“More prosperous shoppers seem to be defying continuing high unemployment levels and economic uncertainty to renew their spending on luxuries such as jewelry, fashion and cosmetics,” we read in the Financial Times this morning.   This would seem to be consistent with the long chain of positive earnings releases thus far in 2010.  Just last week LVMH, owner of the Louis Vuitton brand among others. reported that demand for its high-end products accelerated towards the end of 2009.

So what gives?  Isn’t this supposed to be a “rich man’s recession?”  There are a couple of important points to be made here.

Yes, this is a rich man’s recession. It is an asset-based recession marked by deleveraging.  A crisis that sees virtually all non-Treasury assets fall in value is going to take a bigger bite out of the net worth of the “asset rich” than of the average Joe who works for a paycheck.  When the financial world imploded in 2008, consumption of luxury goods ground to a virtual halt.  Retailers were stuck with a mountain of inventory that they couldn’t sell without deep discounting — a cardinal sin for a purveyor of luxury goods!

But once the shock of the crisis wore off, wealthier shoppers returned to their old haunts.  How do we explain all of this? Read the rest of this entry »

Last week, we had a blog post about the changing demographics of the Middle East based on data from the Christian Science Monitor.  Today, we’re going to comment on another snippet from that issue (January 24, 2010) titled “Adults, and still in the nest.”

No, we’re not talking about American college kids who move back in with mom after graduation.  We’re talking about  Italians who are pushing 40 and still living with mama.  We’ve covered this topic before, but it’s interesting to see it covered again by one of the top foreign affairs newspapers in the world.  The Monitor writes,

The phenomenon of the bamboccioni, or grown-up kids that live with Mom and Dad until their late 30s, has prompted many jokes both here and abroad. Reluctance to give up Mama’s lasagna is just part of the picture. Read the rest of this entry »

In our recent post, “A Round Table With the Experts,” we spoke too soon.

In the last post, we wrote “What separates the Barron’s Roundtable from from many other panels is that the participants actually bicker and argue with one another — and this is a good thing. ‘Experts’ have no value whatsoever when they think and act as a herd (unless, of course, you are using them as a contrary indicator). But when they think as individuals, they often add a great deal of insight.”

As soon as we hit the “publish” button on that post, the Barron’s panel proved us wrong.  In Part 2 of the 2010 Roundtable, we see definite signs of herding among the panelists.  Of the four panelists to offer their picks in this issue, three — Oscar Schafer, Abbey Joseph Cohen, and Scott Black — appear to be bullish on tech and energy.  The fourth, Marc Faber  — a true contrarian who never agrees with anyone..about anything…EVER — was the lone dissenting voice, recommending assorted Asian stocks (his forte and the focus of his practice)  and gold. Read the rest of this entry »

Continuing our Christmas Carol theme, every married man knows how pointless Christmas presents are.  If you buy your wife’s present yourself, she isn’t going to like it, and if she picks it out herself, then what is the point?  You might as well just give her the money and cut yourself out as the unnecessary middleman.  But, if you want to stay married, you have to throw logic aside and continue playing this little game.  This same basic logic also applies to mothers, sisters, and children of both sexes. (Men have a unspoken pact among themselves, however: you don’t get me a present and I don’t get you one, and we both have one less thing to worry about, bud.)

At any rate, let’s see what those cold, hard academics at the Economist had to say about it.  In reviewing the new book by Wharton professor Joel Waldfogel, Scroogenomics: Why You Shouldn’t Buy Presents for the Holidays, the Economist writes,

Mr Waldfogel objects to the ritualised frenzy of shopping for gifts that precedes the enormous meals and awkward family reunions that are the other hallmarks of Christmas in the Western world.

Such complaints are hardly new…[b]ut unlike most criticisms of festive wastefulness, Mr Waldfogel’s objections are based on economic theory rather than morality or taste.  When people buy something for themselves, they believe that their purchase is worth at least the price paid.  But most gift-givers are only dimly aware of the desires and tastes of the beneficiaries of their largesse.  As a result, they often give people presents that are worth far less to the person getting them than the gift-giver paid for them.

The result of all these inappropriate presents—ranging from the sweaters that people will never wear to games they will never play—is what Mr Waldfogel calls a “deadweight loss” from Yuletide generosity.  This is the difference between the satisfaction a person gets when she spends a dollar on herself and when a well-meaning benefactor spends that dollar on a present for her.  Over a period of time, a series of surveys have led him to conclude that the average deadweight loss from gift-giving is around 18%.  Given his estimate that Americans spent $66 billion on Christmas presents in 2007, this amounts to a whopping $12 billion of lost value.  Where others see generosity, Mr Waldfogel sees an orgy of value destruction.

The professor’s solution to this problem of deadweight loss?  To forgo presents and just give cash instead.  Though we have no knowledge of Professor Waldfogel’s personal life, we’re going to have to assume he’s a bachelor.  And that he was raised by a single father, or perhaps by a pack of wolves (males wolves, at that).  But we digress…

There are some economic inefficiencies that you just have to accept if you want to have a happy home.  And the wanton wastefulness of Christmas is one of them.

On a side note, even in this difficult economy, we expect a bubble of sorts to develop in all things Christmas related, at least in the United States.  Christmas is, primarily, a holiday that centers around children (the same can be said of Jewish Hanukkah and Muslim Eid, of course).  With American birthrates currently at levels not seen since the original post-WWII baby boom, in the next decade there should be unprecedented demand for everything from mall Santas to fake snow in a can.  Toy stores should also do quite well in the years ahead, even if the economy continues to flounder.  Most parents would sooner hawk a kidney than allow their children to be disappointed on Christmas Day.  So, astute investors should look for ways to “invest in Christmas” in the years ahead, taking advantage of what promises to be a demographic tidal wave.

Link to Economist article– Scroogenomics: Give Gold, Not Myrrh.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

In a recent post, we talked about how professional sports went through a bubble of sorts over the past two decades in which everything got supersized:  player salaries, memorabilia and merchandise, the price of tickets and parking, corporate naming rights, and even such absurdities as sushi bars and Starbucks in stadiums (Geez, what happened to beer and peanuts?)

Any casual observer could have told you that these trends were unsustainable.  Baseball, for one, used to be cheap entertainment for the masses.  A dad could take his son to a game with whatever small bills he had in his wallet.  But as prices inexorably rose, a day at the ballpark became less of an enjoyable afterthought and more of an extravagant luxury that had to be budgeted.  And when the economy fell apart in 2008, fewer families had room in their budgets for such frivolity.  This is also true of the other major professional sports, most notably basketball, where attendance is flagging.

Today, we see some anecdotal evidence that the bubble in Super Bowl ads may be bursting: “Pepsi not advertising in Super Bowl next year.”

The reasons for Pepsi’s withdrawal are not given, but we have our suspicions.  Might it be that, given the surge in ad prices during the bubble, paying for a Super Bowl ad is simply not worth the money anymore?   The movement of eyeballs away from traditional TV to the net and devices like Tivo that make it easy to skip commercials have altered the economics of the advertising industry.  Is this a possible symptom?  We shall see.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

Nearly a year ago, we first commented that professional sports were getting slammed by the recession (see “Bailout Culture Spreads…to Basketball?” and “Now the Recession Has Hit the NFL“)

This isn’t a garden-variety recession we are experiencing.  It’s something bigger this time; a psychological tipping point has been reached.  The mid-to-late 2000s witnessed the gentrification of professional sports.  Beer and hot dogs were replaced with saki and sushi…or Starbucks!  And perhaps nothing symbolized the excesses of the era more than the Dallas Cowboys and their billion-dollar stadium (subsidized by Arlington taxpayers, of course).  But today, a little more than a year after the financial meltdown, these excesses appear more and more to be a high-water mark of sorts.   Team owners seemed to have forgotten that most sports fans are not the champagne and caviar crowd; they are  far more likely to be found with beer and pretzels…and that’s regular domestic beer, not the microbrew or imported stuff.

So, after the building spree of the past 15 years, we find ourselves with overcapacity in professional sports.  Expensive overcapacity.  We also find ourselves with sagging demand: “NBA ticket revenue slides 7.4 percent”

CBS Sports writes,

Average paid attendance is down 3.7 percent in the NBA through the first quarter of the regular season, sending gate receipts plummeting 7.4 percent, according to league documents obtained by CBSSports.com.

Net gate receipts, the money teams make from ticket sales, fell to an average of $828,985 per game, down from $894,823 at the same point last season. Only nine teams were up or flat in average net gate receipts through Nov. 29, while 21 teams saw a decline.

Excess supply and tepid demand can only mean one thing — falling prices.  Could it be that the bubble in professional sports — including everything from ticket prices to player salaries — could be giving way to deflation?  2010 is supposed to be an enormous year for NBA free agency; if current trends continue, there might be a lot of disappointed free agents.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

With Warren Buffett’s recent acquisition of BNSF, you could understandably get the impression that all is well in the world of American railroads.  After all, if the Sage of Omaha sees value there, then it must be so.

We’re not necessarily disputing Mr. Buffett’s claims about the long-term attractiveness of rail — after all, he’s the best in the investment business, and the man presumably knows what he is doing — but we do feel it is necessary to point out that most of us do not have time horizons like Mr. Buffett, whose preferred holding period is “forever” in his own words.   But while we are waiting for “forever,” a lot can happen in the meantime.  And right now, we’re getting very mixed signals from the rail sector.

Michael Robertson, one of our HS Dent financial advisors, forwarded us these stats from the December issue of Rail Time Indicators, a publication of the Department of the Association of American Railroads:

U.S. Freight Rail Traffic:

Carloads: In Nov. 2009, ↓ 8.2% from Nov. 2008 and ↓17.4% from Nov. 2007.

Intermodal: In Nov. 2009, ↓ 6.7% from Nov. 2008 and ↓ 14.1% from Nov. 2007.

And if a picture is worth a thousand words, we’ll save a little space with this chart: Read the rest of this entry »

Well, here is one way to promote an ethical financial system: “China Executes Rogue Trader”

Reuters writes, “Conscious that the growing gap between rich and poor could generate resentment, China is battling corruption and stock trading abuses. It has used the death penalty as a deterrent in serious cases.”

Resentment is not limited to China, of course.  Goldman Sachs has become a proverbial punching bag for everyone with a real or perceived grievance against “the system.”  Similarly, the Fed is coming under unprecedented scrutiny…which is dangerous.  If you’re going to have a central bank, it must be independent.  If you think its management is bad now, imagine how bad it would be under direct congressional control (a cold chill just ran down my spine at that thought…).

Just as the Great Depression led to the creation of the alphabet soup of government regulatory agencies that make all of our lives miserable today, I fear that the knee-jerk, angry response  to the current crisis may prove to have serious negative consequences in the future.  Let us hope that cooler heads prevail…

Related post: “Angry Retirees Kidnap and Torture Their Financial Advisor!”

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

We’ve commented before about Netflix and its business model.  We’re not a big fan of Netflix’s core business model, and we think it has only a few more years left it in at most.  In the age of fast downloads, it simply does not make sense to mail DVDs back and forth.  (Netflix also has an on-demand movie download service, which has promise.)

At any rate, while Netflix’s original business model is well on its way to obsolescence for digital media like movies, it may yet have potential for “old economy” industries.  The New York Times had an article about two young Harvard MBA graduates who started a “Netflix type” web business that rents designer dresses: “Haute Couture, Available Through the Netflix Model.”

This is an interesting idea.  It has long been possible to rent high-end women’s dresses for events (and men’s tuxedos too, of course).  But there has never been an online mail-order site for it.  The Times writes,

Rent the Runway is a recession-era twist on the Internet rent-by-mail model, which has been used for things like textbooks and video games in addition to movies. Unlike those utilitarian items, however, the dresses offer a touch of Cinderella — on a budget….

Rent the Runway is betting that its shop-by-Web convenience and the appeal of its top-quality fashions will persuade women across the country to rent a dress for a special occasion without trying it on beforehand.

It will be interesting to see if this business prospers.  It’s difficult to buy (or rent) clothes without trying them on.  This is hard enough for a standard pair of jeans, let alone tailored clothing.  Fashion is also a notoriously fickle industry.

At any rate, we’re not so much interested in this particular business as in the larger trend it could represent.  Recessions are a time of vicious creative destruction in which old business models are destroyed and new ones created.  It would be ironic if Netflix’s core business failed yet inspired copycats that revolutionized other industries.

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

“People respond to incentives, although not necessarily in ways that are predictable or manifest,” write Levitt and Dubner in their new book Superfreakonomics.  “Therefore, one of the most powerful laws in the universe is the law of unintended consequences.”

Their book, which is a sequel to their surprise bestseller Freakonomics, is a great series of case studies on unintended consequences and, on a higher level, understanding consumer behavior.   It’s surprisingly one of the funniest books I’ve read in years.  I found the book so entertaining, I pretty well put my life on hold this past weekend to finish reading it.  (My rapid reading of the book was, in itself, a beneficial unintended consequence of my recent buying of my Amazon Kindle.  The convenience of owning a Kindle has enabled me to read much faster and cover a lot more material.  Don’t underestimate the benefit of having a portable library in your briefcase.)

Some of the book’s chapters are better not mentioned in this blog (a large section of the book is dedicated to analyzing the economics of prostitution, calculating the marginal costs and benefits added by pimps, among other topics).

Below are some of the tamer subjects covered Read the rest of this entry »