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THE S&P 500 WAS HUGGING 1100 as economic expectations were slowly brightening near the turn of the year, a year in which a bountiful market rally began off a panic-enshrouded March low, a rally that featured no bruising setbacks along the way.
The Fed was keeping money easy, and was quite open about its intention to do so for quite a while. The dollar was on the defensive, but not in free fall. Big companies were lean, cash-rich and protective of profit margins, and would soon embark on another round of stock buybacks and mergers greased by cheap financing. The U.S. economy was poised to post another post-recession quarter of growth. Indeed, the fourth-quarter number topped 4%, which barely impressed a stock market that had already priced in such a rebound. The market turned away from pure momentum stocks and became more selective.
In early February, a language change by the Fed meant to signal that the end of free money was in sight caused a selloff in stocks. But on the whole, the market stayed firm through the first quarter, registering another modest push higher before succumbing to a corrective phase that lasted months and at times looked as if it would build toward something nastier, but didn't.
No, this isn't a prediction of how 2009 will give way to 2010, but rather a recounting of 2003 seguing into 2004.
There are no perfect historical analogies when handicapping the start of a new year. And there's no denying that the differences between today and late 2003 could fill a column and more.
The crisis and bear market that preceded this rally was deeper, broader and more damaging, to both asset values and investor psychology. While 2003 and '09 were both liquidity-propelled melt-up markets, the earlier experience pulled investor sentiment and participation toward more bullish levels than this one has so far. Fund flows into stocks had started to pick up in late 2003, just 3[frac12] years after the all-time market peak, but haven't this time. The public today is more reluctant -- if far less so than it was only a couple of months ago -- based on survey data. We may not get to the point of excitement this time unless the market keeps lifting, given the depth of the economic trauma just endured.
The year 2004 was the fourth annum of a presidential term, one focused on war and tax cuts, not the second year of one focused on emergency economic measures and health care. Yet certain patterns resemble those in the history texts. Just as early this year, reminiscences of the massive 1938 rally were gaining traction among some market thinkers -- and served as a decent model of the year's action -- so some are looking back to 2004 for guidance. That year, the economic and earnings data arrived as hoped, yet the tape was frustrating for most, as the good news always came with a caveat and the market didn't catch a tailwind until the fourth quarter.
That would neither be wonderful nor terrible for nervous investors today.
TRACKING INVESTMENT COMMENTARY and markets means being forever reminded of how much emotion can take hold of markets and how many ways analysts can slice and serve data.
HSBC strategist Garry Evans has examined how a country's stock market performs in the year it hosts the quadrennial soccer World Cup, which in 2010 will be played in South Africa in June and July. With notable consistency, the local market tended to handily outperform world markets in the first half of the year, then badly underperform in the second half, despite there being no discernible effect on country GDP. Since 1966, only the U.S., in 1994, bucked the pattern, perhaps for lack of domestic enthusiasm about the Cup. It's worth noting that Evans didn't cook up this analysis to serve his entrenched view. He recommends that investors underweight South Africa.
THE FALLOUT FROM TIGER WOODS' acknowledged extramarital affairs might benefit the bottom line at Nike, Woods' prime sponsor, if it convinces the maker of athletic shoes, clothing and gear to curb its costly endorsement deals with top sports figures and teams, one Wall Street analyst says.
"Regardless of how corporate sponsors respond to this specific controversy, we believe the trend away from high-profile, multimillion-dollar celebrity and athlete endorsements has been growing for some time, and 'Tiger-gate' could be an inflection point," Credit Suisse's Omar Saad wrote last week in a research note entitled "Tiger Woods Fallout: Another Nail in the Coffin of the Expensive Endorsement Era."
Saad calls the Woods situation the latest embarrassment for corporate sponsors who've paid a lot for the endorsements of the likes of quarterback Michael Vick, swimmer Michael Phelps and golfer Michelle Wie that have "generated questionable results." Vick, now with the Philadelphia Eagles, went to jail for his involvement with illegal and grisly dog-fighting, and the highly touted Wie has been a bust, winning just one minor tournament on the women's professional tour. And a photo appearing to show Phelps using marijuana made the Internet.
Saad's view is that athletic sponsorships aren't worth what they once were because cameraphones, blogs and paparazzi, combined with a ruthless gossip business, have made it much tougher for celebrities to hide indiscretions. "Most importantly, consumers intrinsically understand that these endorsements go to the highest bidder and do not necessarily reflect true brand loyalty," he observes.
Woods, for instance, promoted Buick until General Motors' financial woes ended the relationship in 2008. Even before then, many wondered about the value of that endorsement because it was hard to believe that Woods was truly a fan of staid Buicks with their generally much older base of drivers. (His famous accident occurred in a flashy Cadillac Escalade, a vehicle beloved by rappers, movie stars and pro athletes, not the kind of folks who spend weekends watching the U.S. Open.) And what was Woods' connection to Accenture, the international consulting and outsourcing firm?
Woods now is poison for sponsors. Accenture has dropped him, Gillette has put him on "hiatus" and watch-maker Tag Heuer is scaling back its use of him. But Nike (ticker: NKE) is sticking with Woods -- at least for now -- in a lucrative endorsement deal that may pay the world's No. 1 golfer $30 million annually, Saad estimates. A Nike spokesman wasn't available for comment.
Nike and Adidas (ADS.Germany), the German maker of athletic footwear and clothing, are fierce rivals for endorsements by individual athletes and teams, particularly outside the U.S. "While many believe that Nike and Adidas need to bid aggressively for sponsorships, we think the reality is that they determine the market price," Saad wrote, adding that he thinks the Tiger mess will cause them to "realize that they are systematically overpaying...especially given the growing risks."
Nike alone may spend more than $1 billion annually, or 5% of its $20 billion in sales, on sponsorships. Saad argues that Nike should prune its list of endorsements by renewing only 75% of expiring contracts, and that it should cut its payments on new contracts by 35%. If Nike were to do this over three years, the estimated life of the typical endorsement contract, its profits could rise by 33 cents annually, or by $1 after three years. That's not trivial, relative to Nike's projected earnings of $3.70 a share in its current fiscal year, which ends next May.
In the end, the Woods scandal could be one of the best things to happen to Nike and its rivals in recent years. Are you listening, Phil Knight?
E-mail comments to editors@barrons.com
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