Category Archives: Recession

Can Twitter Really Drive Investment Decisions?

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A group of hedge-fund managers are launching a multi-million dollar hedge fund next month, using Twitter as its market indicator to determine sentiment and to thereby make investment decisions.

This information came from a recent article on CNBC / Yahoo Finance which quoted Derwent Capital Markets – a London-based hedge fund – as saying it had successfully marketed the new venture, officially called the Derwent Absolute Return Fund, to high net-worth clients and had attracted over £25 million in investments.

The company is confident it can achieve returns of at least 15-20% per annum by analyzing information gathered from over 100 million tweets each day, which the firm brands as “The 4th Dimension.”

On the face of it, this may sound like a risky, or even crazy, venture – but is it?

Let’s face it, the concept of rational markets has been comprehensively debunked during the last few years of economic crisis, and the global growth in wealth came to a dramatic end largely through a change in general sentiment. We’ve also seen plenty of allegations – many apparently backed by evidence – of collusion between those in research and those in investment banking to pump stock prices of certain companies at various times. In fact, based on this and my own experience, it seems that relying on the “experts” to manage your investments is no greater guarantee of success than simply using a general market-tracking fund – and often provides worse returns.

Furthermore, most people agree that we won’t see real growth return this cycle until consumer confidence picks up. Isn’t that really just about general market sentiment?

So contrary to some of the views on this fund, I would argue that this is a smart bunch of people – what they’re doing is using current technology to gauge market sentiment and make investment decisions from there.  Instead of listening to a small group of people to try to understand what “the man in the street” is saying, they’re tapping into the collective feelings of millions.

I see this as the start of a whole new way of tapping into societal collective wisdom and sentiment. What do you think?

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October 2010 – Another Black October?

a tale of two lottos
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There’s an interesting phenomenon surrounding October as regards the stock market – it’s probably the single most feared month of the year, with the three biggest crashes all occurring (or starting) in October. Will October 2010 be another bad month?

The Great Depression was triggered by the sharp slides which happened in October 1929 (and kept going), although the biggest one day drop was that of 19th October, 1987, when the Dow lost nearly 23% in one day, and then kept dropping for some weeks until finding a new bottom, with losses of somewhere around $1 trillion. Most recently, October 2010 was seen as the worst month for the stock markets after the banking crisis came to light – and the economic repercussions are still being felt strongly in most parts of the world.

Although there was hope that economic recovery would continue throughout this year, there are growing concerns about whether this will happen, or if we will see a further drop – the infamous double-dip recession. Behind this are the questions of whether governments put too much money into trying to boost recovery too soon, or whether they haven’t put enough in for it to be effective; how and when countries are going to be able to afford to pay for the economic stimulation so far given, and how they can pay for any more if this is needed; and whether the idea of such government intervention has been effective at all, or whether the market needs to sort itself out.

I’m certainly not qualified to answer these questions. To be honest, I’m not sure that anyone really has the answers, especially given that we’ve seen fairly convincing proof that markets are far from rational as they had previously be held to be. Watching the daily rise and fall of the main indices like the Dow Jones it seems to me that the smallest piece of news is magnified in terms of its impact on the market overall, with billions of dollars being added to, or taken from, the value of companies on the strength of relatively insignificant items.

If this is the case and we go into the last quarter of the year without some strong positive news, will the markets over-react once more and lead us back into a “Black October.”  What do you think?

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Living Your Brand – do companies really care about their Brand?

Goldman Sachs Tower in Jersey City
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2010 certainly seems to be going down as the year when the proverbial corporate skeletons are coming out of the cupboard:

  • Toyota – which had built its brand on reliable, safe vehicles – recalls many millions of cars all around the world in an apparently ongoing saga, with new recalls being announced almost monthly;
  • Goldman Sachs – viewed by many as the pre-eminent merchant bank – being sued for fraud by the SEC and now under investigation by the UK regulators, too;
  • Many airlines – especially those using words like “Favourite” and “5 Star” in their advertising – simply refusing to abide by their legal obligations, in terms of Regulation 261/2004, to provide accommodation and refreshments for their stranded passengers during the volcanic eruption in Iceland.

And this is just a sample of the more recent headline-grabbing issues.

Are they really “Too big to fail” – or just too big to care?

I suspect they believe the latter, not recognising the truth in the old adage that “Pride comes before a fall.” Remember, almost none of the largest and then most successful companies in, say, 1900, are still in any position of strength today – in fact most have disappeared altogether.

These corporates need to get back to basics, to remember that it is their customers that pay their salaries and to start treating their customers as the company’s most precious resource, rather than as a necessary irritant. Simply repeating a marketing mantra branding themselves as the pre-eminent company in their field doesn’t make it true…

The fact is that branding is a lot more than just a logo with a catchy by-line – a company’s brand is everything to do with that company, and the logo is just something to recognise it by as we’re visual creatures. Branding is about customer service, branding is about the way customers interact with the company in all ways, branding’s about staff training, branding includes corporate governance and social responsibility, branding is about all the materials that company produces – from marketing through packaging to the products themselves – in fact, branding is about everything to do with a company.

And this is where so many companies are falling down: they’ve lost sight of everything but the short-term pursuit of the bottom line. And I use “short-term” advisedly – as without attention to all aspects of their corporate brand, those companies will lose customers and start to fail.

Just look at the consumer backlash against many banks that they perceive to have been complicit in the economic downturn. Imagine how consumers who have been poorly treated will feel about giving more of their hard-earned money to those airlines that left them high and dry. Will former Toyota buyers be as happy to buy another Toyota?

Companies need to start refocusing on their entire brand, they need to recognise the power of instant communication for their customers and embrace it to make a positive difference, and they need to once again really put their customers first instead of just saying they do.

What do you think – do companies no longer care about their brand in pursuit of profits? Have you joined the growing ranks of disgruntled consumers and, if so, which are the brands you love to hate?

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Is Offshoring threatened by a return to Onshoring?

CHICAGO - JUNE 16:  A demonstrator protests ag...
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One of the potential side-effects of the global economic slowdown that could have far-reaching financial and political consequences is the question of whether offshore jobs should be brought back onshore.

After all, since the Offshoring model really started to take off in the 90s, a number of economies have become dependent on the revenues generated by their ability to provide such facilities for the historically more costly Western countries. For example, India’s business and technology services companies are estimated to have had revenues of some $58 Billion in 2008, up from just $4 Billion ten years earlier, with that sector’s export earnings (largely Offshoring) reaching an estimated $46 Billion in 2008 – offsetting some three quarters of the country’s oil imports.

The rationale for Offshoring was simple:

  • Consumers were ever-more price conscious, and companies were equally ever more cost conscious.
  • Developing economies had much lower labour rates and so could provide manufacturing and many services at significant lower cost, to the benefit of the consumer and the company.

The effects on local labour were not a serious consideration as it was widely believed that they would find alternate employment – perhaps even at a higher skills level which would earn them more money.

Of course, Offshoring was not without its challenges – issues over the quality/consistency of goods and services supplied, of cultural/language differences (especially in the services sector), of corporate governance (data and information leaks, etc.) and of differing expectations of both parties raised their heads. But these could be overcome while economies remained strong and consumers kept buying.

However, the persistence of the economic slowdown, coupled with the likelihood that unemployment in the Western democracies will remain high for the foreseeable future and the growing public debt are forcing a re-evaluation of the Offshoring model:

  • What impact will weaker Western currencies have on the production cost?
  • Will a move to new models of outsourcing – using a managed-services model with guarantees of performance/quality, as opposed to the classic “staff augmentation” model – enable total delivered cost to be lower Onshore?
  • For manufacturing, to what extent will lower transport costs of finished goods offset the higher manufacture cost of Onshore products?
  • What is the premium that can be attached to national pride (e.g. goods/services from that Onshore country)?

And then there are political considerations for the Onshore country: politicians that are seen to encourage job growth are more likely to be re-elected. What’s more, perhaps this could be done in a way that benefits that country’s fiscus, while being seen to be friendly to business and to the workforce as a whole. To what extent would tax breaks for companies bringing jobs back Onshore be offset by the additional income taxes it would gain from the newly employed, the decrease in unemployment benefits and the additional sales tax/VAT it would gain from the spending of these people?

Although a return to Onshoring may not be suitable for everything – large scale manufacturing of small, relatively low-cost items, for example – it seems to me that the benefits to a country, and to that country’s employers, of adopting a greater Onshoring model could be significant. And, if this trend took hold, the impact on Emerging markets that had come to rely on providing Offshoring could be even more significant. What do you think?

Update:
Great blog article by Derek Singleton: “5 Strategies for Growing as a Domestic Manufacturer

Liquidation – a valid way to build personal wealth?

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A friend of mine in another country brought to my attention a company that is currently under voluntary liquidation – an act that reminded me of how often I’ve seen this tactic used as a convenient way of enriching oneself at the expense of others.

And isn’t enriching yourself at the expense of others in this way little more than fraud?

The problem here is that liquidation laws are necessary for a business in trouble to find a way to most fairly compensate all its creditors and close (or, in some cases, restructure) before it incurs further problems, resulting in even bigger losses for the creditors.

However, some unscrupulous people will start a business, build it over a few years to gain the trust of its suppliers and customers, and then at a point where the cash-flow starts to become problematic, put the business into voluntary liquidation and walk away from the debts. In the meantime, of course, they have paid themselves substantially in terms of salaries and bonuses – in effect, living extremely well off their creditors that are then left behind holding the proverbial baby.

While it is possible, in law, to go after these individuals and sue them for their personal assets to cover the delinquent debt, this is extremely expensive and, in order for the action to be successful you generally have to prove some form of wilful intent: always a tough thing to do, even when all the circumstantial evidence might point that way.

So, having accumulated a handy sum from this now-defunct business, they start again – looking for new victims. Mind you, some are brazen enough to start again in the same line, asking the same creditors for credit – and often, these creditors fall for it the second time, thinking that they will somehow be repaid from the profits of the new business…

And yet, these self-same businessmen will tell you that there are no victims here as their suppliers are (generally) covered by credit insurance and so will be paid out, while the credit insurer should be able to recover its money from the receivables (if it was that simple, why are they liquidating in the first place?)!

The fact is that credit insurance almost never covers the full debt, so the suppliers have a significant shortfall. On top of this, the insurance premiums invariably rise – the insurer has to covers its losses somehow, after all – and is also wary of that sector so withdraws/reduces cover for smaller, generally honest, businesses that then face genuine cash-flow crunches and may have to fold as well.

Victimless? Certainly not.

So, my question to you is this: do you believe this sort of action is legitimate, or should laws be framed to ensure that such action results in the forfeiture of assets by the liquidating party to cover the shortfall?

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Get used to high inflation!

Assorted international currency notes.
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There’s something missing from all the talk of whether or not the economic bailouts have saved the world from a depression – as opposed to a severe recession – and that’s how the massive spending by governments around the world is going to be paid for.

Perhaps it’s the “party effect.” After all, when you’re having fun at a party, nobody wants to think about the hangover that will be with you tomorrow. Not that we’re all having fun in the current recession, of course, although it could have been a lot worse. But the hangover is sure to follow.

The problem is that governments around the world have realised they are easily able to spend money they don’t have, and the recourse – if it comes at all – will come on somebody else’s watch: generally the opposition party that comes in after them. It’s nice to have your political foe lumbered with your mess…

However, the facts are clear – public debt (i.e. what governments owe) has grown at an alarming rate. Let’s look at a few examples among the world’s larger economies, showing public debt as a percentage of GDP for each country at the end of 2009 (using estimates from the CIA World Fact Book):

  • USA                       83.4%
  • Japan                    192.1%
  • Germany              77.2%
  • France                  79.7%
  • UK                         68.5%
  • Italy                      115.2%

What these huge percentages mean is that, firstly, government is over-spending dramatically and secondly, that the percentage of government income (read: taxes!) that go just on interest payments on this debt has grown to become one of the largest single budgetary items.

In fact, the International Monetary Fund (IMF) recently estimated that Japan and the UK would need to reduce government spending by 13% and the US by nearly 9% just to “restore stability” over the next decade. How can they do this with such massive bills to pay? Oh, and it’s worth noting that the public debt does NOT include provisions for future expenditure on pensions, medical assistance and other state commitments – this is only the current debt!

So, what can governments do?

Reducing government spending to any meaningful degree is often seen as political suicide – especially as elections get closer.

Raising taxes is even worse…

There are only two, linked, things they can do to get the public debt as a percentage of GDP down in a reasonable time: keep interest rates artificially low to reduce interest payments and allow inflation into the system to increase GDP and their own revenue as a result.

A 10% inflation rate over five years will reduce the percentage of public debt by close to half, assuming the GDP growth matches or exceeds the inflation rate (e.g. grows in real terms). The other benefit of this is that government revenues will increase accordingly – higher sales means more sales tax/VAT, salaries rising around inflation rate will mean more tax income (the tax decreases are always lower than the extra amount paid through “bracket creep”), and so on.

My guess is governments won’t allow 10% as it’s psychologically too high, but I expect to see inflation moving quite quickly to the high single-digit range, say, 9%. We’ll need to tighten our belts and adjust our business plans accordingly – the ride for the next decade will be somewhat rough.

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Are Layoffs Bad For Business?

View of Wall Street, Manhattan.
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“Downsizing is killing workers, the economy – and even the bottom line.”

This direct quote from an article in Newsweek of 15th February entitled “Layoff the Layoffs” rather forcefully makes the point that contrary to conventional business wisdom, the constant cycle of cutting headcount as a primary means of cutting costs is tantamount to long-term economic suicide – not to mention the effects on the health of people.

According to the article, research clearly shows a link between layoffs and lower stock prices, with the negative impact on the stock prices worsening with the size and permanence of these layoffs – in spite of the widely-held view that layoffs will boost stock prices through showing effective cost management.

Another debunked issue is that of productivity – in fact productivity per employee does not rise, no doubt due to morale issues – while a study of companies in the S&P 500 showed clearly that companies that downsize remain less profitable than those that don’t.

Adding to the profitability falls, of course, are the costs of laying off staff – both direct (severance pay, etc.) and indirect (morale, rehiring costs when things pick up, and so on). These are always woefully underestimated, as is the extent to which companies embarking on wholesale layoff programs have to rehire – at inflated cost – key staff who elected to “take the package.”

In fact, McKinsey studies over the years have shown that company executives believe that less than 40% of corporate transformations in their businesses are “mostly” or “completely” successful.
Conversely, companies that choose to find ways to weather the periodic storms are the first to recover, and do so far more strongly that those that have made significant across-the-board cuts.

Of course, there will always be times when cutting staff is unavoidable in a business – it may even be the thing that will save it from total collapse. But when this time does come, all the experts agree that it should be done in a transparent, open manner, with cuts being made in defined areas, rather than simply across the board – the all-too-frequent approach of an uninvolved management team. Getting everybody from the CEO down personally involved will get the best results, as happened with the well documented case of Malaysia Airlines a few years ago.

Hopefully this message of transparency, involvement and engagement will start to get through to company leaders as well as to the stock market and investment analysts that so many company leaders are guided by. As I mentioned in my blog post, “Leadership for the New Business World,” a new set of skills are necessary for the successful business of the future – skills that will rebuild the faith of communities in their leaders. In fact, it’s interesting to see how many of the top-rated companies in Fortune’s “Top 100 Companies to Work For” list this year have weathered the storm without across the board layoffs, with many showing positive growth in staff and even in their businesses, too.

Certainly, companies that retain their staff, and take the opportunity to hire key new ones, retain all the critical “institutional intelligence” and are best positioned for the economic upswing, as I mentioned in my blog post, “Will your business survive the upswing?

There’s no doubt – Layoffs are bad for your business, especially when handled without due care, attention and precision. Conversely, a covenant with your staff to be open, fair and honest with them at all times will go a long way to securing the long-term, profitable future of your business.

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