Archive for August 7, 2012

Bright Lights, Broke City: The Sad Tale of Allen Park, Michigan- Part 1

Recently the news has been filled with stories of towns, counties, and in some cases entire states being buried under debt.  Local and state governments have been scrambling to find ways to pay for basic public services since the economic downturn, but it seems like job creation, new taxes, and national bailouts haven’t done much to help.  Many towns are banking on a big investment to help bring them out of the red, whether they’re pouring money into buying local company stocks or throwing themselves into capital improvement projects American towns are putting their monetary hopes on big time investments.

Allen Park, a small Michigan city close to Detroit, hoped that a movie studio could bring some money into their community.  But after almost three years of problems the area is worse off than it was before.  Allen Park is now $31 million in debt, the situation is so severe that state officials are looking into taking control of the town.  Let the tale of Allen Park, Michigan serve as a reminder of the danger of all-or-nothing investments: placing all of your money and hopes in a single investment is sure to eventually lead to financial ruin.

The idea of a Midwestern town becoming a movie making hub may seem a bit laughable, but the state of Michigan has had some recent success in movie making.  Clint Eastwood’s hit Gran Torino was filmed almost entirely in the state, and the award winning 2011 movie The Ides of March had several important scenes shot around Michigan.  The state also has extremely lucrative incentive packages for film makers, Gran Torino received a whopping 42% tax credit from Michigan for filming there.

Impossible Dreams

It’s also important to note that at the time the project was proposed that Allen Park and the nearby city of Detroit were in dire need of economic revival.  The city had fallen on some hard times.  Their tourist attractions (they have the world’s biggest “tire” and host the World Series of Bowling) don’t attract many visitors, and the town’s biggest job providers were in economic ruin.  The metro area’s unemployment rate was at 15.9%, and the city’s two biggest automakers GM and Chrysler had recently declared bankruptcy.  So it’s understandable that Allen Park jumped at the opportunity to become a new film making Mecca when Jimmy Lifton came to town.

Jimmy Lifton was a Michigan native, but when he came back to his state to help the dying town of Allen Park he was a slick Hollywood producer through and through.  He had been working in film and television industry for several years, and he was determined to bring box office bucks to Allen Park.  Lifton came to city officials with his plan for Unity Studios, a $146 million and 750,000-square-foot studio that would bring jobs to the town.  Lifton also promised to let local unions and residents have first dibs on studio jobs, all 3,000 of them.  Unity Studios was to be majority owned by a small group of LA investors and Michigan, but Lifton would be the president.

Spending Money to Make Money

When residents first heard about the deal they were ecstatic, they were certain that their economic worries were over.  Business owners started to prepare for the anticipated influx of actors, directors, and industry insiders by revamping their buildings and adding “upper class” products to their merchandise.  Teamsters and union members were eagerly looking forward to steady work.  And Allen Park government officials were ready to finance Lifton’s economic dream.

After being swayed by Lifton’s vision and the excitement of residents, the Allen Park city council voted unanimously to sell $31 million in bonds to turn 104 acres of land into Lifton’s Unity Studios wonderland.  Lifton quickly got to work developing the land, and he soon opened an expensive movie school on Unity’s property.  Students could spend anywhere from $3,000-$13,000 to learn how to be script writers and stunt coordinators, and the tax payers ended up funding a lot of their education.  The state spent an estimated $871,000 on just 127 of the school’s students.

In the beginning of the project the future of the city was looking brighter than ever, but dark financial clouds were looming over the horizon.

 

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IBM to Purchase Kenexa for $1.3 Billion

IBM surprised both stock holders and market analysts by announcing their plans to buy Kenexa Corp, one of the leading social networking information analysts, for 1.3 billion dollars.  IBM plans to pay $46 a share for the company, almost a 42% premium over the stock’s Friday closing price.  The deal is expected to be completed by the end of fourth quarter, but the wait time has done nothing to kill the buzz surround the deal.  Many were surprised that IMB was willing to pay over a billion dollars for a relatively unknown company, but if you look at the work Kenexa has done in the past and truly think about the import role social media plays for businesses the deal makes perfect sense.

IBM has been promoting its business-analytics software for years now.  IBM’s program is designed to help companies sort through large amounts of data in order to study trends and make big decisions.  The company has spent a pretty penny improving their analytics software, over the past five years the company has spent $16 billion on analytics acquisitions alone.  The move makes sense business wise, the demand for hardware and hardware related services has fallen considerable over the past decade.  Now the money seems to be in data analysis, and companies are eager for new and improved ways to properly analyze their data.

Kenexa originally started in the recruitment services field, but since its beginnings in 1987 the company has switched their focus into social networking services in order to improve their data analytics services.  Their business shift has worked dramatically; the company helps big name corporations like Starbucks and General Electric sort through data and find new employees each year.  It looks like the buyout will have some very positive outcomes for IBM, even though stocks initially fell when the deal was announced.

 

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Sex Sells: Fifty Shades of Grey and the Financial Renewal of Barnes and Noble

The erotic novel Fifty Shades of Grey by fanfic author turned best seller E.L. James has reached levels of popularity that are almost unheard of.   The book has topped best seller lists around the world, over 40 million copies have been sold worldwide and book rights have been sold in 37 countries.  The book’s unprecedented amount of success has people re-thinking the once dying book industry, and investors are starting to wonder if it’s time to start buying stock in bookstores again.

Barnes & Noble is the largest book retailer in the United States, but if you’ve been paying attention to the company’s declining revenue over the past decade you certainly wouldn’t think it was.  Like many companies that specialize in the print industry B&N has been through some tough times.  According to Bloomberg Business Week, for the period that ended on July 28th Barnes & Noble lost $45.2 million dollars which amounts to roughly $0.78 per share.  If you compare it to last year’s $56.6 million loss (roughly a whopping $0.99 a share) it doesn’t seem that bad, but in reality the company hasn’t made a profit for a non-holiday quarter in years.

Their Nook e-readers were a big flop, and as more and more people began to buy $0.99-$1.99 digital books on their Kindles the company found itself losing a substantial amount of money.  On top of competing with cheap digital books and Kindle, the company also has to compete against Amazon.com, the reigning king of all e-tailers.

Despite all of these challenges the company reported a surprisingly profitable first quarter.  Digital books may be cheap, but they’re one of the only things keeping the company going.  Revenue for the B&N retail division rose 2% overall, and revenue from bookstores open for at least a year have risen 4.6%.  Digital book sales contributed considerably to company’s first good fiscal quarter in years, but there is one book in particular that has B&N raking in the dough.  Sales for Fifty Shades of Grey have contributed a considerable amount to this revenue phenomena, it’s one of the most popular books sold on the company’s website.

To say that Fifty Shades made all of the company’s success wouldn’t be true.  The demand for digital content in general has increased, digital books, newspapers, and apps have helped digital sales increase by 46%.  B&N also isn’t the only bookstore that has fallen on hard times; failing bookstores have helped B&N take up more of the marketplace.  Regardless of the reasons B&N is seeing success that it hasn’t seen for a long time, and both investors and B&N workers hope they’ll continue to see some good fiscal times.

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The Natural Gas Game

Investing in natural gasEnergy investments always seem like a safe bet, and with the emerging importance of alternative fuel sources there’s more of an opportunity than there ever to start investing.  Natural gas drilling is a controversial topic in the United States, but this article will stay clear of taking a side in the long and occasionally nasty debate.  Bloomberg Businessweek recently did a great in-depth piece on the divide natural gas drilling has caused in the country, and their story brought up a lot of interesting points about the future of natural gas investment. 

Fossil fuels were the top American energy source for the 20th century, but in the 21st century countless companies and individuals are placing their bets on shale gas being the #1 energy source for the country.  Natural gas seems like a miracle fuel for America.  There are literally trillions of tons of natural gas in hidden deep within American shale and bedrock, and it can lessen the country’s dependence on foreign oil.  Some people couldn’t be happier about the country’s interest in natural gas, but others think that focusing on shale gas could spell ruin for many investors.

The Money

Some people believe that natural gas is a great investment because they envision high fuel prices, but if anything natural gas has become devalued since people learned about the abundance of it in the US.  On average natural gas is 80% cheaper than it was a mere 4 years ago, and some worry that the number will get even higher as drilling continues.

Some economists argue that the only way the US can hope to make money off of our vast natural gas reserves is to ship it overseas where natural gas prices are much higher.  This is an excellent practice in theory, but in reality the United States has little infrastructure to facilitate exporting gas.  As of right now the United States has one major port/facility for converting and shipping natural gas, another site was recently approved in Louisiana but that could take years to build.  It can cost several million dollars to construct machinery to properly liquefy gas and make it suitable for transport for one site, so you know that building other facilities will cost a considerable amount of money.

There are an estimated 2,214 trillion cubic feet of natural gas in the country, almost enough to last the country a century.  Despite the high number US citizens actually don’t use a lot of the natural resource, citizens only burn about 22 trillion cubic feet of natural gas each year.  In the future natural gas could be very profitable so it may be worth getting involved in the beginning, but it doesn’t seem like the kind of investment that will make a lot in very beginning.

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Scoring Smartphones As iPhone 5 Is Unveiled

This week, tech analysts at Topeka Capital released a report that predicted Apple would become the most profitable company in history in 2012. The analysis is based on prior predictions of sales for the highly anticipated iPhone 5, and Apple’s recent acquisition of China Mobile, a carrier the company has been trying to land for years. These releases, along with the release of the iPad Mini (likely to hit shelves before the holidays), are likely to explode Apple’s already massive customer base and drive the tech giant to its highest stock price ever.

With the iPhone 5 release date inching closer, these analysts will be proven right or wrong in the coming weeks. But while many will follow Apple blindly due to their massive success, the newest phone release begs the question: is the iPhone still a good investment?

Price: The iPhone 5 release has come, like every iteration before it, with a flurry of rumors. Will the phone be paper-thin? Will the screen double in size? But the most persistent rumor about the iPhone 5 was that it would cost a whopping $800. This price point caused loud outcries from fans across social media but, as with prior iterations, customers can avoid paying high prices by signing up for a new contract with their cellular provider. The iPhone 4S debuted at $199 with a two-year contract, the same price as competitor Samsung’s Galaxy S3. iPhones not tied to a long-term contract have been steadily increasing in price, with a 64-GB 4S going for well over $800. In short, if you want a cheaper iPhone, get yourself a contract.

Durability: One of the biggest issues iPhone has faced is the cracking of screens. A study from consumer advocate SquareTrade.com found that iPhone 4 screens break 82 percent more often than iPhone 3GS. Though the company has not yet stated what durability features will be upgraded with their latest design, the company recently signed an exclusive patent with LiquidMetal, a company that makes a strong but light material it will use to protect future devices. As of now, Apple claims the iPhone 5 will not include a LiquidMetal exterior but will contain some of the material internally.

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Renovate for ROI

With the economy doing as bad as it is now, a home renovation project is probably the last thing on most people’s minds.  Renovation projects can be time consuming, complicated, and above all very pricey.  The unstable housing market has led to many people losing money on what they thought would be a solid investment, but people who are using their homes and properties as their ultimate safe investment shouldn’t give up hope.  If you want your property to be profitable, your best bet may be doing renovation work.

Why Renovate

It’s no secret that renovating a home can help its value.  People typically wait until they’re trying to sell their properties to do any kind of renovation work, mainly because they want their homes to sell for as much as they can.  Renovation projects can improve the value of your property and help breathe life into old rooms.  Just renovating a single room in your home can increase the value.  If you keep your renovations practical, noticeable, and inexpensive you can get a considerable ROI on your properties.

Renovation Tips

  • It’s believed that kitchen and bathroom renovations will give you the most bang for your buck, nothing improves a property’s value more than newly installed plumbing fixtures and new kitchen appliances.
  • If you want to get good ROI for your renovation work your property appraised before you start any construction work.  You’ll start off you project knowing exactly how much your home is currently worth, and that can help you better assess which areas you need to focus on to make your property more profitable.
  • No matter what, stick to your set budget during the renovation process.  This may seem like it doesn’t need to be stated, but you’d be surprised by how many people ruin their ROI hopes by having their renovation project funds balloon.  Come up with a realistic budget and renovation plan, then stick to it through thick and thin.
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Will Paul Ryan Offer Strong Returns Romney Camp Hopes For?

Few U.S. businessmen understand the power of a good investment better than Mitt Romney. The man who made $20 million in 2010 alone, rescued Staples from bankruptcy and saved the 2002 Olympics from disaster has made his career on making the right choices at the right times. But his most recent investment—the choice of Wisconsin Representative Paul Ryan as his Vice Presidential running mate—has raised some eyebrows among conservatives as to the potential return on investment that Ryan can bring to the GOP ticket this fall.

Ryan’s positives are clearly apparent. For a candidate that has run his entire campaign focused on the economy, Romney chose the man who, as he said in a speech introducing Ryan, is the intellectual leader of the Republican party. Originally called the Path to Prosperity, Ryan’s budget proposal tackles not only government spending but entitlement reform, including cuts to Medicaid and making Medicare into a voucher system. As a massive driver of federal deficit spending, entitlement programs must be addressed, according to many fiscal conservatives, even though doing so has been historically unpopular among voters.

The tough, unpopular cuts that Ryan has proposed are already proving a liability for the Romney campaign. A USA Today Gallup Poll shows that 42% of registered voters surveyed think that Ryan would be a “fair or poor” choice for VP, while 39% think he would be a good choice.

But while these numbers are believed to be because Ryan is not well known to many voters, Ryan will have to work harder to correct his lack of popularity in swing states. While Tuesday was election day in many state-wide races, every major Florida newspaper ran reactions to Paul Ryan’s Medicare proposals on the front page. With large senior citizen populations, Florida voters are concerned about Medicare becoming a voucher system that may leave seniors searching for health insurance on the private market.

One place where Ryan may help the Romney campaign is in Wisconsin. Ryan is a 6-time winner in a district that helped elect Bill Clinton and Barack Obama. Before the pick of Paul Ryan for VP, the Romney campaign had virtually given up on Wisconsin, a state that had been thought to be going blue, despite the re-election of Scott Walker there this summer. But with hometown boy Paul Ryan on the ticket, the Romney camp believes they have a shot to take Wisconsin, turning Ryan’s home district red and capturing a major swing state.

Analysts from MSNBC to CNN to Politico all report that, while many conservatives believe Ryan can be a liability because of his unpopular proposals, the main goal of the Romney camp should be to get on the same page. While Ryan has a budget proposal, Mitt Romney claims he has his own budget proposal that he will groom with the help of Ryan. So far, the pair has failed to articulate a unified proposal. One thing is clear: they will have nothing but chances to do so, as the announcement is still dominating the airwaves across the country.

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Chevy Money-Back Guarantee Not A Slam Dunk, Say Experts

In the world of medicine, the benefits of early detection are too numerous to count for most diseases. But in the world of automotive sales, it is more of a hit-or-miss game. So when Chevrolet announced this week that it would be offering a money-back guarantee on its cars, as well as no-haggle pricing, it was clear that the company was getting out in front of a sales slump that has left GM with a surplus of vehicles as the third quarter begins to wind down.

Will the plan work? Some experts aren’t so sure. According to a report out this month from Bloomberg, Dennis Virag, president of Automotive Consulting Group based in Ann Arbor,Michigan, called these types of programs “marginally effective, but said he does not expect the plan to attract a large number of new customers to Chevy.

But others, likeRebecca Lindland, an industry analyst with IHS Automotive, said the new promotions, which GM calls its Chevy Confidence program, address two things car shoppers dread: haggling and commitment.

“Americans aren’t great at haggling and we are expected to do so on the two biggest purchases we face: real estate and autos,” she said today in an e-mail. “This Chevrolet Confidence program alleviates the issue of haggling and eliminates ‘buyer’s remorse.’”

 Chevy’s marketing team, in statements about the Chevy Confidence program, echoed these sentiments. “We know people have been hesitant to return to Chevrolet because they had a bad experience or haven’t seen how we’ve revamped the lineup. This is the way to get them in the door,” says Chevy spokeswoman Afaf Farah.

When they get in the door, Chevy’s marketing team hopes dealers will have plenty to show. While sales in the first and second quarters dropped precipitously, losing out to Honda and Toyota, Chevy feels confident as it rolls out the Spark subcompact and presents a redesign for the Malibu, the company’s best-selling model.

By getting out ahead of the sales drop, Chevrolet has secured one more positive point by adding a customer service plan: press coverage. In an era where fairness and monetary matters are on the minds of the American people, Chevy’s money-back guarantee has put them on the radar of all the major news outlets in a positive light, instead of a negative one. By addressing this issue in the third quarter, Chevy paves the way for their new offerings to come online without a hitch, getting buyers excited instead of depressed.

 

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Diversification: Construction

In difficult economic times people think about investing in companies that provide human necessities.    Concrete, steel, and cement are used in almost every modern building and structure.  Even if there’s another recession, there will always be a demand for strong building materials.  There are an array of companies you could invest in, but we’re just focusing on two for this post.

Fluor Corporation

The Fluor Corporation specializes in engineering, procurement, project management, and construction.  They already have a few profitable projects in the works.  Fluor is in charge of the modernization of the BP refinery In Whiting, IN.  They’re also a part of California’s biggest construction project, the Eastern span replacement of San Francisco’s Oakland Bay Bridge.

Ambuja Cements Limited

Sometimes when you look for construction companies to invest in, it’s best to look overseas.  Countries in Africa, Asia, and South America are experiencing a construction boom.  They need more hospitals, homes, and buildings built quickly in order to keep up with their growing population.  Ambuja is one of the largest cement manufacturers in India, and they have a considerable presence in both foreign and domestic markets.  It’s estimated that the company is worth $1.38 billion in American dollars. Ambuja sees a lot of money come in during the rainy season due to the demand for repairs, but even after this past usually dry rainy season the company is still going on strong.  June’s quarter earnings show that Ambuja’s profit rose to 34.9% (after taxes), and the company just reported that they saw a 2% production increase for the month of July.

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What Is Going On With Best Buy?

Investors, businessmen, and average electronics consumers have watched in horror and confusion as Best Buy has taken a sharp decline in over the past few years.  Don’t be confused by the terrible recent news, despite all of its troubles Best Buy is still the largest specialty consumer-electronics store in the world.  The company’s size hasn’t been much help in the past few years.  The company has lost a considerable amount of business to tech companies that sell their own merchandise like Apple and online merchants like Amazon.com.  As a result Best But has lost billions of dollars, laid off hundreds of employees, and closed many of their retail stores.

All of those factors helped contribute to the general shock from people on August 6th when Richard Schulze, Best Buy’s founder former chairman, made a bold offer to Best Buy and make it a private company.  Here are the basics of the deal:

-Schulze offered to acquire all of the common stock of the company for $24 – 26 per share in cash (shockingly 36 – 47% premium to Friday’s closing price)

-Schulze stepped down as CEO in 2002, but in 2011 was named along with three other Best Buy board members in a shareholder suit because of alleged illegal insider trading.

-Even though Schulze is no longer the chairman of the company, he still is the company’s single largest shareholder (he owns 20% of the company).

-Schulze is offering $8 billion for the company, although some industry insiders believe that deal should more realistically be around $10 billion because of all the debt the company has acquired over the years.

The timing, ambitious offer, and general history of Schulze has helped catapult this story to every business blog’s front page.  Schulze could be rightly blamed for the company’s demise in the first place.  During his chairman days he failed to make vital changes to company’s retail focus that could have saved them, and since the end of his chairman days he’s been accused of some serious crimes.  Even though Schulze has had his considerable share of troubles over the years, he also was the man who helped make the company into a retail giant.  Regardless of the outcome it will be a story to watch closely, the end decision could change the way business restructure

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