Are We Asking to be Fooled by Prices?

JCP, coupons, & shopper psychology- NYT

Ron Johnson, J.C. Penney's chief executive, left recently due to what some might call a lack of knowledge about the Penney's customer.  The article references a Penney's shopper named Tracie Fobes who, like many, get a thrill from using a coupon to get a great deal.  It is a rush for shoppers like Tracie to hunt down a deal, go out of their way to where they will get the best price, and hand over a coupon in order to get the best discount possible.

See the current JCP stock price here.

Johnson stopped the practice of offering coupons and sales in J.C. Penney and as a result, saw sales drop precipitously and was accused of not knowing his customers.  Penney has recently reversed the policy and is back to maintaining its usual prices, only to slash them and offer coupons to shoppers.  While customers see the red slashed prices and see the sale signs and feel good about them, the article points out that customers of stores like J.C. Penney are not actually paying less for the products they are purchasing.  Otherwise, how could Penney stay in business, much less turn a profit?  The chain has combatted this by simply continuing to raise prices and then discount them through promotions, sales and coupons.

And customers are used to using coupons and promotions to shop for the best deal.  Walmart (click WMT for current stock price) is one of the select few retailers who can pull off having 'everyday low prices.'  Consumers are so used to waiting for deals and waiting for that coupon in the mail that to take that away from them, reduces their desire to go to those stores.  The consumer no longer feels the same satisfaction out of their purchase because buying something at a price that is low, but is not technically 'on sale' is not the same as buying something with a high price tag that they pay the same low price for by presenting a coupon at the register.  Having one, generically low price, the article points out- only works assuming that consumers have a decent idea of how much a product ought to cost.  In many cases, consumers do not have any idea so this strategy is not effective.

Personally, I very much enjoy getting a great deal.  Everyday low prices are great, but if the price is low to begin with, the perception of quality may be different than if the price were higher, then discounted.  Clearly, there is a lot that goes into pricing products and it is imperative that retailers pricing strategy takes into account the feeling that consumers get from using a coupon or simply feeling like they are getting a good deal.

Easier Money for Mortgages

Signs of Easier Money for Mortgages- NYT

Over the past 2.5 years, I've lost count of how many times customers have made a comment to the effect of "What are you going to ask from me next, my firstborn child?"  This article, from the New York Times, gives me hope that perhaps I will be hearing less of this kind of remark in the coming months and years.

Click here for current mortgage interest rates courtesy of Bankrate.com.

Banks are beginning to loosen up on their strangle-hold of credit, tinkering with one aspect of a loan at a time.  For example, if someone has a less than stellar credit score, but has an excellent income, they may be willing to lend at a higher loan to value percentage.  Or conversely, if a borrower has a fantastic credit score, but can only put down 5% on the property they are purchasing, again- the banks these days are willing to work with that person.  Or at least consider it.  

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Mortgage requirements are still quite rigorous but there are signs that banks are becoming just a bit more flexible... for people they consider qualified.  The piggyback loan (a first mortgage and a line of credit attached) allows borrowers to obtain more than 80% financing while avoiding the mortgage insurance that they would otherwise have to pay for going over 80% loan to value.  Another means of working with the customer (more extreme in my opinion) is that offering by NASA Federal Credit Union and Navy Federal Credit Union- these two institutions are offering 100% financing to some borrowers in markets that they consider to have stabilized or where home values are on the upswing.  In my own experience, the only 100% financing that I see is for VA loans.  

It is a great thing to have more options available, especially as fees for FHA (Federal Housing Administration) loans inch higher. The upfront mortgage premium (which can be rolled into the loan amount) is 1.75% and the mortgage insurance premium (the monthly add-on for mortgage insurance) rose from 1.25% to 1.35% as of April 1st.  The biggest change in my opinion, is the fact that the mortgage premium used to only be paid until the loan amount was less than 78% of the value of the home.  As of April 1st, in most circumstances, the mortgage premium is due for the entire life of the loan.  This greatly increases the cost of the loan over its life and may be a real game-changer.

I look forward to seeing where banks go from here... will they continue to loosen the reigns a little bit?  Will the housing market continue to pick up?  Will the refinance market die out?  These questions are extremely relevant to my day-to-day activities and I will continue to keep a close eye on them.

Big 4 Cell Carriers Fighting Over Prime Airwaves

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Control of the airwaves- upcoming auction - WSJ online

The top 4 cellular carriers in the US- AT&T, Verizon, Spring and T-Mobile are fighting over the available airspace in the US.  The matter of controlling airspace is becoming increasingly more important to each of these companies as Americans become more and more dependent upon their individual mobile devices, both for personal use and for work.  

The Federal Communication Commission is planning to auction off airspace, currently used by broadcast television companies, to wireless carriers.  The issue is which company or companies will be permitted to acquire this valuable space.  The airwaves in question are lower frequency waves that are ideal for transmitting data over long distances, particularly in rural areas.  The number 3 & 4 carriers currently have very few low-frequency airwaves making their acquisition of these airwaves even more important for them.  As it stands now, they are not able to compete to the best of their ability.  If they are allowed to at least bid on the low-frequency airwaves, it would open up a new realm of competition to the smaller carriers.  There is, of course, also a benefit to the consumers as well.  As a consumer, I want as many carriers and as many options out there.  It is to my benefit to have multiple carriers competing for my business and as a result, allowing the consumer the best price possible.  I for one, would not argue with that!

More information about this topic can be found here:

http://www.startribune.com/lifestyle/202591521.html?refer=y

Beating the Bond Market Through Managed Bond Funds

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Beating the Bond Market- WSJ

Over the past year, more than $230 billion has poured into actively managed bond funds.  A mere $63 billion has been invested in indexed bond funds during the same time period.  So why is so much more money being put into managed funds versus index funds?  Last year, 79% of intermediate-term bond funds beat their comparable index fund.  The difference is rather significant- about 1.8 percentage points over the past 12 months.  The long-term managed bond beats the index fund by 2.5 points.  

In the past, bond fund managers struggled just to keep up with the indexes.  Beating them is a boon that no one expected.  That said, however, taking a look at historical returns for the two, should point out to anyone that the managed funds probably cannot beat the indexes forever.  

So why are managed bond funds able to beat indexed funds?  The article points out that indexes don't make an effort to buy the best-performing securities at the time or to avoid the worst... their goal is to mirror everything that is available in the market and to keep prices extremely low.  When a hot bond fund comes to the market, the managed funds can buy into it and take advantage of what is hot at any given moment.  The index fund just keeps on mirroring the index.

It is certainly worthwhile considering the risks before putting all of your money into the managed funds.    With the increased return of the fund, of course, comes an increased risk.  Taking history into account, you may just decide the risk is not worth it and that an index is still the way to go.

For more information about bond funds and their specifics, Fidelity.com provides some interesting information.  

President Obama's Effective Tax Rate

WSJ- Obama Tax Rate

The President's effective tax rate for the 2012 tax year was 18.4%.  The Obamas paid $112,214 in federal income taxes on adjusted gross income of $608,611.  In 2011, the first family paid an effective tax rate of 20.5%- a higher rate due to the higher amount of royalties coming in from the president's book sales.  

The release of the president's tax return information comes at a time when debate about the amount of taxes the wealthy ought to pay begins to heat up again.  The president is making another push for a "grand bargain" on deficit reduction.  On the left side of the aisle, "democrats believe any deficit-reduction package would have to include significant new federal revenues from increased taxes on wealthy people."  Meanwhile, republicans take an opposing viewpoint... they believe that any further major deficit reduction measure has to come from reducing the level of spending done by the federal government.  In particular, they want to rein in the spending on entitlement programs like Medicare and Medicaid.

Epidemic of Tax Return Identity Theft

WSJ- tax returns

Identity thieves are stealing thousands of tax return refunds that should be going to deserving tax payers.  The IRS has no reason to question the fraudulent return until... the real filer goes to bat for themselves when their return is rejected because one has already been filed in their name.  This scam is becoming increasingly more common and at this point is costing taxpayers an estimated $5 billion per year.  And the problem is likely to continue to increase as the trend of e-filing grows.  The IRS states that tax-fraud cases of identity theft have increased by 650% since 2008.

The frustrating part for the prosecutors tasked with bringing the scammers to justice is the fact that the IRS will not provide the most key piece of evidence to the prosecutors in these cases- namely the fraudulent return itself.  Federal authorities and IRS criminal investigators, rather than local law enforcement, handle these types of cases and because of the volume of tasks that they must handle, it can take many months for a tax-fraud case to be resolved... with the victim being stuck in limbo the entire time.  Whatever the resolution, one must be found soon as a recent report by NBC News pointed out that even after a taxpayer's account is flagged when their identity is stolen, some continue to be victims of identity theft year after year.

Online Sales Tax On the Horizon?

Amazon & Sales Tax- wsj

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As is evident from Amazon's huge success as an online retailer, millions of consumers prefer to shop via Amazon.com for millions of products.  One of the reasons Amazon is so popular is because it offers, well, everything, and as an online retailer, charges no sales tax.  This has long been a point of contention for brick & mortar retailers as not only do they have to compete with Amazon's already discounted prices, but then charge sales tax on top of that.  A two-fold cost increase to drive more customers to online retailers.

Amazon's advantage, however, is being chipped away at gradually as the issue of sales tax for online retailers gets more and more attention.  It will be interesting to see where this issue goes and how it will effect e-commerce and the retail industry as a whole.