Financial Advisers: Who Can You Trust?
February 27th, 2009 | Posted by stockIf you haven’t done so already, check out BusinessWeek’s special report on financial advisers. In it, we highlight 50 of the most trusted and experienced financial advisers based on research from the Paladin Registry.
It looks like financial advisers need all the good publicity they can get. According to new data released by Mintel, the financial sector “has the furthest to go in regaining consumer trust.”
Banks, credit card issuers and lenders need to clean up their books and communicate openly to regain the people’s faith.
The most compelling datapoint: Mintel says only 28% of high net worth adults say they’re relying more on financial advisers because of the economy. “The current financial market presents a substantial opportunity to advisers who can gain investor’s trust,” says Joan Holleran, director of research at Mintel.
Some advisers say they have learned a lot from the meltdown. Just this week well-known adviser Harold Evensky told his clients that he shares their pain.
As an entrepreneur, my personal equity investments are primarily my business, my IRA, and our pension. For the last year our firm’s pension plan (heavily equity oriented) is off over 30%, my IRA (100% in the Russell 3000) is off almost 50%. My “safe” municipal portfolio (managed like our clients by Thornburg) has barely managed to break even. There is much pain and concern amongst investors around the country right now, and we understand, because we too are experiencing the pain and concern.How do I feel? Probably like you and every other investor in America: frustrated, concerned, and even angry. I also know that many of you are more than concerned—you’re frightened. I wish I could say it’s silly to be scared. Unfortunately, with some of the most dramatic market losses in living memory, I can’t. It is scary.
Evensky’s candor is refreshing. Has your adviser done anything lately to gain your trust?
February 23rd, 2009 | Posted by innovThis comment was issued by Standard & Poor’s Equity Research Services on Feb. 20
Our wish last week was that the stock market do something, and our modest request came true very quickly as the major indexes finally broke down out of fairly narrow trading ranges. It appears the stalemate between the bears and the bulls is over, and the bears still rule as the downtrend in the market is alive and well. The safe haven areas continue to work like a charm with the U.S. dollar continuing higher, long-term treasury yields moving lower and gold prices soaring above $1000 per ounce.
Taking a look at the three major indexes from a chart standpoint, the DJIA is clearly the weakest with the Nasdaq holding up the best, and the “500″ somewhere in between. The DJIA was the first of the three indexes to break below its November bear market bottom at 7,552, and is now approaching the 2002 bear market low at 7,286. Bearishly, there was not much of a fight by the bulls at the November lows, just some intraday short covering.
The problem for the DJIA, as well as the other indexes, is that once the 2002 bear market lows are taken out to the downside, there isn’t a lot of clearly identifiable chart support that we can talk about as a possible bottom. This makes the technician’s job mighty hard at forecasting the next price nadir. In our view, chart support and resistance are by far the most important levels on the chart for identifying potential tops and bottoms. Going all the back to 1996, there is a layer of potential chart support from a sideways consolidation that sits between 5350 and 5780 for the DJIA. Very long-term trendline support, starting off the lows in 1932 and extending through the lows in 1982, using a semi-log chart, and projecting out about a year, does not come in until the 4000 to 4500 zone.
Another way to get a potential downside target for the DJIA because of the lack of definable chart support is to base our projections on the width of the latest consolidation. Using the low from November 20, the consolidation measured 1483 DJIA points. Subtracting this width from the breakdown point of 7552 gives us a potential measured move down to 6069. Looking at Fibonacci extensions based on the width of the latest consolidation gives us an initial target of about 6600 and a potential secondary target of 5100. There are a lot of potential targets to chew on, but we don’t know where the next bottom will eventually be. We just have to wait until the market decides where it is.
While the S&P 500 has not busted through its November 20 lows at 752, the picture is not that encouraging either. The last bastion of near-term chart support for the “500″ lies between the intraday low of 741 from November 21, and the November closing low of 752. We think that these lows will be taken out, although we do expect more of a fight by the bulls when the index gets near or into this range as this is a logical spot for shorts to cover their positions. Even though put/call (p/c) ratios are finally starting to rise again, as fear strikes the options market, we just don’t think that the p/c’s have spiked enough to even illicit a decent counter trend rally. The closing low from the 2002 bear market was 777 so once the November lows give way; we have to go way back on the chart to find the next potential piece of chart support. This comes from the 1996 price consolidation that ranges between about 600 and 680.
The width of the latest price consolidation on the S&P 500, assuming that 752 gives way, is 182 points. This gives us a potential measure move (752-182) down to 570. An initial Fibonacci extension, based on the width of the consolidation, targets the 640 level. Major long-term trendline (semi-log scale) support off the low in 1932, which touches the significant lows in 1942, 1974, and 1982, comes in between 550 and 580 when extending the line out into next year.
While we almost always look at semi-log charts, where the distance on the y-axis is proportional based on percentage moves, there are some technicians that use standard, arithmetic charts. Interestingly, there is a pretty nice trendline starting in 1982, and going through the lows in 1984, 1987, and 1990, that comes in around the 720 level. Possibly more panic and most likely, strong, powerful demand will define the next price low, so we will just have to wait and see what level finally attracts a sufficient number of buyers.
Gold prices have reached our initial target just above $1000 per ounce so we would take some profits as we think there could be some profit taking near the prior highs we set in 2008. With the metal hitting major chart resistance as well as cycling into overbought territory, we see two potential scenarios playing out. The most likely from a technical standpoint and most preferred from an investment perspective, in our view, is a near-term pullback back to the $900 to $950 area. There are many pieces of support in that zone starting with a 23.6% retracement of the move since November, and that targets the $935 level. Trendline support, off the highs since 2008, and once a resistance line, also sits near the $935 area. Chart support lies between $892 and $921 while key trendline support, off the lows since November, comes in around $900. A 38.2% retracement of the rally since November sits just below $900.
The other scenario that has less probability, in our view, is that gold hangs around the $1000 area for a couple of weeks before resuming its advance. This would not allow investors wishing to either increase their positions on weakness or initialize positions on weakness much of an opportunity. If gold pulls back or pauses, we think any strong break above $1000 will open the door to another powerful move up to the $1200 to $1500 range. This projected range is based on the width of the latest correction, Fibonacci extension targets, and longer-term trendline resistance. Needless to say, the quicker the stock market declines, the faster gold will continue to head north, in our view.
With no direction home, like a complete unknown, like a rolling stone
February 20th, 2009 | Posted by stockDividend reductions within the S&P 500 last quarter (Q4,’08) set a record at $15.9 Billion. Now, 50 days into the quarter, the record has already been broken, with 26 issues cutting $16.6 billion. We expect more cuts to be announced as companies take steps to conserve cash in order to ride out the global recession, which at this point has no convincing end date (click here).
With 93% of the Q4,’08 earnings in, reported Q4 sales are down 8.8%, with 59% of the issues postings revenue declines. Operating earnings set a low not seen since Q1 1992, and As Reported (GAAP) posted its first negative EPS in index history, with over $100 billion in losses for the quarter. Many of the write downs were for impairment and speak to balance sheet items, but translate into acceptance by the companies that future earnings for those assets will deteriorate. Others were provisions (layoffs, closing, pensions) which will hit the actual cash flow later this quarter and next. There has been no major shift in estimates yet as the stimulus, TARP, and housing plan details come out. Basically, analysts are waiting for more details and reaction to the plan from consumers, corporates and politicians: ‘With no direction home, like a complete unknown, like a rolling stone’ (click here).
As far as dividends for the rest of the market goes (common: NY, AS, NASD), the dollar value isn’t as bad (smaller issues), but the numbers are worse. YTD there have been 175 decreases, compared to 44 for all of January and February of 2008. 2009 is the year of the cash flow.
The S&P 500 has now lost over half its value -50.23% or $7.02 Trillion, since the 10/9/07 highs; we’ve already lost more than is left, so things have to better ahead than behind (always look for bright side, and yes I still believe in dividends).
The S&P 500 (778.94) is near its 11/20/08 low (752.96), after that it’s a slight decline to the 4/14/97 low (743.73). That other guy (7465.95) is near its bear market low (7286.27 on 10/9/02), with the next low point being 4/28/97 (6783.02).
With the Dow Jones industrial average off nearly 300 points over fears of bank nationalization, Treasury Secretary Timothy Geithner, like his counterparts in the FDIC, rushed in on a Friday to rescue beleaguered financial institutions – at least for one day. Unlike the FDIC, which seizes a bank on Friday and has it ready to open on Monday, the White House sought to avoid that scenario with a mid-day announcement that it would release details of its financial rescue plan next week — and nationalization would not be part of the plan.
The announcement worked. The Dow Jones Industrial Average and S&P 500, both down over 3% at the time, fought their way back to unchanged before giving back some of the rally to close down around 1% for the day.
It’s déjà vu all over again. Back in November, only a Federal Reserve pledge to support the banks prevented the stock market from trading much below its 10-year low and the market rallied 25%. Now, as the S&P 500 approaches those lows again – it traded as low as 754 on February 20, just two points above its 752 close on November 20 – investors hope to see some radical solution from the Treasury Department and the Federal Reserve. If they’re disappointed, expect the market to test those lows.
But this is really about banks and two banks in particular: Citigroup and Bank of America. Citi closed down 22% on Friday, while Bank of America was down around 4%. Citi and B of A can talk all they want about having adequate capital, but if it weren’t for the sheer size of the two financial behemoths – and the worries about the knock-on effects their demise would have on the financial system – the banks would have been seized and sold off months ago.
The hope that the feds will figure out some way out of this mess without wiping out shareholders is the only force keeping BofA and Citi’s shares aloft. But Geithner is no Luke Skywalker — and Bernanke no Ben Kenobi. The ending to this saga may not be pretty.
END OF TAX YEAR PLANNING: Spring breaks.
February 19th, 2009 | Posted by taxTechnical Connection sets out a detailed action plan for ensuring that your clients make full use of tax planning opportunities for 2008/09 and the forthcoming tax year February and March are key months in which to consider tax planning to maximise the use of an individual’s allowances, reliefs, exemptions, etc, for the current tax year. Some of these will be lost if not used before the tax year end.
Year-end tax planning is even more important in the current financial climate as a means of minimising tax payable and maximising net income, capital growth and wealth. As well as last-minute tax planning for 2008/09, now is also a good time to put in place strategies to minimise tax in 2009/10. Of course, tax planning is an important part of financial planningbut it is not the only part. It is essential therefore that any tax planning strategy being considered also makes commercial sense. Please note that in this article references to married couples include registered civil partners. 1.1: Independent taxation Significant changes to the rates of income tax occurred on April 6, 2008, in that the 10 per cent rate of income tax no longer appliesto earned income and basic-rate income tax was reduced from 22 per cent to 20 per cent. Income tax saving opportunities still exist for married couples who carry out appropriate planning. Most of these need a full tax yearto operate to give maximum effect so these suggestions may serve more as a reminder for planning for the coming tax year than as a means of saving tax this year. Where a higher-rate taxpaying spouse owns investments, income from these may suffer tax at a rate of up to 40 per cent or 32.5 per cent (if dividends). Therefore, subject to practical considerations, the transfer of investments to a lower or non-taxpaying spouse can save tax and increase overall investment returns. Such transfers must be outright and unconditional. Where possible, a couple should try to ensure that they both have pension plans to provide an income stream in retirement that will also use their personal allowances. Clients should make maximum use of all personal allowances available to them and their family. A husband and wife each have their own personal allowance. This is particularly relevant where one spouse pays tax at a lower rate than the other. A non-working spouse with noinvestment income will be able to receive income of #6,035 for tax year 2008/09 (#6,475 for tax year 2009/10) before he or she pays anytax. Older married couples benefit from an increased age-related personal allowance. It may be advisable to transfer income producing assets between couples where one would otherwise exceed the age allowance limit of #22,900 (2009/10). Business owners may consider the payment of a salary to a lower ornon- taxpaying spouse (provided, of course, he or she performs work for the business that fully justifies the payment). This could be upto the NIC free limit (currently #105 per week) that would still attract contributory State benefits and give the ability to pay additional pension contributions. 1.2: Investment planning Isas The Isa is still the main method of investing savings, with freedom from income tax and capital gains tax. Improvements to Isas were made from April 6, 2008. Although the rules have recently changed, there are still two types of Isa – a cash Isa and a stocks and shares Isa. The overall annual contribution limit is #7,200, of which no more than #3,600 can go into cash. The balance can be invested in a stocks and shares Isa. This means a couple could invest #14,400. Money that has been invested in a cash Isa can be transferred to a stocks and shares Isa. However, a transfer from a stocks and sharesIsa to a cash Isa is not permitted. A child aged 16 or over can invest #3,600 in a cash Isa. Enterprise Investment Scheme An EIS offers tax relief on an investment in new shares of an unquoted trading company which satisfies certain conditions. For tax year 2008/09, an investment of up to #500,000 can be made to secure income tax relief at up to 20 per cent, with relief being restricted to the amount of income tax otherwise payable. Unlimited capital gains tax deferral relief is also available on an investment in an EIS provided some of the EIS investment potentially qualifies for income tax relief. For those who have disposed of assets before April 6, 2008 which has resulted in a CGT liability at a rate of more than 18 per cent (after taper relief), investment into EIS shares within three years ofthe disposal would mean that the original gain will be taxed at 18 per cent (and not some higher rate) when the EIS shares are realised. However, careful calculations will need to be carried out for disposals before April 6, 2008 as the applicable CGT rate could be as low as 5 per cent (business assets) or 12 per cent (investment assets)because of taper relief. Deferral of a capital gain means taper relief is lost. Venture capital trusts The VCT offers income tax relief for tax year 2008/09 at up to 30 per cent for an investment of up to #200,000 in new shares, with relief being restricted to the amount of tax otherwise payable. There is no ability to defer CGT as with an EIS investment but dividends and capital gains generated on amounts invested within the annual subscription limit are tax free. For both the EIS and the VCT, it is essential that would-be investors are aware of the likely greater investment risk and lower liquidity that will have to be accepted in return for the attractive tax relief. 1.3: Gifts for children Bare trusts for children The benefit of a parent establishing a bare trust for the benefit of a minor unmarried child not in a civil partnership is that all capital gains of the trust will be taxed on the child beneficiary. Thus, it is possible for the child to use his/her annual CGT exemption of #9,600 for tax year 2008/09. The potential downsides are: * The application of the #100 parental settlement income tax rule. * Trust capital can be claimed by the child on attaining age 18 (16 in Scotland). Subject to these potential downsides, bare trusts can be useful planning mechanisms for an investment into unit trusts or Oeics that are geared towards capital growth so that the child’s annual CGT exemption can be used. Discretionary trusts If more control over trust assets is desired, then a discretionary trust may be more appropriate. There may also be income tax benefits. The first #1,000 of gross income in a tax year falls within the trustees’ standard rate tax band and is taxed at the basic rate. Income in excess of this will be taxed at the normal trust rates of 40 per cent or 32.5 per cent (for dividends). The trustees of a discretionary trust are entitled to an annual CGT exemption of normally #4,800 for 2008/09. It is important that careful thought is given to the investments underlying a discretionary trust to maximise tax efficiency and enhance the benefits available for the beneficiaries. This is particularly the case as the top rate of income tax on discretionary trusts mayincrease to 45 per cent in tax year 2011/12. 1.4: Pensions In theory, there is no limit to the amount of contributions that can be paid by an individual or an employer on behalf of an employee. However, the individual – and employer – must also be aware of thetax charges applicable should either the lifetime allowance or annual allowance be exceeded and any pension planning must take account of this. One way to avoid an annual allowance charge is to manipulate input periods. It is often stated that an individual’s maximum contribution in any tax year is limited to the amount of the annual allowance (that is, #235,000 in tax year 2008/09). However, there is no restriction onthe amount of tax-relievable personal contributions to the amount of the annual allowance where the individual’s relevant UK earnings in the tax year in question exceed the annual allowance. It would normally be unwise to pay a contribution exceeding this level as the excess would be subject to an annual allowance tax charge of 40 per cent and normal tax treatment on benefits. It is, however, perfectly possible by judicious planning and the manipulation of pension input periods for an individual to obtain full tax relief on a contribution paid in tax year 2008/09 exceeding #235,000 and avoid an annual allowance charge. For example, an individual with relevant UK earnings of #400,000 could pay a contribution of up to that amount prior to April 5, 2009 and obtain tax relief on this in tax year 2008/09. If he were, for example, to pay #235,000 to a Sipp on March 2, 2009, he could then elect that the pension input period for that Sipp ends on, say, March 10, 2009. This would mean the pension input period would end in tax year 2008/09 and this would be set against his annual allowance for 2008/09. He then pays the remaining #165,000 contribution on March 25, 2009. This will fall in the pension input period ending on March 9, 2010and will be set against his annual allowance for 2009/10 of #245,000. Therefore, in the above exercise, the member will have received full relief in 2008/09 on his #400,000 contribution but with no annual allowance charge. However, he will be limited to a #80,000 contribution in 2009/10 unless the process is repeated. One other aspect specifically needs to be taken into account as the 2008/09 tax year end approaches. Monday, April 6, 2009 is the deadline for any individual who wishes to make an election to HMRC for enhanced and/or primary protection. Copyright: Centaur Communications Ltd. and licensors
February 18th, 2009 | Posted by innovI’ve recently been nagged by a somewhat peculiar thought: In a way, the dogged pursuit of excellence is the path to anything but. As you head down the road to mastery, you run a real risk that in fact you have nothing to distinguish yourself other than the depth of your expertise. That may sound like a good thing, but that expertise may not be either sufficient or satisfying.
To be clear, I am not suggesting for a moment that depth is not important. There are no shortcuts. One does have to put in the thousands of hours that are required to achieve mastery in pretty much anything worthwhile. But like anything else, there are limits beyond which the effort may well prove counter-productive.
In this vein, let me put forward a few balancing counter-propositions:
Always be bad at something that you are passionate about.
By this, I really mean two things: always be a beginner at something, and always be in love with what you are beginning.
Why? The latter keeps a fire in your heart and soul, and the former keeps you grounded. The more expert you are in your “day job,” the more important such grounding is. Additionally, the further such new beginnings are from your core expertise, the more likely it is that they will feed that expertise in some unexpected way in the future.
For example, Yvon Chouinard refers to himself as “an 80% man.” Yvon is the founder of clothing company Patagonia and the author of one of my favorite design books of the past decade, Let My People Go Surfing: The Education of a Reluctant Businessman. In the book, he talks about climbing, explaining that when he reached about 80% of his potential in the sport, he promptly devoted time to other passions rather than directing his focus on pursuing that remaining 20%.
For Chouinard, other passions included fly-fishing and surfing, not to mention his business, family, and commitment to the environment. All of these experiences helped to shape every aspect of his craft and businesses, from innovating on the design of pitons and ice axes, to founding what became Black Diamond (one of the world’s top makers of climbing gear), and Patagonia itself, which is a paragon of eco-sensitive business. And I suspect that his having done so also improved his climbing—or at least the quality of his experience in the mountains—more than if he had focused on that alone.
You can be everything in your life—just not all at once.
Always being in the throes of a passionate beginning is one of my primary methods of sustenance. But as is all too frequently the case, too much of a good thing can cause its own set of problems. The energy of pursuing such passions can be addictive, and take over at the expense of other things that are equally or more important. It can become destructive. I found this out the hard way, and my wife was able to help me when I most needed it. It was she who reminded me that the limitlessness of life has to be shoe-horned through the limitations of the present. Which leads me to…:
When you get good at one skill, drop another in which you have achieved competence in order to make room for a new passion at which you are—yet again—bad.
Lest what I am advocating be confused with superficiality or dilettantism, let me emphasize that what I am speaking about here is what one wraps around one’s true calling. Of course one needs depth and perseverance in one’s profession. But the behaviors that I am advocating serve to feed the base of your experience and your soul while you pursue that calling. Don’t be surprised if they also inform it, shape it, or even morph into a new calling.
Life is too short to waste on bad teachers and inefficient learning.
When you decide that you want to learn something, do your homework and find the best person in the world that you can possibly convince to teach you. It is amazing how far true passion, willingness, and dedication will take you when approaching mentors that you might otherwise consider unapproachable. Keep this in mind if and when someone approaches you for help with a newfound passion!
For instance, when at age 40 I decided that I wanted to ride competitively (never having been on a horse), I somehow convinced the top Canadian rider from the Los Angeles Olympics to coach me. I stated my desire to see if I could qualify for the Olympics, and then mentioned that I had neither horse nor saddle. She laughed, but she also took me on, and what I learned over the next decade not only got me on the talent squad of the national team, it helped my other work in a myriad of subtle and unexpected ways.
Remember: You can learn from anyone.
So, yes, my coach was an Olympian. But on the other hand, some of my most valuable lessons were learned from a 14-year-old girl who, while laughing at my incompetence on horseback, was also generous with her insights. Was she world-class? No, but her feedback was exactly what I needed. Riding in that environment was a very design-like experience in that we critiqued each other. It was a salient reminder: All of those in training are also coaches of a sort.
We live at a time where we hear repeated calls for the need for creativity and innovation. What better way to cultivate the full potential of our creativity than by sustaining the passion, curiosity, delight, energy, and enthusiasm of the beginner, coupled with the wisdom and experience of the expert?
EA Sports Gets into Real Life Goods
February 18th, 2009 | Posted by innovEA Sports has announced a partnership with Toy Island “to develop a unique new line of sports equipment that will bring the excitement of video game simulation outside onto the fields of play.” This multi-year deal is actually part of an older agreement with IMG from February 2008. EA Sports said the products will make use of infrared, motion and equilibrium sensors and will “serve as a virtual coach as they instruct the user on form and technique, speed and power, and more.”
Products for baseball, football, basketball, soccer and hockey are all currently in the works and are slated to launch later this fall; other sports will follow after launch next year. Some of the products will include:
• a line of interactive training tools featuring voice commands and instructional coaching elements designed to take budding stars to the next level;
• a complete game-in-a-box containing all the equipment necessary for kids to practice and play a sport;
• a line of sports toys that will utilize electronics to reward young athletes with cheers when they use proper techniques;
• a basic line of high density-foam balls to help kids develop throwing and kicking motor skills at an early age.
“Our goal is to take the EA Sports brand deeper into the fabric of sports, and into new markets that allow more people to unleash their inner spirit of sports and competition,” said Moore. “With Toy Island, we’ve found a partner that shares EA Sports’ passion for quality and innovation. We’re excited to be working with them to bring to market unique products that are sure to be captivating for young athletes.”
“We could not be more thrilled with the opportunity to work with EA Sports on what we think is the next level of sporting goods,” said George Vorkas, President of Toy Island. “To take games that so many of us play with and make them relatable on a physical level to kids that have grown up playing EA Sports video games, is something that we are delighted to do.”
A Run of Money Fund Redemptions
February 18th, 2009 | Posted by stockRetail money fund assets dropped for the sixth consecutive week, to $1.35 trillion, as of Feb. 12, according to the Investment Company Institute.
Treasury and municipal money market funds felt the brunt of redemptions and assets dropped $6 billion. Taxable non-government offerings, which typically earn higher yields by investing in short-term, high quality instruments such as certificates of deposit and commercial paper, had a far smaller $400 million decline.
Those so-called “prime funds,” including Vanguard Prime Money Market Fund, yielded an average 2.45% (2.55% at the Vanguard fund) for the 12 months ended Jan. 30. Retail Treasury money funds averaged 0.96%. (On average, retail money market funds yielded 1.66%, after fees, for the 12 months ending Jan. 30, vs. 4.54% a year ago.)
Still, says Peter Crane of money fund tracker Crane Data, “while yield has played a role in the success of money funds, convenience and simplicity have been bigger drivers.” Crane estimates money funds have produced over $1 trillion in interest income over their 38-year history—over $300 billion more than bank savings accounts would have yielded.
How about you? Sticking with your money market fund? Or trading in for higher-yielding CDs?
February 17th, 2009 | Posted by innov“I meant to do that.” In the campy 1980s comedy Pee-wee’s Big Adventure, whenever Pee-Wee Herman fell off his bike, he dusted himself off, looked around sheepishly, and said, “I meant to do that.”
Well, we just fell off our economic bike. As we try to reconcile our financial capabilities with our material aspirations, something has to give. Can we act like we intended to do this? Baby boomers have a long history of translating their self-interest into a moral imperative: Make love, not war. Greed is good. Show me the money. Change we need. What’s next: Proud to be modest?
Now that boomers (Confession: Yes, I am a boomer) have much less money than they thought they did, is it going to be cool to consume less and save more? Are consumers going to strap their spending patterns to the ever-nascent environmental movement and take pride in cutting back? Are we going to say to ourselves, “I meant to do that.” Well, perhaps we really did. But unlike Pee-Wee Herman, when we do get back on our bike, it is likely to be a very different one.
What Do Consumers Really Want?
To design goods and services for these new consumers, we need to understand what they really want. In a series of in-depth consumer studies conducted before the U.S. recession and equity market collapse, we can see evidence emerging of much more modest aspirations than our spending habits would have suggested.
We recently asked a range of people across the U.S.: What would they do if their house were on fire? What would they grab as they ran out of their home? The kids and the dog came first. The answers that followed included things of no great material value: photographs, childhood toys, and other tokens of their memories—things that have essentially no exchange value, but are extremely personal.
Talking to car buyers, we learned that some young people wanted the utility that they saw in their parents’ sport-utility vehicles, but packaged in a way that was smaller and more efficient. And from upper-middle-class baby boomers, we learned that they were not looking to be rich in retirement but simply to have enough.
Personal, smaller, and more efficient. Simple enough. These are the real aspirations for many people, and they will guide how they allocate their time and money.
When times are flush, people can be persuaded to want more and spend more, but our current reduced circumstances are forcing us to be more introspective. When we think more carefully about what is important to us, we are likely to make different choices and ones that align better with our real values. When consumers do come back to the market in 2010, they will have different priorities, not just quantitatively different, but qualitatively different. Everything is changing.
The Innovation Challenge
The business of design, innovation, and marketing has always been about how to meet the needs of people, and how to connect products and services to the meaning in their lives. That is how we design things that people will want. It’s how we market to them in a way that makes people want to buy. But frankly, people today recognize that the connection between needs and meaning has been stretched quite thin—buy this $5,000 stove and you can have a more intimate time with your family in the kitchen. Really?
The current recession is going to force us as innovators to think hard about people’s changing priorities and to be as creative in our solutions. We need to get inside the heads of these new consumers, and then envision completely new ways to meet their aspirations. Not just bigger, better, faster, but new, relevant, genuine.
Unfortunately, as the automobile companies are finding out, getting from here to there is not going to be easy. As a society, we have designed the wrong cars, built the wrong factories, and put houses in the wrong places. More of the same is not going to work, but we can’t afford to simply discard what we do have.
How Design Thinking Can Help
We are surrounded by what feel like impossible innovation challenges—a small company trying to rapidly improve its product line without access to credit, a large company fighting inertia to try to change course before it is too late, a government looking for ways to foster this transformation without misallocating resources or misguiding regulation.
How can we begin to approach these problems?
1. Acknowledge that you do not know the answer. The answer may not be in the limited set of options you have in front of you, so instead of making false trade-offs, search for another way. Be open to completely new ideas that are not even in the framework of your current thinking.
2. Search for solutions—not inwardly as experts, but through the lens of consumers and customers and constituents. Conduct your research as if you were an anthropologist.
3. Explore options by tapping a broad range of people with different skills, disciplines, and mind-sets. Include people who understand well the constraints you have to work within, but also include people who do not see any constraints. New solutions often come from outside current expertise.
4. Prototype and evaluate a range of ideas. Learn, iterate, and refine until it is right. Great ideas with small flaws fail. Details matter.
People all over the world are shifting gears. People are asking questions: What do I need? What do I really n
We know how to pump up a business into something more, something bigger. It is new territory to build a company or an economy around personal, smaller, and more efficient. Simply enough, it will take some very creative teed now? And what will I need for the future? Across the globe, companies are trying to shift gears to keep pace with their customers. One might call it Humble New World.
hinking to find a way.
Emerging Markets or “Submerging” Markets?
February 13th, 2009 | Posted by stockFinance ministers from G7 countries, including Treasury Secretary Timothy Geithner, meet today in an effort to steer the world economy toward stability and recovery. But data from around the globe suggests the wild ride will continue.
The swiftness of the global downturn makes it impossible to confidently predict the future. Investors are naturally confused: Is your money better off in the U.S., Europe, Asia? So-called developed markets or emerging markets?
Emerging markets — like China, India, Brazil, Russia and many others — are the toughest puzzle for stock investors. There are reasonable arguments to be made that emerging markets could be the very best place to invest, and there are also good arguments they’re the worst.
Allan Conway, head of emerging market equities at Schroders, gave a talk yesterday on the outlook for emerging markets. He made a good case for the relative attractiveness of emerging markets. Here, according to Conway, are some of the advantages of stocks in emerging markets:
1. No credit crunch or excessive levels of debt in most emerging economies.
2. Economic fundamentals. Because of large reserves, nations like China don’t need to borrow to fund their stimulus packages.
3. It’s not true that China and other countries are unduly reliant on exports to developed nations. Domestic demand has been a big contributor to growth, and so have exports to other emerging nations.
4. Stocks are very cheap in emerging economies.
5. Most global investors, spooked by last fall’s market meltdown, are very much underweight emerging markets. There is money waiting on the sidelines.
6. But the main argument has to do with economic growth:
Conway believes emerging economies will grow 3 to 4 percent faster than developed nations. “This three to four percent growth [advantage] will continue into the future, irrespective of whether this is a recession or depression and how long it lasts,” Conway says.
Even in a worst-case scenario, growth in places like China should remain positive.
But does faster economic growth translate into stock market gains?
Over the last decade it did. From the end of 1998 to 2008, developed stock markets were down about 2%, while the MSCI Emerging Market index rose 143.5%. That takes into account last year’s steep sell-off in emerging market stocks.
Here’s the problem with this sunny outlook:
Even if you accept Conway’s thesis, he admits deciding when markets have finally hit bottom is very difficult. “There are going to be a lot of false dawns,” he says.
Also, Conway admits: In an economic downturn, there is the risk of social unrest in many emerging economies. Slower growth in developed nations will be less disruptive.
Moreover, the fluctuations in the U.S. dollar complicate any American investors’ overseas strategy.
Finally, economists may have a hard time predicting the course of emerging economies over the next few years.
This week, Lombard Street Research’s Charles Dumas issued a much gloomier assessment of China’s economy. He pointed to a 40% decline in China’s imports over the last six months, and a 20% drop in exports. China’s economy could shrink, he warns. “The chance of actual Chinese recession looks major.”
As Conway put it: “It feels like giving a weather forecast in the eye of the storm. Almost any prediction is likely to end up being wrong.”
Long-term fundamentals might look better in emerging economies than those in what Conway calls “submerging” developed economies. But it’s hard for investors to think long-term amid so many present dangers.
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