Powers of Ten: every situation in the world can be looked at from different angles

How would you define "reframing"? I would define reframing as adjusting a thought process in order to change the range of possible solutions. For example, consider the following rudimentary example: (a) what is the sum of 5 plus 5 and (b) what two numbers add up to 10? As you can see, Option B opens the door to many more possibilities yet the both rely on simple addition. Business leaders should consider the same. When developing a business plan or strategy, instead of describing problems and solutions in a “black and white” manner, the process itself should also be analyzed and considered. Consistently asking the “how” and “why” can help all employees to think outside the box, which will lead to innovative and original thought. Consider the following example that reinforces the fact that you can look at every situation in the world from different angles, from close up, from far away, from upside down and behind.

Ecommerce: Effectiveness in marketing and growing trends

A key goal in marketing and advertising is establishing brand recognition. In eCommerce, marketing/advertising campaigns need to illustrate how a reliable model of service delivers on promises in a way that stores cannot. Consequently, it is essential to determine what specific consumers want from an ecommerce experience. With that, consider the following basic marketing concept: a marketing plan should focus first on identifying the needs and wants of the customer. Therefore, an effective marketer should focus on customers’ problems and try to develop products to solve them — and this applies to marketing as a whole, not just in eCommerce ventures. Solving such problems creates a brand by forming a distinct and special meaning for the product, and doing this over time will create brand equity and reputation. Effectiveness in marketing and advertising is measured by determining how much more useful, valuable and appealing the activity made a product.

In relation to eCommerce, specifically internet marketing, it seems a few trends are growing in popularity. First, images are dominating. Images are making content easily and quickly digestible. On that note, content is becoming more and more mobile friendly. With the widespread use of smartphones and tables, it is becoming necessary that marketing and advertising campaigns accommodate and appeal to users who are using mobile devices. Third, which somewhat ties in to our first and second points, the concept of “less is more” is becoming more apparent than in-depth messages. Some of the top brands in the world clearly value simplicity, avoiding the stereotypical advertisements that scream “look at me.” Simple, powerful, and quick messages are proving to create more value.

Consider Carnival’s most recent ad (see below) that has received stellar reviews. While not directly related to eCommerce, I think it ties into the changes in marketing I mentioned above — especially since the hospitality and entertainment industries have always seemed to showcase their brand as very "look at me" and vibrant. What do you think?

The 12 Pillars of Competitiveness

The Global Competitiveness Index (GCI) determines its rankings by (1) their Executive Opinion Survey and (2) various economic data sources. The goal of the executive survey is to capture valuable information on a broad range of factors that are critical for a country’s competitiveness and development, which data sources scarce or non-existent[i]. Combined with the prior years results, a formula assesses the grades and, through a complex methodology, determines a score. Frankly, due to the amount of exceptions, balancing/weight schemes and the sheer complexity of the formula, I expect only those who work at the WEF understand the process. You can see what I mean by looking at “Box 2” on page 90 and 91 of the report.  

Although the accuracy of the Executive Opinion Survey is easy to question and criticize, I think the specific categories – what the WEF calls “the 12 pillars of global competitiveness” – are particularly useful for business managers. These pillars measure everything from mobile phone and internet subscriptions to the prevalence of HIV. See the 12 Pillars below.

The pillars contain the following measurable/hard data:

Pillar 1: Institutions – strength of investor protection[ii]

Pillar 2: Infrastructure – hard data includes the number of mobile phone subscriptions and fixed telephone lines

Pillar 3: Macroeconomic environment – hard data includes government budget, gross national savings, inflation, government debt, country credit ratings

Pillar 4: Health and primary education – hard data includes malaria and tuberculosis incidences, HIV prevalence, infant mortality, primary education enrollment rate

Pillar 5: Higher education and training – secondary education enrollment

Pillar 6: Goods market efficiency – total tax rate, number of procedures and the time required to start a business, trade tariffs, and imports as a percentage of GDP

Pillar 7: Labor market efficiency – redundancy costs, female participation

Pillar 8: Financial market development – legal rights index

Pillar 9: Technological readiness – internet users, fixed broadband and internet subscriptions, internet bandwidth, and mobile broadband subscriptions

Pillar 10: Market size – domestic market size, foreign market size, GDP, exports as a percent of GDP

Pillar 12: Business sophistication – Patent Cooperation Treaty patent applications

This measurable data (or hard data) may possibly one of the most useful features of the GCI for firms and their international strategy. Consider, for instance, that a growing technology firm is participating in FDI for the first time. While all the pillars tie into business somehow or another, pillars 9 and 12 may prove to be a significant aide in their decision, Pillar 2 for a construction/engineering firm or automobile manufacturer, Pillar 10 for a textile firm, and perhaps Pillar 6 if the firm is seeking a locations specific benefit (i.e. the current ‘inversion’ deal debate[iii]). 

David Ricardo and Comparative Advantage... for Dummies

A new favorite explaining Ricardo's theory of comparative advantage and international trade theory! Supposedly it was Albert Einstein who said "if you can't explain to it 6 year old, you don't understand it yourself."

Inverse ETFs

ETFs have grown tremendously since the launch of the first ETF in 1993. The chart below is from BlackRock’s iShares website and illustrates ETF growth.

The most notable benefits of ETFs are their trading flexibility. ETFs are priced throughout the trading day, and because ETFs trade like stocks on an exchange, you can buy them on margin and place limit and stop orders. You are able to trade it like a normal stock, but it is a package of 500 or more stocks. Trading flexibility, however, can be a double-edged sword. The ability to trade anytime is a benefit to busy investors and active traders, but that flexibility can draw some people to trade too much. As John Bogle, Burton Malkiel, Warren Buffet, Benjamin Graham, and other long-term investors have all published via various mediums, a high turnover of a portfolio increases its cost and reduces returns. In just 20 years, ETFs have gone from relative obscurity to accounting for 40% (as of 2011) of daily trading volume. However, these products do exactly what they are supposed to do: reflect market sentiment. In my opinion, I believe regular investors can benefit greater by following a more conservative, time-tested strategy, such as investing in an index fund by means of dollar cost averaging.

One of the most interesting ETF products is inverse ETFs. Inverse ETFs short the index it is tracking. For instance, Direxion Daily Large Cap Bear 3X Shares (NYSEARCA: SPXS) moves opposite the S&P. The fund seeks daily investment results of 300% of the inverse of the performance of the S&P by investing in futures contracts, options on securities, indices and futures contracts, equity caps, swap agreements, forward contracts, short positions, and reverse repo agreements. For example, today the S&P was down 1.1% and the SPXS was up 3.3%. If tomorrow the S&P is up 0.5%, the SPSX will be down 1.5%. Moreover, if the S&P follows with a 2% drop, the SPXS will rise 6%. Keep in mind that not all inverse ETFs seek an investment result greater than 100% and some will move exactly 1-1 opposite of its respective index.

Inverse ETFs provide an easy means for a regular investor to hedge their bets by indirectly investing in complex derivative products. However, as mentioned above, this increased flexibility can cause some traders to trade too much.

What are your thoughts on inverse ETFs?

Bank Consolidation: For the money, duh!

Why are small business and retail depositor banks being created? To make money, duh!

Steven Syre, Boston Globe columnist, published an opinion piece today on community banks in Massachusetts that are lining up to go public. Banks rolling out plans for the public market include:

• Beverly Bank, which has four branches and oversees $324 million worth of assets.
• Melrose Cooperative and Pilgrim Bank of Cohasset, which together hope to raise about $45 million.
• The parent company of East Boston Savings Bank, which sold a minority interest to the public in 2008, plans to go all-in by the end of 2014.
• Blue Hills Bank, which customers knew as Hyde Park Savings for more than a century, hopes to raise nearly $240 million by going public.


Taking a company public can have many fundamental and underlying reasons, but (in my opinion) bringing in massive profits is surely at the top of the list. Lots of people make big money in the process of an IPO – including the executives who took the bank public. And a lot of people make big money in the process of M&A – including the executives who took the bank public. A lot of small, regional banks are acquired by larger banks shortly after their public offering, and according to a new analyst report, M&A activity among regional banks is off to a better start this year contrasted with the prior two years. A way for struggling banks to increase shareholder value is to hitch their wagon to the star, serving as a way for management of the local bank to bring in wads of cash. 28 "whole-bank" deals — those in excess of $5 million — have been announced during the first quarter. That compares to 24 during Q1 2013 and 22 in Q1 2012 (Investor’s Business Daily). M&A activity does not drive this, but rather it is a byproduct of a bull-attitude toward the financial services industry. The fact that there are a lot of banks getting ready to go public is an encouraging sign for our economy, and the line forming at the moment suggests that many bankers believe the economy of the next several years will be strong enough to grow and avoid serious loan problems (Boston Globe).


References:

http://www.bostonglobe.com/business/2014/03/31/community-banks-line-public/gkvGKzMtkUxqkZOQrnevfJ/story.html http://news.investors.com/business/033114-695245-regional-banks-manda-activity-rises-in-2014.htm

Derivative-based market indicators

It seems the importance and speculative value of using derivatives as an indicator of risk increased tremendously following the credit crisis, which, for the most part, I think is due to rating agencies maintaining AAA ratings before the panic. Considering the volume of derivatives contracts (MBS, CDO) amplified during the real estate boom, and rating agencies failed to respond and adjust their ratings, investors now view the strategy of financers as a way to judge market risk. The logic: if derivative volume is growing, investors must be preparing for default (or a significant drop in the market).

Some derivatives, such as typical stock options, trade on exchanges.  But many are private contracts between banks or other investors.  As a result, it is hard to know the total volume of derivatives now outstanding. That is both an advantage and disadvantage of using a derivative-based index to measure risk. While price discovery is stimulated and there is a greater degree of market “completeness,” volatility increases since a larger number of derivative participants leads to speculation and raises impulsiveness in the markets (compare historic VIX charts and you’ll see that a majority of spikes have taken place in the last 5 years). Moreover, since OTC derivative trading is still going through massive international regulation, I think derivative-based indicators, as well as other market breadth indicators, should be used with reservations when making an investment decision.

For instance, consider the charts below. The first displays a comparison of OTC derivative markets in 2010 and 2013. The second is a breadth charting showing an Advance-Decline (AD) line for the NYSE.

Short sellers using derivative-based market indicators over the last few years have not profited. The derivative market has grown by over $100B, but AD indicators show no sign of slowing down. We are definitely experiencing a bull market. However, 2008 showed us that breadth charts could move rapidly, and bulls can turn to bears in seconds. A market/bubble “pop” is always something to consider. Who knows, maybe there is another Mike Burry lurking and waiting to capitalize on the next bear market.

A bit off-topic, but since the subject of short selling, derivatives and risk management is on the table, what are your thoughts on inverse and leveraged ETFs?

References used:

http://business.time.com/2013/03/27/why-derivatives-may-be-the-biggest-risk-for-the-global-economy/
http://www.risk.net/risk-magazine/feature/2332503/otc-reforms-numbers-only-tell-part-of-the-story
http://www.financialsense.com/contributors/matthew-kerkhoff/market-breadth-indicators-important