Maybe Inflation Isn't a Problem

There's always a debate on inflation when you get a bunch of economists, bankers and investors together.  Some cry deflation is the worry while others scream about inflation and loose monetary policy, well what if they're both right?

I'm not an economist by trade, but as an analyst I like thinking about broad economic and business challenges in new ways, which unfortunately is not as well received among the economic elite of the 21st century.  While you have the perennial battles between the Keynesians and Monetarists of the Chicago School, I put myself clearly in the fringe of the Austrian School, which to most would make me a crackpot, survivalist gold bug, but that's really beside the point.  Back to the inflation or deflation debate, some say that inflation is the problem as we see much higher food and energy costs and the Federal Reserve is pumping up its balance sheet and printing ever more dollars in "Quantitative Easing" programs.  Others say that deflation is the problem, with the deleveraging of the consumer, the collapse of housing prices, the overall direction is toward deflation not inflation.  What if they are both right?

In the 40 years since Nixon slammed the gold window shut to the rest of the world, and fulfilling the promise of his Treasury Secretary John Connally, when he said the dollar "is our currency, but your problem," we have been living in a very unusual time, where inflation and deflation have become further abstract concepts divorced from their underlying causes.  We've seen inflation, defined as an increase in the quantity of money relative to the amount of goods and services produced, transformed into a mere "increase in the overall price level" - thus altering the definition of inflation as a symptom rather than the underlying cause.  Similarly, we've seen the results of inflation as illustrated by this simple definition most dramatically in the 1970s, with rampant price increases for nearly every type of good.  Unfortunately the altered definition caused us to miss completely the other result of rampant inflation that occurred in the Greenspan era.  While CPI (however defined) was relatively tame, massive increases in monetary aggregates resulted in excess money flowing into other assets, creating the new "bubble" economy, first with the stock market bubble of the late 1990s and then real estate bubble in the 2000s.

Now we are again seeing inflation in the traditional venue of consumer prices, though they aren't as severe as the inflation of the 1970s, at least not yet.  But are we seeing deflation?  I argue that we are seeing deflation, when we step back from the current dollar regime and thing in broader monetary terms.  Let's look at gold prices (insert Keynesian eye roll here).  Some would argue that gold rising from $282.05 at the beginning of 2000 to $1,405.50 at the end of 2010 is yet another sign of an asset bubble destined to burst.  Well what if instead of an asset bubble, gold is reasserting itself as a currency, and similar to the 1930s, the value of gold, and hence the purchasing power of money is increasing dramatically - the classic definition of deflation!

So from a practical standpoint, what does this look like?  Well, first let's look at a couple of stock charts to give an idea of the rough comparisons.  The first is a chart of the Dow Jones Industrial Average for an 11-year period from January 1929 through December 1939.  During this period, the United States was under a gold standard with the dollar pegged first at $20.67 per ounce, and then after the default and devaluation of Roosevelt's first term it was pegged at $35 per ounce.

Clearly this is a picture of the overall stock market during the Great Depression, where after the crash of October 1929, stock prices rebounded initially and then were in for a multi-year bear market which left prices down more than 50% a decade later.  Compared to this chart, the Dow performance in the first decade of the 21st Century seems pretty tame by comparison, after all we ended 2010 just a little above where we started in January 2000.  In nominal terms this may be true, but what if we adjust prices to reflect the $35 per ounce standard in place from 1933-1971?  Here is what the last decade looks like for the Dow:

Not as comforting as the unusual nominal charts we see, and in fact it looks a lot worse than the chart from the 1930s listed above because it is!  From January 1929 through December 1939, the Dow posted a compound annual percentage LOSS of 6.3% per year, but for the similar period from January 2000 through December 2010, the Dow adjusted to gold standard pricing posted a compound annual percentage LOSS of 13.4% per year!  This is really the mother of all bear markets!

Of course we can't make judgements on inflation or deflation looking just at stock prices, what about gas prices?  Well in nominal terms from 2000 to the end of 2010, average prices for regular unleaded gas rose from $1.289 to $2.993, an increase of 132.2% or an average annual increase of 8.0% per year for 11 years, that must be whopping inflation right?  Well, adjusted to a gold standard, the price of gas fell more than 52% from 15.9¢ to 7.5¢, which is a decline of 6.5% annually.  How about food, cereal prices are through the roof!  In 2000, an 18-ounce box of Kellogg's cornflakes was $2.99 and by 2011, a 12-ounce box was $3.79, a 33% reduction in size for a 26.8% higher price!  However, on a comparable basis, an 18-ounce box which rose more than 90% in dollar terms during the period, would have fallen under a gold standard from 36.8¢ to 14.3¢, a decline of 61.1% or 8.2% annually!  Unfortunately for wage earners the news was even worse.  Even though nominal wages rose 26.6%, or 2.4% annually from 2000-2009, under a gold standard pegged at $35, wages would have collapsed by 63.7% or 9.6% per year!

So it's quite possible to have inflation and deflation at the same time, and perhaps the inflation that we see in nominal prices combined with the deflation in gold equivalent prices are giving rise to the current malaise among consumers, and why the "Summer of Recovery" is feeling a lot more like the hard times encountered by our grandparents and great grandparents during the depression.

Making an Investor Day a Success

A couple weeks back we had the honor of attending an "Analyst Day" for one of our clients at the production facilities of one of their largest subsidiaries.  It was a great event, well attended by the sell side analysts that cover the company and the industry, and we had a nice opportunity to see some of the latest products and business lines for which we've been writing press releases all this time!

This great event got us to thinking, in all the Analyst Days and investor events we've attended over the years, what makes a good one?  Are there formulas for success in this often expensive and time consuming effort?  Well, there may not be one set recipe for success, but there are certainly steps that every company can take to ensure their investor event is as successful as it can be.

1. Give Investors a Reason to Show Up!  Most analysts on the buy side and sell side who are familiar with your story will want to attend an investor event, but why not make it easier for them to decide to attend?  Give them a great reason why this is the one event this year they should not miss!  From a practical standpoint that means providing something new, whether it's access to a new product or service line, access to a broader group of management team members or even touring facilities that are seldom viewed outside the company.  The worst events are usually those which provide investors the opportunity to ask the same old questions to the same group of managers as they would on a quarterly earnings call.  If that's all you're providing, then most investors would save the plane ticket and pick up the tab for a 45-minute call.
2. Make it easy to attend.  Yes, technology has made the investment world much more egalitarian, and there are now institutional investors and analysts in all corners of the globe, but let's face it, New York City is still the center of the financial universe, particularly for the sell side, and Boston is a close second, with a bigger concentration of buy side folks.  If you are planning an event that's outside of your own facilities, try doing it in close proximity to one of those centers.  It may cost you a little more for a venue, but it will pay off handsomely in terms of broad based attendance.
3. Make it a fun day!  Yes, it's important to get your message out to investors, and this is a very serious investment in your company's resources, but if you plan a fun day it can really show the passion and commitment of your management team to investors, and make it a really memorable day for them.  Interactive events are particularly well suited for this purpose, as experiences can often have the biggest impact on analyst and investor perception of your company, products and brands.  Some of the most exciting events we've participated in have involved really unique experiences, from driving a 42-foot motorhome to climbing into a 30-ton armored military vehicle to trying out the latest jet ski models!  These experiences make and impression and leave a lasting impression on your guests that can reverberate among the investment community for years to come.
4. Think outside the box.  Often investor relations professionals and event planners get stuck in familiar patterns when determining how best to execute an investor day, but this can lead to a stale, cookie cutter event.  Don't be afraid of new ideas, and certainly try to think of unique things that your company can bring to an event.  If you are a retailer, do you have any stores near the event location where you can arrange a tour?  Nothing shows management's passion like showing off the best parts of a retail location.  Is there an R&D facility that you can use to highlight new products?  Some of the biggest missed opportunities come when trying to convey what's great about a new product, when managers so familiar with the products take basic information as a given, and fail to explain to investors that have little experience with the product's new features.  As a food company, are there ways to more easily show how your products are made? Showing a drive for high-quality, healthy ingredients can make a huge difference in investor perception about your company.

These are just a few hints that we've learned over the years which can help make your investor event a success.  And remember, don't be afraid to enlist extra help to plan and execute the event, as the investments you make on the front end will pay off with a successful event in the end.

MARKET INSANITY!!!

Well, in case you’ve been out of the country or asleep on a white sand beach for the last month, it’s been a rough couple of weeks for the markets!  Things are going crazy, the U.S. government goes to the brink of default before the parties can get together to raise the debt ceiling, banks are starting to charge fees to hold cash, and last Friday evening we hear that Standard & Poors has downgraded the sovereign debt rating of the United States to AA+ with a negative outlook. Treasury debt is now rated below the debt of Great Britain, Canada, Germany, France and Lichtenstein!

Since the beginning of July, the S&P 500 index was down 10.5%, the Dow was down 9.0%% and the Nasdaq fell 10.1%, and these results don't even include the 5%+ pounding the market is enduring so far today.  This marks the worst string of losses since the Lehman crisis and effectively wipe out any gains for the year.  Clearly the recent market momentum is anything but encouraging and media coverage of the markets hasn’t exactly helped.  A recent story on Bloomberg called the selloff “a global rout.”  So what’s driving this dismal performance?  Well, there are any number of potential culprits, from the recent debt ceiling debacle in the U.S. to the worries of contagion in the EU periphery, to the slowing of the global economy and worries of a double dip recession (though depending on your industry you may be asking yourself when the recession ended).

Given this recent shock to our financial system, you may be hearing from your stakeholders: employees, suppliers, customers, not to mention investors and analysts.  You might be hearing a broad range of concerns, whether they be worries over the performance of your Company to concerns over 401(k) plans, and although these concerns are never easy to address, we would offer a few points to ponder:

1)      Stick to your knitting! When investors see red on their Bloomberg screens, they suddenly forget about relative performance, and every issuer is suspect.  When fear dominates market sentiment and blood runs in the streets, investors ignore fundamentals and think only of short-term liquidity.  They no longer ask whether the fundamentals justify a stock price, they only ask “How quickly can I get into cash?”  During these times continued focus on driving operating performance, and enhancing long-term shareholder value become the keys to you success.  Companies that focused on performance in the depths of 2008 fared the best as conditions eventually improved.

2)      Remain calm.  Do you remember the crisis in the fall of 2008?  Back then it seemed like the world was coming to an end, the media dug up footage of soup lines in the 1930s to suggest where we were headed.  Ultimately we survived, granted it was a tough market and a tough time to be managing a public company, but we survived and became stronger as a result of the experience.  This time will be different, because this time we have the experiences of three years ago to give us a sturdy foundation for making it through another tough market.

3)      Lean into the wind. When there is uncertainty, the companies that get out in front of investors (in a less crowded market) earn more attention and credibility. Remember the crisis in the fall of 2008? At times, it seemed like the world was coming to an end. The natural tendency during the most recent downturn was to pull back and do the minimum when it comes to communication and IR, which can exacerbate concerns and lead to a greater negative effect. There are benefits to remaining proactive in time of uncertainty.

Market turmoil can be tough to endure, it can make you question what you are doing and keep you up at night, but ultimately it is transient. It's the actions we take during these turbulent times that set the foundation for our success tomorrow and ultimately show the world the strength of our character and leadership.

How to turn a bad article around

For those in the public relations and investor relations business, there's always a fear when reporters and financial journalists take a story about a client and run with it.  This challenge is even greater in today's fast paced world of internet based journalism, where many people with broad backgrounds are publishing blogs, research notes and various other opinion pieces on investments with tangential relationships to facts.

For old media, you could always talk to the reporter, or even to the editor to get a correction, or refute the assertions in an article, or in cases of factual errors, force a correction.  In the wild west of internet news, these options are often unavailable, so it may take some creative thinking to resolve a problem.

Recently we were faced with a not-so-complimentary blog post about one of our clients that appeared on a major investment blog site.  Since the blogger used the clients stock ticker, the article appeared with all manner of other headlines on the stock quote pages of Yahoo! Finance and other sources, so at least we were quickly made aware of the article.  The blog post basically made some assertions and interpreted some facts in ways that made the company and its management team look unprofessional, but also like their interests weren't aligned with shareholders.

Rather than post a rebuttal or try to make the blogger look bad, we decided instead to engage the author, the first step being to send him an e-mail through the blog site explaining who we are and that we'd like a chance to discuss his article further.  He eventually responded and we began a constructive conversation via e-mail, and had a chance to respond to each of his assertions and provide the company's perspective on the issues he raised.  We offered some other facts that he had missed which altered the tone of his original piece, and we explained a number of factors that he didn't seem to understand in his original article.  He was so impressed that he asked if we would approve of him publishing his questions and our answers in the next installment of his blog.  How could we refuse?

Now, rather than a negative article and frustrated management, we told our story to investors and his readers and have started a new relationship with a member of the internet-based media.

How do you deal with a grumpy shareholder?

In our investor relations practice we deal with shareholders of all types, from individual shareholders to the world's largest institutions.  We often act as gatekeepers for our clients, offering introductory calls and meetings to help investors familiarize themselves with companies and then follow up when we encounter questions where we don't have ready answers.  In most cases, our relationships with investors are friendly, or at the very least cordial, as we are both seeking the same goal, for the investor to understand the fundamentals of our clients' businesses so they can make informed investment decisions.

So what happens when you encounter a somewhat more curmudgeonly investor, the kind of person that never seems happy no matter what you say or do?  We've seen a number of instances, where investors just seem truly disgruntled with a company's management, financial performance or investment decisions, and often it seems like they really should not be invested in the company's stock.  Recently we had a conversation with a portfolio manager that had been a long-time holder of a stock and after reporting quarterly earnings, he could find nothing positive in the report!  Certainly we counsel clients to be realistic in their earnings releases, owning up to shortcomings but also highlighting the good things accomplished in the period.  Needless to say, we've never published an earnings release that had no positive news, and no redeeming qualities to the results.  So we asked ourselves, why does this person still own the stock if they can't find anything good about it?  How should we respond to this investor?

Well, there are several ways to approach this, but in our experience, there are some fairly basic "do's" and "don'ts" when handing a shareholder like this:

1. Let them vent.  Often, these investors may not really hold the overwhelming negative opinion they shared, it could just be they are very frustrated with a few aspects of company performance, but are having trouble articulating their thoughts.  In this case, letting them vent to you, before they hit the speed dial to the CEO or CFO could give you an opportunity to identify the true underlying causes of the frustration and address it before things go too far south.  Sometimes the solution ends up being simple, like one investor we dealt with several years ago with a similar attitude, and all it came down to was that he didn't like having to wait a week for one financial number to be published in the 10-Q.  We adjusted our process and began reporting the number in the earnings release and he couldn't have been more pleased.  We alleviated his frustration and showed him we were listening and responsive to his ideas.

2. Turn the question back to them.  As investors express their disappointment or frustration, sometimes it pays to bring the conversation back to them through a variety of questions.  Simple questions like, "Were there really no positive aspects of the earnings report?  What about [name a positive aspect]?" or "If performance is as poor as you perceive, what could we do to improve it?"  Often the answers to these types of questions might give insight into what is troubling the investor, or perhaps identify areas where we aren't effectively communicating the positive messages of our performance.

3. It's okay to let go.  Sometimes there is nothing you can do to change the direction or tenor of a relationship with a frustrated shareholder.  When their response to questions on how to improve the business consists of "fire the management team," maybe it's time to move on.  Politely tell them you're sorry they feel this way about the company and invite them to keep the lines of communication open.  Just don't be surprised if you never hear from them again.

Where to begin...

So I read somewhere that this internet thing is more than just a fad, and maybe it could be useful for sharing ideas, so I figured why not try sharing some of my experiences and wisdom gained during my career.  After all, since graduating from college in 1992, I've seen a lot of change, from the Mexican debt crisis, to the internet bubble, the Asian contagion, and the Great Recession, so it seems a good idea to try to share some of those experiences and offer some practical advice to corporate executives and IR professionals alike.

Over time, I'll try to share some experiences, successes and mistakes, insights and ideas on how to be more effective in relating to your investor base.  Topics will probably be very broad, but I don't want to give any specific hints to spoil the surprise.  So I hope you learn a bit and share your own thoughts on investor relations.