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Chart of the Day: Fracking Downgrades

The US economy likely grew at its fastest rate since the start of the expansion in 2009, yet earnings forecasts are now falling at the fastest pace since 2009.  The catalyst: fracking oil prices.

Fracking Downgrades

While all eyes remain on European deflation, don’t be surprised to see US headline inflation post a negative print in the coming quarters. The implications for global yields and asset prices could be significant.

Posted in Macro.

Selling Sex, Seduction & Immigrants

Chrysler and the U.S. auto industry have been on the mend since the financial crisis (see Imported From Detroit).  Europe’s economy, on the other hand, has remained stagnant. As a result, Fiat announced its return to U.S. with the Fiat 500. Although the brand has remained popular in foreign markets like Latin America and Europe, it has been effectively dead in America since Tony’s Departure in the 1980’s. Initial efforts to revive the brand proved challenging. Fiat lacked a broad-based marketing strategy, received mixed reactions and generated little buzz. Until Francois was handed the keys to the brand.

Francois has set the tone and style of Fiat’s U.S. marketing ever since. “We have a small car selling in a niche segment, so we can’t pitch it here the way we pitch a mainstream brand in Europe,” François explained to AdWeek. “We cannot pitch it as a car you need, but as a car you want. It’s not a commodity, not mainstream. It’s a great design. It is cool. The language is youth, fun, trendy.”

Fiat’s return to the US was kicked off in style with Immigrants (above) – a 2012 commercial featuring Fiats driving from Italy to New York. The brand’s origins played into subsequent ads. Francois took it one step further with Italian Invasion (below), marked by ample cleavage and espresso.

In addition to television spots, Fiat has gone digital to reach a younger audience with content that “sometimes does not fit network standards and practices.” Leveraging this Italian flare, Francois created the Seduction series, (my personal favorite for soon to be obvious reasons). Seduction (below) made its debut at the 2011 Los Angeles Auto Show on a shoestring budget and was then posted to the brand’s YouTube site.

Without having ever been aired on television or cable networks, the montage reached 20 million views. Social media is stoking Fiat brands, in conjunction with partnerships with celebrities like Dr. Dre, Ziggy Pop, Zac Brown and Lenny Kravitz.

The commercial first aired on television during the 2012 NFL Championship Game. Seduction cast the Romanian Supermodel, Catrinel Menghia, as the scorching personification of a Fiat 500 Abarth and illustrates what happens the first time an average guy encounters one. The spot ends with the message, “The Fiat 500 Abarth. You’ll never forget the first time you see one.”

For the follow-up, Topless, a scorpion pinches off Menghia’s bikini strap with its pincers as she’s innocently sunbathing on the beach. Selling cars based solely on gas mileage and safety features can fall flat per Francois, “and the last thing you want to do is sell a commodity. We’re selling sex. We’re selling passion. Make people lust after the product.”

It would appear that Francois is getting the job done. The entire 2012 run of the Fiat 500 Abarth sold out despite expended production.  Sex sells.

Posted in Security Analysis.

Imported From Detroit

The Chrysler Corporation was founded by Walter Chrysler in 1925 and remains one of the “Big Three” American automobile manufactures today. While the brand remains headquartered in Auburn Hills, the company is owned by Italian automaker Fiat, once derisively known as Fix It Again Tony.

A  Frenchman named Oliver Francois crafts the company’s clever marketing campaigns and appears to understand our culture better than most Americans. Judging by the results – Chrysler’s domestic market share has marched steadily higher from 8.7% in March 2010 to 13.2% today – perhaps this fresh perspective is just what the American company needed.

Chrysler Growth

Chrysler has grown at four times the pace of the rest of the industry this year, topped off by a greater volume increase than all other automakers combined last month. Francois rejects marketing that dwells on features and price. His commercials make people talk. Bloomberg called him Chrysler’s Don Draper a few years back:

Chrysler may still hail from the Motor City, but Francois isn’t interested in selling cars the way Detroit used to. In a business that increasingly markets price, he’s using hip-hop music and evocative images to strike a chord with average Americans rather than simply glorify sheet metal. The famed $9 million, two-minute spot for the Chrysler 200 sedan that premiered at the 2011 Super Bowl featured rapper Eminem talking about Detroit’s rebirth but barely showed the vehicle. And a commercial featuring George Washington driving a Challenger to chase off British Redcoats sells the idea of freedom more than the muscle car itself. Explains Francois: “What we’re trying to do is to create, to reignite the American dream.”

The 50-year-old Francois, born in Paris, isn’t the kind of executive you’d find at General Motors. The Fiat veteran writes poems, spends his free time in recording studios, and was a fixture at red carpet events in Europe when he worked there. He also since 2009 has had the daunting job of trying to make customers see sophistication in Chrysler—the recipient of two government bailouts in the past 30 years—months before new Fiat-derived models hit U.S. showrooms.

The 2011 Super Bowl spot with Eminem and the Selected of God choir sparked a comeback wave for Motown. A year later, Eastwood delivered his “Halftime” pep talk and in 2012, Fiat’s Chief Marketing Officer, Olivier Francois, received two prestigious industry honors.

Francois was named the “Grand Brand Genius” by Adweek magazine and Advertising Age magazine named Chrysler Group, the “Marketer of the Year” for a series of advertising campaigns that resonated across America and lifted sales. “Halftime” reached millions online and spawned parodies on Saturday Night Live.

Francois’ Super Bowl success was followed by Farmer in 2013 which drew 20 million views on YouTube and critical acclaim. Most importantly, the ads sold cars. Ram’s market share jumped from 11.7% to 18.9% after “Farmer” and before “Halftime,” the Chrysler 200 sold 800 units a month. After the spot, it jumped to 6,000 a month.

While we wait to see what Francois has in store for this season’s Super Bowl, Chrysler has already followed up its commercials featuring Eminen, Oprah and Clint Eastwood with Ron Burgundy and the Dodge Brothers this year.

At last year’s Association of National Advertisers meeting, Francois described Ron Burgundy as a “timeless authority” on “how to stay classy.” The greater point about Chrysler’s marketing philosophy: “Breaking convention is what guides us,” said Francois. “We won’t make marketing as usual.”

Chrysler and Fiat no longer create commercials. The firm’s stories are bigger than commercials, and have helped build brand equity with consumers that Chrysler has historically lacked. Francois gets it. “It doesn’t matter if they stand close in the showroom,” he said. “It matters if they stand out in the marketplace.” As Ron Burgundy might say, Francois “has a voice that could make a wolverine purr.” We’ll take a closer look at who is purring in our next post on Fiat’s return to the US.

Posted in Security Analysis.

Fix It Again, Tony

Fiat has a long history in the United States, although that history has not always been particularly enjoyable for its owners. In 1908, the Fiat Automobile Company established a plant in Poughkeepsie, NY and began producing Fiats a year later, long before Chrysler opened for business in 1925. Sales grew through the 1970’s until Fiat earned the derogatory “backronym” Fix It Again Tony for the brand’s poor reliability and problems in the 1980’s. Consequently, Fiat left the United States in 1983 with a reputation for poor quality cars that has plagued the brand for years.

The company has been running scared from Tony ever since; but not anymore. Today, Olivier Francois, Fiat’s Chief Marketing Officer, calls Tony the elephant in the room. At last month’s Los Angeles Auto Show, he promised to retire that perception with the latest addition to Fiat’s brilliant marketing campaign. The Fiat 500X takes Tony head on. Both the 500X and the Jeep Renegade are built in Melfi and exported to the United States. The Fiat 500X is expected to arrive in U.S. showrooms next year. The commercial features Fiat’s skeleton in the closet. “The elephant in the room,” according to Francois. “His name was Tony, and he had to go.”

We’ve owned shares of Fiat since the London-based company listed in the US. Our research efforts, which began last summer, have focused on the company’s operations, management stewardship and brand values. Since then, “some” of us have developed a bit of a man crush on Fiat’s CEO, Sergio Marchionne, who was recently named Automotive News’ Industry Leader of the Year. In short, Marchionne is a stud and has a number of levers at his disposal to highlight the value of Fiat’s brands. But since this is a holiday week, I thought we’d have some fun looking at the company’s creative side before analyzing its operational track record. Stay tuned.

Posted in Security Analysis.

EBAY: Quote of the Day

From Larry Robbins’ at Invest for Kids in Chicago: “eBay is like a divorce. One is focused on a lifetime of shopping, the other focused on a lifetime of payments.” We think both will ultimately make attractive partners for potential suitors. As they say, beauty is in the eye of the beholder.


Posted in Quotes, Security Analysis.


I recently had the opportunity to spend some time with Don Yaeger. I’m embarrassed to say that before I did, I had no idea who he was! So for those in the same boat, by way of introduction, Don is a business leadership coach, a New York Times best-selling author and longtime Associate Editor for Sports Illustrated. He has done some fantastic work over the years working with The Great Ones, and made quite an impression. Accordingly, I’ve read more than a few of his books over the past couple weeks.

As a kid growing up watching the 85 Bears, I thought Walter Payton was invincible.  His autobiography offers so many life lessons I can only hope to pass down to our boys.

“Consistency is the most difficult thing to attain in life. Anyone can be good for a day, or a year. But can you be consistently great? That is so much more difficult. It requires a person to continue to work hard even after they have achieved success. It requires sacrifice, even after sacrifice is no longer required. It requires a hunger in a person that is about more than just making it. It is about staying there.”

For investors, Payton exemplified a trait we discussed in our Annual Letter. “The reasonable man adapts himself to the world. The unreasonable one persists in trying to adapt the world to himself.”  Payton was a reasonable man.  He was quick, but not fast.  If he ran conventionally, he may have failed conventionally.  Instead, he developed a stutter step to help him break long runs. Opponents didn’t know what he was going to do. They didn’t know if he was going to go straight, come right at them or stop. “If you break free and are running down the sideline, the defensive guy who has an angle on you is already calculating in his mind where he’s going to hit you. He knows where you are going to be at a certain time because he’s judging your speed.” So that’s when Payton would start his stutter step and change speed. When you do that they have to think and that gives you the edge to go right by him. It is a way of breaking long runs when the other player is faster than you.

The NFL could use more men of this character today. How many professional athletes could express this sentiment from Payton? “They paid me for football.  But I would have played for nothing because I had fun.” Not many, I’m afraid.  That said, we are still having fun at Broyhill, enjoying what we do and the people around us.  Although, perhaps not as much fun as the 85 Bears and The Superbowl Shuffle!

Posted in Letters & Links, Process, Quotes.

Herding: The Asch Experiment

Posted in Process.



Posted in Uncategorized.

The Role of Macro

Many fundamental “bottom-up” investors often denounce macroeconomic forecasts.  What may be less clear, is that this does not imply they are oblivious to macroeconomic developments. Count us in the camp with Third Avenue’s International Team who recently shared some insights regarding the role of macroeconomic information in the investment process:

Macro has two primary roles in our investment process. The first one is as a tool to determine the sensitivity of our investment theses to a variety of macroeconomic environments. This allows us to reject investment opportunities for which our thesis playing out would require a very specific set of conditions.

The second one is as a frequent source of investment opportunities.  Dire economic outlooks have indeed been one of our team’s most fruitful hunting grounds over the years. Troubling macroeconomic situations can easily shake investors (speculators) focused on the near-term outlook and paralyze those who require a high level of confidence in their ability to forecast the macroeconomic future. Truth be told, our habit of seizing opportunity in the face of dire macroeconomic circumstances has occasionally appeared foolhardy in the short-term. Yet, the Fund has made many profitable investments in this way in the past.

We couldn’t have said it better ourselves.  See also LatAm.  See also Scotland.  See also Mel Gibson, Braveheart.



Posted in Macro, Portfolio Strategy.

Chart of the Day: Peak Liquidity?

Source: Bloomberg, SG Cross Asset Research

Posted in Macro, Portfolio Strategy.

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