Manny Weintraub of Integre Advisors put out a note last week with the optimistic thesis that “it really isn’t as terrible as it could be.”
He mostly focused on the “silver linings” of the increase in energy prices. Shipping costs, for example, are rising and imports are more expensive, which is “good for American jobs and American workers.” The U.S. steel industry, is “really having quite a turnaround,” he says. Also, Americans are adapting to the high price of gas:
When the price goes up we deal with it. Sales of SUVs have plunged. But people are buying scooters. They are dealing with it by consolidating trips, and just making one trip to Wal-Mart… People are adjusting and doing a good job.
Finally, Weintraub says, “There’s a lot of money out there.” Lehman Brothers (LEH) quickly raised $6 billion, while during the savings and loan crisis 20 years ago, it was much harder to raise money. “We have a manageable economic situation with attractive valuations,” he says.
Stock moved higher Monday afternoon despite a host of negative headlines including volatility in the price of oil, a huge loss at Lehman and turmoil in the top ranks at AIG (AIG). Weintraub’s brand of optimism helps explain why there are still plenty of buyers in the stock market.
Could Floods Affect Investors?
June 16th, 2008 | Posted by stockWall Street might begin to feel the impact of the devastating and tragic flooding in the Midwest. And I’m not just talking about indirect effects, like damage to Midwestern states’ economies and higher food prices.
Stifel Nicolaus (SF) analysts Christopher Mutascio and Brian Zabora just released a note warning that Wells Fargo (WFC), for one, could be directly hurt by the floods. Why?
The San Francisco-based bank was the second largest underwriter of crop insurance by market share for the last three years. Wells Fargo’s 16.7% market share in 2007 was second only to ACE Ltd. (ACE), Stifel analysts say. Rounding out the top five crop insurers are NAU Country Insurance Co. (a private company), American Financial Insurance Group (AFG) and the German-owned Allianz Insurance Group.
It will take some time to find out if any or all of these firms have serious exposure to the flooded areas in Iowa and elsewhere. On Monday afternoon, none of these firms’ stock prices seemed affected by the possible danger. In fact, Wells Fargo shares were up more than 2% at one point Monday.
June 13th, 2008 | Posted by innovSándor was only 23 when the Soviets lined him and his co-workers up against the wall and raised their weapons.
Accused of transmitting anti-Soviet messages from the local television tower, the young engineers desperately tried to explain their innocent intentions: to protect their equipment while the freedom fighters of the 1956 Hungarian Revolution demonstrated in the streets below.
The ashen-faced technicians trembled as the soldiers cocked their guns. Suddenly, an officer burst in and ordered the troops to another location. Sándor’s captors vanished as quickly as they had appeared. And he wasted no time on his own vanishing act—emigrating to the U.S.
Sándor began a perilous weeklong trek toward the Austrian border. Making the choice to leave behind family and friends, penniless and lacking English skills, he demonstrated what innovators have at the core of their character: the courage to take a huge risk because of their unshakable optimism and faith in opportunity.
Upon arrival in the U.S., Sándor took a crash course in English, talked his way into graduate school, and eventually received a Master’s degree in electrical engineering from the Massachusetts Institute of Technology and a PhD in physics from Harvard University. He has over 50 patents to his name. He is one of the most innovative people I know—and living proof of the American Dream.
Sándor is also my father.
As a child of refugees, I am not surprised that 25% of American startups and 50% of Silicon Valley startups are led by immigrants, according to a recent study by Vivek Wadhwa, currently of Duke University. Perhaps the kind of person willing to start a new venture and the one who is willing to leave everything behind to pursue a better life have more in common than seen at first glance.
For his 75th birthday a month ago, my dad and I traveled to Budapest. I had visited several times in the past, but not in more than a decade. What I experienced this time gave me pause and further insight into the forces that promote—and thwart—innovation.
I have always pictured Hungarians as innovative people. We can thank a long line of Hungarian inventors for important advancements and introductions such as matches, ballpoint pens, helicopters, computer programming, automotive and rocket engines, carbonated drinks, Braille, classical physics, non-Euclidian geometry, and—dare I suggest it—the atomic bomb. Eighteen Nobel Prize winners have originated from this tiny central European country.
But during this trip, I saw a different Hungary.
“The economy is in the cellar,” the locals complained. “Taxes are too high!” “The leadership is making the wrong decisions!” As reported in the Mar. 27 issue of The Economist, this sentiment is widespread: “Once the local wonder child, Hungary is limping…its economy sclerotic, and its population resentful.”
More than anything, it was the uncharacteristic sense of hopelessness and resignation that really shook me. Are these the same Hungarians who stood up valiantly against the Soviets in 1956? The same people renowned for their liberal form of “Goulash Communism” and who comprised “the happiest barrack” of the Soviet bloc in the 1970s and 80s because of their entrepreneurial spirit and capitalist ways? What happened?
There’s no one clear explanation for Hungary’s current state of affairs. Some point to poor leadership, or the residue of communism in a free market economy, or the culmination of decades of growing debt. But looking through an innovation lens, I see a different reality—one where the people stopped feeling empowered, optimistic, and motivated to invest in a better future. In short, they stopped feeling like innovators.
As I walked along the cobbled streets of Budapest I realized that, as individuals, we cannot wait for others to make the environment right for us. We must live every moment as innovators, envisioning a better world, embracing unconventional ideas, and taking the initiative to make change. For some, like my father, this is as natural as breathing. For others it requires greater resolve. But ultimately it is the willingness to risk failure that drives success.
Now whenever I ponder an opportunity in the face of convention and skepticism, I will remember to look to my father’s fearless optimism for inspiration.
June 13th, 2008 | Posted by stockTo start the weekend, here are some intriguing blog posts on the stock market and investing:
1. Bespoke Investment Group notes that, on average, the stock market performs no more poorly on Friday the 13th than any other day of the year. So disregard those rumors of a “Jason Effect.”
2. Jeffrey Miller, on the blog “Dash of Insight,” put together a page of his best blog posts. His goal is to provide some good resources for individual investors, and there is some good stuff there, including advice on how to avoid big mistakes, and how and when to listen to experts.
3. How much extra return to small-cap stocks provide, in exchange for the higher risk associated with smaller companies? How should value investors play the micro end of the market? James Picerno at the Capital Spectator has some interesting thoughts and reporting on a new effort to find undervalued micro-cap stocks.
4. Tim Sykes has an interesting post on TradingMarkets on the benefits of using limit orders rather than market orders. Eddy Elfenbein at Crossing Wall Street offers his thoughts, as someone who uses market orders.
It’s a classic debate among investors and traders, and I’d just add that some recent academic research seems to side with the market order crowd. As I noted late last year, the problem is that limit orders turn “stale,” especially when news breaks or sentiment shifts. Sykes probably uses limit orders in a way that limits this danger, but at least some evidence suggests many amateur investors use them incorrectly.
InBev’s Bud Bid: A Bullish Sign for Stocks?
June 12th, 2008 | Posted by stockInBev made it official, launching a unsolicited $46 billion bid for Anheuser-Busch (BUD). When the possibility of a deal was first reported last month, I wrote:
This $46 billion deal, if it happens, is a vote of confidence in the U.S. economy, a good sign of the health of the credit markets, and yet more evidence that the M&A market is waking up from the dead.
Maybe I was overstating things a bit, but this deal does seem like a bullish sign (—amid plenty of other bearish news out there.) Here’s why:
1. This is reportedly the biggest all-cash buyout ever. That’s impressive during a credit crunch. According to last month’s reports, InBev had already obtained $50 billion in financing from two banks. Of course, beer is such a stable business that even most conservative bankers would probably feel comfortable they’re getting their money back. Still, the apparently easy access to $50 billion is a sign that credit conditions are still fair, if not good or great, for credit-worthy borrowers.
2. Finally we are seeing foreign buyers take advantage of the weak U.S. dollar to buy up U.S. assets. Patriotic Americans might object to foreign ownership of the “King of Beers.” But infusions of foreign money into the U.S. stock market are a positive sign for equity investors here.
However, my bullishness is muted a bit by the reality that this is in many ways a unique deal. InBev’s interest is in small part a vote of confidence in the U.S. economy (because Anheuser is so strong in its home market), but it’s mostly a vote of confidence in Budweiser, Bud Lite and Anheuser’s other brand names. Other U.S. companies might not have the same appeal to foreign investors.
There are other things to worry about: The deal’s prospects are still uncertain, with members of the Busch family including the CEO, reportedly opposed. An even higher bid might push Anheuser’s board toward a deal, but there are dangers here: An expensive buyout could force Inbev to wring more cost savings out of Anheuser. No, InBev won’t (as one colleague joked this morning) send the Clydesdales to the glue factory, but the demands of a heavy debt load could tarnish the very prize that InBev is trying to win.
June 11th, 2008 | Posted by stockEarlier this week, I wrote about “nontoxic” financial stocks, focusing on banks, brokers and other financial institutions that prospered despite tough times. (The accompanying slideshow by Ricky McRoskey is here, and I also talked about the story briefly on CNBC today.)
Looking at how many financial stocks have suffered in the past year, it’s hard to be optimistic about the sectors’ prospects. Especially as the financial crisis drags on, housing prices continue to fall and the Federal Reserve threatens to raise interest rates to deal with inflation.
However, it’s worth putting some of the trouble in perspective. Yes, the trouble hit hard the big banks and investment that made bad mortgages or bought up toxic investments. Those bets killed Countrywide and Bear Stearns, and wounded Lehman Brothers (LEH), Citigroup (C), Washington Mutual (WM), E*Trade Financial (ETFC) and many others.
But Robert J. Ellis of the financial consulting firm Celent, told me he sees reason for hope in the many local and regional banks around the country. Some of their stocks have been battered, but Ellis says, “the mass of the retail community banking market [is] “in great shape.”
As the economy slows down, they’re forced to set aside more reserves for credit losses. “But they are not hurt for the long term,” Ellis says. They’re managing risk fine, and, most importantly, they’ve been through banking crises like this before. “They know how to handle it.”
Ellis pointed to a couple other positive trends for financial stocks: As far as we know, people are still putting money away for retirement. “I don’t hear of too many people abandoning their 401(k)s,” he says. Finally, he said, there’s just not that much panic out there.
June 9th, 2008 | Posted by stockIn my ‘in box’ this morning appeared more evidence that the stock market’s movements from day to day are almost entirely random.
The Dow Jones Industrial Average dropped almost 400 points on Friday. What, you might ask, does a big stock drop on one day predict about the next day’s market movements?
Almost nothing, according to Marc Reinganum, director of quantitative research at OppenheimerFunds Main Street team (OPY), who bases his conclusion on more than 80 years of data.
Reinganum says:
“History suggests that, by itself, a one day -3% decline contains little information about the direction of the markets on the next day. Since 1926, following a -3% market decline, the market experiences nearly flat returns with an average drop of -7 basis points.”
Markets have a one-in-ten chance of declining by another 3% or more, but they also have a 10% chance of bouncing back more than 3%.
That lines up with other data suggesting it’s almost impossible to predict short-term moves in stock prices. So I think Reinganum is right when he concludes: “Investors should maintain their investment strategy and not react to short-term hiccups.”
(By the way, it turns out that stocks barely budged on Monday after Friday’s sell-off.)
M&A premiums up despite slowdown
June 5th, 2008 | Posted by stockBuyers are paying more than ever to shareholders to acquire companies, even as the M&A market remains slow.
This is the intriguing contradiction in new May 2008 data from Thomson Reuters.
So far this year, “financial sponsors and strategic acquirers” worldwide have paid an average of 25% above the publicly traded share price four weeks prior to a deal announcement. That’s the highest M&A premium since 2002.
Yet, at the same time, M&A activity is down 45.5% from the same period a year ago.
In markets — equities and real estate for example — prices are supposed to adjust to the laws of supply and demand. If there are fewer buyers competing over the same assets, why are they agreeing to pay even more?
The answer is that in the M&A market, fundamentals matter. Stock prices may have fallen in the past several months, but many companies’ profits remain strong. In fact, the same report from Thomson Reuters points out that the average price-to-earnings (P/E) ratio “is expected to hit its lowest level in a decade, signaling possible buying opportunities as market conditions improve.”
The slowdown in the M&A market is a bearish indicator. But rising M&A premiums are a sign that acquirers still see a lot of value in the current stock market.
June 5th, 2008 | Posted by stockStocks rallied today. One portfolio manager said it was mostly just a “relief rally,” a bouncing back after bearish news earlier in the week.
But to put you in a more optimistic mood, check out something John Wilson of Morgan Keegan wrote this morning. He was summarizing a note from Thomas Trantum:
Most recent data shows that corporate profits in the first quarter hit a record $1.157 trillion. To put that in perspective, at the high water market in 2000, corporate profits hit the amazing level of $602 billion.OK, let’s do some simple math. As the economy has deteriorated and the press has harped on how bad things are, corporate profits are up on the order of 92%. Meanwhile the S&P 500 is about 10-12% below where it was at the 2000 peak. By definition, valuations have shrunk. With the Fed Model showing stocks 45% undervalued to bonds, I have to believe that the risk/reward ratio is heavily on the side of stocks.
For more on the data behind the conclusions, check out Trantum’s note.
Ten Reasons Your Next Launch Will Fail
June 3rd, 2008 | Posted by innovIntroducing new products and services successfully requires: a) sufficient expertise and resources, b) a defined process (BusinessWeek.com, 5/8/08), and c) leadership resolve (BusinessWeek.com, 5/20/08).
But talking about expertise, process, and resolve is boring to everyone except engineers (and people who introduce new products successfully). So, with apologies to David Letterman, here’s our list of the top 10 reasons your next new launch will fail.
10. Science Run Amok.
Companies use their research and development capabilities to come up with unique products, instead of making customer needs their starting point. They begin with what they are good at, as opposed to what customers want. New products aren’t bloodhounds that go find markets. They must address an unmet need.
9. The Lemming Effect.
“The competition has just introduced an X, so we need to have an X, too.” If all you are offering is a me-too product, you can only gain market share by cutting price, and who wants to go that route? Find an unmet need and go after it.
8. “Team ACME.”
See if this sounds familiar. Someone comes up with an idea and it gets implemented by an ad hoc team with money found in a slush fund. It’s a daring approach. It’s innovative. And it almost never works because it isn’t sufficiently thought out.
If you have ever watched a Wile E. Coyote cartoon you understand the problem. The Coyote’s ad hoc solutions to the problem of catching the Road Runner always seem on the surface to make sense, but they always contain a fatal flaw that causes them to blow up in the end. If you substitute your company for Wile E. and “a nagging consumer challenge” for the Road Runner, you’ll see why there are better ways to go. Meep Meep.
7. It’s Scary Out There.
There are thousands of reasons not to be bold. The economy is weak; the market is unsettled. Somebody needs a hug. Fine, go get yourself one. Then buck up and get aggressive.
6. The Market is Too Small.
For a new product to be successful you need sufficient sales. It sounds ridiculously obvious, doesn’t it? But you would be amazed at the number of companies that design a product for too small a market. Say your new product is targeted at households with at least $55,000 in annual income. Well, that’s only 50% of the 105 million U.S. households. But it’s really just for the 18-65 age group—there goes another third of the market that’s left.
And this mythical product will only appeal to those with an active lifestyle: one-third of the remaining 35 million homes—some 12 million. Say you get 33% to try it, and of those 4 million households, only 50% said they would buy it again. Your potential market is about 2 million households, and sales at that level won’t cover the developmental costs, advertising, etc.
Instead of acknowledging this, we redefine the market as “for everyone 18 and over”—and then wonder why a product designed for a narrow target didn’t sell well.
5. Dartboard Product Design.
There is almost never sufficient thought given to what the total product should look like. Let’s say there are four key components—price, packaging, size, and usability—that could affect how well it sells. And each one of them has four options. So there are 256 different ways you could manufacture that product.
What’s the predominant technique used to choose among them? People sit around a conference table with some pizza and soft drinks and say, about a new paper towel, for example, “Let’s go with 500 sheets, super-high absorbency, and middle-of-the-road packaging, and priced 10% above the market leader.”
What’s the probability they’ve chosen right? By definition, it is 1 out of 256. Maybe they have some expertise; that boosts the odds to 1:128. Better, but still not great.
4. Death by Consensus.
If everyone has to agree on the key characteristics of a new product, you are going to end up introducing really bland products. The higher the number of people who have to agree, the worse this gets. Create a small task force of new product experts and empower them. Get out of their way. Let them live (or die) by how often they are right. You will get more compelling ideas to market faster.
3. Lack of Alignment.
You have a great idea. But because your process did not identify key stakeholders and influencers, it is your idea, not everyone’s. The Five Dysfunctions of a Team by Pat Lencioni does a great job talking about what happens to teams when trust is not established. Your success criteria should reflect the wants of the stakeholder. Trust builds momentum. Want to see your boss kill an awesome idea? Fail to include him early and often.
2. Leadership Churn.
Great ideas are like kids. They need to be nurtured, protected, pushed, challenged, and loved. Innovators are the proud parents that make sure this happens. So when these parents move from one brand to another, are poached by competition, or simply burn out, the kids suffer. (See? It really is always the parents’ fault.)
1. Ready, Fire, Aim.
Tom Peters and Bob Waterman perpetrated one of the biggest crimes ever against Corporate America when they told it to do a little homework, get the product in the marketplace, and make corrections based on market feedback, a concept they called “ready, fire, aim.” Speed to market is a killer concept in the negative sense. It kills new products.
You don’t want to make your mistakes in public. To launch a product before it is ready with a $40 million campaign is just idiotic. The problem is, it isn’t seen as idiotic. It’s seen as one of the costs of doing business. That’s sad. People who do this should not be seen as bold, they should be seen as bad marketers.
After reading this, feel free to smile knowingly, roll your eyes in frustration, or forward it to unresolved leaders. Better yet, why not take a look at your current innovation initiatives and make sure none of these things is happening on your watch.
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