Today at TILE we talked about the impact that the financial crisis is having when you go shopping — sales, sales and more sales!  Consumers are demanding greater value, looking for special offers (e.g. gift cards), and challenging high prices (e.g. some designer clothes have been marked down by as much as 75% in recent months).

Wall Street Journal: Neiman Presses Designers for Cuts

While department stores, designers, and luxury brands benefitted from the “boom” in luxury consumption of the past, they are now feeling the pain of the downturn.  In other words, the stores and designers loved it when you bought a lot of expensive things and now they are hurting when you don’t buy as much.  Bain & Co actually forecast global luxury consumption would fall 21% this year.

In order to survive when customers buy less, firms make adjustments.  For example, Neiman Marcus is asking designers for lower priced items; designers are focused on smaller collections; and everyone is being more cost conscious.

Short-term, this is great for you, your friends and your family!  Maybe you can buy the special purchase you always wanted at a discount.  Even if not “officially” on sale, ask for a discount — I actually negotiated an extra 5% off of a large purchase from Barney’s the other day.  It never hurts to ask.

On the other hand, too many sales may not signal good things long term.  If people continue to buy less and the sales continue there may be negative consequences (don’t you always hate it when your teacher or parent says that term?):

- will your favorite designer or store be able to stay in business?

- will designers be able to  afford to be extra creative if they are afraid the cutting edge design won’t sell?

- will there be less variety to choose from?

On a personal level, are you starting to feel self-conscious about buying something expensive?  Do your friends react the same when you buy a new pair of shoes or a new IPhone?  While we often associate peer pressure with leading us to BUY, we are now in a place where peer pressure may raise your awareness during these tough times.

Have you been buying less?  Try going to the SPEND tab in TILE — in the transaction details take a look at what you spent on Clothing or Electronics a year ago versus today.    What are you noticing about your SPENDING patterns?  Is it more or less?

Just a little food for thought….

What are you noticing about your GIVING patterns?  Is it more or less?

- Amy

Today at TILE we talked about what happens when credit markets “tighten” – when investor fear leads to a “downward spiral”. A healthy economy is characterized by investors who trust the information they receive and want to “put their money to work” (or invest money rather than hide it away). In contrast, in a “seizing” or “frozen” market, investors don’t trust what companies say, aren’t sure of the rules of the game, and are afraid surprises will decrease value. All of these characteristics and fears are in the market right now.
Wall Street Journal: New Fears as Credit Markets Tighten Up

Here are some examples:

- Lack of Trust in Information. In order to make good investment decisions, you need to know the information you are using is good information. For example, if a Company said there was $10 in cash on the balance sheet, but then says, “oops, we really only have $2 in cash on the balance sheet” you would think twice about whether the company is a good investment. Similarly, when credit rating agencies change their mind about the credit ratings (or measure of the ability to repay debt) they publish, it makes investors question whether they can trust the information necessary to make investment decisions. If you can’t trust the information, sometimes there is a preference not to make any investment – or “Freeze”.

- Questioning the Rules of the Game. Investors are also questioning the rules of the game. Some basic “rules” mentioned in the article include: 1) bond holders have first claim on the assets (e.g. they get first dibs over equity holders if something goes bad); and 2) the government has protected bondholders. If those rules change, either in practice by the government or in courts, it would create a lot of confusion. For the most part, investors like consistency, not confusion – otherwise could choose to do nothing/not invest.

- Watching Values Decrease. When investors are uncertain and choosing not to invest, this sends prices or values down. For example, GE’s bonds are trading at 63.5 cents on the dollar because people don’t know whether the bonds will be paid back – the more uncertainty about the health of the company, the lower the price. Another way to think about it, the more uncertainty, the higher the interest rate an issuer/company must pay. That is what the article refers to as a “spread” – the greater the spread between Treasury bonds (which are considered risk free because they are guaranteed by the US Government)or LIBOR rates (a well known benchmark) and the bond (e.g. Junk Bonds have a 19 point spread) the greater the perceived risk.

So what does it mean for the TILE Community? Well, the concern is that the viscous cycle will impact you in different ways. First, it can hurt the value of your portfolio. If you bought a GE bond for 100 cents on the dollar and now it is trading at 65 cents on the dollar, your portfolio is worth less. What you thought you bought may be different than what you own. Second, continued fear will make investors less likely to invest in the market. If you are trying to get a loan or a mortgage, banks or lenders will be less likely to trust you (e.g. they are risk adverse). You are still a great person but people just trust you less.

What can be done? As the article points out, it is important for the government to set the “rules of the road” and NOT change them. At present, it feels like there are new rules every week. While the intentions are good, investors and business people need consistency so if the rules constantly change they are more likely to sit on the sidelines (e.g. freeze up). How would you feel if you played soccer and every time you ran down the field the referee changed his/her definition of a foul? At some point you may just stop playing!

Relative to TILE, go to GROW and take a moment to look in the Fixed Income or Bond portion of your portfolio. Do you recognize all the names? If you do a news search on them what does it tell you? If you look at a price chart of the yields are they moving quickly in one direction or another? If you have any concerns about any of the names, Ask Your Advisor their opinion. The more you know about what is in the portfolio the more informed investor you will be!

- Amy

Amy Butte is a co-founder of TILE Financial. TILE stands for The Investing Learning Environment – an online community where young people go to develop their financial identity around Spending, Growing and Giving their money.

Today at TILE we talked about nurturing start up companies – why investing in young companies is a good idea.  In the article about NYC Seed, an early-stage technology fund, it talks about why the fund is making investments, who is providing the capital (aka money), and what types of companies are benefiting.

New York Times: NYC Seed Nurtures Homegrown Start-Up

So what  is “early-stage” investing? Basically, where  a company is in its development determines its “stage”.  Thus, investing in a start-up company is an early-stage investment.  This is often called seed or venture investing – seed being the earliest.  If a company is in mid-life or middle-age (e.g. already operating but needs some investment to get to the next level), that is later-stage investing.  Terms such as private equity or mezzanine are often used in these cases.

In essence, seed, venture and private equity all represent investments in companies.  When called an Angel Investor it is a person. When called a fund, it is “pooled” money intended to be allocated (e.g. distributed) across a large number of investments by an investment manager.  In the case of NYC Seed, here are the players:

- The Investment or Fund Manager is Owen David.  He decides which start up companies will “get funded” or receive $200,000 to start their business.

- The Investors, or people who gave money to the fund, include the New York City Investment Fund, Polytechnic University, and others.  They have raised $2 million to date.

- The Fund is called NYC Seed.  The rules (or terms) of the fund say that each company receives $200,000 each and the fund looks to invest in technology- oriented companies that plan to do business in New York and have a founder living in New York.

- Advisors are people who have experience in investing in young companies.  This means that companies don’t just get money, they also get valuable experience on what makes a successful company.

What does this mean for the TILE Community? Well, right now the economy is shrinking – traditional companies in the automotive (e.g. Ford, Chrysler, GM), financial (e.g. Lehman, Bear Stearns, Merrill Lynch), and retail (e.g. Kmart, Linens ‘N Things) have either shrunk in size, been acquired by another company or gone out of business. That has a dual impact: 1) the company has reduced need for inventory/employees and 2) services previous used by those companies are less needed. For example, if the economy is shrinking, you need fewer lawyers, fewer advertisers, fewer consultants…you get the picture. Places you thought had full-time job potential may no longer be viable options. Thus, for the TILE Community, as well as the economy as a whole, it is important that new companies are given a chance to succeed – they are the future of our economy (and your paycheck, benefits, etc.).

From an investment perspective, have you considered investing in a start-up? Could you “seed” a cool business that you like and think has promise? If you could and want to, take a look in the NYSE Learn To Grow module and select the Private Investment Wizard – it will take you through some good questions to ask (e.g. does the management team have experience? What is the market potential?).

From a personal perspective, if you are currently in college, what are you thinking about doing after you graduate? Since the job market is difficult in a shrinking economy, maybe you want to go to graduate school? Travel the world? Work for a nonprofit? Or find a start up?  By the way, TILE Financial is looking for interns…..

- Amy

Today at TILE we talked about JPM’s decision to cut its Dividend by 87% — from $0.38 to $0.05 per share. Why did they do it? Does it imply JPM is a healthy bank or an unhealthy bank?

A dividend represents the earnings that a company pays back to investors – instead of reinvesting back into the business. In this sense, the stock “yields” a cash return to investors every year (versus just creating value by increasing in price). Sometimes investors look for stocks with high dividend yields as a reason for investment.

In this context, if you increase the dividend you are sending the following message to investors: we are financially healthy, have more resources than necessary to support our growth plan, and are making a commitment to pay you a given “yield” on the stock.

In contrast, if you decrease the dividend you may be sending the following message: we can’t dividend our resources to you because we need it to maintain our financial health/keep cash available on our balance sheet and/or invest in growth. “Sorry” but you can’t count on the yield we told you to expect.

In the case of JPM, I actually think traditional rules don’t apply (as Jamie Dimon, JPM’s CEO says, “Extraordinary times call for extraordinary measures”). In this case, JPM is proactively saying we want to be prepared for: the new stress tests, the unknowns in the market, and the ability to pay back TARP funds. Before running out of money they are holding onto it – smart!

Think about decisions you make, would you splurge on a fabulous European vacation if you knew that you might have trouble paying your tuition bill? Its not that you don’t have money in the bank, its simply a choice of how you spend it. How about your health? Just because you don’t have a health problem at this moment doesn’t mean you shouldn’t exercise – preventive medicine is the way to ensure a healthy future.

In terms of the TILE community, you may want to look in your GROW portfolio and explore the number of stocks that have dividend yields – how many? which stocks? And how much cash does that generate for your expenditures or reinvestment on an annual basis? If you are dependent on this cash flow, maybe you want to do a little research on the companies or consider reallocating those funds into another vehicle (e.g. a bond) that also generates cash yields.

- Amy

Today at TILE we were talking about making investment decisions for the future – how do you know when to invest money, where to invest it, and how much?

In the article, Steve (the father) encourages his 17 year old son to open a Roth IRA (see glossary). In the midst of being busy, watching the markets decline and watching his own portfolio decline in value, Steve delays the decision to take his son to open an IRA. Here were my takaways:

- Not all investment firms and advisors are the same. The best advisors are those that recognize that all investors are unique too. Just like with doctors, it can often help to get a second opinion (and because of this Isaac found a firm that would open an IRA account for someone under 18).

- The decisions you make as a 15-25 year old will be vastly different than the decisions made by someone in their 40s, 50s or 60s. Investment decisions are influenced by your time horizon – the more time you have to invest (e.g. before you need or want the money), the more risk (and potentially the higher return) you can take. In general, and history does suggest, that greater risks (e.g. investing in stocks versus bonds) lead to higher returns.

- Your input matters! Where you put the money (how you allocate it) reflects your goals and tolerance for risk. In this story, Isaac chose to diversify (e.g. put it in more than one place) in order to 1) meet two goals (have no debt after college and have a nest egg for retirement) and 2) to reduce the risk in this current market.

What the article didn’t talk about, and we talk about all the time, is how important it is to have someone who you feel comfortable speaking to about these topics. Isaac was lucky because his dad took the time to introduce him to a Roth IRA; some people aren’t so lucky.

For some of the TILE community, there is little concern about paying off college loans or if there will be enough for retirement. Nonetheless, these are important issues – thinking about the future, asking yourself to weigh the pros/cons about risk and return, and making sure you get good advice. Come to think of it, those issues are important in many places besides finance.

Wall Street Journal: Faith in the Future: Isaac Opens an IRA

- Amy