I got a phone call Saturday from my family in Pittsburgh saying that they were in Chicago to bring Sophie, my cousin's 4 year old girl to the American Doll store. I was planning on watching my beloved Michigan State Spartans take on the Buckeyes who I hate with the utmost passion. Unfortunately, I knew what the outcome of the game was going to be before it started even though most of the "experts" were counting on MSU to pull it off. Seriously, if these "experts" ever watched MSU play a game, they would have known they are still a long ways off from being a true competitive team... sure they can walk all over crap teams like Notre Dame, Iowa and Northwestern, but they don't have the defense to support their slow paced running game.
So, off I headed to the American Girl store to meet up with my aunt and cousins. I'd be lying to you if I said this was my first time in the American Doll store, I'd be lying if I said I wasn't just a little bit excited to see Sophie in action. In fact, my first time in the store was the previous Saturday. My girlfriend was visiting from Cincinnati and we were down on the Magnificent Mile and she dragged me in to show me the dolls she had when she was young. I've always heard lots about the store, but when I entered I was in disbelief.
The American Girl store recently moved to a larger location, two floors of dolls, clothing, different stores within the store, and stories. The place was a an absolute zoo. Girls of all ages were going crazy running from one display to another, grabbing dolls, trying on the life size clothes that matched their doll. I turned to say something to my girlfriend but realized she was 20 yards away from me darting to the Molly display.
Once I finally caught up to her, after I received the life story on Molly, after I received the life story on all of Molly's friends, after I was lucky enough to see all the outfits and accessories that my girlfriend once owned, we went for a walk around the store. Each doll had their own section of the store which included all their different outfits, their rollerblades, their snowboards, and their animals. Each had a movie with them acting out the story of their life.
Upstairs there's the personalization center, where you could make an American Doll that looked like yourself. There's a hair salon with miniature barber chairs for the dolls where professional doll beauticians would do the dolls hair any way imaginable (and believe me, little girls have quite the imagination). There's a shirt making shop where you could make a shirt of you and your doll. There's even a tea room where you and your doll can have a tea party (reservations are required). But the best was the doll hospital where the girls could drop off the dolls that were broke or had marks on them and they would be changed into a gown and wheeled off in a miniature wheel chair to be repaired.
I looked up how much money American Girl Doll was sold for to Mattel. This a doll that is sold for a huge margin (I'm assuming based on the $90 price tag) and a never ending number of accessories to keep the product alive. They've built an experience that people will base weekend plans and drive 500 miles to go to the store. They've built an unbelievable business model. Each doll comes with a book about the American Girl's adventures. So the girl picks a doll and already the doll has a history that the girl connects to and instantly is hooked to. All the company has to do is come up with two or three new outfits a year and keep getting the next generation of girls hooked (and I can't imagine dolls will EVER go out of fashion). They primarily sell the dolls from a magazine, so beyond the cost of printing and distribution of the magazines, they have the COGS and the salaries of what I'd imagine to be a small staff. On top of all that, they have a huge brand name that creates a huge barrier to entry for any competition. They sold the company for $700 million to Mattel in 1998. A lot of money, I can't find any financial information in my quick research, but Mattel did release their 3rd quarter earnings noting that American Girl segment was up 11%.
With that said, I'm disappointed that I'm going to be in Cincinnati this Saturday, officially putting an end to my new Saturday routine. I got twice the enjoyment this past weekend though seeing Sophie as excited as a little girl can be in and out of the store. The entire rest of the day Sophie was telling anyone that would listen that she visited the American Girl store and found a new best friend, Mia.
Thursday, October 23, 2008
Friday, October 17, 2008
Ted Spread vs. Consumer Confidence
The most depressing and addictive part of my day is checking my 401-k. I'm a 23 year old male that started my professional career as a financial risk consultant just over a year ago in the city of Chicago. I'm lucky enough to be working for a company that provides a match 401-k match program (although it is very weak in comparison to what my company's competitors offer) and there was no question I was going to take advantage of the program. Although I made good, conservative decisions (at least for now) when choosing what funds to place my money in since my retirement is far off, my return now is still much less than desirable. It's funny that I get excited, and absolutely addicted, to look at my 401-k every hour of the day. Looking at my 401-k is like being a Lion's fan, I can't wait to see it (because it's my investment) and for some reason I always have hope (which is where the addictiveness), yet it always disappoints (although for the first time in the past 50 years the Lions made a GREAT trade).
The market is a crazy thing that is filled with unpredictable variables. After another lackluster week, there may be hope, but unfortunately it is not too promising. There are two main focal points that need to be considered for the market to turn around.
The first factor is the Ted Spread, which is the good news. The Ted Spread is the difference between the 3-month LIBOR rate (the interest rate bankers charge other bankers to loan money) and the 3-month T-bill rate and it measures the credit risk in the market. The whole reason the market is in this funk is the banks are failing. What's going on is the banks are lacking liquidity to loan money to consumers, businesses and each other. Therefore, the cost of lending is high and consequently credit risk is also high. This is evidenced by the record highs of the Ted Spread (the higher the Ted Spread, the higher the credit risk).
Well, that is exciting and all, but where is that good news you speak of?
This week the Ted Spread finally fell. The Ted Spread was 20 basis points in early 2007, right before the sub prime started affecting the market. On October 10th it reached a high of 464 basis points. For the past seven days it has fallen and now sits at 363 basis points. This is the first time that the Ted Spread has decreased 7 consecutive days since December. There's no doubt that a 363 basis point spread is something to get too excited about, but there is no doubt that it is a sign that the bail out is working (at least in the short term).
The decreasing Ted Spread is a sign that banks are starting to trust each other and are willing to invest in each other. So why did the Dow fall today, and why is my 401-k continuing to depress me?
What drives the market is consumers willing to purchase the products/services that the firms are selling. It's wonderful that the banks are beginning to believe in each other but in order for the market to turn around, consumers need to buy in too. I can't blame consumers for not investing their life's savings because the Ted Spread decreased 101 basis points in the week, that for the first time since December the Ted Spread decreased seven consecutive days (I sure as hell haven't bought in yet). It's a start though. There's no doubt most consumers don't know what the Ted Spread is, why should they? Warren Buffett was urging people to start investing in the market today, he's a billionaire whose made his fortune investing, does he know something we don't?
My question is, can the banks continue to believe in each other, can the Ted Spread continue to drop off to level of healthy economy, if consumers aren't believing in what the banks are doing? It's possible that the consumers are beginning to understand that they can't live on credit alone and the consumers that can afford to take loans are the only consumers doing so, which would improve the LIBOR rate.
There's no doubt that there are many more factors that are causing the bear market (i.e. the housing market that is not allowing first time home owners to upgrade to a larger home, we'll save that for another post), and that there are other factors that are reducing financial institutions liquidity (i.e. FAS 157, also saving for another post), but the fact is the key underlying indicator is showing improvement, yet that means nothing if the consumers are not buying in.
The market is a crazy thing that is filled with unpredictable variables. After another lackluster week, there may be hope, but unfortunately it is not too promising. There are two main focal points that need to be considered for the market to turn around.
The first factor is the Ted Spread, which is the good news. The Ted Spread is the difference between the 3-month LIBOR rate (the interest rate bankers charge other bankers to loan money) and the 3-month T-bill rate and it measures the credit risk in the market. The whole reason the market is in this funk is the banks are failing. What's going on is the banks are lacking liquidity to loan money to consumers, businesses and each other. Therefore, the cost of lending is high and consequently credit risk is also high. This is evidenced by the record highs of the Ted Spread (the higher the Ted Spread, the higher the credit risk).
Well, that is exciting and all, but where is that good news you speak of?
This week the Ted Spread finally fell. The Ted Spread was 20 basis points in early 2007, right before the sub prime started affecting the market. On October 10th it reached a high of 464 basis points. For the past seven days it has fallen and now sits at 363 basis points. This is the first time that the Ted Spread has decreased 7 consecutive days since December. There's no doubt that a 363 basis point spread is something to get too excited about, but there is no doubt that it is a sign that the bail out is working (at least in the short term).
The decreasing Ted Spread is a sign that banks are starting to trust each other and are willing to invest in each other. So why did the Dow fall today, and why is my 401-k continuing to depress me?
What drives the market is consumers willing to purchase the products/services that the firms are selling. It's wonderful that the banks are beginning to believe in each other but in order for the market to turn around, consumers need to buy in too. I can't blame consumers for not investing their life's savings because the Ted Spread decreased 101 basis points in the week, that for the first time since December the Ted Spread decreased seven consecutive days (I sure as hell haven't bought in yet). It's a start though. There's no doubt most consumers don't know what the Ted Spread is, why should they? Warren Buffett was urging people to start investing in the market today, he's a billionaire whose made his fortune investing, does he know something we don't?
My question is, can the banks continue to believe in each other, can the Ted Spread continue to drop off to level of healthy economy, if consumers aren't believing in what the banks are doing? It's possible that the consumers are beginning to understand that they can't live on credit alone and the consumers that can afford to take loans are the only consumers doing so, which would improve the LIBOR rate.
There's no doubt that there are many more factors that are causing the bear market (i.e. the housing market that is not allowing first time home owners to upgrade to a larger home, we'll save that for another post), and that there are other factors that are reducing financial institutions liquidity (i.e. FAS 157, also saving for another post), but the fact is the key underlying indicator is showing improvement, yet that means nothing if the consumers are not buying in.
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