Archive for October 29th, 2008
I posted this almost exactly a year ago. At that point people were calling for the bottom of this thing to be summer of ‘08. Well another year, and it’s still unfortunately apropos. I have a feeling it will be good for at least one more year. You?  Thanks as always to the great readers of this site that make it what it is. Thanks for reading, thanks for commenting, thanks for all of your email. It means a lot. – Morgan
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10
2008
Can GM CEO Rick Wagoner’s lobbying help land federal bailout?Posted by: admin in Stocks Money News
Filed under: General Motors (GM), Politics, Financial Crisis
Bloomberg News, which broke the story, reported that Wagoner’s “involvement includes attending meetings, such as one with Treasury Department officials last week in Washington.” You can bet that Michigan’s powerful senior member of Congress, John Dingell, is attending many of the same meetings as Wagoner. GM no doubt is employing an army of lobbyists — both Republicans and Democrats — to press its case. The company, which for now may be the largest, has little choice. GM and Chrysler would need between $10 billion and $12 billion to integrate their operations, according to a Citigroup note cited by Bloomberg. Combining the two fading industrial behemoths would be a logistical nightmare. Imagine trying to combine disparate systems for everything from personnel to purchasing to accounting. Let’s not forget the byzantine IT systems at both companies as well. Economically, it’s hard to justify bailing out GM. Decades of incompetent management at the Big Three resulted in the industry drowning in billions of debt. The problem with telling the industry “no” is political. Dingell is a 1,000-pound gorilla in Congress. The auto industry continues to have considerable clout in Washington as well. Their argument is simple: if Wall Street fatcats can get a federal bailout, why not us? The problem with rescuing Wall Street is that lots of struggling industries are going to pass the hat in Congress. What about the airlines? The retail sector? Pharmaceuticals? When does it end?
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29
10
2008
Boeing reaches deal with machinists. Is its engineering union next?Posted by: admin in Stocks Money News
Filed under: Good news, Employees, Boeing Co (BA) After a 52-day strike, Boeing Co. (NYSE: BA) has reached a tentative deal with its 27,000 member machinists union. Tentative details suggest that workers will get a 15% wage increase over three years, an $8,000 bonus over four years, and a freeze of medical costs at 2005 levels. Furthermore, the new contract limits the amount of work that can be outsourced and will last a year longer than the previous pact. But even though the contract has not been ratified, this is good news for Boeing and its workers. Limiting outsourcing could be good for Boeing and the workers depending on how it’s accomplished. One of the reasons for the delay in delivering its very popular 787 aircraft was that Boeing outsourced the majority of the design and manufacture of the components and later discovered that it was not doing enough to manage those subcontractors. As a result, Boeing suffered unpleasant surprises in its delivery schedule. If Boeing and its machinists agreed to give the union a chance to bid on work under consideration to be outsourced, then both parties might be better off. That’s because if the union offered a competitive price and excellent quality, Boeing would likely find it easier to manage its union workers than those of a subcontractor located half way around the world. Continue reading Boeing reaches deal with machinists. Is its engineering union next?
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A guest post from Constantine von Hoffman, veteran business journalist and author of the blog CollateralDamage.biz, a humorous look at marketing, business and his dog. Under water is the industry term for homes with negative equity – where more is owed on them than they are worth. You know the cliché about the iceberg and only seeing the tip of it because the rest is … well you know where. Well, the cliché is sadly still true when it comes to the mortgage crisis. The US economy is likely to be further swamped by a wave of “under water” mortgages (how’s that for a mixed metaphor?). Reuters reports “about 12 million U.S. homeowners owe more than their homes are worth, compared with 6.6 million at the end of last year and slightly more than 3 million at the close of 2006.” Because so many people bought homes with little or nothing down when housing prices spiked, a huge number of people are now facing this situation. Nearly one in three homes purchased since 2003 have negative equity. The number is even more terrifying for those who bought after that, nearing 50% for people who purchased homes in 2006. The argument used to be that buying was better than renting because you are building equity. A lot of people may do the math on their homes and realize that bankruptcy makes more financial sense than paying into something they will never see a return on. No one likes to declare bankruptcy and admit this kind of defeat, so it will not be an easy or happy decision for any of these folks. However, it may be the only choice they have.
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10
2008
iPhone at $99: Would that be the smartphone market conqueror?Posted by: admin in Stocks Money News
Filed under: Analyst reports, Products and services, Competitive strategy, Apple Inc (AAPL)
Smartphones have been on that quest, with Apple Inc. (NASDAQ: AAPL) in the lead. No company seems to more attentively strategize its price points than Apple, and the iPhone has a storied history, first launched for $599 and $499 for the 8GB and 4GB models, respectively, followed swiftly by a $200 price cut for both products. Now the new 8GB iPhone 3G is $199 if you buy it with an AT&T phone plan (and $299 for the 16GB version). In a research note yesterday, analyst Charlie Wolf of Needham Research said he’d done the analysis and Apple could safely sell the 8GB version for $99, a price point that, with the subsidy from AT&T, would protect its margins at 42.3% (I need to see the numbers on this), and certainly convince holdouts like me (the refurb Blackberry I use was free with the contract subsidy) that the iPhone is the thing. At this price, surely the game would be a landslide in Apple’s favor. The iPhone is more beautiful, more useful, and has more geeky cred than the Blackberry; at $99, I agree that the market would be won and to the iPhone conqueror would be the spoils.
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29
10
2008
Like it or not, here’s what your next Pepsi can will look likePosted by: admin in Stocks Money News
Filed under: Coca-Cola (KO), PepsiCo (PEP), Marketing and advertising
Blogger Peter Shankman was treated to an elaborate series of courier deliveries that culminated in a sample of the new can: the same royal blue hue, but clean-looking, polished to a metallic sheen, and sporting the sort of lower-case lettering that was last popular during the disco craze. A few people have already pointed out that the new logo slightly resembles the one used by Barack Obama’s current campaign. I don’t see it myself. Both are circles, and both are red, white, and blue. But if anything, the Pepsi logo looks a whole lot like, well, the old Pepsi logo. And even that soon-to-retire yin-yangy logo, which came online in 2002 but was based on a decades-old design, looks more like Obama’s stamp than the swishier new one. Continue reading Like it or not, here’s what your next Pepsi can will look like
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10
2008
Saving Money is for Economic Girlie Men: 5 Reasons Why The United States Government Wants you to Remain a Broke Debt Hamster.Posted by: admin in Real-estate newsThe U.S. Government wants you to stay perpetually broke. The lenders and banks want you to stay in the poor house. Why? Somewhere along the line the notion of saving money got perverted to the point that now people equate access to credit as actual money. This psychological shift didn’t happen overnight but there is […] The U.S. Government wants you to stay perpetually broke. The lenders and banks want you to stay in the poor house. Why? Somewhere along the line the notion of saving money got perverted to the point that now people equate access to credit as actual money. This psychological shift didn’t happen overnight but there is no doubt that many of our current economic struggles are rooted in this misguided perception. Earlier this year a colleague called me up all worked up about something. I asked what was going on and he conveyed to me that his home equity line had just been reduced. Sacré bleu! How dare the lender take away his money! I had a really positive response to a previous article stating that you should only purchase a home that is 3 times your gross income. One quick clarification is that I was referring to the actual mortgage amount and should have been clearer on that point. In essence, you should not buy a home that carries a mortgage 3 times your gross yearly income. However at the peak of the boom in California more and more people bought homes with no down payment:
We went from 3.9% of all homebuyers purchasing homes with no down payment to 21.1% of all homebuyers in 2006 at the peak of the bubble in California. This was simply unsupportable. Yet even given the current credit crisis, people are still able to buy homes with 10% down and this is data from last month. How can we figure that out? Let us look at some data: “(DataQuick) The typical monthly mortgage payment that Southern California buyers committed themselves to paying was $1,458 last month, down from $1,566 the previous month, and down from $2,198 a year ago. Adjusted for inflation, current payments are 31.9 percent below typical payments in the spring of 1989, the peak of the prior real estate cycle. They are 44.4 percent below the current cycle’s peak in June 2006.” Since the vast majority of loans are now backed by the government, the prevailing rate for the summer was about 6%. It has gone up a bit but the above data would not reflect that. The current Southern California median price is $308,500. With that, we can get a rough estimate of how much home buyers are putting down:
That gives us a good idea. We are looking at 10 to 15 percent down for current homebuyers. We are simply returning to more old school standards. And this idea of no money down is another direct consequence of this notion that no one should save and delayed gratification is for chumps. We are going to see a major shift in the next few years especially when there is a silent and disturbing economic depression going on already in our country. Today we are going to look at 5 reasons why the U.S. Government wants you to remain a perpetually broke debt hamster that is motivated by spending. Reason #1 - U.S. Savings Instruments One of the best kept secrets was the U.S. Savings I-Bond. This simple instrument provided the purchaser a fixed rate and also a variable rate that adjusted with the CPI. You know that I think the CPI is a cooked stew of economic alchemy but hey, it is what it is. But at least this was a form for people to save money and be assured that they wouldn’t lose any money. I started purchasing these things earlier in the decade and at the time, the rates seemed low given the tech bubble (which bursted) and the subsequent housing bubble (which is now exploding). But take a look how the government has decreased the actual fixed rate over time:
In fact, some of the bonds in the portfolio are now earning 7% which isn’t a bad deal. But look at how the government has slashed the fixed component of the bond to zero. Now how does this encourage savings? So that is one strike. They can easily increase the rate of savings for Americans by simply upping this rate. In addition, buyers were also able to purchase up to $30,000 worth of these bonds a year. So when I got an e-mail earlier this year that they were lowering the amount cap to $5,000 a year, I was getting a hint as to where the government was heading:
Okay, another strike. Now those few folks who actually have some money to save in this struggling economy would be capped at $5,000 per year. So if you had other money your options were to stick it into a mattress, stocks, or banks that seemed to be collapsing everyday. They were limiting options creating an environment were the consumer was forced into riskier products. Just look at the return on some institutional savings accounts:
This is for your run of the mill Bank of America savings account. 0.20 percent is almost comically low. You might as well stuff your money into a mattress. But going back to the I-Bonds which are offered through the U.S. Treasury they also implemented this online security feature which makes it much more difficult to login:
For those who hold I-Bonds and other instruments you now need a plastic card to decode an online password that would make National Treasure seem like a walk in the park. This is also after an online keyboard where you have to click with a mouse your password. What this does is that it makes it utterly hard to save your account information in your browser to log back in. Maybe one day you get a nice little bonus and you want to save it. But your serial card is at home. Too bad! Why not log into your Amazon account and blow your money on reading Ben Bernanke’s book on the Great Depression. They’ll even ship it out tonight with a one-click ship! Where is the one-click save here? I understand the need for security but even top notch brokers and high powered banks like JP Morgan and Bank of America don’t make it this hard to login. And for $5,000 this has now gone from being a viable option to a flash in the pan. Too bad. This was a good way to get Americans to save. I think many are looking at a 7% return as stellar given the current stock market shenanigans. Reason #2 - U.S. Consumption Based Economy Our economy is based on consumption for the most part. The GDP equation of: GDP = consumption + gross investment + government spending + (exports - imports) GDP has a heavy emphasis on consumption. That is why last month when retail sales fell 1.2% when the market expected a drop of 0.7% the economy when gaga. In fact, people should have been cheering that Americans are actually tempering their manic spending but this actually had the opposite effect of sending stocks into their proverbial corner which is now becoming a more common occurrence. It is estimated that nearly 70% of our economy is fueled by consumption. That is, buying cars, homes, boats, computers, televisions, furniture, movie tickets, and all those other great consumerist items. And much of that consumption was fueled by debt. Many Americans during the bubble pulled out equity from their homes to upgrade the kitchen to something Emeirl would envy even if they rarely had the time to cook. Many also used the money to fund extravagant vacations and purchased numerous technological gadgets. This was great but buying on credit simply meant you dried up the well for future expenditures. Now, that debt is coming back home with a vengeance. We are spent out. That is why the world central bankers nearly had a heart attack when they saw the credit (debt) markets freeze up. See, we really can’t say debt since it carries a negative connotation. Credit seems much more pleasant. Sort of like interchanging high yielding bonds for junk bonds. Same thing, different name. So the central banks encouraged by the government did what they know best. Loaded the system up with more debt. Now we are in a debtors spiral and they are hoping beyond all else that people will spend. One small caveat. People need freakin jobs! And many of these jobs were based on people spending money they never had! We need sustainable jobs and industries and not those that are fueled by debt spending. Reason #3 - Our Government is in Massive Debt Our government itself is in massive debt. With over $10 trillion already on the national debt book we have additional debt in every other imaginable area: Home Mortgage Debt: $10.54 trillion Consumer Credit: $2.55 trillion Corporate Debt: $6.8 trillion State and Local Governments: $2.19 trillion Everywhere you look there is this perpetual debt circle. The government doesn’t want you to save because they aren’t saving either! How can a government ask its own populace to be prudent when the are spending beyond their means? The people are merely taking note from their political leaders encouraged by the lending and banking apparatus. Frugality is now however making a comeback but not by choice. It is being forced down the throat of many. After all, you as an average American don’t have the same access as a Wall Street bank for a corporate crony and perverted The disconnect is even larger than it was during the Great Depression. Here is the gig. The lenders, Wall Street, and central bankers want you to continue to believe in a false economic system that has clearly failed. They want you to believe in those Barnes and Noble books that if you save 5% a month for 40 years, you’ll retire a millionaire. What they don’t tell you is the way we are currently spending money we don’t have, a million dollars in 20 years might only buy you a used vintage Hummer. Most people right now that invest in a 401(k) plan trust their advisors to do the right thing. That is why so many have lost $2 trillion in their retirement accounts in the last few months. Where did they put this money? Into Fannie Mae/Freddie Mac, A.I.G., and across the board companies are having hard times. To lose 40% of your portfolio is not an easy thing to take especially when a large number of baby boomers are edging closer to retirement. Now imagine if there were no Social Security for example. Now according to the Social Security Administration we get these facts: Retired Workers Monthly Amount: $1,086 average monthly payment 32,113,000 fall in this category as of August of 2008 Keep in mind you also have 2,399,000 spouses and 499,000 children that fall under the “old-age” component of Social Security. Their payments are $534 and $539 respectively. Not big bucks at all. It also goes to show how inadequate this system is going to be in the future since our government is simply kicking this can down the road:
Now that you know the awfully low amount, this above chart should startle you. 33% of those aged 65 and older get 90% of their income from Social Security. 32% get more than 50% of their income from Social Security. Only about 35% of those aged 65 and older have other sources of income that supplement their Social Security payment. And they wanted to invest a portion in the stock market? Great idea. What in the world is the government doing about this given that the tsunami of baby boomers is coming down the road? All the government is doing is bailing out toxic lenders and banks. Absurd and frankly disturbing. But are people also ready for a change in psychology? That is, can people accept the fact that we will not be able to spend as we did during the past decade? Many will have no choice but will the cultural mood be one of acceptance and sacrifice or of foot stomping on the ground because someone couldn’t buy a Kawasaki jet ski? I’m not sure. But if you flip around media stations I’m not sure we have the demeanor as a society of the 1930s. There is a much angrier sentiment and contingent in our culture. Clearly we have come a long way in many other areas since the early 1900s but in other areas, we have actually gone backwards. Many who have grandparents from the Great Depression may laugh or mock the frugality by which they live. They live frugally because they realize at any given point, the system can come to a crashing halt and you need to be prepared to confront that. The biggest mocking is done by places like CNBC that skewered any tempered view during the heyday of the bubble. “Doomer” or “naysayer” where all words charged against anyone that didn’t buy into the Pollyanna religion of most anchors. Many have not seen an economic calamity like this one. Frankly, I have not lived through one myself but I’ve studied enough to realize that history can happen again and I am not arrogant enough to think that “this time it is different” when history clearly tells us where we may be heading. So are we ready as a nation to become savers? It is amazing when we realize we have a negative savings rate. If this were another smaller country our foreign credit card would have been taken away a long time ago. Either way, we don’t have a choice on the coming austerity. The only choice we do have is how we adjust to it. Reason #5 - Saving Money is Good for You Most importantly, saving is good for you. It does the body and country good. It creates a buffer zone from calamity. It provides a piece of mind and cautious optimism which is necessary. Make no mistake, those prophets on CNBC are nothing more than a person jumping off a cliff with no parachute saying things are good in mid-air simply because they have yet to hit the ground. They preach diversification but when someone comes on the show during good times and mentions bonds or U.S. Treasuries they get laughed off the show. Talk about practicing what you preach. Finally it is your responsibility to educate yourself and see the system for what it is. The government doesn’t want you to save. Lenders and Wall Street don’t want you to save. You may be fighting the environment here and going against the current but like those that decided not to buy a home at the peak, they knew that something was wrong when most of their money would be going to finance debt. We are going through a major cultural and economic shift and those that expect this thing to be over in a few months are going to be in for a major shock.
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In business school, MBA students play a marketing strategy game where they launch imaginary electronics products, using phantom research & development dollars and marketing expenditures to position the products as high-end or low-end, to market to certain audiences, and then to change the price point to attract the maximum sales possible. It’s a delicate game meant to emphasize how consumers value products; and how some will not purchase a product if it’s too inexpensive; the low price devalues the item. It’s a quest for the perfect price.
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