Thursday, January 29, 2009

Death Of The Luxury Brands?

CNN this weekend was showing a program about the rise of 'cheap chic'. It’s basically the death of luxury brands and the ascendency of the discount stores. Of course the glitterati brushed it off as recession worries and all would be back to normal after our current problems, but is this sign of something deeper?

I have a confession, before I go on. When I was a young man about the City I was a brand freak. I didn't think you could buy a decent shirt for less than £100, suits that were cheaper than £1000 were just off limits and buying shoes for less than £200 was just a false economy. My jeans were Armani or YSL my jumpers emblazoned with little badges of the latest designer and God forbid I went to the ski slopes in anything less than Salomon, I even flew to Barbados once, just to buy a watch.

Years later with a lovely wife and a great teenager, who grows a foot a week, eats like a Tyrannosaur and wants to go to MIT, the follies of youthful spending soon went out of the window.

Finding I could buy great looking shoes for £50 and that have lasted longer than the £200 Bally's I used to buy, that I could buy 3 different shirts for £100 and that suits costing £300 were, for all practical purposes, no different from a Hugo Boss, was quite a wake up.

On the slopes this year I have been adorned with Reebok, only because we came across a store closing down and I rented all my ski equipment for the entire season for less than £100.

This had lead me to believe that people are not just turning their backs on brands because of the economy. I believe that the brands have just been found out, that is certainly how I feel when shopping.

I dealt with a small luxury brand company that shall remain nameless. They were looking to introduce watches. I found that you could buy Swiss made watches in bulk for £100 up to whatever price you wanted, per watch. The idea was to simply add your brand name and double the price. You could get the watches for even cheaper if you had 'Swiss Assembled' on the back instead of 'Swiss Made'. Swiss Assembled simply meant it was made in China or somewhere and shipped to Switzerland to have the back put on. While doing research I found this was the same with some Italian labeled clothes. The clothes are made in China, or some other cheap labor country, and then shipped to Italy to have the arms sewn on, or the beads or, more likely, the designers label.

Now before I get a caning from some luxury brand somewhere I note some exceptions, of all the wasteful spending I gorged on I have three items left. A gold Tiffany watch that has not missed a beat in 15 years, a Gucci watch that is the same and YSL jumper that looks brand new. There is a certain quality to some items and for this you pay, but I could have had an awful lot of Jumpers for the £600 it cost me, the watches, however, I cannot complain about.

Lambos, Ferraris, Bentleys and Astons etc are built beautifully and are deserving of their price tags, but everyday items, especially clothing is, in my opinion a giant marketing trick. You and I both know that most of the labeled stuff we can by is just that, a label with, in some cases, a little better material used.

We are told it is the expense of advertising, the full page ads in every man's magazine that is what we are paying for. OK, just drop the ads. I don't need Brad Pitt in a shirt to tell me it’s nice, you could knock of £100 and I will come into your shop and have a look around, if I like it I will buy it. Right now, and I believe for evermore (no matter how much money I have) I will just walk past your shop and look at another shop whose prices are more realistic.

I am sure this is part of the reason that the drop off is occurring and the knock-on affects for magazines is there for all to see.

Ad pages at the top luxury magazines fell 22 percent year over year for the December 2008 issues, according to Media Industry Newsletter. Vogue, for example, dropped from 284 pages last December, to 221 pages this December, while Food & Wine went from 160 pages to 126, according to the newsletter.

That has meant cutbacks at publishers. In October, Condé Nast announced it would reduce Men’s Vogue from 10 issues a year to two, reduce the number of issues of Condé Nast Portfolio and cut magazine budgets by 5 percent. Niche Media, which publishes Gotham and Hamptons, laid off some employees and closed a shelter magazine. American Express Publishing, which owns Departures, Travel & Leisure and Food & Wine, is lying off 4 percent of its staff.

“It’s definitely an environment that most have never seen,” said Ed Ventimiglia, the publisher of Departures. “Everyone is very concerned and somewhat confused as to what they should do.”

I know what you should do Ed, tell your mates in the publishing world that paying lost of money for a mag that is full of adverts for stuff that is overpriced is a game that has run its course. Sit down, realize that the consumer has become wise to your game and start changing your business plan.

It is not just the fact that luxury spending is on the decline because of the economy and that consumers are realising the bait and switch of magazine advertising, it is also that some luxury brands are just..well... naff, because the pirates ripping off designs have made them so.

Louis Vuitton bag for your wife? My wife turned down the potential present with a 'no thanks' that made it sound like I had made a huge fashion faux pas. Dior, Gucci, Dolce and Gabbana forget about it. And I think I have discovered another reason why all these are becoming soooo 90's. Ever watch Top Gear on the BBC with Jeremy Clarkson? They have the 'Cool Wall' where various cars are sorted into their cool ratings. Some supercars are just not cool because footballers own them, or others because they are too technical and geeky.

This then forms the basis of part of my theory, you see its not the super rich that keep the big brands going, its everyday people wanting a bit of the good life. The problem now is that whenever a woman walks into her freinds with a spanking new branded bag, the first thing she will say is 'and its a real one'. Now, I don't know about you, but that is just not cool and women are beggining to think the same. That is why they are turning to more realistically priced things, without being overtly branded, sure they want their Calvin Klein perfume, their Jimmy Choo shoes etc but the main stream brands are becoming passe and cheap chic is in.

Years back cheap stuff was the worst incarnation of the word, poorly made, not stylish and not even worth the cheap price then. Now quality products are being made cheaper, big high street stores now sell these goods at very good prices, and people like it H&M for examples says they will create 7000 news jobs this year to cater for demand... in a recession!

Lots of people who have been forced to look at their budgets have now discovered that buying a label is, in many cases, just that, and that an item of the same style and quality can be bought elsewhere for less.

I think it will be hard for many of the brands to come back from that. So Clooney can keep his 'Nespresso' I will go instant, my homage to 'Cheap Chic'.

Wednesday, January 14, 2009

From Pin Stripes To Orange Jump Suits

I took a trip to London yesterday and there were several stark reminders of the current bleak market. Most visual was the 'To Let' signs in the City, I have never seen as many offices up for rent, it was bizzarre. A certain sign that times are not good.

The most profound thing I saw, however, was at the airport. I glanced at the cover of Fortune Magazine which had a picture of someone in handcuffs and the teaser 'Sending Wall Street to jail, it's payback time' or something very similar.

In October last year, we said this was where it would all end up. In our article we said "We have said it before on this blog, the regulators are getting tough and are probably being backed by a political will to catch the big guys. Someone's scalp will be on the mantle of an ambitious politician soon, we are sure of it."

We never envisaged that the backlash would be so vitriolic. Don't get me wrong, people have a right to be angry. Some very greedy people did some very stupid things and vaporised $9 trillion dollars of asset value and cost taxpayers a trillion dollars and counting, but I fear things are getting carried away.

What is a CEO to do at his shareholders meetings, or in interviews now? If he says everything is OK and then earnings tank followed quickly by the share price he is committing an offence. If he says 'OK we are screwed, but we think we can get through it" he will be rewarded, within days, with a dead share price and vote of no confidence at a hastily arranged shareholders meeting.

It is a dilemma that is not appreciated by the lynch mobs baying for CEO's blood. Hard to be sympathetic thought, n'est pas?

This wave of hatred was backed up by a sticker I saw on a road sign in the City it read "Tax the rich, Make them pay for their crisis"

I also read an article in a newspaper while on the Tube that talked abut Raoul Weil, a fellow Swiss resident, who was formerly head of UBS's wealth managemnet business. He has been formally declared as a fugitive by the US.

Prosecutors in Miami released a copy of a judge's brief order putting Weil on the court's fugitive list, but said they would have no further comment.

An indictment unsealed in November alleged that Weil and other unidentified bankers conspired to help 17,000 Americans hide $20 billion of assets in Swiss bank accounts in order to avoid paying U.S. taxes.

At the time, an attorney for Weil said he was innocent and called the indictment against him "totally unjustified."

Visons of Harrison Ford playing Raoul in the movie 'Fugative III' - being chased by Tommy Lee in the Alps were replaced by those of the more sinister movie 'Rendition', the game has changed Raoul.. run.

I am sorry to make lite, but give me a break. Were UBS not regulated in the US? Were they not subject to inspection by the regulators? What did the regulators think a Swiss Bank was doing in the US? And now, Raoul, who I am sure is an honest, honorable and decent Swiss guy has had his life, basically, destroyed.

I am also sure that the Head of the SEC is an honorable, honest man but, just like Raoul, he is responsible for not making sure that all was above board. Where are his handcuffs?

What about UBS's US Lawyers? Did they not give opinions on the situation.. are they in court?

I am not making excuses for wrong doing, nor do I purport to know the full story, but witch hunts never end well and it all smacks of political manouvering. The IRS and, seemingly, all other European countries, do not like Switzerland's independance and their souvereign right to structure their tax system how the wish, so the easiest way is to start arresting people and throwing your weight around.

The bottom line is that, in our world, politicians make the rules, they are responsible. US politicians appointed the SEC boss, the SEC allowed UBS to operate under their supervision, UBS's lawyers no doubt made millions in fees advising UBS and our friend Raoul didn't believe he was doing anything wrong.

Problem is (especially for Raoul) the game changed, someone has to take the fall and the last people to take any blame, and who will never see the inside of a jail cell, will be those people who put themselves before us, pledged to do the best by us, to be honest, diligent and servants of the people.. politicians.

These are the real criminals here because they were asleep at the wheel, not just with UBS, but with the whole mess. Watching these pompous assholes now clamouring for anybody in a suit who gets over a million dollars to be jailed is, frankly, sickening. There are plenty of bankers deserving of jail time, but there are more politicians.

Thursday, January 08, 2009

2009 - The Year of The Regulator?

Well, as Gordon Gecko would say 'Christmas is over and business is business'. So here we are in 2009 staring down the barrel of a potentially crappy year. Potential landmines are everywhere and our governments are running short of bullets to protect. With interest rates reaching all time lows, zillions of dollars across the world being used to stimulate the economy, I still feel like I want to take a year off and come back when the dust has settled.

Sadly, school fees, car payments and a depleted portfolio put paid to that idea before it was fully thought out, so onwards and upwards, once more into the breach.. and all that.

We kick this year off with the news that short selling is back, Sainsburys have had a record Christmas and plans 4000 jobs in 2009 and we have 'Super Obama' entering the White House ready to splurge to save us all.

Perhaps it will not so bad after all.

Even Neil Woodford at Invesco Perpetual is calling the bottom. He said: "With the sharp falls in the UK and global stock markets in late 2008, the UK market seems to be discounting an outlook which is at least as bad as that which I foresee. Overall UK equity market indices are now lower than 10 years ago and I think there are now good grounds for thinking the overall market has bottomed.

"But, as always, it is important to look at individual stocks and sectors and at that level there is some very good value indeed."

After this ray of sunshine he then rains on our parade, he is still pessimistic on the outlook for the wider economy and says there will be significant further bad news in the three interconnected factors of consumer spending, the housing market and economic growth.

"Taking house prices first, we have already seen a drop in average UK house prices of 20pc from the peak level in August 2007. But house prices are still high in relation to average earnings, especially for first-time buyers.

"In the early 1990s the house/price earnings ratio fell very markedly, from almost five to just over three. Even if the fall is not as marked in the current phase of adjustment, it is quite possible that we will see another 15pc-20pc drop in house prices nationally.

"The latest Treasury forecast of a 1pc fall in GDP in 2009 looks far too optimistic. Furthermore, the recovery from that is unlikely to be a sharp, V-shaped one. With consumers and banks deleveraging and with the prospect of a very large government fiscal deficit, the recovery after 2009 is likely to be pretty anemic."

Even the prospect of Obamanomics is overshadowed by his desire to reign in Wall Street."Wall Street has not worked," Obama told CNBC's John Harwood in an exclusive interview. "So it's going to be a substantial overhaul. We're going to have better enforcement, better oversight, better disclosure, increased transparency.

It seems to me that President Elect Obama is a sensible guy and has a team around him that know what they are talking about. I do hope, however, that he and his team don't pander to the wider public and throw regulations at the market without thinking them through. You may wonder why I would be worried about this, well, it seems to me that whatever Obama does in the US will be mirrored over here in some way shape or form.

If you are not concerned, imagine a Euro Sarbanes-Oxley act here (more than likely called Sarkozy-Merkel here). Bye, bye IPO's, hello massive regulatory cost hikes. Compliance consultants and accountants would be happy; pretty much everyone else would get screwed.

We have seen the shape of things to come with the short selling ban. As much as it pains me, I would argue that the move to ban short selling in banks was the right decision at the time, it was special circumstances.

Problem is, now idiot Politicians who catch CNBC for a few minutes a day in their Parliamentary offices, think that they are market experts. This 'expertise' now leads them to believe that short selling is evil and the cause of the world's problems. Their constituents believe this because they have read the 'City' pages in their favorite red-top, and suddenly we have a love-in that ends in some unworkable, ridiculous rules.

Imagine if short selling were completely banned, how long would it be before the hedgies and the wider investment community would find a way of being able to exploit a one sided market. Pushing stocks to incredibly high levels without the fear of shorters spoiling the party. Enter a second Internet bubble type market. Not good for anyone.

This year could be a write-off, it could be a sobering reminder that times can't always be good, it might even show how resilient the world economies are as we shrug off the recession in the last quarter but one thing it will definitely be is 'The Year Of The Regulator'.

Just when you thought it was safe to go back in the water