Week 13 - Right to Manage

Week of April 23rd, 2009

Although we had a test this week, an article about the government being a majority shareholder of GM, and most likely banking institutions in an effort to nationalize them...concerns me greatly. As a democratic society, we have the right to life, liberty and the pursuit of happiness. For some people, this happiness is found only in running, owning, or managing a business. Granted, the government did loan GM and the banking institutions quite some money, it does not mean that they have the right to request that debt be exchanged for equity shares, and ultimately make them the majority shareholders in control of the board. This is only the beginning, and as time progesses under our current leadership (who I think has far too much power politically and socially for his own good) I think we will see more and more governmental influence and destruction of our inalienable rights.

One thing that I think GM and our entire country needs to consider is if giving up our rights is worth staying in business. I drive a Pontiac, and I'm sad to see the brand go. But it will not be the end of the world. There are other cars out there. In fact, too many cars out there. There is an economic justification for the demise of GM. They did not do good business...they did not manage their assets and growth in an effective manner. Yes, it will be devastating for society for GM to shut their doors. The unemployment rate will surely surge. However, it is not helping society today or in the future to continue to support a failing business. I don't see other businesses getting this kind of help! Seriously, what makes the government think that they can manage GM better? They can hardley manage their own business and budgets! Does this mean that they will essentially buy out the other American automakers, stop allowing imported cars to safeguard their business, issue each person their civilian car like a social security number!? Let's slow down a minute Mr. President and really think about what you're doing and how it will affect life today, and tomorrow.

I am in complete fear of the future. For our country and the world.
http://online.wsj.com/article/SB124083476254259049.html

Week 12 - Supply and Conquer!

Week of April 16th, 2009

We started our discussion on operations management this week. An importatnt topic to grasp is that of Supply Chain management. Sometimes, your vendor supply can have power over you because they are the only one to supply your need. Or the buyer can have control over the suppliers, like WalMart. Or if you go in the opposite direction, to distribution, your distributors can control your creative flow. For example, in the Wall Street Journal this week, Pepsi has announced that it is going to try to purchase their bottlers so that they can "test drive" new products more easily and actually market them from that distrubtion. Pepsi is not concerned about weighing down their balancing sheet with bottling assets, their growth rate will remain strong and healthy. The best part of the deal, is that Pepsi could eliminate a lot of administrative people aka "reduncancies" and save money...but also increase the unemployment rate. Thanks Pepsi!
http://blogs.wsj.com/deals/2009/04/20/why-pepsi-wants-to-buy-its-bottlers/

More dismal news in the auto industry, Chinese Auto Suppliers are expecting their bubbles to burst in the next year and a half. China is not as talented and supplying as the US, they require almost double the working capital to manage efficiently. The slow down in auto sales means a slow down in auto parts suppliers etc, and thus decreased working capital. My biggest question is how many cars do auto makers think we need? Theworld population is stabling out and the average person only owns seen cars in their lifetime. I think it's about time that we stopped over producing a lot of goods, especially outdated transportation that uses a lot of resources. I imagine that this will be society's make it or break it run. Today is the opportunity for someone to make it big by inventing a new form of personal transportation as widespread as the automobile, but safer for the environment and cheaper for the pocket books.
http://blogs.wsj.com/autoshow/2009/04/16/chinese-auto-suppliers-squeezed-by-global-car-slump/

Week 11 - When to retire?

Week of April 9, 2009

Wall Street Journal did a survey of people's retirement expectations, and only 13% think they have enough to live comfortably during retirment. We can apply what we've learned in the finance chapter to planning for retirement. We could use present value to determine how much we will need on the day of retirement to live comfortable for an average life span, and we can use present value to determine how much we need to save each year until then to make that much for retirement. Also, we could use the various capital investment decision making tools to determine which investements will get us the best return for retirement. Things like NPV, and IRR can apply to various mutual funds and other investment ventures.

The only problem, according to the WSJ, is that people are not adjusting the amount they put into their retirement funds to compensate for the money lost recently in the stock market. Instead, their plan is to just retire later. The average age is up 3 years to 65. Although this concept works according to the laws of math, it is not necessarily the best solution. Another depressing solution is that more and more people plan to work some during retirement.
http://online.wsj.com/article/SB123967208769515763.html

Wall Street Journal also has a very interesting video about taking your investment broker to arbitration....
http://online.wsj.com/video/lost-money-take-your-broker-to-arbitration/3BD21C1E-00E1-4B65-99D9-27E4D6582E47.html
That may be another option for retirees to recover some of their lost funds.

However, some people are having trouble making the same contributions to retirement, so in the future we could see the average retirement age go up even more, and a higher percentage of people still working in retirement. Looks like Wal Mart will have no shortage of greeters :)

But advisors recommend thinking of your retirement contribution like you do your rent. It is something you have to do to survive...so cut out the cable, internet and cell phone first. Skipping contributions causing you to miss out on employer matches as well as the interest your money could have earned during that time.
http://blogs.wsj.com/wallet/2009/04/14/extreme-finance-cutting-out-401k-contributions/?mod=rss_WSJBlog?mod=personalFinance

Week 10 - Today, Tomorrow, and Yesterday

Week of April 2nd, 2009

The effects of inflation in nominal vs. real rates

Inflation is becoming a concern for the future of investments. Corporate Investment Grade bonds are a fairly good investment, until you consider inflation. If the bond is stated at 5.5% and inflation is 6%, who would want that investment. Obviously, the price of the bond will fall until the price matches the market. For example, anyone forced to sell their bond at these deep discounts will lose money in nominal terms, while those holding out to maturity will lose money in real terms.
As the government prints more money, our current low inflation rate will be seen no more. They are making a lot of bets on that inflation rate remaining low. Also, if one of the investment grade companies can't pay some bills, the price of their bonds will fall even more. If bankruptcy is in the future, they have a higher chance of getting paid than equity owners, but they will still incur some losses.
http://online.wsj.com/article/SB123879540430687915.html

Warranties on "captial projects"

In our current economic state, families are focusing on smaller if any purchases. They aren't buying a new car, their getting the one they have fixed. They aren't buying new appliances, they're getting the old ones fixed. Hopefully, you took a gamble and bought the extended warranty. An article titled "Is added warranty worth the cost?" takes a look at the gamble of purchasing a warranty.
If you bought the warranty, and something went wrong you were satisfied. If you bought it and time passed without a hitch, you threw your money out the window. The director at consumer reports says that there is not much difference between the cost of the warranty and minor repairs. There is also a slim chance that there will be a problem during the warranty time frame. But 60% of Americans spend that extra money on the warranty for big-ticket items. But there is a shift toward becoming "keepers" vs. "tossers." More and more people are buying for quality rather than price.
http://online.wsj.com/article/SB122981203258724227.html

Week 9 - Mature Yields

Week of March 26th, 2009

Treasurys affecting the stock market...


The Fed is buying back treasurys causing fluctuations in the value of various length notes. And they are planning to buy many more, specifically inflation indexed bonds mature in the next 7 years. It has a positive effect on the market, and the longer dated treasurys performed the best. This probably means that purchasers of American debt to not expect our economic conditions to improve any time soon. Wall Street Journal provides an interesting article that contains an interactive chart to see the effects of the buy backs on various level treasurys. But the effects on the stock market are showing some sectors are gaining strength back.




http://online.wsj.com/article/SB123859169588078053.html

























The FDIC is increasing fees charged to banks for their insurance. It's only a matter of time until these fees are passed onto investors. But the banks are still going to pay the fees for backing their debt because it is more appealing in the market than unsecured debt. The fee is going up an addition 0.25 percentage points of their existing fees. It is difficult to speculate the impact of the increased fees. However, a change in rate can greatly affect the bottom line over time. So, it may be safe to say that their will be dramatic changes in long term debt backed by the FDIC. Although, the FDIC would like to encourage financial institutions to become more independent in issuing their own debt. I think the question becomes, what investor would be willing to do that after living through our current situation?
http://online.wsj.com/article/SB123863158276180829.html

Week 8 - The Value of Time

Week of March 12, 2009

Although we didn't have class this week...we are talking about the time value of money and how that affects the present value of investments including stocks and bonds.

One common assumption is that stock prices adjust for what investors expect in the future for certain companies. And it can be calculated by taking the present value of all future dividend payments. In fact, you can even factor in a certain percentage of growth and assume that these dividend payments will continue into perpetuity. But what happens when the prices do not adjust appropriately? Net Flix is one such company. Investors had high hopes that Net Flix's product offering would appeal to consumers during a recession. It's much cheaper than going out to the movies, and more convenient than going to the local rental store. They also had high hopes for the streaming movies and the appeal it would hold for more technically savvy individuals. And finally, with the impending bankruptcy of Blockbuster, their biggest competitor, what could Net Flix possibly have to lose? Well, investors may have moved too soon to build this perfect storm environment into Net Flix's stock price. They have some new emerging competition to watch out for through Amazon.com, Disney and Hollywood Videos. The bubble is expected to burst at any time.
http://online.wsj.com/article/SB123776433980008861.html

From a bond perspective, GM is trying to restructure to stay afloat. But their bondholders are not confident in the proposal. They would like to swap the bonds for stock to leverage with more equity. However, their current state does not have bondholders wanting to own a share of the company. If they change for equity shares and then GM goes bankrupt, those shares are worthless. Again, GM wants some help from the government and are seeking a $16 billion loan call for the two-thirds swap. They have until March 31 to present the government with their restructure plan, and they need an additional $22 billion to keep things going. From what we discussed in class, it would take a lot of stock and promise of high returns for the GM Bondholders to accept that level of risk. I wouldn't do it...but who's going to buy the bond from me either way. It may be time for GM investors to get out while they still can.
http://online.wsj.com/article/SB123776653433809307.html

Week 7 - Funds are fun!

Week of March 5th, 2009

It's Pension Funds vs. Hedge Funds in Utah

When the economy was going good, fund managers took it upon themselves to charge high fees for the service. Utah Retirement System's Larry Powell is trying to have them spread these fees out over several years. It used to be the case that the fund named the fees, and the people paid it. Now they are realizing that they are going to have to negotiate. One interesting thing to consider is that these fee changes will only apply to the new funds. How will that affect how people like Larry Powell determine which funds are the better investment. He expects that the top performers will still have the advantage of dictating fees, but the new ones will definitely have to build customer relationships through negotiation.

This applies to our class discussion, because changing when and how fees are paid changes the value of a fund. $10,000 today is worth a lot more than $10,000 spread evenly over three years. It would be interesting to see if they factor in the time value of money into those fees. Which, essentially would not create any real savings for investors, but would make it easier to manages their cash flows. In my current situation, paying the fees off over time would be much more appealing, because I don't have the cash. However, if I did have the cash now, would I want to still pay fees right away when I could invest that extra cash and maybe make some returns greater than what I'd be paying. It's an interesting thought to consider.

http://online.wsj.com/article/SB123629796624746265.html

Week 6 - Keeps looking better

Week of February 26, 2009

Not even ratios can save us...

In class we discussed financial ratios. Essentially a ratio can help a person to understand any relationship between any two numbers. In fact, we even discussed making our own ratios. However, in the Wall Street Journal this week John Mauldin says that ratios are based on assumptions and in the current economic conditions, you cannot uses conventional assumptions. Most future rates are based on current numbers. However, financial uncertainty causes us to not be able to project appropriately into the future. So, essentially financial ratios are completely useless right now for valuation purposes. Pay particular attention to the comments left with this article.
http://online.wsj.com/article_email/SB123605688123316929-lMyQjAxMDI5MzA2MzAwNTM2Wj.html#articleTabs%3Darticle


Just continuing with the theme of gloom and doom...In this opinion piece in the Wall Street Journal today it is speculated that there is a 1 in 5 chance that our current economic situation will lead to a depression. Robert Barro studied many countries to formulate his conclusion, not just the United States. But remember there are always two sides to every percentage, so there's an 80% chance of avoiding a depression.
http://online.wsj.com/article/SB123612575524423967.html

This video advices us to never pick individual stocks, but rather invest in mutual funds. Is that really good advice considering all the bad press that Bernard Madoff is giving this traditional investment instrument. He also recommends that when diversfiying with bonds, your percentage invested in this instrument should correlate to your age...so it gets bigger as you get older and need those more stable returns.
http://online.wsj.com/video/a-guide-to-the-end-of-wall-street/07B2FEB7-21BA-4A31-9EED-404F2BB8C9AF.html

Week 5 - New product, new ad

Week of February 18, 2009


Dawn is not the only brand that is having difficulty marketing a new line extension. Is the new hand renewal soap for dishes or your hands? Will it take off? Others dealing with similar issues is Trident gum attempting to market products that strengthen your teeth. One way to get new ideas out is called viral marketing. This occurs when a company produces a unique video that catches the attention of viewers so much so that they are compelled to send it to everyone they know. It has similar effects as a chain letter. In Trident's case, they tried to show the strength of a man, Jerry's, teeth and made the video look like it was for a TV show called That's not fake. The show investigated the situation and reported that Jerry used the new Trident Xtra Care chewing gum. However, it appears that the marketing attempt is not going anywhere...so much for viral marketing.
http://online.wsj.com/services/article/SB123439670534574971-search.html?KEYWORDS=Trident&COLLECTION=wsjie/6month

The American auto industry is falling to pieces. GM and Chrysler claim that $17.4 billion was not enough to help them and all thier suppliers. Their justification for what they did get was that bankruptcy would end up costing tax payers a lot more money. Both companies submitted recovery plans that showed how they would trim expenses and boost sales. The biggest effort, cutting make on brand names. Reporters found that suppliers do not solely count on the Detroit 3 though, and ship many products to Asian manufacturers. The ultimate decision will rest with President Obama and he is not expecting anything cheap.
http://www.economist.com/business/displaystory.cfm?story_id=13145718

Week 4 - Mixing it up

Week of February 12, 2009

Even the rich folks are cutting back, as shown when sales of expensive designer clothes slowed last year. Vera Wang was advised to go commercial. She started designing bridal gowns 19 years ago, and recently expanded into clothing lines. She's cutting costs by not having a huge fashion runway show, and cutting back on the creative side and opting for a more practical style. Many other high fashion designers have followed suit. Focus is not selling people items they need, not just style.
http://online.wsj.com/services/article/SB123517153386836823-search.html?KEYWORDS=product+mis&COLLECTION=wsjie/6month

Pricing is the trickiest part of marketing. You want to make money off your products, but you also want customers to buy them and this requires boosting perceived value. In these hard economic times, P&G is trying to bolster their bottom line by raising prices with some retailers. Some retailers refused and suspended shipments of products in late December. P&G doesn't seem to care, they are not after mindless share and volume growth. P&G thinks increased prices will work, but others are skeptical.

http://online.wsj.com/services/article/SB123508966388628145-search.html?KEYWORDS=product+mix&COLLECTION=wsjie/6month

Week 3 - One in every color, as long as its black

Week of February 5th, 2009


Mass Customization

Companies such as Dell and Lands End have enacted a differentiated value proposition using "mass customization." This essentially is an ability to efficientl produce customized products. It is only possible through such innovative measures as just-in-time inventory and complicated websites. Many consumers have come to appreciate similar efforts from other companies to allow for personalization. Next on the list of demands, according to Network World, is the operating systems for computer networks. Every company requires different functionality for their systems. Many have invested billions into IT personnel and the latest tech gadgets to achieve this level of customized functionality. Many Linux users are leaning toward a JeOS or just enough operating system. It's is limited to the ability to run a few key applications. Because it's Linux, you still get the tech support and hardware that you need.

http://www.networkworld.com/news/tech/2009/012109-tech-update.html?page=1


Market Segmentation

Car manufacturers are attempting to gain marketshare in the BRIC emerging economies. These segments consist of Brazil, Russia, India and China. In the Economist, China's methods on breaking into the industry are discussed. Customs taxes were too high to make the foriegn automobiles appealing to locals. China only allowed foreign car manufacturers into their country through joint venutres with Chinese manufacturers. The first was Volkswagen, who created the Santana (much like the Passat, but fully Chinese made). Then came GM pushing brands such as Buick, which sold twice as well in China than it did in America. When the auto market is divided by geographic segments, the American segment seems to be over saturated with choices. It is very appealing for manufacturers to get into the developing countries to establish their brands early. Automakers in Brazil have free reign, no such joint venture requirements exist there. The Russian market is held back by high oil prices. And India is dominated by the early bird Suzuki, who formed a joint venture with Maruti in the 1980's. The market for automobiles has grown considerably since Ford created the assembly line in Michigan. Now cars are designed, not only with optional colors, but with optional assemblers as well.

http://www.economist.com/specialreports/displaystory.cfm?story_id=12544905


Market Positioning

If you can't beat 'em, join 'em. This is Pfizer's thinking in attempting to buy out competitor Wyeth. Wyeth's most profitable drug is Lipitor, but the patent will run out soon. With no new medicinal innovations in its cauffers, they will be very vulnerable in the current economic conditions. Pfizer is the number one drug company in the world. Between purchasing their number two competitor and the aging baby boomer generation, their position as such will certainly continue indefinitely. However, as more drug makers consolidate, what will that mean for the cost of medicine?

http://www.economist.com/business/displaystory.cfm?story_id=13007939

Week 2 - The Widget Factory

Week of January 29, 2009


I am not a tool.


In class, we had a lengthy discussion on whether students are their teacher's customers. The conclusion we arrived at is that students are a resource/product of the university and the professor is the tool/machinery. In an article from the National Association of Scholars, the role of students in the educational system is discussed. Peter Wood says that students are just students. The relationship of students to teachers is one that cannot and should not be morphed to fit a metaphorical mold. He supports his argument by referencing Socrates "The Clouds." Generally, he feels that the attitude customers take is that they are in control of the situation. This is a bad situation for the teacher. However, it is important that students exercise judgment over their professors.

In our discussion, students were compared to pieces of steel to be molded. We are customers of the university, but not the teacher. The argument supporting this idea is that only a small portion of tuition dollars goes to the professors. However, you would think that any monetary amount would qualify it as a market exchange. So, if students are resources...the teacher must be a tool. Or rather the method the university takes to add value to the resource. Who are the customers then? Society. Especially for state institutions that get a lot of funding from taxes.
http://www.nas.org/polArticles.cfm?Doc_Id=320

Target Markets

A target market is a focused effort of a company to marekt their product to specific individuals, ignoring all others. As the economic situation worsens, many marketers are finding that creativity is even affected by budget constraints. So, marketers have to put on their accounting hats and do some cost-benefit analysis of different marketing channels. The Wall Street Journal article titled "More Web Ads Improve Their Aim" addresses the concept that more and more people are absorbing advertisments through the internet. Yahoo is one company that provides added value for this marketing method. The performance-based media they use also provides a means of tracking the effectiveness of the internet advertisements, giving them a lot of value for the shrinking advertising dollar.

http://online.wsj.com/article/SB123379182761749823.html

Value Proposition

Companies with a differentiation marketing strategy seek loyal customers that are willing to pay a premium for a product. Communicating value to potential customers, in order to convince them your product is worth it, can be costly. In fact, new small-time entrants to some markets are resorting to give-a-ways. Experts say doing this could send the message that your product is cheap, rather than showing its immeasurable value. Others, like Vaillant, have gone to free installation with no up front costs to gleam more customers. None of these innovative methods have proved to work yet.

http://online.wsj.com/article/SB123378641759849447.html

Week 1 - What is Money?

Week of January 22, 2009


What is money?

Briefly mentioned in class discussion was a five part video entitled “Money as Debt” available on YouTube.com. The origins of money were originally based on trade. Something of value was exchanged for another item of value. This evolved into precious metals molded into standard coins. Eventually, it became burdensome to lug around many coins, and people would store their gold coins with the goldsmith in return for a slip of paper called a claim ticket. At some point in time, the goldsmith started to loan out the use of the coins to other people. Then he discovered that he can loan out more money than he actually has on hand, provided everyone does not come claim their money at once. Eventually interest became an additional way for the goldsmith to gain funds, and he accumulated wealth. This system of loaning more money than actually exists is called a fractional reserve system. Today, governments around the world have adopted this system and allow banks to create money according to a standardized ratio. The paradox of this system is that you constantly have to feed debt into the system to keep the money supply available. The debt is based on things of value like houses, cars, business production. Ultimately, banks control all the resources and the system promotes overuse of resources. In the fifth segment, the creator suggests some ways to overcome this.
This concept has never crossed my mind before. I always thought banks were limited to loaning only the amount of their deposits. The realization of this monetary system makes me fear the future. It is only a matter of time before something of this nature collapses. I only hope that Barrack Obama has seen this…hahaha.

http://www.youtube.com/watch?v=vVkFb26u9g8


Total Quality Management and Edward Deming

Edward Deming was hired by Japan after World War 2 to rebuild their industrial system. He came up with many valuable quality management theories, starting a wave of quality obsession. This fad has since declined, after businesses realized that 100% quality is unattainable at reasonable costs. The result was a mutation into Six Sigma efforts. The government requires a certain level of quality in manufactured goods, so does the consumer. So quality is a very important aspect of operations management. An article from PR Newswire discusses the Six Sigma approach to quality management. http://sev.prnewswire.com/advertising/20090128/DA6369228012009-1.html

Also, many companies are responding more responsibly to quality lapses. See this article from the Wall Street Journal about Toyota: http://online.wsj.com/article/SB123318164275026113.html


American Auto Industry

We discussed the failing US Auto Industry in class. Many American cars are not even made in America any more. In fact, America even gave up on the Industry by not providing a bailout. Now, the UK is offering to step in. Not only will the components be foreign, but the financing as well. This article in the Wall Street Journal discusses their offer. http://online.wsj.com/article/SB123307576867520133.html