Looking for the Silver Lining: Predicting Our Future

With the recent collapse of three of five major American financial institutions, a war going into its sixth year, an election that is far from predictable and a housing crisis that has thousands struggling to pay their mortgages, it’s no surprise that Americans are worried about the future.

To make matters worse, the rising cost of oil and the slumping stock market have most of the country on edge. If you aren’t on edge, you must have a nice doctor prescribing overpriced mood-levelers or pain meds — if you are lucky enough to have health insurance.

Americans are scared – and in the absence of true leadership, fear can manifest itself in many different ways. What behaviors are we likely to see? Will people stay close to home and "nest?" Will they invest in "sure things?" Stuff their mattresses? Watch more TV? Play more Videogames? Eat out less? Perhaps there will not be any visible changes at all?

A quick historical tour clearly shows that war, commodity shortages and elections are fairly common in America. However, we can’t use the wisdom of hindsight to judge our current situation, so the collapse and consolidation of some of America’s oldest and most influential financial institutions is scaring everyone from white shoes to Jimmy Choos.

Instead of chowing down on Xanax Bars, let’s look at some crisis situations where everyone didn’t completely freak out. One of the most noteworthy cases was in 1993 when the World Trade Center was hit with the first foreign terrorist attack on American soil.

Despite the fact that one of the biggest financial buildings in the world was hit with a 1,500 lb (680 kg) urea nitrate-hydrogen gas bomb, the market failed to be adversely affected. In fact, the market was actually up at the end of the day. While Americans were rightfully worried about homeland security, which wasn’t a household term in 1993, they did not show their worry financially as the market continued to climb for as much as a year later.

America had all but recovered from the depths of the Depression and the market, which hit 41.22 in the middle of 1932, and was over 100 by November of 1941. December 7, 1941, the day that Pearl Harbor was bombed sent shivers down the spine of the financial industry, which had been working hard for over ten years to recoup loses from Black Tuesday. But, the war sent thousands of Americans to work, boosted the economy and the Dow Jones steadily rose from 1942 to 1946, when it was above 200 points. —

StockCharts.com

Certainly the collapse of Bear [BSC], Lehman (LEH), Merrill (MER), AIG (AIG) and other financial institutions is cause for concern, but while some companies are slashing jobs and trying to stay afloat, others are expanding, trying to take advantage of the situation.

For example, Lone Star Funds, a private investment company, has consistently purchased other companies’ damaged assets at rates way below cost. The company began doing so during the saving and loan fiasco of the early 1990s and continues to do so today. In July, Lone Star purchased nearly $31 billion dollars worth of assets from Merrill Lynch for $6.2 billion. The investment company even got Merrill to finance 75% of the purchase price. This is not to say that Wall Street is not in crisis. It is. But some companies are well positioned to withstand what’s happening, and they are prospering.

Even in modern history, this is nothing new. During the Depression when companies were drastically cutting spending on advertising, Procter & Gamble (PG) actually increased its advertising budget. The company knew that despite financial turmoil, people still needed household products like soap. They turned to radio and developed broadcast shows aimed at the women who purchased such goods and the soap opera was born. The company not only held strong but actually increased revenue and improved its brand image. Procter & Gamble understood the power of message management and by developing radio shows based around their products; the company was able to expand their base and brand.

While established media networks like newspapers, radio and television are hurting from a lack of ad revenue, internet and tech companies seem to have an unlimited upside. While great American mainstays like Lehman and Merrill are folding or merging, relative young guns like Google (GOOG) and Apple (AAPL) continue to expand their reach, boosting revenue and expanding into new markets.

While Google failed to meet analysts’ predictions in the third quarter, the company’s rampant growth across a variety of markets, including cloud computing and mobile devices and applications, has positioned them well for the future. The stock got hammered this past week because of fear about the entire ad marketplace, but if Google’s initiatives are indicative of the future, the company won’t be relying on a single revenue stream for much longer.

Google has acquired the world’s largest online advertising company (DoubleClick), is working on a sustainable power grid with GE (GE), selling mobile devices through T-Mobile and the potential search ads deal with Yahoo! (YHOO), which may or may not pass government regulation. In fact, Google chief economist Hal Varian believes that the recession could have a positive impact on Google, as consumers looking to find good deals online will use their search engine and search ads to save money, a technique coined the "Wal-mart Method."

Apple is another company that has shown prominent growth despite the slumping economy. Jobs and Co showed 74% growth in the Q2 over Q2 last year. The company sold more computers during the first six months of 2008 than analysts expected, with 856,000 desktops purchased and 1,433,000 laptops.

This is significant because Apple is a niche computer company. While Dell (DELL), HP (HPQ) and other PC manufacturers produce cheaper, more affordable models which run on Microsoft’s (MSFT) Windows operating system, Apple’s Mac offerings are more expensive and cater to a segment of society with more disposable income. The very people who are less likely to be harshly affected by the down-turning economy. And, while its computers may be pricey, its signature iPod mp3 player comes in so many models that it is almost universally affordable.

According to Nielsen Monitor-Plus, ad sales were down slightly during the first half of 2008. However, there were some industries that flourished. For instance, Cable TV saw the largest growth, 8.1% over this time last year, with Syndicated TV falling in behind it with 7.2% growth (www.marketwatch.com). All this despite the fact that major advertisers like the automotive, pharmaceutical and motion picture industry spent roughly 9.5% less during the first half of 2008 than they did from January to June in 2007.

Media mogul Rupert Murdoch isn’t worried about the effect of a tanking economy on his News Corp (NWS) empire. When asked, Murdoch answered: "Hard times are good for big companies." Murdoch also believes that the Wall Street Journal and all of News Corp's Internet offerings will be resilient to the economic climate. The WSJ, which recently launched a site redesign, charges $100,000 a day for ads on its site, while MySpace charges an average of $500,000 a day, and sometimes as much as $1 million.

It is very easy to argue that if the financial services industry collapses, it will take the rest of us with it. Perhaps... No one can (or should) try to make such a prediction about a system of this complexity. What is true, is that some consumer behaviors are going to change by choice and others will change by necessity. Predicting where your business fits into that equation is easier, and it’s a better use of your time.

Disclosure: None

Comments

[PRAVANTI:]

Very good analysis of Google and Apple, too bad the market can't appreciate or have enough vision to see it that way. Those companies should not be tied to the industrial averages. They are in a situation of their own due to their international positions and attachment to the Web 2 universe which no one can stop now.

2008 Sep 22 09:12 AM

[David Lentz:]

More importantly, both Apple and Google (along with others that will do well in the weeks and months to come) are internally financed and are not dependent on the debt markets to fund their growth. Having little or no debt on the balance sheets is now more important than ever.

2008 Sep 22 10:34 AM

[jmmx:]

Nice analysis BUT

Bejeebers - can't you update your 6 year-old description of Apple? It is NOT a niche market. It does NOT sell the cheapest computers available, but it DOES sell computers into all markets! AND if you do a cost comparison based on equivalent hardware - you will find that Macs are NOT much more expensive, and this is easily made up for (in the minds of most buyers) by the advantages of the Mac OS and the added software.

This is why they are expanding market share not only in consumer markets, but in corporate markets as well.

Please, come up to date.

Thank you.

2008 Sep 22 11:37 AM

[jmmx:]

All this assumes that we will not see a major recession - or worse. People need to look at the reality of this financial bailout:

I am usually an optimistic guy (which is why I have lost a stupid amt in my portfolio this year)
.
But let's look at it.
If you are standing on level ground and you dig down 1 foot (debt) and step in, you're not doing bad. You can probably pretty easily fill that hole back in and get back. But if you are in a hole up to your neck, that 1 foot puts you underground, and it is REALLY difficult to reach out and start pulling dirt back in.
.
700 BILLION DOLLARS - that is a tremendous amount of debt to add onto the existing deficit. Oh yes we MAY get some of it back, but I would not count on getting much back. Have you guys forgotten that THE DEFICIT IS BAD FOR THE ECONOMY??
.
Where is this money going to come from? Not many options. The government can borrow it from Saudi Arabia (they have lotsa $$ now from selling us oil) or from China (that great bastion of democratic values), OR we can print more dollar bills – another 1/2 Trillion of them.
.
But let’s just remember that there is a price to pay. In either case, the world will devalue the dollar. Then prices will go up (especially OIL). In other words, there will be inflation. Inflation + slowing economy = Stagflation. Unfortunately, I think it is going to take us a lot of years to get out of this one!

2008 Sep 22 11:38 AM

[TC109:]

$700 Billion for mortgage related assets mortgage bailout
$29 Billion for Bear Stearns
$300 Billion for FHA insurance loans
$200 Billion for Fannie MAE and Freddie MAC
$85 Billion for AIG

Afghanistan was the right place to be.
Iraq was not --- cost = $6.5 Billion
It has caused the collapse of the economy
The people and the industry and the gov't expected to use that money in our economy

Total cost of the collapse = $2.05 Trillion

2008 Sep 22 12:11 PM

[TC109:]

Correction IRAQ is close to $600 B

2008 Sep 22 12:19 PM

[Urbane Gori...:]

Novocain/Pain in 2009!
Vote GOP back into office!

jegan ;-)

2008 Sep 22 01:37 PM

[OldLimey:]

PRAVANTI and David Lentz: not everybody is sitting on the sidelines out of pure stupidity or bloodymindedness. I, for example, wouldn't want to dispute your analyses - it's just that I'd prefer to miss out on the first 10-20% of the good times you foresee rather than risk losing 10-20% to a deeply flawed, heavily manipulated, utterly unpredictable market. Good luck to you both. I'll join you later.

2008 Sep 22 02:17 PM

[mollytjm:]

Apple computers run Windows better than PC's do...even PC magazine says so. i think people are realizing that when you buy a PC you better buy reallly good virus protection...something unneeded on a mac, so that makes up the $ difference.
and you might have missed the fact that businesses are starting to go Mac now because IT departments are very expensive and Apple products don't need much in the way of IT people and also offer very good tech support on the phone and in person at the stores...Free.
the AP in washington which was pc has in the past year, added imacs to all the desks and they're not alone.
so niche product doesn't really define it anymore, though, in the past, i think it did when Macs didn' t run windows (which apple invented and sold to microsoft).
so i think APPL is a good buy right now because it's growth will continue and into all markets, at all levels.
disclosure...long APPL

2008 Sep 22 02:36 PM

[LMN1948:]

I don't think Apple sold Windows. I think Microsoft Stole Windows!

2008 Sep 22 08:50 PM

[TraderJoe100:]

The only place the gov't can get the money to pay for this bail-out is the boomers 401k accounts. Raiding those accounts will get the US GDP and corporate profits in poor shape for a long time - how long? As long as it takes the govt to siphon $2trillion from the 401k accounts with higher taxes. Bottom line is the boomers will not be allow to keep that money in their accounts or use much of it for retirements - sorry...the gov't need it now.

2008 Sep 23 01:55 AM