October 28, 2021

Strategies: Forecast for a 20,000 Dow Still Holds

LAST July, when the Dow Jones industrial average was still stuck below 12,900 and investors were seeking safety in bonds, Seth J. Masters made a startling argument.

Mr. Masters, the chief investment officer of Bernstein Global Wealth Management, said that people were so traumatized by the financial crisis that they were seriously underestimating the stock market. In fact, the chances were quite good that by the end of the decade, the Dow would rise more than 7,000 points and reach 20,000, he said.

In some important ways, he said, stocks at that moment had become safer than bonds. “This argument may seem provocative,” he told me back then. “But that’s only because market conditions are so unusual, and so many people have become so pessimistic.”

Last week, Mr. Masters made essentially the same argument, but it sounded much less provocative. In fact, after months of soaring prices, new stock market records and minuscule bond yields, it may even be the Wall Street consensus.

“It seems we’re somewhat ahead of schedule but I think we’re still on track for Dow 20,000 by the end of the decade,” Mr. Masters said last week. “The odds have just gotten better.” And despite the stock market’s recent meteoric rise, he said, stocks still look relatively cheap, certainly compared with bonds.

“It’s not that the expected return on stock right now is really that high,” he said. “It’s that the return on government bonds is indubitably very low.”

That unfavorable verdict on bonds is no accident. In a sense, it’s the policy of the Federal Reserve. Ben S. Bernanke, the Fed chairman, says he is trying to make traditionally riskier assets like stocks relatively attractive, increasing investors’ wealth and in that way stimulating the economy.

As far as the bond market goes, the yield on a benchmark 10-year Treasury note was only 1.5 percent when I spoke to Mr. Masters in July, and it is about 1.9 percent now. To put those yields in perspective, the average for 10-year bonds since 1962 has been more than 6.5 percent, according to quarterly Bloomberg data. In other words, since last July, bond yields have risen by the tiniest bit, and they remain extraordinarily low, on a historical basis.

For bond investors, particularly retirees, these low yields pose a serious dilemma. “This situation creates great problems for people trying to live off the income they can get from bonds,” Mr. Masters said. (I’ll explore this issue further in a future column.)

For now, it’s worth noting that the problem for income-seekers will sort itself out eventually when bond yields rise and prices fall. But that shift is likely to inflict considerable harm on unwary investors.

That day of reckoning keeps receding, however, as global economic growth and inflation remain constrained. That alone tends to keep bond rates low. Furthermore, government spending cuts like the budget sequestration in the United States have reduced economic growth substantially, in the view of the International Monetary Fund and other forecasters.

And as long as unemployment is high and inflation is low, the Fed says it will continue to keep short-term interest rates near zero — and buy $85 billion a month in long-term bonds and other securities. Other central banks have made similar promises. At least for a while, then, historically low interest rates seem likely to persist, for short-term bills as well as for long-term bonds.

The likelihood of low bond yields helps explain the relatively high stock market returns expected by Mr. Masters. And a new study suggests that those yields are the main factor behind the bullish stock market consensus of financial analysts on Wall Street and in academia.

Fernando Duarte and Carlo Rosa, two economists at the Federal Reserve Bank of New York, described their study last week in “Are Stocks Cheap? A Review of the Evidence,” a posting on the New York Fed’s Liberty Street Economics blog. They analyzed 29 separate economic models and found that most predicted extremely high stock returns for the next five years. Why? There are many wonky reasons but in the end, they said, it is “mainly due to exceptionally low Treasury yields at all foreseeable horizons.”

Article source: http://www.nytimes.com/2013/05/12/your-money/forecast-for-a-20000-dow-still-holds.html?partner=rss&emc=rss

Clothing Companies Try to Sell Directly to Consumers

“Companies like Bonobos, Warby Parker and Lululemon were on their meteoric rise, selling direct to consumers,” said Ms. Medvitz, 31. “In a naïve way, we thought, ‘If they can do it, we can do it, too.’ ”

While exact numbers are hard to come by, many new apparel brands have decided to forgo the traditional wholesale route of selling through multibrand boutiques and department stores. “There is no doubt that there is a trend toward direct selling,” said James Dion, founder of Dionco, a Chicago retail consultancy. “And it’s been aided by the Internet, which has given that smaller brand the ability to go direct to the consumer.”

As with most trends, however, direct selling is not for everyone. For one thing, getting your name out there — on the street or on the Web — is hard. Faced with this reality, three years after opening for business, the Medvitzes started to sell through more traditional channels.

“We have been humbled by our experience,” Ms. Medvitz said. “Growth in consumer awareness is slow, and that’s exactly what the wholesale channel offers: scaled exposure at a faster pace.”

It is easy to see why a new apparel brand might want to avoid selling to department stores and boutiques. “The shirt you bought for $70 in Nordstrom was made for $7 or $8. The rest of the money is chewed up in margin and markup that is of no benefit to you,” said Bayard Winthrop, who introduced the American Giant sweatshirt brand as a Web-only company early in 2012. “We thought if you could address that $60, you could deliver a better quality product with a better customer-service platform.”

Those who sell to department store chains not only have to accept low margins, they also often find the rules complicated and onerous. The chains may demand money for advertising, an unlimited right to return orders and the right to pay suppliers less when merchandise is marked down. In addition, the chains have suffered a generation-long decline in market share — from as much as 10 percent of the retail market in the 1980s to 2.4 percent in 2010, said Craig Johnson, president of Customer Growth Partners, a market research firm based in New Canaan, Conn.

“What the department stores used to be able to deliver was credibility to your brand,” Mr. Dion said. “But what a lot of these new brands have discovered is that the price that they have to pay is draconian. It’s become almost unprofitable to pursue department store distribution.”

When Brian Guttman founded a men’s clothing brand, Jeremy Argyle, in 2009, he steered clear of department stores. “I saw the challenges of being at the mercy of the large department stores,” said Mr. Guttman, 33, whose family spent more than 60 years supplying department stores with private label clothing through a company based in Montreal, Paris Star. Jeremy Argyle now operates two stores in New York. While it sells wholesale to a handful of boutiques, 70 percent of its $5 million in 2012 sales came through its own stores and Web site.

Mr. Guttman said he was most put off by the inability to control his brand once it hit the department store floor.

“I hate seeing stuff on sale,” he said. “It cheapens the brand so quickly. And when I walk into a department store, everything is on sale. And the people selling your product don’t understand the product. In a Jeremy Argyle store, my sales team can talk about the details, the fit, the fabric.”

By contrast, when Christina DiPierro helped found Adea, a brand of Italian-made women’s camisoles and layering tops, she started by selling through boutiques and department stores, including Bloomingdale’s. But in 2008, she decided to concentrate on selling directly through the company’s own Web site, MyAdea.com. “We were doing quite a bit of volume wholesale,” she said. “However, the profit margins were very slim. So much of our expenditures went to trade shows and showroom fees and rep commissions.”

Leaving wholesale behind was not easy. Annual revenue, which was about $1 million, plunged to $350,000 in 2009 before rebounding to $500,000 in 2012. And yet, gross margins doubled, said Ms. DiPierro, 36, to 50 to 60 percent. “That has allowed us to maintain pricing for our customers,” she said, “and it allows us to do more advertising and marketing.”

As the San Francisco brand Pop Outerwear learned, the big issue in trying to sell directly to customers is whether you can reach enough of them.

“The reach you get from opening one or two stores is nothing like the reach of a Macy’s,” said Jack W. Plunkett, chief executive of Plunkett Research, a Houston market research company. “I can’t imagine Coach being the huge brand it is without the marketing boost of all the stores that have sold it through the years.”

And the risks of direct selling can be deceptively large. “If you’re in a top 20 metro market in the U.S., the cost of opening a store can be horrendous,” Mr. Plunkett said. “I have seen my own good friends go bankrupt when they had to close a store and they were sued for the remaining lease.”

Before opening a Pop Outerwear company store, Ms. Medvitz and her husband turned for advice to a friend who had established a successful T-shirt shop. For the store to work, he told them, customers would need to see a variety of products for sale. “After they adhere themselves to a brand,” she said, “they want to keep coming back and see new stuff.”

Another concern, said Mr. Winthrop of American Giant, is whether a brand can inspire passion. “The thing that is going to chew up a lot of pure-play e-commerce brands,” he said, “is if they can’t figure out a way to ignite the irrational relationship with customers, to get customers saying, ‘This brand stands for something I want to get behind.’ ”

Mr. Winthrop marketed his company’s sweatshirts as high quality and made in America. The challenge was to sell the quality to consumers who could not touch the garments. But good word of mouth helped, and then some positive reviews led to American Giant selling out its inventory in December. In fact, said Mr. Winthrop, 42, the company’s first-year’s sales were five times his projections.

The answer for many brands may be to try a bit of everything and see what works. After concluding that the six products they had developed were not enough to stock a store, the Medvitzes decided to go wholesale. They started selling to four boutiques in San Francisco in 2012, and they plan to add others in the fall. During 2012, about 10 percent of their $250,000 in revenue came from wholesale; Ms. Medvitz says she is aiming to double that this year.

While Ms. Medvitz said she loses 10 to 20 percentage points of her margin when she sells wholesale, she thinks she makes it up in other ways. Some of her customer acquisition costs — Google AdWords and the like — shift to the boutiques, and when the boutiques do not have a certain style or product, the customers often buy from the Pop Outerwear Web site.

“To be honest,” she said with a laugh. “I bet it just evens out.”

Article source: http://www.nytimes.com/2013/03/07/business/smallbusiness/clothing-companies-try-to-sell-directly-to-consumers.html?partner=rss&emc=rss

DealBook: Groupon Files to Go Public

The social buying site Groupon filed on Thursday to go public with plans to raise an estimated $750 million in a highly anticipated debut that comes amid a frenzy for new technology companies like LinkedIn and Yandex.

Groupon, a Chicago-based start-up, has enjoyed a meteoric rise in its short life. Shortly after starting in 2008, Groupon notched revenue of $94 million. Two years later, it had swelled to $713 million.

The company reported $644.7 million of revenue in the first quarter of 2011 alone, with 83 million subscribers across 43 countries, according to its filing.

As its prospects have grown, so has investor interest.

Last year, the company was worth roughly $1.4 billion, based on a fund-raising round led by D.S.T. Global. Groupon spurned a $6 billion bid from Google in December. A month later, the start-up raised nearly $1 billion from large institutional investors like Fidelity Investments and T. Rowe Price. Groupon’s value was pegged at $25 billion just a couple of months ago, based on discussions for the initial public offering.

In a letter to prospective shareholders, Groupon’s chief executive, Andrew Mason, highlighted the company’s growth opportunity but cautioned investors to temper their expectations.

“In the past, we’ve made investments in growth that turned a healthy, forecasted quarterly profit into a sizable loss,” he said. “When we see opportunities to invest in long-term growth, expect that we will pursue them regardless of certain short-term consequences.”

Like many start-ups, Groupon is still struggling to turn a profit. Last year, the company’s loss topped $450 million, compared with $6.9 million in 2009 and $2.2 million in 2008.

It’s unclear when its fortunes will turn. The company warned, under the risk factors in its filing, that it had lost money since its inception and that it expected its operating expenses to grow for some time.

The company’s biggest expense is marketing. Groupon spent $263.2 million on online advertising, subscriber e-mails and the like, compared with just $4.5 million the year before.

“We cannot be certain that we will be able to attain or increase profitability on a quarterly or annual basis,” the filing said.

Groupon’s investors and early employees stand to reap a windfall in an I.P.O. The company’s largest shareholder, Eric P. Lefkofsky, a co-founder and board member, would be worth billions of dollars. Mr. Lefkofsky owns 64.1 million shares, or roughly 21.6 percent of the company’s Class A common stock. The venture capital firm, Accel Partners, which invested in Groupon in November 2009, owns a 5.6 percent stake. Mr. Mason, who made $180,000 for his base salary last year, controls 7.7 percent of the company.

Groupon, which will trade under the ticker “GRPN,” has hired Morgan Stanley, Credit Suisse and Goldman Sachs as lead underwriters for the offering.

Article source: http://feeds.nytimes.com/click.phdo?i=93ed15141cda9e99025850c9679d6403