PeppercomBlog

Taking Down the Dow

Posted by Milos Sugovic

The Dow Jones industrial average is a misnomer -- it’s an unreliable representation of the broader market. The media can’t get over its 777.68 point (6.98 percent) drop yesterday, which is understandable as it’s the most popular index. But it’s misleading. And to those affected (that’d be all of us), it might make sense to use a more accurate yard-stick.

Take a look at the umbrella indices: The S&P 500 dropped 106.59 points, or 8.79 percent. The Nasdaq Composite lost 199.61 points, or 9.14 percent. Does this mean the stock market plummeted more than just 6.98 percent? You bet.

The Dow has many big problems. Let’s revisit the basics: It’s based on 30 companies only. There’s no way this fully reflects economic trends on Wall Street and Main Street. It’s price-weighted, meaning a dollar change in stock price translates into points. But not all stock price changes are created equal. Since when does relative size not matter?

There’s clearly a disconnect between reality and the 107-year-old index, and yesterday’s stock market (or bailout) failure makes it evident.  So when using any index, make sure you understand the math behind it. And if you don’t or can’t, make sure it reflects what you’re trying to measure. More often than not, you’ll find the most popular metric to be the most misleading.

The bailout is here, but what does it mean?

Today's guest blog entry comes from Scott Krady

 Lawmakers in the House and Senate reached an agreement on the parameters of a $700 billion plan to bail out U.S. financial markets yesterday. $250 billion would be made available to the Treasury immediately.

Under the plan, the Treasury will in effect borrow funds to buy hard-to-sell assets from troubled financial institutions. The goal is to calm financial markets by removing these “toxic” assets that consist mainly of bad mortgages on Main St. and are crippling the markets. The plan would infuse billions of dollars into the financial system and ensure that credit could be made available to businesses and consumers. 

However, it may not be time to celebrate, just yet. It’s important to keep in mind that as the paint dries on the deal reached Thursday afternoon, its passage is anything but a sure thing. Democrats and Republicans were already contesting various aspects of the plan Thursday night – mainly in the areas of limits on executive compensation, the role of government and some lawmakers’ inability to stomach a taxpayer-fueled mortgage bailout. The saga should continue until early next week.  

Nevertheless, here are the details of the agreement reached Thursday:

Debating the Short Selling Ban

The recent short selling ban sparked a discussion between Peppercom senior analyst Matt Purdue and research analyst Milos Sugovic.

The Financial Times reports that the withdrawal of big traders in the financial realm in lieu of the ban could have a big impact on investment banks and increase market volatility.

Matt: Let’s not forget that the ban on short selling will artificially inflate the value of these financial stocks. And do we really want LESS transparency about these companies right now? Most short selling is seen as another piece of information a market uses to value a stock. Markets in general don’t like information gaps.

Milos: Here’s my two cents: Short-selling a stock you don't own increases its supply, driving the price down, in exactly the same way that buying a stock drives the price up. This effect is amplified especially in the aggregate. So a ban on shorting artificially reduces the “excess” supply and props up stock prices. No doubt about it.

But the fundamental question here is: is shorting really excess? The decision to short is based on short run expectations, and a ban on such speculation invariably introduces market imperfections. In effect, you’re not allowing the market to reach equilibrium via arbitrage due to asymmetries with regards to price, information, profit, etc. As a result, liquidity suffers.

The Morals of Econ Lingo

Posted by Milos Sugovic

Those that understand the ramifications of economics see through the moral content attached to “econ lingo.” Economic jargon is repeatedly abused in the press, and to mock this trend “an occasionally tactless economist” posted the following juxtaposition on Bluematter:

The moral content of economic terminology in the popular press: A guide

Foreign direct investment (inbound): Good
Current account deficit: Bad
Trade deficit: Catastrophic
Capital account deficit: Not used. Presumably bad.
     Weak national currency: Bad
     Exports: Good
     Imports: Bad
Rising house prices: Good
Falling house prices: Bad
Affordable houses: Good
Unaffordable houses: Bad
     Free trade: Neutral
     Unfettered free trade: Bad
     Fair trade: Good
     Outsourcing: Evil
     Buying local produce: Divine
Pay rises: Good
Low interest rates: Good
Inflation: Bad
     Communism: Very Bad
     Socialism: Bad
     Capitalism: Bad

Many of these are amusing and subtly humorous. Economic systems work such that any change often leads to other changes, frequently in an unambiguous pattern. So what seems “bad” might actually be “good,” and vice versa. 

Take for example weak national currencies and the “bad” connotation. A weak dollar helps reduce imports, which are “bad,” and increase exports that are considered “good.” That helps to reduce the current account deficit, another “bad,” and the trade deficit, which is “catastrophic.” So why do we consider a weak national currency that reduces the trade deficit a “bad” thing?

Look at foreign direct investment (good) and its complementarity with trade. Outward FDI is associated with additional exports (good) and imports (bad). Conversely, inward investment (good) is associated with a trade deficit (catastrophic) of the host country. Does that make FDI “good” or “bad?”

What about wages and inflation? Pay increases are considered to be “good.” But that leads to inflation via a price/wage spiral, which is “bad.” Similarly, low interest rates are considered “good,” but that increases money supply, which causes inflation (bad). So are pay increases and low interest rates as “good” as we think?

Finally, rising house prices are considered “good,” but that creates unaffordable housing in the long run (bad). Falling house prices, on the other hand, are “bad,” yet it leads to affordable housing (good). So which is it?

When it comes to communism, socialism, and capitalism, I’ll leave that one to the political scientists and sociologists. In the mean time, public relations professionals and journalists should be careful when using economic jargon. After all, if you use it correctly (good) you might make friends with a few economists (bad).

Need for Speed

Posted by Milos Sugovic

Good strategies are based on good indicators. With the news of FedEx quarterly profit down 22 percent, I can’t help but recall a note from Gene Colter in November of last year regarding a FedEx cut in profit forecasts: 

The first shoe was housing, and here comes another: FedEx just cut its earnings outlook. (There may well be more than two legs on the Economy Animal; a third leg would be that poorly understood appendage, the consumer.) 

FedEx and other major shippers are viewed as proxies for the broader economy, because, even though we live in the Internet Age, they still touch all parts of the cycle: If manufacturers are making fewer goods, reduced freight at FedEx reflects that. If fuel costs are climbing and thus raising shipping costs, FedEx reflects that. Etc.  

FedEx is seen as a bellwether of U.S. economic activity. So it’s no surprise that high oil prices, lower consumer confidence, decreasing industrial production, and inflationary pressures are reflected in FedEx’s earnings. Heck, with service in more than 220 countries and territories, FedEx’s pain or gain is a proxy for global economic activity. 

So if businesses want to make strategic short and long term decisions, they need not wait for macroeconomic indicators that are generated by government agencies such as the BEA or BLS. Those statistics should be taken with a grain of salt anyway; and they take forever.  

To stay ahead of the game, look at players with cross-sector linkages and the trends they’re facing. Surely, FedEx will deliver your strategy fastest.

Tragedy and its Aftermath

Posted by Matt Purdue

What a strange predicament out in my hometown, Los Angeles. All PR professionals should watch this closely. On September 12, a commuter train collided with a freight train in the L.A. suburb of Chatsworth. The crash killed 26 people, making it one of the deadliest U.S. train accidents in years. 

The way the story was fed to the press following the crash has become simply bizarre, and a case study in crisis management. The day after the accident, Denise Tyrrell, a spokesperson for the public commuter rail agency, Metrolink, admitted to the press corps the results of a preliminary investigation: the Metrolink engineer had apparently run a red signal. 

Two days later, Tyrrell announced her resignation. She claimed that the Metrolink board had undercut her by telling the press that her statement was premature and unauthorized by the board. Tyrrell then brought all of her PR skills to bear, landing an exclusive interview with a local television station to profess her shock and outrage. She was just doing her job as a PR professional in getting her organization out in front of a breaking crisis, she argued. What’s more, she trumpeted, she was doing her duty as a public servant: telling the truth to the taxpayers—come what may. 

In a strange twist, she told the press that her CEO, at her urging, had given her the green light to make her announcement. The CEO backed up her story, and fell on his sword, telling the media that it was his decision to reveal the findings of the red-light investigation. 

So Tyrrell is out, and this blogger is still wondering why. It seems that she made all the right moves in this crisis—insisting on being proactive and candid with the press--until she quit. She said she resigned not only because she was sucker-punched by the board, but also because she felt she would be fired. Why not stick by her guns and wait for the pink slip? That would have only strengthened her position.

Not only does her organization appear to be run by buffoons, but in a way, her own reputation is tarnished. At a time when Southern Californians should be mourning the loss of 26 innocent lives, we’re hearing about her righteous indignation. Certainly there’s a time for her to call out her bosses, but is now the most appropriate time?

The lesson is clear: During a crisis, sometimes the most damaging moves can come from the inside. Make sure that your crisis communications plans account for this.

Fore!

Posted by Matt Purdue

For any organization, using strategic communications to build and maintain a good reputation is difficult enough. So why do some groups seem to go out of their way to attract bad publicity? These organizations are most often guilty of either completely ignoring the zeitgeist or, worse, appearing to create policies that purposely move in a direction diametrically opposed to what’s happening in the real world. 

The latest example of this clueless behavior comes at the expense of the Ladies Professional Golf Association. Let’s forget for a moment that even the term “ladies” reeks of the provincialism of the era in which the LPGA was founded: the early 1950s. Last month, the LPGA announced a policy that would require players to speak passable English by 2009 or risk suspension. 

The LPGA’s first mistake was allowing the information to leak to Golfweek before the association could officially launch it. In fact, the LPGA didn’t even have a written policy before it slipped out. Reaction from the media and public was somewhat mixed, but not at the newspaper of record. The New York Times, which, like most newspapers, normally acts as if women’s professional golf hardly exists, immediately ran—no, sprinted—with the story.  

While the New York Times claims to be the bastion of fair-minded journalism, it doesn’t take a Columbia j-school professor to realize that when the Times picks up on a story that usually isn’t part of its bailiwick, they’re out to get someone. In this case, it was the LPGA. Now don’t get me wrong: the paper presented a balanced view of the issues. But what most PR professionals don’t realize is that editors at outlets like the Times have an inherent bias; not in the newsroom, but toward the readers that they think they serve. 

And in the Times’ case, that perceived readership is a well-read, urbane, open-minded audience—and it was that force against which the LPGA found itself pitted. Just by publicizing the LPGA’s policy, the Times was telling its readership that the association was, at best, ignorant about the world today—a world where international borders mean less and less, a world where xenophobia is seen as a cancer and a world where, despite what John McCain and Sarah Palin think, the U.S. of A. is not the dominant player. 

As if the Times even needed to spell this out, the paper ran an editorial in the A section on August 27, calling the LPGA’s decision shameful, offensive and self-destructive. On September 4, the LPGA backed away from its policy. Using both ink-stained hands to firmly pat itself on the back, the Times reported with a straight face that the LPGA bowed to “a torrent of criticism” and swift “disapproval of the policy…from news media outlets.”  

The LPGA got stuck in a sandtrap of its own making. Not only did the organization come across as narrow-minded and prejudiced, but also spineless for caving to external pressure. The LPGA wasted thousands of hours and dollars concocting its ill-conceived policy and then defending it. A few glances out the window at our globe in 2008--or even a subscription to the New York Times--might have avoided this whole mess.

Gates to Success?

Today's guest blog comes from Clare Abdalla, Peppercom

Is all news good news? Seems like the folks at Microsoft think so.

Monday’s WSJ article demonstrates that bad news about a bad ad can still create buzz, as the Bill Gates/Seinfeld Windows commercial hit the streets. Blogs, the business community and mass media picked up the pointless ad which showed Gates and Seinfeld shoe shopping. Microsoft and Windows weren’t even mentioned.

Which makes one wonder: Is the lack of substance in the message a tactic? 

How is it to draw in customers?

Microsoft is already a household name with a hurting reputation. Every consumer has an opinion, and Mac commercials aren’t helping - they point out the disadvantages of owning Windows machines.

So how will shoe shopping re-establish the business superiority of Windows? Am I supposed to be assuming that the process of buying a computer is similar to buying shoes? Too many degrees of freedom that Microsoft needs to explain, fast.

Microsoft swears that this was an icebreaker commercial and more are to come. Maybe they’ll bring some meat to the table, but with Seinfeld as the star, seems like they’re relying on cash instead of creativity.

Giants like Microsoft are too big to fail, but they suffer from their own success; and that need not be a bad thing. Microsoft dominates in terms of market share, and that results in high levels of compatibility, economies of scale and scope, and the luxury of being very close to a monopoly. But capitalizing on the history of success is a challenge oversized organizations face. Marketing pink iMacs is catchy, but translating economies of scale into jingles has never been easy.

So maybe the Seinfeld commercial is an attempt to keep Microsoft in the media, even though its products cannot do so alone.