Archive for June, 2009

When the world’s largest public corporation (and largest private U.S. employer) tinkers with its highly successful business model, it’s hard not to take notice.

According to Wal-Mart executives who recently concluded a shareholder meeting, a recession is no time for wimps.

And it’s no time to rest on one’s laurels, even if the laurels include hitting the $400 billion mark in sales for the first time during its last fiscal year, according to a New York Times story.

Sales have been robust for the retailing giant during this recession, but the company’s head honchos have set out to build long-lasting relationships with its new, more affluent customers. Many of them set foot inside a Wal-Mart for the first time during this recession seeking refuge from higher prices elsewhere, and Wal-Mart’s betting that the sea change in consumers’ attitudes about spending will be a permanent one.

The company’s retention strategies include a new store design and remodeled layout that would make shopping — and checkout — a more pleasant experience. This means wider, more easily navigated aisles with lower shelves, as well as expanded food and electronics departments, two product categories that are selling briskly. The most popular items, including groceries, pet supplies, health and beauty goods, and baby products, will be located closer together so customers don’t have to schlep all over the store. There’ll be fewer brands, and the take-out food and deli areas will be relocated closer to store entrances to accommodate customers who want to eat on the go.

While many smaller businesses have already closed or are struggling to stay afloat, Wal-Mart has leveraged its massive buying clout to deliver on its mantra of low prices. (“Save Money. Live Better.”)

What’s your take? Does this bode well for consumers?

With the unemployment rate flirting with 10%, personal and commercial bankruptcy filings are again spiking higher and are projected to reach 1.5 million this year, according to a USA Today report June 4.

Personal bankruptcy filings occurred 6,020 times a day last month, not quite as bad as the 2 million filings in 2005, but startlingly higher than 2008’s 1.1 million. Corporate bankruptcies are occurring at the rate of 376 a day, compared to 255 a day in May 2008.

According to USA Today, Nevada, Michigan and California had the largest increase in bankruptcy filings per capita last month, higher than anywhere else in the nation. (Think real estate bust and ailing car makers.)

Bankruptcy laws were rejiggered in 2005 to reduce abuse of the system and make it harder for individuals to file for bankruptcy. But rising joblessness is putting the squeeze on many families, who then follow a predictable downward spiral of exhausting savings, depleting retirement accounts and turning to credit cards to pay the bills before resorting to the worst-case scenario — bankruptcy.

What’s the best defense?  Follow these strategies to protect yourself if you fear a job layoff could happen to you.

Consumers are still stubbornly clinging onto their hard-earned dollars, so much so that marketers of many national brands are working harder than ever to convince consumers it’s still worth parting with them.

Procter & Gamble, the New York Times reports, plans to selectively reduce prices on brands it believes are perceived as being expensive compared to its rivals.  But it will also try to position its products as being a better value. 

Consumers, we’re told, are looking more closely at the spread in prices for different brands offering the same product and making individual choices about what’s best for them — the dirt-cheap brand, the middle-of-the-road brand or the premium brand.

As the Times pointed out, “value” means different things to different people, and people may differ in their willingness to pay a premium for value for certain purchases.

It reminds me of the old L’Oreal hair coloring commercials that justified the higher price with the tagline, “Why? Because I’m worth it.”

Some might insist on paying more for good-quality clothing, while for others it’s a top-of-the-line plasma TV. I guess it really comes down to personal priorities and what’s important to you.

 Are there certain high-end brands you’re still willing to pay extra for, or has the recession put all things on the table?

We’ve all heard the ads from companies that claim they can help you settle your outstanding debts for far less than what you really owe. But as with most things that seem too good to be true, it turns out that these claims are too.

Many consumers who find themselves trapped by debt are lured by these advertised promises to reduce your debt burden, sometimes by up to 75 percent. In return, the companies require an upfront fee. However, these fees can turn out to be rather large, depending on the size of the debt, and with payments required in advance, there’s little incentive for the companies to follow through on their promises.

Now, New York Attorney General Andrew Cuomo is calling many of these debt-settlement companies out on their empty promises and shady practices.  He’s subpoenaed fee-structure records from 14 debt-settlement companies and one law firm.

“Today, millions of hardworking Americans are finding themselves imprisoned by debt. In response, a rouge industry has stepped in, offering consumers false hope, charging tremendous fees, and leaving them in a worse financial situation,” Cuomo said in a statement to the press.

But consumers need to take responsibility to protect themselves before getting involved with disreputable companies in the first place. The best way to protect yourself: Read the fine print! Know what you’re getting into before you agree to anything or pay one penny.

Attorney Gail Hillebrand told MarketWatch that consumers should steer clear of any company that requires payment upfront. She also warns consumers to avoid doing business with companies that tell customers to stop paying off their debts while the company is in the negotiation process. If you stop paying, she says, you’re only setting yourself up for harassing phone calls from collection agencies and the very real possibility of lawsuits — not to mention significant damage to your credit score.

Instead, Hillebrand says you should contact creditors directly to see if you can work out a payment plan before you’re in too deep. Credit counseling is another avenue to explore before jumping on board with one of these for-hire companies, because it has the least impact on your credit rating.

While the 30-year fixed rate mortgage loan has long been the traditional choice of homebuyers, recent data show a growing trend by home shoppers to opt for a 15-year mortgage.

The number of 15-year mortgages rose by 43% in February compared to the previous month; in dollar terms, 15-year mortgage loans more than doubled from February to March, and this pattern is expected to continue amid the current refinancing boom. 

What’s the allure of the 15-year mortgage? Homebuyers may be experiencing a growing abhorrence of debt, understandable in the current recession, and want to pay off their debt as quickly as possible. That’s a good thing, because it sets the stage for disciplined mortgage holders to enjoy their retirement days free of mortgage debt.

Still, the 15-year mortgage is not a slam-dunk decision for everyone, since 15-year mortgages will command significantly higher monthly payments compared to a 30-year loan at the same interest rate. In the long run, though, the 15-year mortgage holder would pay $194,000 less in interest over the life of a $400,000 mortgage than on a 30-year loan, according to a New York Times story on the subject.

In the New York Times example, a borrower taking out a $400,000, 15-year loan at 4.375% would have monthly payments of about $3,034 a month, compared to about $2,056 a month on a $400,000, 30-year fixed-rate loan at 4.625%.

Taking on the higher interest payments of a 15-year mortgage also carries added risk should you lose your income. Indeed, some economists predict we’ll soon see a “third wave” of foreclosures as many of those with good credit and prime loans lose their jobs. (The first wave was foreclosures induced by speculators, and the second wave occurred when low-interest introductory rates expired and the rates shot higher, resulting in prohibitively expensive monthly payments.) 

That’s why it puzzles me to see consumers willingly take on such added risk in a climate of continued high unemployment.  There’s a perfectly workable alternative that allows them to pay off their mortgage as quickly as they could with a 15-year mortgage — but without the greater burden they’d face if they were laid off.

Simply take out a 30-year mortgage, but make the higher payments you would make as if it were a 15-year loan. This way, you have the flexibility of stopping the higher payments in the event you lose your income; when your income returns to normal, you can resume the higher payments. The only shortcoming here is that you won’t benefit from the lower interest rate associated with a shorter-term loan. Still, assuming you held onto your job for the duration and that you have the discipline to continue the higher payments, you’d succeed in paying off your loan in just 15 years, with built-in flexibility and safeguards. (Just make sure there are no pre-payment penalties in your loan contract.)

In the end, it’s an individual decision that balances the value of the savings you’d gain from the lower rate of a 15-year loan versus your confidence in your job security and how things would go if you lost your job.  It’s your call.

Have you ever considered why you bank with Chase or Bank of America instead of your local community bank or credit union?

Now might be a good time to reconsider your banking habits, since we keep hearing how lending has dried up at many of the big banks. According to a recent New York Times story, the nation’s 8,500 community banks have plenty of money to lend and are itching to supply borrowers with needed cash, if only they could find them.

What’s the big difference between a bank like Citigroup, the world’s largest financial services network, and your local savings and loan? For one thing, community banks have come out on the other side of the recession in pretty good shape. That’s because they mostly steered clear of such exotic financial instruments as loan securitizations and credit-default swaps and instead stuck to the basics.

Consider the philosophy of Rusty Cloutier, CEO of Lafayette, Louisiana’s MidSouth Bank, as told by the New York Times:

Cloutier says he believe his job as a banker is to know who runs a business well and thus may survive a downturn. Community banks are well equipped to make that kind of judgment because, as clichéd as it sounds, they really do know their customers. “If a guy owes you seven or eight million dollars, you better know everything there is to know about him,” Cloutier [said]. Cloutier knows scores of people just from coaching local basketball, baseball and football teams. Like most community banks, MidSouth sponsors a long list of organizations and causes; the shelves in Cloutier’s office are lined with awards from civic organizations. And because community banks often sit on the board of nonprofits and local businesses, they know their local industries.

The mega banks, on the other hand, make loan determinations based on mathematical models and mainly measure creditworthiness based on income and a look at the consumer’s credit score.

Why do consumers continue to bank with lenders who accepted billions in taxpayer bailout dollars after their greed and widespread abandonment of standard lending standards dismantled the global monetary system? Many of these same banks are now trying to bilk yet more money from responsible credit card borrowers before more consumer-friendly laws go into effect next year.

As the Times points out, the five largest American banks (that would be J.P. Morgan Chase, Bank of America, Citibank, Wachovia, and Wells Fargo) control 40% of all deposits, yet community banks still make 43% of all small business loans under $1 million. Significantly, less than 1% of all community banks have failed since January 2008.

Simon Johnson, a former chief economist at the International Monetary Fund, said our financial system would be healthier if we abandoned the mega banks in favor of a network of regional banks and community banks, the Times reported.

Meanwhile, back in Lafayette, Louisiana, Mr. Cloutier says that “trying to make a loan today is like trying to feed my 7-month-old grandson green peas.”

All I can say is that if we all act like sheep, we’ll continue to be led around by a halter and collar. Let’s connect the dots between what we read about in the news and how it affects our everyday financial lives. Then let’s decide not to condone or contribute to the mess that big banks have gotten us in by continuing to give them our business, whether it’s in the form of a loan, checking account or credit card.