Sunday, February 3, 2013

Investment Thoughts on the Super Bowl - Including Post-game addendum

The  Super Bowl is a uniquely American Event. Outside of the US, the only equivalents that I can think of are the World Cup for football (what we in the US call soccer) and possibly the Melbourne Cup race (for thoroughbred horses) in Australia. To place the Super Bowl’s importance in the American context, I have been told that over 170 million will watch the game this year, or about 50 million more than voted in the last Presidential election.

My long-term readers may remember that last year I blogged from Shanghai, after watching the game with a single color commentator and very few commercials. I missed the commercials, which I will discuss in a moment.

Two other points of disclosure are needed before I discuss my investment thoughts. First, as indicated many times in the past, I search for investment implications of just about everything to which I am exposed. The second, is that for many years I have had the privilege of working with the National Football League and the NFL Players Association on their defined contribution plans governed by their collective bargaining agreement.

Comparisons between professional football and institutional investing

Both efforts require a high level of training, energy, integrity, risk management, and the recognition that there is an end to every game, but also there is always the next season or market. The role of analysts is to review all relevant past history to determine potential risks and rewards generated in the past. In last week’s post I listed 19 different measures that I look for in examining different stocks and funds. The 19 measures are far from exhaustive. (The key point to the list is they are not directly imbedded in any ETFs that I know.) Recognize that both football analysts and securities analysts are essentially historians. Putting these historical evaluations to work is the job of the quarterbacks or portfolio managers who need to update the history based on game day evaluations and the ability to see new opportunities and threats. In the end the quarterbacks and portfolio managers must execute both the planned plays/options and the broken ones. The coaches or chief investment officers need to provide that the right people are on the field or on the right desk, as portfolio manager, analyst, trader or administrator. The owners of the teams and the investing institutions need to have a long-term view as to the commercial success of their ventures in order to have enough of the right resources to build their franchises for the long term.

Investment inputs from the sidelines

One very successful hedge fund manager looks (as I do) at the Super Bowl television commercials very closely each year. He has a view that those sectors that predominate are often not good investments in the ensuing year. This year he believes that snack food and drinks fill that category. During the periods of market uncertainty many portfolios built up their positions in consumer staples. If we have any sort of the continuation of the January rise, where Mid and Small Cap funds gained 6 and 7%, it is likely that money will flow out of consumer staples. One under-owned area other than financials is problem-solving technology. The NFL is considering utilizing Kevlar and other approaches to improve the players’ helmets and reduce the impacts to the brain of concussions. This is a big problem, but similar to other problems that technology can help.

Occasionally Super Bowl ads can have important strategic implications. My favorite is the 1984 “attack” ad by Apple for its introduction of the Macintosh computer against the unidentified grey competitor of IBM. While the commercial may not have helped Apple, the implications of the ad eventually led to IBM selling its PC business to Lenovo who appears to be making a success of it.

One of the conundrums currently facing investors is the rate of inflation. The Federal Reserve believes that there is little inflation present today. One of the realities of this year’s game is that an “Okay” ticket at list price costs $950, up $50 from last year and less than half of the price that scalpers are offering for tickets. This is just one small example of government data being out of date or inaccurate. Recently we have seen significant corrections of past data from many US cabinet departments. One gets the impression that the current group in Washington is relying on its out of date internal numbers without having enough contacts with the real world outside of the Beltway. At some point this condition is likely to cause policies to be abruptly changed.

Can the January performance continue?

In general, our clients were relieved with their investment performance for 2012 and will be thrilled by the January, 2013 results. If the 6%+ mutual funds’ gains for the month would continue to be compounded over the year, their accounts would just about double. This is very unlikely considering they had gains in the teens to low twenties for 2012. Perhaps more important is that a multiyear expansion is a risky bet. Any series of numbers is fair game for out of-the-box comparisons. That great sports paper, the Financial Times in their Saturday “Lex Column” had a note suggesting a three year hangover. In 2000, which was the first time the S&P 500 broke 1500, the final score of that year’s Super Bowl was 23 to 16, or an aggregate of 39. In the following three years the S&P 500 Index declined 39%. The next time the S&P 500 got to 1500 was in 2007, when the Super Bowl score was 29-17 or a combined total of 46, and the index dropped an amazing 47%. As we are getting to the 1500 level on the S&P 500, the FT would like to see a scoreless tie. While this aside is amusing, one should remember that various fiscal problems facing much of the developed world are not being fundamentally addressed and to use the vernacular, are being “kicked down the road.” I would suggest that a wise coach needs to bone up on defense for the coming markets while enjoying the scoring opportunities today, even as the press, the pundits, and the central banks suggest the water is fine to plunge into. As a basic contrarian I doubt it. 

Which team will win?

Because of my professional responsibilities, I must remain neutral. I do hope my team, the on-field officials in their striped uniforms, call a great game this evening. Go Zebras!

Post-game addendum:

Using the FT’s “Lex Column” math, the final score of Baltimore 34 - San Francisco 31 would suggest that from these levels the S&P 500 could drop 65% over the next three years. I do not believe that the stock price penalty will be anywhere close to that decline caused by the markets' recognition of the manipulations caused by the central banks at the bequest of the politicians.

The second half had two elements that we could translate back into our investment world. The first was the power failure that put half the stadium in darkness for about half an hour. This was an outside technological failure. Almost every major marketplace over the last several years has experienced something similar. In our interconnected world, with aging electrical grid systems as well as inadequate attention to our infrastructure, we could be shut down for awhile. (Just think of super storm Sandy and what it did to a relatively small part of  New York and New Jersey.) Just as the players and the crowd at the Super Bowl did not panic when this problem happened, we shouldn’t. The second element is that we should always be alert to the possibility of reversals. At the end of the first half, the Baltimore Ravens led by 21 to 6. As noted the final score was Baltimore 34 to 31. This meant that in the second half the San Francisco 49ers were about twice as productive as the Baltimore Ravens, 25 to 13. Market participants should be aware that rallies off bottoms can be very sharp and could set up new highs if their energy is not sapped by the rise.

In the US, the two financial commercials that I think worked well were Prudential’s on the need to invest for our longer lives and E-Trade on the need to invest wisely.

Thus, we can learn a lot about investing by watching the Super Bowl.   

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