Wednesday, September 30, 2009

Bad News, Recession Over. Risk Taking, Personal Savings Up

Are companies ready for pent up spike in demand? M&A, IPOs, SPACs return. Fasten seatbelts as ides of October approach on anniversary of financial crisis. Have we learned anything?

With the Dow Jones Industrial Average knocking on the door of 10,000 – a benchmark seemingly out of reach six months ago – and nationwide home prices up for the second straight month, both leading and trailing indicators of the economic rebound we first called in this blog in April are all around us. From a technical perspective, the "recession is very likely over at this point," U.S. Federal Reserve Chairman, Ben Bernanke said in a mid-month Q&A session at the Brookings Institution. So why aren’t homeowners and job seekers rejoicing, let alone the marketers who target them?

The Dow 10,000 barrier is mostly psychological, but as Stuart Freeman, senior equity analyst at Wells Fargo Advisors told the New York Times this week: “It’s psychological, but if enough people act on it it’s meaningful. The higher the market goes, the more those on the sidelines sit there and are concerned they’re missing something.”

Why we’re still worried

Home prices nationwide are still 13.3 percent lower than a year earlier, according to the widely followed S&P/Case Schiller Index, but recent monthly gains show that the pace of decline has slowed. Housing aside, several trends concern us at this juncture. First, the Government, including the Fed, is not in the forecasting business. It’s in the restating-the-obvious-but-making-it-official business. Second, we’re not convinced the fundamentals are there to support a sustained rally in the economy. More on that in a minute. Third, and perhaps most frightening, is this economic turnaround might be for real.

What’s wrong with that you say? Plenty. For starters, most companies are not be prepared to handle the surge in pent up demand, as they trimmed their workforces, production capabilities, customer service departments and marketing budgets so severely during the downturn. Cost-cutting occurs faster and deeper, than re-hiring and re-investing. The only thing worse than having customers bail on you when times are lousy is having them bail on you because you can’t handle their orders when times are better.

And here’s where it gets tricky. Even if the Fed and the financial markets are correctly signaling the end of the Great Recession of 2008-09, 15 million able-bodied workers – about 10 percent of the full-time work force -- are out of work. Combine that with stagnant incomes for all workers and higher rates of personal saving (due to fear, not financial discipline) and this could reduce corporate revenue for years to come. We’re also dealing with massive consumer defaults on credit cards, record numbers of mortgage defaults, delinquent student loans and stagnant incomes for those lucky enough to be working. Oh, and housing unit sales (not prices) went down another 2.7 percent in August, we learned last week.

Where is the money going to come from, to purchase those goods and services we need to keep the economy humming? More than 70 percent of Americans still rate the job market “bad” according to a recent Harris Poll. Paychecks have been stagnant for about a decade and using one’s home equity as an ATM machine – essentially what kept the Great Recession at bay for about three years – isn’t a viable fallback this time around.

Cautious Optimism for The Economy Ahead

Results of the latest Harris Poll of 2,498 U.S. adults surveyed online show that there is a slight sense of optimism regarding the economy. Nearly half (46%) of Americans believe the economy will improve in the coming year, while a third (32%) say it will stay the same and 22 percent believe it will get worse. In May, just under two in five believed the economy would improve in the coming year while over one-quarter said they thought it would get worse. But overall, they’re not so confident about their own situation, which is a great departure from most economic climates in which survey respondents tend to say they’re better off – not worse off -- than their neighbors.

One-quarter of Americans believe that their household financial condition will be better in six months while half say it will remain the same and 28 percent believe it will get worse. If there’s a silver lining to this cloud, consider that the 28 percent who say their household's financial condition will get worse in the next six months is the lowest reading for this question since Harris pollsters first asked in February of 2008.
Greed and irrational exuberance

Twitter –- a 60-person online social networking company with a catchy name and no revenue to speak of, was recently valued at $1 billion as it announced plans to raise $100 million to salivating venture capitalists. The markets also bounded higher on signs that companies once again had enough cash, credit and confidence to enter into big M&A deals. Xerox, Abbot Labs, Dell, Disney and Kraft Foods have announced takeover plans. Could credit really be flowing again between banks and corporate giants? At least the lawyers are happy.
What’s more, last week was the busiest for companies completing IPOs since December 2007. The Wall Street Journal reports some two dozen firms have filed plans to go public in the past two months, which is twice the number who filed to go public in the first seven months of this year. Has the IPO pendulum swung back to “Initial Public Offering” from two years of “It’s Pretty-Much Over”?

If that’s not enough to convince you investors are regaining their appetite for risk, more than one billion dollars in acquisitions took place last week through special purpose acquisition companies (SPACs). What’s a SPAC? It’s basically a “blank check offering” that allows investors to raise money through an initial public offering, and then gives them up to two years to buy a business as long as the sale receives shareholder approval. Sounds pretty spaculative.

Media spending still lagging

More than one-third of marketers plan to cut their advertising budgets over the next six months, according to he latest Association of National Advertisers (ANA) study. While an improvement from the 50-percent budget cutting threshold ANA reported earlier this year, the times ain’t exactly flush for marketers or media owners. As even ANA will admit, budget cutting tends to get under-reported in forward looking surveys (turns out 61% of marketers, not 50% cut their budgets over the past six month, according to ANA research).

If you’re a media buyer, now might be the time to pounce, as traditional media owners will do just about anything to get your business. The top 100 advertisers spent 10.2 percent less than they did in the previous year, according to the latest data from TNS media Intelligence and magazine ad pages are down 22 percent through October according to the latest Publishers Information Bureau. Network TV spending was down six percent, and newspaper advertising was down nearly 11 percent over the same period, TNS reports.

Another disturbing data point for media owners is that new research indicates lead generation is what advertisers want these days, not building brands or customer “buzz.” That means every dollar counts and will be measured and held accountable. Nearly 70 percent of marketers surveyed by MarketingSherpa last month said “Generating High Quality Leads” was their biggest challenge, more than twice the number who pointed to brand building, public relations buzz and nearly twice the number who pointed to creating perceived value in “cutting edge” product benefits.

The one bright spot, not surprisingly, was Internet display advertising – up 10.8 percent -- as more marketers shifted funds online. “Perpetual movement is the essence of survival and prosperity online,” quipped Michael Moritz, the Sequoia Capital investor who backed Google, Yahoo and Sugar a fast growing consumer blog network in a New York Times interview last week. “If online media and entertainment companies don’t improve every day, they will just wind up as the newfangled version of Reader’s Digest — bankrupt.”

Welcome to Q4, the last fiscal quarter of this topsy turvey decade. Fasten your seat belts.

Tuesday, September 08, 2009

Summer of Discontent to Continue?

All signs point to ‘not sure,’ but innovation thriving. Smart ad dollars will find the right home.

Economists and investors were buoyant Friday when the Labor Department announced we lost only a quarter of a million U.S. jobs. Despite the fact that nearly one in 10 (9.7%) able bodied Americans are now officially out of work – the highest jobless rate since 1983 – and millions more have essentially given up trying, Federal Reserve policy makers said they were increasingly confident the downturn had ended and the economy would start growing again in the second half of the year. What’s a quarter million lost jobs when we saw 700,000+ jobs evaporating monthly during the winter?

A “’jobless recovery” may be underway, but experts say we’re still vulnerable to “adverse shocks” and we’re in for a slow, halting rebound. Not exactly the powerful, “makeup-sex” kind of recovery we’ve been accustomed to when rocketing out of previous recessions. Economists say businesses will remain skittish about hiring. Income growth is sluggish. And credit is still tight for millions of households. A further drag on the employment scene is that older workers, who would normally be retiring at their current ages, are fearful of leaving the workforce as the value of pensions, 401ks and uncertainty about social security keeps them feeling anything but secure. Pretty scary, and there’s no little blue pill to fix all that.
A jobless recovery doesn’t conjure warm, fuzzy feelings for marketers, media professionals and other WANT-creators. We’re the folks who depend on businesses and households NOT being able to do more with less. They need to buy, invest, get bigger, better and of course v2.0 and new and improved.

But this trend toward austerity goes against our consumer DNA. It’s not likely to sustain itself as workers burn themselves out or find new jobs; companies lose orders because they can’t fill demand, and U.S. households, just can’t resist bargains. Demand will eventually win out over restraint, and the spending/hiring cycle will ramp up in due time. Just make sure you’re ready for it.

Unusual recession

“This has been an unusual recession in term of severity and the circumstances that triggered it,” noted Abby Joseph Cohen, president of the Global Markets Institute at Goldman Sachs in a recent interview in The Investment Professional magazine. “There has been enormous financial disruption along with a deep and painful recession.” Unlike the prior two recessions which were relatively mild and in which the economy responded well to standard pro-growth policy tools like interest rate reduction and targeted fiscal stimulus policy, the Great Correction of 2008-09 was more extreme and standard policy tools couldn’t be applied, said Joseph. It has been marked by a frozen financial system and economic climate. Goldman Sachs economists expect GDP to be slightly positive in the second half of 09, although Joseph warns the U.S. economic recovery will be linked with the global economy more so than ever before.

What could derail the recovery? Joseph points to three things:
1. Ongoing weakness in the domestic U.S. economy
2. Unresolved financial issues involving mortgages, credit cards and commercial real estate
3. Potential policy missteps in the U.S. and abroad

What’s been lost in all this consternation about the economy is the extent to which innovation (and adoption of new technology) has accelerated.

A nation of early adopters

We’re all gadget geeks now, according to a Forrester Research report released last week which surveyed more than 50,000 households in the U.S. and Canada. Researchers found 63 percent of Americans now have broadband connections, and nearly 10 million households added HDTV in the past year, a 27 percent increase.

Despite the recession, online spending remained strong, with older consumers leading the way. On average, older consumers spent on average $560 online in the past quarter, and one in five, spend over $1,000 over that period. In addition, researchers found that 86 percent of families with children had mobile phones and were more likely to use music, video playback and other advanced features.

More people are also migrating away from the home and office to access the Web via their smartphones. About 15 percent of cellphone owners were using the Internet on their phones in 2008, showing that for a growing number of Americans, there is an increasing “expectation that all the same services and resources are available to us, no matter where we are,” said Charles Golvin, Forrester analyst in a statement.

Outlook murky for ad advertising

All signs point to a relatively robust recovery in ad spending beginning next year, said Matthieu Cooper, a UBS analyst in a recently released report from his forum on the global media climate. Not everyone agrees. For starters, magazine ad pages were down 28 percent for the first half of 2009, according to Publishers Information Bureau. Again, that’s nearly 30 percent lower than the first half of 2008 – which wasn’t exactly a banner year for the print media folks.

Most analysts and ad execs agree the worst is over, but there is little consensus on the strength and duration of the recovery. One reason for caution is that advertisers are waiting….waiting …waiting to commit their budgets. As a result, ad execs and media companies say they have little clarity about spending prospects even for the short term. We may even be seeing a shift back to subscriptions, paid content and other forms of non-advertising revenue.

PWC says the gap between advertising and other forms of media company revenue will continue, as ad spending will remain below 2008 levels for at least another half decade. By contrast, spending on media and entertainment by consumers and businesses will rise to $812 billion in 2013, from $707 billion this year.

If you’re smart, you’ll embrace the new climate of working harder for your money. Marketers and media owners who really take the time to understand their partners’ needs will find a home for the smart dollars still circulating out there. Those that don’t may find themselves left out in the cold, waiting for the good times to return. And it may be a mighty long wait.