by Adam Hartung | May 15, 2016 | In the Swamp, Investing, real estate, Retail
Last week Sears announced sales and earnings. And once again, the news was all bad. The stock closed at a record, all time low. One chart pretty much sums up the story, as investors are now realizing bankruptcy is the most likely outcome.
Chart Source: Yahoo Finance 5/13/16
Quick Rundown: In January, 2002 Kmart is headed for bankruptcy. Ed Lampert, CEO of hedge fund ESL, starts buying the bonds. He takes control of the company, makes himself Chairman, and rapidly moves through proceedings. On May 1, 2003, KMart begins trading again. The shares trade for just under $15 (for this column all prices are adjusted for any equity transactions, as reflected in the chart.)
Lampert quickly starts hacking away costs and closing stores. Revenues tumble, but so do costs, and earnings rise. By November, 2004 the stock has risen to $90. Lampert owns 53% of Kmart, and 15% of Sears. Lampert hires a new CEO for Kmart, and quickly announces his intention to buy all of slow growing, financially troubled Sears.
In March, 2005 Sears shareholders approve the deal. The stock trades for $126. Analysts praise the deal, saying Lampert has “the Midas touch” for cutting costs. Pumped by most analysts, and none moreso than Jim Cramer of “Mad Money” fame (Lampert’s former roommate,) in 2 years the stock soars to $178 by April, 2007. So far Lampert has done nothing to create value but relentlessly cut costs via massive layoffs, big inventory reductions, delayed payments to suppliers and store closures.
Homebuilding falls off a cliff as real estate values tumble, and the Great Recession begins. Retailers are creamed by investors, and appliance sales dependent Sears crashes to $33.76 in 18 months. On hopes that a recovering economy will raise all boats, the stock recovers over the next 18 months to $113 by April, 2010. But sales per store keep declining, even as the number of stores shrinks. Revenues fall faster than costs, and the stock falls to $43.73 by January, 2013 when Lampert appoints himself CEO. In just under 2.5 years with Lampert as CEO and Chairman the company’s sales keep falling, more stores are closed or sold, and the stock finds an all-time low of $11.13 – 25% lower than when Lampert took KMart public almost exactly 13 years ago – and 94% off its highs.
What happened?
Sears became a retailing juggernaut via innovation. When general stores were small and often far between, and stocking inventory was precious, Sears invented mail order catalogues. Over time almost every home in America was receiving 1, or several, catalogues every year. They were a major source of purchases, especially by people living in non-urban communities. Then Sears realized it could open massive stores to sell all those things in its catalogue, and the company pioneered very large, well stocked stores where customers could buy everything from clothes to tools to appliances to guns. As malls came along, Sears was again a pioneer “anchoring” many malls and obtaining lower cost space due to the company’s ability to draw in customers for other retailers.
To help customers buy more Sears created customer installment loans. If a young couple couldn’t afford a stove for their new home they could buy it on terms, paying $10 or $15 a month, long before credit cards existed. The more people bought on their revolving credit line, and the more they paid Sears, the more Sears increased their credit limit. Sears was the “go to” place for cash strapped consumers. (Eventually, this became what we now call the Discover card.)
In 1930 Sears expanded the Allstate tire line to include selling auto insurance – and consumers could not only maintain their car at Sears they could insure it as well. As its customers grew older and more wealthy, many needed help with financia advice so in 1981 Sears bought Dean Witter and made it possible for customers to figure out a retirement plan while waiting for their tires to be replaced and their car insurance to update.
To put it mildly, Sears was the most innovative retailer of all time. Until the internet came along. Focused on its big stores, and its breadth of products and services, Sears kept trying to sell more stuff through those stores, and to those same customers. Internet retailing seemed insignificantly small, and unappealing. Heck, leadership had discontinued the famous catalogues in 1993 to stop store cannibalization and push people into locations where the company could promote more products and services. Focusing on its core customers shopping in its core retail locations, Sears leadership simply ignored upstarts like Amazon.com and figured its old success formula would last forever.
But they were wrong. The traditional Sears market was niched up across big box retailers like Best Buy, clothiers like Kohls, tool stores like Home Depot, parts retailers like AutoZone, and soft goods stores like Bed, Bath & Beyond. The original need for “one stop shopping” had been overtaken by specialty retailers with wider selection, and often better pricing. And customers now had credit cards that worked in all stores. Meanwhile, for those who wanted to shop for many things from home the internet had taken over where the catalogue once began. Leaving Sears’ market “hollowed out.” While KMart was simply overwhelmed by the vast expansion of WalMart.
What should Lampert have done?
There was no way a cost cutting strategy would save KMart or Sears. All the trends were going against the company. Sears was destined to keep losing customers, and sales, unless it moved onto trends. Lampert needed to innovate. He needed to rapidly adopt the trends. Instead, he kept cutting costs. But revenues fell even faster, and the result was huge paper losses and an outpouring of cash.
To gain more insight, take a look at Jeff Bezos. But rather than harp on Amazon.com’s growth, look instead at the leadership he has provided to The Washington Post since acquiring it just over 2 years ago. Mr. Bezos did not try to be a better newspaper operator. He didn’t involve himself in editorial decisions. Nor did he focus on how to drive more subscriptions, or sell more advertising to traditional customers. None of those initiatives had helped any newspaper the last decade, and they wouldn’t help The Washington Post to become a more relevant, viable and profitable company. Newspapers are a dying business, and Bezos could not change that fact.
Mr. Bezos focused on trends, and what was needed to make The Washington Post grow. Media is under change, and that change is being created by technology. Streaming content, live content, user generated content, 24×7 content posting (vs. deadlines,) user response tracking, readers interactivity, social media connectivity, mobile access and mobile content — these are the trends impacting media today. So that was where he had leadership focus. The Washington Post had to transition from a “newspaper” company to a “media and technology company.”
So Mr. Bezos pushed for hiring more engineers – a lot more engineers – to build apps and tools for readers to interact with the company. And the use of modern media tools like headline testing. As a result, in October, 2015 The Washington Post had more unique web visitors than the vaunted New York Times. And its lead is growing. And while other newspapers are cutting staff, or going out of business, the Post is adding writers, editors and engineers. In a declining newspaper market The Washington Post is growing because it is using trends to transform itself into a company readers (and advertisers) value.
CEO Lampert could have chosen to transform Sears Holdings. But he did not. He became a very, very active “hands on” manager. He micro-managed costs, with no sense of important trends in retail. He kept trying to take cash out, when he needed to invest in transformation. He should have sold the real estate very early, sensing that retail was moving on-line. He should have sold outdated brands under intense competitive pressure, such as Kenmore, to a segment supplier like Best Buy. He then should have invested that money in technology. Sears should have been a leader in shopping apps, supplier storefronts, and direct-to-customer distribution. Focused entirely on defending Sears’ core, Lampert missed the market shift and destroyed all the value which initially existed in the great retail merger he created.
Impact?
Every company must understand critical trends, and how they will apply to their business. Nobody can hope to succeed by just protecting the core business, as it can be made obsolete very, very quickly. And nobody can hope to change a trend. It is more important than ever that organizations spend far less time focused on what they did, and spend a lot more time thinking about what they need to do next. Planning needs to shift from deep numerical analysis of the past, and a lot more in-depth discussion about technology trends and how they will impact their business in the next 1, 3 and 5 years.
Sears Holdings was a 13 year ride. Investor hope that Lampert could cut costs enough to make Sears and KMart profitable again drove the stock very high. But the reality that this strategy was impossible finally drove the value lower than when the journey started. The debacle has ruined 2 companies, thousands of employees’ careers, many shopping mall operators, many suppliers, many communities, and since 2007 thousands of investor’s gains. Four years up, then 9 years down. It happened a lot faster than anyone would have imagined in 2003 or 2004. But it did.
And it could happen to you. Invert your strategic planning time. Spend 80% on trends and scenario planning, and 20% on historical analysis. It might save your business.
by Adam Hartung | Apr 27, 2016 | Food and Drink, In the Rapids, In the Swamp, Retail, Software, Web/Tech
Growth fixes a multitude of sins. If you grow revenues enough (you don’t even need profits, as Amazon has proven) investors will look past a lot of things. With revenue growth high enough, companies can offer employees free meals and massages. Executives and senior managers can fly around in private jets. Companies can build colossal buildings as testaments to their brand, or pay to have thier names on public buildings. R&D budgets can soar, and product launches can fail. Acquisitions are made with no concerns for price. Bonuses can be huge. All is accepted if revenues grow enough.
Just look at Facebook. Today Facebook announced today that for the quarter ended March, 2016 revenues jumped to $5.4B from $3.5B a year ago. Net income tripled to $1.5B from $500M. And the company is basically making all its revenue – 82% – from 1 product, mobile ads. In the last few years Facebook paid enormous premiums to buy WhatsApp and Instagram – but who cares when revenues grow this fast.
Anticipating good news, Facebook’s stock was up a touch today. But once the news came out, after-hours traders pumped the stock to over $118//share, a new all time high. That’s a price/earnings (p/e) multiple of something like 84. With growth like that Facebook’s leadership can do anything it wants.
But, when revenues slide it can become a veritable poop puddle. As Apple found out.
Rumors had swirled that Apple was going to say sales were down. And the stock had struggled to make gains from lows earlier in 2016. When the company’s CEO announced Tuesday that sales were down 13% versus a year ago the stock cratered after-hours, and opened this morning down 10%. Breaking a streak of 51 straight quarters of revenue growth (since 2003) really sent investors fleeing. From trading around $105/share the last 4 days, Apple closed today at ~$97. $40B of equity value was wiped out in 1 day, and the stock trades at a p/e multiple of 10.
The new iPhone 6se outsold projections, iPads beat expectations. First year Apple Watch sales exceeded first year iPhone sales. Mac sales remain much stronger than any other PC manufacturer. Apple iBeacons and Apple Pay continue their march as major technologies in the IoT (Internet of Things) market. And Apple TV keeps growing. There are about 13M users of Apple’s iMusic. There are 1.5M apps on the iTunes store. And the installed base keeps the iTunes store growing. Share buybacks will grow, and the dividend was increased yet again. But, none of that mattered when people heard sales growth had stopped. Now many investors don’t think Apple’s leadership can do anything right.
Yet, that was just one quarter. Many companies bounce back from a bad quarter. There is no statistical evidence that one bad quarter is predictive of the next. But we do know that if sales decline versus a year ago for 2 consecutive quarters that is a Growth Stall. And companies that hit a Growth Stall rarely (93% of the time) find a consistent growth path ever again. Regardless of the explanations, Growth Stalls are remarkable predictors of companies that are developing a gap between their offerings, and the marketplace.
Which leads us to Chipotle. Chipotle announced that same store sales fell almost 30% in Q1, 2016. That was after a 15% decline in Q4, 2015. And profits turned to losses for the quarter. That is a growth stall. Chipotle shares were $750/share back in early October. Now they are $417 – a drop of over 44%.
Customer illnesses have pointed to a company that grew fast, but apparently didn’t have its act together for safe sourcing of local ingredients, and safe food handling by employees. What seemed like a tactical problem has plagued the company, as more customers became ill in March.
Whether that is all that’s wrong at Chipotle is less clear, however. There is a lot more competition in the fast casual segment than 2 years ago when Chipotle seemed unable to do anything wrong. And although the company stresses healthy food, the calorie count on most portions would add pounds to anyone other than an athlete or construction worker – not exactly in line with current trends toward dieting. What frequently looks like a single problem when a company’s sales dip often turns out to have multiple origins, and regaining growth is nearly always a lot more difficult than leadership expects.
Growth is magical. It allows companies to invest in new products and services, and buoy’s a stock’s value enhancing acquisition ability. It allows for experimentation into new markets, and discovering other growth avenues. But lack of growth is a vital predictor of future performance. Companies without growth find themselves cost cutting and taking actions which often cause valuations to decline.
Right now Facebook is in a wonderful position. Apple has investors rightly concerned. Will next quarter signal a return to growth, or a Growth Stall? And Chipotle has investors heading for the exits, as there is now ample reason to question whether the company will recover its luster of yore.
by Adam Hartung | Apr 21, 2016 | In the Rapids, Leadership, Lifecycle, Television, Web/Tech
Netflix has been a remarkable company. Because it has accomplished something almost no company has ever done. It changed its business model, leading to new growth and higher profits.
Almost nobody pulls that off, because they remain stuck defending and extending their old model until they become irrelevant, or fail. Think about Blackberry, that gave us the smartphone business then lost it to Apple and its creation of the app market. Consider Circuit City, that lost enough customers to Amazon it could no longer survive. Sun Microsystems disappeared after PC servers caught up to Unix servers in capability. Remember the Bell companies and their land-line and long distance services, made obsolete by mobile phones and cable operators? These were some really big companies that saw their market shifts, but failed to “pivot” their strategy to remain competitive.
Netflix built a tremendous business delivering physical videos on tape and CD to homes, wiping out the brick-and-mortar stores like Blockbuster and Hollywood Video. By 2008 Netflix reached $1B revenues, reducing Blockbuster by a like amount. By 2010 Blockbuster was bankrupt. Netflix’ share price soared from $50/share to almost $300/share during 2011. By the end of 2012 CD shipments were dropping precipitously as streaming viewership was exploding. People thought Netflix was missing the wave, and the stock plummeted 75%. Most folks thought Netflix couldn’t pivot fast enough, or profitably, either.
But in 2013 Netflix proved the analysts wrong, and the company built a very successful – in fact market leading – streaming business. The shares soared, recovering all that lost value. By 2015 the company had more than doubled its previous high valuation.
But Netflix may be breaking entirely new ground in 2016. It is becoming a market leader in original programming. Something we long attributed to broadcasters and/or cable distributors like HBO and Showtime.
Today’s broadcast companies, like NBC, CBS and ABC, are offering less and less original programming. Overall there are 3 hours/night of prime time television which broadcasters used to “own” as original programming hours. Over the course of a year, allowing for holidays and one open night per week, that meant about 900 hours of programming for each network (including reruns as original programming.) But that was long ago.
These days most of those hours are filled with sports – think evening games of football, basketball, baseball including playoffs and “March Madness” events. Sports are far cheaper to program, and can fill a lot of hours. Next think reality programming. Showing people race across countries, or compete to survive a political battlefield on an island, or even dancing or dieting, uses no expensive actors or directors or sets. It is far, far less expensive than writing, casting, shooting and programming a drama (like Blacklist) or comedy (like Big Bang Theory.) Plan on showing every show twice in reruns, plus intermixing with the sports and reality shows, and most networks get away with around 200-250 hours of original programming per year.
Against that backdrop, Netflix has announced it will program 600 hours of original programming this year. That will approximately double any single large broadcast network. In a very real way, if you don’t want to watch sports or reality TV any more you probably will be watching some kind of “on demand” program. Either streamed from a cable service, or from a provider such as Netflix, Hulu or Amazon.
When it comes to original programming, the old broadcast networks are losing their relevancy to streaming technology, personal video devices and the customer’s ability to find what they want, when they want it – and increasingly at a quality they prefer – from streaming as opposed to broadcast media.
To complete this latest “pivot,” from a video streaming company to a true media company with its own content, Morgan Stanley has published that Netflix is now considered by customers as the #1 quality programming across streaming services. 29% of viewers said Netflix was #1, followed by long-time winner HBO now #2 with 21% of customers saying their programming is best. Amazon, Showtime and Hulu were seen as the best quality by 4%-5% of viewers.
So a decade ago Netflix was a CD distribution company. The largest customer of the U.S. Postal Service. Signing up folks to watch physical videos in their homes. Now they are the largest data streaming company on the planet, and one of the largest original programming producers and programmers in the USA – and possibly the world. And in this same decade we’ve watched the network broadcast companies become outlets for sports and reality TV, while cutting far back on their original shows. Sounds a lot like a market shift, and possibly Netflix could be the game changer, as it performs the first strategy double pivot in business history.
by Adam Hartung | Mar 27, 2015 | Investing, Mobile, Software, Trends, Web/Tech
Phablets are a very hot, growing market. Phablets are those huge phones (greater than 4″ screen size) that some people carry around. From almost nothing in 2012, over the last 3 years the market has exploded:
Source: Jay Yarrow, Business Insider http://www.businessinsider.com/in-one-chart-heres-why-the-ipad-business-is-cratering-2015-3?utm_content=&utm_medium=email&utm_source=alerts&nr_email_referer=1
The original creator of this market data, Kulbinder Garcha of Credit Suisse, thinks this demonstrates cannibalization of tablet sales by phablets. And this is supposedly a bad thing for Apple.
But there is another way to look at this. By introducing and promoting a phablet (iPhone 6+ and Galaxy S6,) Apple and Samsung are growing users of mobile media and mobile apps. As the chart shows, growth in tablet sales was nothing compared to what happened when phablets came along. So people who didn’t buy a tablet, and maybe (likely?) wouldn’t, are buying phablets. The market is growing faster with phablets than had they not been introduced, and even if tablet sales shrink Apple and Samsung see revenues continue growing.
Who wins as phablet sales grow? Those who have phablet products in the market, and newer versions in the works.
Source: Kantar WorldPanel and Seeking Alpha http://seekingalpha.com/article/3032926-microsoft-the-china-mobile-backed-lenovo-windows-10-smartphone-could-be-a-future-tailwind?ifp=0
As this chart shows, the companies who dominate smartphone sales are those who make Android-based products (#1 is Samsung) and Apple. Microsoft missed the mobile/smartphone trend, and even though it purchased Nokia it has never obtained anything close to double digit share in any market.
Unfortunately for Microsoft enthusiasts, and investors, Microsoft’s Windows10 product is focused first on laptop (PC) users, second on hybrid (products used as both a laptop and tablet), third tablets (primarily the slow-selling Microsoft Surface) and in a far, far trailing position smartphones.
Source: IDC
As data from IDC shows, Surface sales are inconsequential. So the big loser from phablet cannibalization of tablets will be Microsoft. Given its very small user base, and the heavy losses Microsoft has taken on Surface, there is little revenue or cash flow to support an intense competitive effort in a shrinking market. Apple and Samsung will market hard to grow as many sales as possible, and likely will make the tablet products more affordable. Thus one should anticipate Microsoft’s very small tablet share would decline as tablet sales shrink.
This is the problem created when any business misses a major trend.
Microsoft missed the trend to mobile. They didn’t prepare for it in any of their major products, and they let new products, like music player Zune and Lumia phones, languish – and mostly die. By the time Microsoft reacted Apple and Samsung had enormous leads. Microsoft is still trying to play catch-up with its “core” Windows product.
But worse, because it is so far behind, Microsoft’s leaders are unable to forecast where the market will be in 3 years. Consequently they develop products for today’s market, like tablets (and their hybrid products,) which we now see will be obsolete as the market shifts to new products (like phablets.) Because Apple and Samsung already have the new products (phablets) they are prepared to cannibalize the old product sales (tablets) in order to overall grow the marketplace. But Microsoft has no phablet product, really no smartphone product, and will find itself most likely writing off more future Surface products as its tiny market share erodes to nothing.
So this trend to phablets continues to make a Microsoft comeback as a major personal technology competitor problematic. Windows 10 may be coming, but its relevance looks increasingly like that of new Blackberry models. There is little reason to care, because the products are years late and poorly positioned for leading edge customers. Further, developers will already be onto new competitive platforms long before the outdated Microsoft products make it to market. Without share you don’t capture developers, without developers you don’t have a robust app market, without apps you don’t capture customers, without customers you can’t build share — and that’s a terrible whirlpool Microsoft is captured within.
Be sure your business keeps its eyes on trends, and does not wait to react. Waiting can turn out to be deadly.
by Adam Hartung | Mar 9, 2015 | Current Affairs, In the Rapids, Leadership, Television
The Netflix hit series “House of Cards” was released last night. Most media reviewers and analysts are expecting huge numbers of fans will watch the show, given its tremendous popularity the last 2 years. Simultaneously, there are already skeptics who think that releasing all episodes at once “is so last year” when it was a newsworthy event, and no longer will interest viewers, or generate subscribers, as it once did. Coupled with possible subscriber churn, some think that “House of Cards” may have played out its hand.
So, the success of this series may have a measurable impact on the valuation of Netflix. If the “House of Cards” download numbers, which are up to Netflix to report, aren’t what analysts forecast many may scream for the stock to tumble; especially since it is on the verge of reaching new all-time highs. The Netflix price to earnings (P/E) multiple is a lofty 107, and with a valuation of almost $29B it sells for just under 4x sales.
But investors should ignore any, and in fact all, hype about “House of Cards” and whatever analysts say about Netflix. So far, they’ve been wildly wrong when making forecasts about the company. Especially when projecting its demise.
Since Netflix started trading in 2002, it has risen from (all numbers adjusted) $8.5 to $485. That is a whopping 57x increase. That is approximately a 40% compounded rate of return, year after year, for 13 years!
But it has not been a smooth ride. After starting (all numbers rounded for easier reading) at $8.50 in May, 2002 the stock dropped to $3.25 in October – a loss of over 60% in just 5 months. But then it rallied, growing to $38.75, a whopping 12x jump, in just 14 months (1/04!) Only to fall back to $9.80, a 75% loss, by October, 2004 – a mere 9 months later. From there Netflix grew in value by about 5.5x – to $55/share – over the next 5 years (1/10.) When it proceeded to explode in value again, jumping to $295, an almost 6-fold increase, within 18 months (7/11). Only to get creamed, losing almost 80% of its value, back down to $63.85, in the next 4 months (11/11.) The next year it regained some loss, improving in value by 50% to $91.35 (12/12,) only to again explode upward to $445 by February, 2014 a nearly 5-fold increase, in 14 months. Two months later, a drop of 25% to $322 (4/14). But then in 4 months back up to $440 (8/14), and back down 4 months later to $341 (12/14) only to approach new highs reaching $480 last week – just 2 months later.
That is the definition of volatility.
Netflix is a disruptive innovator. And, simply put, stock analysts don’t know how to value disruptive innovators. Because their focus is all on historical numbers, and then projecting those historicals forward. As a result, analysts are heavily biased toward expecting incumbents to do well, and simultaneously being highly skeptical of any disruptive company. Disruptors challenge the old order, and invalidate the giant excel models which analysts create. Thus analysts are very prone to saying that incumbents will remain in charge, and that incumbents will overwhelm any smaller company trying to change the industry model. It is their bias, and they use all kinds of historical numbers to explain why the bigger, older company will project forward well, while the smaller, newer company will stumble and be overwhelmed by the entrenched competitor.
And that leads to volatility. As each quarter and year comes along, analysts make radically different assumptions about the business model they don’t understand, which is the disruptor. Constantly changing their assumptions about the newer kid on the block, they make mistake after mistake with their projections and generally caution people not to buy the disruptor’s stock. And, should the disruptor at any time not meet the expectations that these analysts invented, then they scream for shareholders to dump their holdings.
Netflix first competed in distribution of VHS tapes and DVDs. Netflix sent them to people’s homes, with no time limit on how long folks could keep them. This model was radically different from market leader Blockbuster Video, so analysts said Blockbuster would crush Netflix, which would never grow. Wrong. Not only did Blockbuster grow, but it eventually drove Blockbuster into bankruptcy because it was attuned to trends for convenience and shopping from home.
As it entered streaming video, analysts did not understand the model and predicted Netflix would cannibalize its historical, core DVD business thus undermining its own economics. And, further, much larger Amazon would kill Netflix in streaming. Analysts screamed to dump the stock, and folks did. Wrong. Netflix discovered it was a good outlet for syndication, created a huge library of not only movies but television programs, and grew much faster and more profitably than Amazon in streaming.
Then Netflix turned to original programming. Again, analysts said this would be a huge investment that would kill the company’s financials. And besides that people already had original programming from historical market leaders HBO and Showtime. Wrong. By using analysis of what people liked from its archive, Netflix leadership hedged its bets and its original shows, especially “House of Cards” have been big hits that brought in more subscribers. HBO and Showtime, which have depended on cable companies to distribute their programming, are now increasingly becoming additional programming on the Netflix distribution channel.
Investors should own Netflix because the company’s leadership, including CEO Reed Hastings, are great at disruptive innovation. They identify unmet customer needs and then fulfill those needs. Netflix time and again has demonstrated it can figure out a better way to give certain user segments what they want, and then expand their offering to eat away at the traditional market. Once it was retail movie distribution, increasingly it is becoming cable distribution via companies like ComCast, AT&T and Time Warner.
And investors must be long-term. Netflix is an example of why trading is a bad idea – unless you do it for a living. Most of us who have full time day jobs cannot try timing the ups and downs of stock movements. For us, it is better to buy and hold. When you’re ready to buy, buy. Don’t wait, because in the short term there is no way to predict if a stock will go up or down. You have to buy because you are ready to invest, and you expect that over the next 3, 5, 7 years this company will continue to drive growth in revenues and profits, thus expanding its valuation.
Netflix, like Apple, is a company that has mastered the skills of disruptive innovation. While the competition is trying to figure out how to sustain its historical position by doing the same thing better, faster and cheaper Netflix is figuring out “the next big thing” and then delivering it. As the market shifts, Netflix is there delivering on trends with new products – and new business models – which push revenues and profits higher.
That’s why it would have been smart to buy Netflix any time the last 13 years and simply held it. And odds are it will continue to drive higher valuations for investors for many years to come. Not only are HBO, Showtime and Comcast in its sites, but the broadcast networks (ABC, CBS, NBC) are not far behind. It’s a very big media market, which is shifting dramatically, and Netflix is clearly the leader. Not unlike Apple has been in personal technology.
by Adam Hartung | Jan 22, 2015 | Current Affairs, Defend & Extend, Games, In the Swamp, Innovation, Leadership, Software, Web/Tech
Yesterday Microsoft conducted a pre-launch of Windows 10, demonstrating its features in an effort to excite developers and create some buzz before consumer launch later in 2015.
By and large, nobody cared. Were you aware of the event? Did you try to watch the live stream, offered via the Microsoft web site? Were you eager to read what people thought of the product? Did you look for reviews in the Wall Street Journal, USA Today and other general news outlets?
Microsoft really blew it with Windows 8 – which is the second most maligned Windows product ever, exceeded only by
Vista. But that wasn’t hard to predict, in June, 2012. Even then it was clear that Windows 8, and Surface tablets, were designed to defend and extend the installed Windows base, and as such the design precluded the opportunity to change the market and pull mobile users to Microsoft.
And, unfortunately, that is how Windows 10 has been developed. At the event’s start Microsoft played a tape driving home how it interviewed dozens and dozens of loyal Windows customers, asking them what they didn’t like about 8, and what they wanted in a Windows upgrade. That set the tone for the new product.
Microsoft didn’t seek out what would convert all those mobile users already on iOS or Android to throw away their devices and buy a Microsoft product. Microsoft didn’t ask its defected customers what it would take to bring them back, nor did it ask the over 50% of the market using Windows 7 or older products what it would take to get them to go to Windows mobile rather than an iPad or Galaxy tablet. Nope. Microsoft went to its installed base and asked them what they would like.
Imagine it’s 1975 and for two decades you have successfully made and sold small offset printing presses. Every single company of any size has one in their basement. But customers have started buying really simple, easy to use Xerox machines. Fewer admins are sending even fewer jobs to the print shop in the basement, as they choose to simply run off a bunch of copies on the Xerox machine. Of course these copies are more expensive than the print shop, and the quality isn’t as good, but the users find the new Xerox machines good enough, and they are simple and convenient.
What are you to do if you make printing presses? You probably need to find out how you can get into a new product that actually appeals to the users who no longer use the print shop. But, instead, those companies went to the print shop operators and asked them what they wanted in a new, small print machine. And then the companies upgraded their presses and other traditional printing products based upon what that installed base recommended. And it wasn’t long before their share of printing eroded to a niche of high-volume, and often color, jobs. And the commercial print market went to Xerox.
That’s what Microsoft did with Windows 10. It asked its installed base what it wanted in an operating system. When the problem isn’t the installed base, its the substitute product that is killing the company. Microsoft didn’t need input from its installed base of loyal users, it needed input from people who have quit using HP laptops in favor of iPads.
There are a lot of great new features in Windows 10. But it really doesn’t matter.
The well spoken presenters from Microsoft laid out how Windows 10 would be great for anyone who wants to go to an entirely committed Windows environment. To achieve Microsoft’s vision of the future every one of us will throw away our iOS and Android products and go to Windows on every single device. Really. There wasn’t one demonstration of how Windows would integrate with anything other than Windows. And there appeared on intention of making the future an interoperable environment. Microsoft’s view was we would use Windows on EVERYTHING.
Microsoft’s insular view is that all of us have been craving a way to put Windows on all our devices. We’ve been sitting around using our laptops (or desktops) and saying “I can’t wait for Microsoft to come out with a solution so I can throw away my iPhone and iPad. I can’t wait to tell everyone in my organization that now, finally, we have an operating system that IT likes so much that we want everyone in the company to get rid of all other technologies and use Windows on their tablets and phones – because then they can integrate with the laptops (that most of us don’t use hardly at all any longer.)”
Microsoft even went out of its way to demonstrate how well Win10 works on 2-in-1 devices, which are supposed to be both a tablet and a laptop. But, these “hybrid” devices really don’t make any sense. Why would you want something that is both a laptop and a tablet? Who wants a hybrid car when you can have a Tesla? Who wants a vehicle that is both a pick-up and a car (once called the El Camino?) Microsoft thinks these are good devices, because Microsoft can’t accept that most of us already quit using our laptop and are happy enough with a tablet (or smartphone) alone!
Microsoft presenters repeatedly reminded us that Windows is evolving. Which completely ignores the fact that the market has been disrupted. It has moved from laptops to mobile devices. Yes, Windows has a huge installed base on machines that we use less and less. But Windows 10 pretends that there does not exist today an equally huge, and far more relevant, installed base of mobile devices that already has millions of apps people use every single day over and over. Microsoft pretended as if there is no world other than Windows, and that a more robuts Windows is something people can’t wait to use! We all can’t wait to go back to a exclusive Microsoft world, using Windows, Office, the new Spartan browser – and creating documents, spreadsheets and even presentations using Office, with those hundreds of complex features (anyone know how to make a pivot table?) on our phones!
Just like those printing press manufacturers were sure people really wanted documents printed on presses, and couldn’t wait to unplug those Xerox machines and return to the old way of doing things. They just needed presses to have more features, more capabilities, more speed!
The best thing in Windows 10 is Cortana, which is a really cool, intelligent digital assistant. But, rather than making Cortana a tool developers can buy to integrate into their iOS or Android app the only way a developer can use Cortana is if they go into this exclusive Windows-only world. That’s a significant request.
Microsoft made this mistake before. Kinect was a great tool. But the only way to use it, initially, was on an xBox – and still is limited to Windows. Despite its many superb features, Kinect didn’t develop anywhere near its potential. Cortana now suffers from the same problem. Rather than offering the tool so it can find its best use and markets, Microsoft requires developers and consumers buy into the Windows-exclusive world if you want to use Cortana.
Microsoft hasn’t yet figured out that it lost relevance years ago when it missed the move to mobile, and then launched Windows 8 and Surface to markets that didn’t really want those products. Now the market has gone mobile, and the leader isn’t Microsoft. Microsoft has to find a way to be relevant to the millions of people using alternative products, and the Windows 10 vision, which excludes all those competing devices, simply isn’t it.
There was lots of neat geeky stuff shown. Surface tablets using Windows 10 with an xBox app can now do real gaming, which looks pretty cool and helps move Microsoft forward in mobile gaming. That may be a product that sets Sony’s Playstation and Nintendo’s Wii on their heels. But that’s gaming, and historically not where Microsoft makes any money (nor for that matter does Sony or Nintendo.)
There is a new interactive whiteboard that integrates Skype and Windows tablets for digital enhancement of brainstorming meetings. But it is unclear how a company uses it when most employees already have iPhones or Samsung S5s or Notes. And for the totally geeky there was a demo of a holographic headset. But when it comes to disruptive products like this success requires finding really interesting applications that otherwise cannot be completed, and then the initial customers who have a really desperate need for that application who will become devoted users.
Launching such disruptive products has long been the bane of Microsoft’s existence. Microsoft thinks in mass market terms, and selling to its base. Not developing breakthrough applications and finding niche markets to launch new uses. Nor has Microsoft created a developer community aligned with that kind of work. They have long been taught to simply continue to do things that defend and extend the traditional base of product uses and customers.
The really big miss for this meeting was understanding developer needs. Today developers have an enormous base of iOS and Android users to whom they can sell their products. Windows has less than 3% share in mobile devices. What developer would commit their resources to developing products for Windows 10, which has an installed base only in laptops and desktops? In other words, yesterday’s technology base? Especially when to obtain the biggest benefits of Windows 10 that developer has to find end use customers (companies or consumers) willing to commit 100% to Windows everywhere – even including their televisions, thermostats and other devices in our ever smarter buildings?
Windows 10 has a lot of cool features. But Microsoft made a big miss by listening to the wrong people. By assuming its installed base couldn’t wait for a Microsoft-exclusive solution, and by behaving as if the installed base of mobile devices either didn’t exist or didn’t matter, the company showed its hubris (once again.) If all it took to succeed were great products, the market would never have shifted from Macintosh computers to Windows machines in the 1990s. Microsoft simply doesn’t realize that it lacks the relevance to pull of its grand vision, and as such Windows 10 has almost no chance of stopping the Apple/Google/Samsung juggernaut.
by Adam Hartung | Jan 14, 2015 | Investing, Retail, Trends
Retail sales fell .9% in December. Even excluding autos and gasoline, retail sales fell .3%. Further, November retail sales estimates were revised downward from an initial .7% gain to a meager .4%, and October sales advances were revised downward from a .5% gain to a mere .3%. Sales were down at electronic stores, clothing stores and department stores – all places we anticipated gains due to an improving economy, more jobs and more cash in consumer pockets.
Whoa, what’s happening? Wasn’t lower gasoline pricing going to free up cash for people to go crazy buying holiday gifts? Weren’t we all supposed to feel optimistic about our jobs, higher future wages and more money to spend after that horrible Great Recession thus leading us to splurge this holiday?
There were early signals that conventional wisdom was going to be wrong. Back on Black Friday (so named because it is supposedly the day when retailers turn a profit for the year) we learned sales came in a disappointing 11% lower than 2013. Barron’s analyzed press releases from Wal-Mart, and discerned that 2014 was a weaker Black Friday than 2013 and probably 2012. Simply put, fewer people went shopping on Black Friday than before, despite longer store hours, and they bought less.
So was this really a horrible holiday?
Retail store sales are only part of the picture. Increasingly, people are shopping on-line – and we all know it. According to ComScore, on-line sales made to users of PCs (this excludes mobile devices) were up 17% on Cyber Monday, in stark contrast to traditional brick-and-mortar. Exceeding $2B, it was the largest on-line retail day in history. The Day after Cyber Monday sales were up 27%, and the Green Monday (one week after Cyber Monday) sales were up 15% (all compared to year ago.) Overall, the week after Thanksgiving on-line sales rose 14%, and on Thanksgiving Day itself sales were up a whopping 32%. The week before Christmas (16th-21st) on-line sales surged 18%. According to IBM Digital Analytics the on-line November-December sales were up 13.9% vs. 2013.
The trend has never been more pronounced. Regardless of how much people are going to spend, they are spending less of it in traditional brick-and-mortar retail, and more of it on-line.
So, what about Wal-Mart? The chain remains mired in its traditional way of doing business. Even though same-store sales have been flat-to-down most of the last 2 years, and the number of full-line stores has declined in the USA, the chain remains committed quarter after quarter to defending its outdated success formula. Even in China, where Alibaba has demonstrated it can grow on-line ecommerce revenues more than 50%/year, Wal-Mart continues to try growing with a physical presence – even though it has been a tough, unsuccessful slog.
Yet, despite its bribery scandal in Mexico undertaken to prop up revenues, lawsuits due to over-worked, stressed truck drivers having accidents on double shifts killing and injuring people, and an inability to grow, Wal-Mart’s stock trades at near all-time highs. The stock has nearly doubled since 2011, even though the company is at odds with the primary retail, and demographic, trends.
On the other end of the spectrum is Amazon.com. Amazon is still growing revenues at over 20%/year. And introducing successful new publishing and internet service businesses, expanding same day delivery (and even one hour delivery) in urban markets like New York City, as well as expansion of its Prime service to include more original programming with famed director Woody Allen after winning the Golden Globe award for its original series Transparent.
However, several analysts were trash talking Amazon in 2014. 20% growth has them worried, given that the company once grew at 40%. Even though Amazon’s growth is a serious reason companies like Wal-Mart cannot grow. And there is the perennial lack of profitability – including a larger than expected loss in the second quarter ; a loss which included a $170M write-off on FirePhones which never really found a customer base. The latter item led to a Fast Company brutal lambasting of CEO Jeff Bezos as a micro-manager out-of-touch with customers.
This lack of analyst support has seriously hurt Amazon.com share performance. From 2010 to early 2014 the stock quadrupled in value from $100 to $400. But over the past year the stock has fallen back 25%. After dropping to $300/share in April, the stock has rallied but then retrenched no less than 3 times, and is now trading very close to its 52 week low. And, it shows no momentum, trading below its moving average.
Which is why investors in Wal-Mart should sell, and reinvest in Amazon.com.
All the trends point to Wal-Mart being overvalued. Its revenues show no signs of achieving any substantial growth. And, despite its sheer size, all retail trends are working against the behemoth. It has been trying to find a growth engine for 10 years, but nothing has come to fruition – including big investments in offshore markets. The company keeps trying to defend & extend its old success formula, thus creating a bigger and bigger gap between itself and future market success.
Simultaneously, Amazon.com continues to invest in major developing trends. From publishing to television programming to cloud/web services and even general retail, everything into which Amazon invests is growing. And even though this is a company with $100B in revenues, it is still growing at a remarkable 20%. While some analysts may wish the investment rate would slow, and that Amazon would never make mistakes (like Firephone,) the truth is that Amazon is putting money into projects which have pretty good odds of making sizable money as it helps change the game in multiple markets.
Think of investing like paddling a canoe. When you are investing against trends, it’s like paddling up the river. You can make progress, but it is hard. And, one little mistake and you easily slip backward. Lose any momentum at all and you could completely turn around and disappear (like happened to Circuit City, and now both Sears and JCPenney.) When you invest with the trends it is like paddling down the river. The trend, like a current, keeps you moving in the right direction. You can still make mistakes, but the odds are quite a lot higher you will make your destination easily, and with resources to spare. That’s why the sales results for December are important. The show traditional retailers are paddling up river, while on-line retailers are paddling down-river.
I don’t know if Wal-Mart’s stock value has peaked, but it is hard to understand why anybody would expect it to go higher. It could continue to rise, but there are ample reasons to expect investors will figure out how tough future profits will be for Wal-Mart and dispose of their positions. On the other hand, even though Amazon.com could continue to slide down further there are even more reasons to expect it will have great future quarters with revenue gains and – eventually – those long-sought-after profits that some analysts seek. Meanwhile, Amazon is investing in projects with internal rates of return far higher than most other companies because they are following major trends. Odds are pretty good that in a few years the trends will make investors happy they own Amazon, and dropped out of Wal-Mart.
by Adam Hartung | Dec 11, 2014 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Lifecycle, Television, Web/Tech
The trend toward the death of broadcast TV as we’ve known it keeps moving forward. This trend may not happen as fast as the death of desktop computers, but it is a lot faster than glacier melting.
This television season (through October) Magna Global has reported that even the oldest viewers (the TV Generation 55-64) watched 3% less TV. Those 35-54 watched 5% less. Gen Xers (25-34) watched 8% less, and Millenials (18-24) watched a whopping 14% less TV. Live sports viewing is not even able to maintain its TV audience, with NFL viewership across all networks down 10-19%.
Everyone knows what is happening. People are turning to downloaded entertainment, mostly on their mobile devices. With a trend this obvious, you’d think everyone in the media/TV and consumer goods industries would be rethinking strategy and retooling for a new future.
But, you would be wrong. Because despite the obviousness of the trend, emotional ties to hoping the old business sticks around are stronger than logic when it comes to forecasting.
CBS predicted at the beginning of 2014 TV ad revenue would grow 4%. Oops. Now CBS’s lead forecaster is admitting he was way off, and adjusted revenues were down 1% for the year. But, despite the trend in viewer behavior and ad expenditures in 2014, he now predicts a growth of 2% for 2015.
That, my young friends, is how “hockey stick” forecasts are created. A lot of old assumptions, combined with a willingness to hope trends will be delayed, and you can ignore real data while promising people that the future will indeed look like the past – even when it defies common sense.
To compensate for fewer ads the networks have raised prices on all ads. But how long can that continue? This requires a really committed buyer (read more about CMO weaknesses below) who simply refuses to acknowledge the market has shifted and the dollars need to shift with it. That cannot last forever.
Meanwhile, us old folks can remember the days when Nielsen ratings determined what was programmed on TV, as well as what advertisers paid. Nielsen had a lock on measuring TV audience viewing, and wielded tremendous power in the media and CPG world.
But now AC Nielsen is struggling to remain relevant. With TV viewership down, time shifting of shows common and streaming growing like the proverbial weed Nielsen has no idea what entertainment the public watches. They don’t know what, nor when, nor where. Unwilling to move quickly to develop tools for catching all the second screen viewing, Nielsen has no plan for telling advertisers what the market really looks like – and the company looks to become a victim of changing markets.
Which then takes us to looking at those folks who actually buy ads that drive media companies. The Chief Marketing Officers (CMOs) of CPG companies. Surely these titans of industry are on top of these trends, and rapidly shifting their spending to catch the viewers with the most ads placed for the lowest cost.
You would wish.
Unfortunately, because these senior executives are in the oldest age groups, they are a victim of their own behavior. They still watch TV, so assume others must as well. If there is cyber-data saying they are wrong, well they simply discount that data. The Nielsen’s aren’t accurate, but these execs still watch the ratings “because it’s the best info we have” – a blatant untruth by the way. But Nielsen does conveniently reinforce their built in assumptions, and their hope that they won’t have to change their media spend plans any time soon.
Further, very few of these CMOs actually use social media. The vast majority watch their children, grandchildren and young employees use mobile devices constantly – and they bemoan all the activity on YouTube, Facebook, Instagram and Twitter – or for the most part even Linked-in. But they don’t actually USE these products. They don’t post information. They don’t set up and follow channels. They don’t connect with people, share information, exchange photos or tell stories on social media. Truthfully, they ignore these trends in their own lives. Which leaves them woefully inept at figuring out how to change their company marketing so it can be more relevant.
The trend is obvious. The answer, equally so. Any modern marketer should be an avid user of social media. Most network heads and media leaders are farther removed from social media than the Pope! They don’t constantly download entertainment, and exchanging with others on all the platforms. They can’t manage the use of these channels when they don’t have a clue how they work, or how other people use them, or understand why they are actually really valuable tools.
Are you using these modern tools? Are you actually living, breathing, participating in the trends? Or are you, like these outdated execs, biding your time wasting money on old programs while you look forward to retirement? And likely killing your company.
When trends emerge it is imperative we become part of that trend. You can’t simply observe it, because your biases will lead you to hope the trend reverts as you continue doing more of the same. A leader has to adopt the trend as a leader, be a practicing participant, and learn how that trend will make a substantial difference in the business. And then apply some vision to remain relevant and successful.
by Adam Hartung | Oct 28, 2014 | Current Affairs, Defend & Extend, Food and Drink, In the Swamp, Leadership, Lock-in, Television
I’m a “Boomer,” and my generation could have been called the Coke generation. Our parents started every day with a cup of coffee, and they drank either coffee or water during the day. Most meals were accompanied by either water, or iced tea.
But our generation loved Coca-Cola. Most of our parents limited our consumption, much to our frustration. Some parents practically refused to let the stuff in the house. In progressive homes as children we were usually only allowed one, or at most two, bottles per day. We chafed at the controls, and when we left home we started drinking the sweet cola as often as we could.
It didn’t take long before we supplanted our parent’s morning coffee with a bottle of Coke (or Diet Coke in more modern times.) We seemingly could not get enough of the product, as bottle size soared from 8 ounces to 12 to 16 and then quarts and eventually 2 liters! Portion control was out the window as we created demand that seemed limitless.
Meanwhile, Americans exported our #1 drink around the world. From 1970 onward Coke was THE iconic American brand. We saw ads of people drinking Coke in every imaginable country. International growth seemed boundless as people from China to India started consuming the irresistible brown beverage.
My how things change. Last week Coke announced third quarter earnings, and they were down 14%. The CEO admitted he was struggling to find growth for the company as soda sales were flat. U.S. sales of carbonated beverages have been declining for a decade, and Coke has not developed a successful new product line – or market – to replace those declines.
Coke is a victim of changing customer preferences. Once a company that helped define those preferences, and built the #1 brand globally, Coke’s leadership shifted from understanding customers and trends in order to build on those trends towards defending & extending sales of its historical product. Instead of innovating, leadership relied on promotion and tactics which had helped the brand grow 30 years ago. They kept to their old success formula as trends shifted the market into new directions.
Coke began losing its relevancy. Trends moved in a new direction. Healthfulness led customers to decide they wanted a less calorie rich, nutritionally starved drink. And concerns grew over “artificial” products, such as sweeteners, leading customers away from even low calorie “diet” colas.
Meanwhile, younger generations started turning to their own new brands. And not just drinks. Instead of holding a Coke, increasingly they hold an iPhone. Where once it was hip to hang out at the Coke machine, or the fountain stand, now people would rather hang out at a Starbucks or Peet’s Coffee. Where once Coke was identified and matched the aspirations of the fast growing Boomer class, now it is replaced with a Prada handbag or other accessory from an LVMH branded luxury product.
Where once holding a Coke was a sign of being part of all that was good, now the product is largely passe. Trends have moved, and Coke didn’t. Coke leadership relied too much on its past, and failed to recognize that market shifts could affect even the #1 global brand. Coke leaders thought they would be forever relevant, just do more of what worked before. But they were wrong.
Unfortunately, CEO Muhtar Kent announced a series of changes that will most likely further hurt the Coca-Cola company rather than help it.
First, and foremost, like almost all CEOs facing an earnings problem the company will cut $3B in costs. The most short-term of short-term actions, which will do nothing to help the company find its way back toward being a prominent brand-leading icon. Cost cuts only further create a “hunker-down” mindset which causes managers to reduce risk, rather than look for breakthrough products and markets which could help the company regain lost ground. Cost cutting will only further cause remaining management to focus on defending the past business rather than finding a new future.
Second, Coca-Cola will sell off its bottlers. Interestingly, in the 1980s CEO Roberto Goizueta famously bought up the distributorships, and made a fortune for the company doing so. By the year 2000 he was honored, along with Jack Welch of GE, as being one of the top 2 CEOs of the century for his ability to create shareholder value. But now the current CEO is selling the bottling operations – in order to raise cash. Once again, when leadership can’t run a business that makes money they often sell off assets to generate cash and make the company smaller – none of which benefits shareholders.
Third, fire the Chief Marketing Officer. Of course, somebody has to be blamed! The guy who has done the most to bring Coca-Cola’s brand out of traditional advertising and promote it in an integrated manner across all media, including managing successful programs for the Olympics and World Cup, has to be held accountable. What’s missing in this action is that the big problem is leadership’s fixation with defending its Coke brand, rather than finding new growth businesses as the market moves away from carbonated soft drinks. And that is a problem that requires the CEO and his entire management team to step up their strategy efforts, not just fire the leader who has been updating the branding mechanisms.
Coca-Cola needs a significant strategy shift. Leadership focused too long on its aging brands, without putting enough energy into identifying trends and figuring out how to remain relevant. Now, people care a lot less about Coke than they did. They care more about other brands, like Apple. Globally. Unless there is a major shift in Coke’s strategy the company will continue to weaken along with its primary brand. That market shift has already happened, and it won’t stop.
For Coke to regain growth it needs a far different future which aligns with trends that now matter more to consumers. The company must bring forward products which excite people ,and with which they identify. And Coke’s leaders must move much harder into understanding shifts in media consumption so they can make their new brands as visible to newer generations as TV made Coke visible to Boomers.
Coke is far from a failed company, but after a decade of sales declines in its “core” business it is time leadership realizes takes this earnings announcement as a key indicator of the need to change. And not just simple things like costs. It must fundamentally change its strategy and markets or in another decade things will look far worse than today.
by Adam Hartung | Sep 5, 2014 | Employment, Investing, Politics
The Bureau of Labor Statistics (BLS) just issued America’s latest jobs report covering August. And it’s a disappointment. The economy created an additional 142,000 jobs last month. After 6 consecutive months over 200,000, most pundits expected the string to continue, including ADP which just yesterday said 204,000 jobs were created in August. So, despite the lower than expected August jobs number, America will create about 2.5 million new jobs in 2014.
One month variation does not change a trend
Even thought the plus-200k monthly string was broken (unless revised upward at a future date,) unemployment did continue to decline and is now reported at only 6.1%. Jobless claims were just over 300k; lowest since 2007. And that is great news.
Back in May, 2013 (15 months ago) the Dow was out of its recession doldrums and hitting new highs. I asked readers if Obama could, economically, be the best modern President? Through discussion of that question, the #1 issue raised by readers was whether the stock market was a good economic barometer for judging “best.” Many complained that the measure they were watching was jobs – and that too many people were still looking for work.
To put this week’s jobs report in economic perspective I reached out to Bob Deitrick, CEO of Polaris Financial Partners and author of “Bulls, Bears and the Ballot Box” (which I profiled in October, 2012 just before the election) for some explanation. Since then Polaris’ investor newsletters have consistently been the best predictor of economic performance. Better than all the major investment houses.
This is the best private sector jobs creation performance in American history
Bob Deitrick – “President Reagan has long been considered the best modern economic President. So we compared his performance dealing with the oil-induced recession of the 1980s with that of President Obama and his performance during this ‘Great Recession.’
As this unemployment chart shows, President Obama’s job creation kept unemployment from peaking at as high a level as President Reagan, and promoted people into the workforce faster than President Reagan.
President Obama has achieved a 6.1% unemployment rate in his 6th year, fully one year faster than President Reagan did. At this point in his presidency, President Reagan was still struggling with 7.1% unemployment, and he did not reach into the mid-low 6% range for another full year. So, despite today’s number, the Obama administration has still done considerably better at job creating and reducing unemployment than did the Reagan administration.
We forecast unemployment will fall to around 5.4% by summer, 2015. A rate President Reagan was unable to achieve during his two terms.”
What about the Labor Participation Rate?
Much has been made about the poor results of the labor participation rate, which has shown more stubborn recalcitrance as this rate remains higher even as jobs have grown.
Source: Polaris Financial Partners Using BLS Data
Bob Deitrick: “The labor participation rate adds in jobless part time workers and those in marginal work situations with those seeking full time work. This is not a “hidden” unemployment. It is a measure tracked since 1900 and called ‘U6.’ today by the BLS.
As this chart shows, the difference between reported unemployment and all unemployment – including those on the fringe of the workforce – has remained pretty constant since 1994.
Source: BLS Databases, Tables and Calculators by Subject – Labor Participation
Labor participation is affected much less by short-term job creation, and much more by long-term demographic trends. As this chart from the BLS shows, as the Baby Boomers entered the workforce and societal acceptance of women working changed labor participation grew.
Now that ‘Boomers’ are retiring we are seeing the percentage of those seeking employment decline. This has nothing to do with job availability, and everything to do with a highly predictable aging demographic.
What’s now clear is that the Obama administration policies have outperformed the Reagan administration policies for job creation and unemployment reduction. Even though Reagan had the benefit of a growing Boomer class to ignite economic growth, while Obama has been forced to deal with a retiring workforce developing special needs. During the 8 years preceding Obama there was a net reduction in jobs in America. We now are rapidly moving toward higher, sustainable jobs growth.”
Economic growth, including manufacturing, is driving jobs
When President Obama took office America was gripped in an offshoring boom, started years earlier, pushing jobs to the developed world. Manufacturing was declining, and plants were closing across the nation.
This week the Institute for Supply Management (ISM) released its manufacturing report, and it surprised nearly everyone. The latest Purchasing Managers Index (PMI) scored 59, 2 points higher than July and about that much higher than prognosticators expected. This represents 63 straight months of economic expansion, and 25 consecutive months of manufacturing expansion.
New orders were up 3.3 points to 66.7, with 15 consecutive months of improvement and reaching the highest level since April, 2004 – 5 years prior to Obama becoming President. Not surprisingly, this economic growth provided for 14 consecutive months of improvement in the employment index. Meaning that the “grass roots” economy made its turn for the better just as the DJIA was reaching those highs back in 2013 – demonstrating that index is still the leading indicator for jobs that it has famously always been.
As the last 15 months have proven, jobs and economy are improving, and investors are benefiting
The stock market has converted the long-term growth in jobs and GDP into additional gains for investors. Recently the S&P has crested 2,000 – reaching new all time highs. Gains made by investors earlier in the Obama administration have further grown, helping businesses raise capital and improving the nest eggs of almost all Americans. And laying the foundation for recent, and prolonged job growth.
Source: Polaris Financial Partners
Bob Deitrick: While most Americans think they are not involved with the stock market, truthfully they are. Via their 401K, pension plan and employer savings accounts 2/3 of Americans have a clear vested interest in stock performance.
As this chart shows, over the first 67 months of their presidencies there is a clear “winner” from an investor’s viewpoint. A dollar invested when Reagan assumed the presidency would have yielded a staggering 190% return. Such returns were unheard of prior to his leadership.
However, it is undeniable that President Obama has surpassed the previous president. Investors have gained a remarkable 220% gain over the last 5.5 years! This level of investor growth is unprecedented by any administration, and has proven quite beneficial for everyone.
In 2009, with pension funds underfunded and most private retirement accounts savaged by the financial meltdown and Wall Street losses, Boomers and Seniors were resigned to never retiring. The nest egg appeared gone, leaving the ‘chickens’ to keep working. But now that the coffers have been reloaded increasingly people age 55 – 70 are happily discovering they can quit their old jobs and spend time with family, relax, enjoy hobbies or start new at-home businesses from their laptops or tablets. It is due to a skyrocketing stock market that people can now pursue these dreams and reduce the labor participation rates for ‘better pastures.”
Where myth meets reality
There is another election in just 8 weeks. Statistics will be bandied about. Monthly data points will be hotly contested. There will be a lot of rhetoric by candidates on all sides. But, understanding the prevailing trends is critical. Recognizing that first the economy, then the stock market and now jobs are all trending upward is important – even as all 3 measures will have short-term disappointments.
Although economic performance has long been a trademark issue for Republican candidates, there was once a Democratic candidate that won the presidency by focusing on the economy and jobs (Clinton,) and his popularity has never been higher! President Obama’s popularity is not high, and seems to fall daily. This seems incongruous with his incredible performance on the economy and jobs, which has outperformed his party predecessor – and every other modern President.
There are a lot of reasons voters elect a candidate. Jobs and the economy are just one category of factors. But, for those who place a high priority on jobs, economic performance and the markets the data clearly demonstrates which presidential administration has performed best. And shows a very clear trend one can expect to continue into 2015.
Economically, President Obama’s administration has outperformed President Reagan’s in all commonly watched categories. Simultaneously the current administration has reduced the debt, which skyrocketed under Reagan. Additionally, Obama has reduced federal employment, which grew under Reagan (especially when including military personnel,) and truly delivered a “smaller government.” Additionally, the current administration has kept inflation low, even during extreme international upheaval, failure of foreign economies (Greece) and a dramatic slowdown in the European economy.
