see on the runway.

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Full article:
http://www.brandweek.com/bw/content_display/news-and-features/packaged-goods/e3i8f41b4ad7b54e9000311387db21d1441?imw=Y

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Economics: The high cost of CAFE …

September 17, 2008

Excerpted from the WSJ: “How to Save Detroit … And $50 Billion”, by Holman Jenkins, September 10, 2008

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The Detroit auto makers were all over the two conventions … with  a plea for $50 billion in federal loans. Congress practically owes us this money, Ford, GM and Chrysler argue — because Congress slammed us with new fuel mileage mandates that will cost us $100 billion to meet.

But before rushing to pass the legislation, there’s an easy way to save $50 billion or whatever part of these loans wouldn’t be paid back: Just repeal the fuel economy rules.

It must infuriate the auto makers how readily their critics attribute their problems to their own incompetence. Then how to explain that GM is thriving in Europe, selling small cars that get lots of miles per gallon? Buick is among the biggest selling brands in China. GM is running away with Latin America.

The Big Three’s problem, to be blunt, is North America. They should have pulled out long ago.

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Not only did history saddle them with a UAW labor monopoly that their foreign competitors have managed to avoid. Even that might not have been fatal had Congress not enacted its “corporate average fuel economy” rules in the 1970s.

Look at gallons consumed, miles driven, barrels imported or emissions emitted: CAFE has had no significant impact on energy consumption. Its sole practical effect has been to inflict on Detroit the need to produce, with high-cost U.S. labor, millions of small cars designed to lose money.

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CAFE has to be the most perverse exercise in product regulation in industrial history. It confronted the Big Three with the choice only of whether to lose a lot of money, by matching Toyota and Honda on quality and features; or somewhat less money, by scrimping on quality and features and discounting, discounting, discounting.

Rationally, they scrimped — and still live under a reputational cloud in the eyes of sedan buyers. Yet notice that their profitable product lines, in which they invest to be truly competitive — such as SUVs, pickups and minivans — hold their own against the Japanese and command real loyalty among U.S. consumers.

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It flies in the face of human and business realities to imagine that, generation after generation, Detroit hired idiots while Toyota recruited geniuses — though that’s the usual explanation of Detroit’s troubles.

Had CAFE not existed, there is no reason the Big Three today could not be competitive. As businesses do, they would have allocated capital to products capable of recovering their costs. Investments in fuel efficiency would still have taken place — to the extent consumers valued those investments. That is, if they were profitable.

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If Washington found this unsatisfactory, it could have done as the Europeans do and raised fuel taxes to coax the public to make different choices. Politically inexpedient? Well, yes, but that doesn’t mean CAFE is an effective substitute. It isn’t and never was.

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Having squandered the domestic auto industry’s capital on millions and millions of cars that lost money, now Congress will squander the taxpayer’s capital. It will lend the auto makers $50 billion to invest in fuel efficiency innovations that, by definition, won’t command from car shoppers a price high enough to cover the cost of making them. Which makes it very unlikely we will get the $50 billion back.

Bottom line: Fifty billion won’t turn CAFE into effective policy. It will do just fine, though, as an indicator of Washington’s willingness to throw good money after bad rather than admit the folly of its own long-running handiwork.

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Full article:
http://online.wsj.com/article/SB122100316976917063.html?mod=todays_columnists

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