Dear Subscribers and Readers,
Important note: The following was written prior to the horrible events in London earlier today. We will discuss the potential geopolitical and economic implications of the London attack in this weekend's commentary.
We switched from a 50% long position to a completely neutral position in our DJIA Timing System on the morning of June 13th at DJIA 10,485. With the exception of the NYSE ARMS Index, most of our technical indicators are still too overbought. Yesterday's drop was very ominous - despite the fact that breadth (especially the number of new highs) held up relatively well. In fact, the 10-day moving average of the NYSE high-low differential is still lower than the late June high - which in turn is lower than the late February high, and which in turn is lower than the mid November 2004 high. The trend is lower highs still reign. Our position of a continuing correction and then a "blow off" rally sometime in the next two to four months is still very much in effect.
We have modified one of our boards in our discussion forum. The Central & Eastern Europe Board has now been changed to the Europe Board - accounting for the fact that our Western European subscribers represent our second most populous group by geographical region. This is a very fitting change, as I also believe the rejuvenation of Western Europe will be immensely important for the health of the global economy going forward in the next five to ten years. Moreover, my partner, Rex, and I will be discussing how to better organize our website going forward, especially our archives of commentaries and articles. Dear readers, please give us some feedback as to how you want our website to be organized going forward!
We first discussed the importance of "Brand Name Watching" during a cyclical bull market in our April 24, 2005 commentary - stating that "In a healthy, cyclical bull market, the shares of most of the biggest brand names or the fastest-growing brand names in America should be doing extremely well - i.e. the relative strength (vs. a major index such as the S&P 500) of most of these companies should be rising. At the very least, the share price of these companies shouldn't be falling." Readers who are not familiar with that commentary should back and at least skim through the article once again. Moreover, the main thesis of that article was constructed with Interbrand's Top 100 Global Brands in mind. Keep in mind, however, that this list was published on July 22, 2004 and is due for a further update later this month. There is no doubt that some notable companies will fall off the list, and that some new companies will make the list - possibly Google. For now, I believe our April 24th commentary remains very relevant, as the companies we are mostly looking at represents the most valuable, but also very stable brands.
Without further ado, let's go ahead and look at the number one brand name by value - that of Coca-Cola (KO). According to Interbrand, KO has a brand value of $67.4 billion - fully two-thirds of its total market capitalization. Moreover, its Coke bottlers aside, KO has one of the best business models around, as it is mostly a syrup producer and manufacturer and has a return to equity ratio of more than 30%. Like I said in our April 24th commentary, however, the more immediate point is the fact that KO (regarded as a growth stock at the time - just after the legendary CEO, Robert Goizueta, died in 1997) actually topped out in early 1998 at the same time the NYSE A/D line topped out - signaling the imminent end of the great secular bull market from December 1974 to early 2000. Just what is the price action of KO saying now? Following is an update of the chart that I posted in our April 24th commentary - a weekly chart of KO (along with relative strength vs. the S&P 500) dating back to January 2002:
The most recent bounce in the price of KO does not change our overall negative picture on the stock - as can be seen in our March 3, 2005 commentary on the stock discussing whether it was a valid value play or not (we concluded that it was not quite yet). Please note that the stock price is again below both its 20-week and 50-week EMAs - along with the fact that the 20-week EMA has bounced off the 50-week EMA and is now turning down yet again. While I do not believe the cyclical bull market has ended yet, the fact that KO is still struggling says to me that we would most probably have more downside correction to go before we can sustain a decent rally in the months ahead.
The second name on our list is none other than MSFT. While MSFT's share of the internet search market is still relatively dismal, they are certainly making inroads in other tools such as collaboration software. Most recently, MSFT has announced that MSN Virtual Earth will go live sometime later this summer - which is a direct challenge to Google Earth. Interestingly, I still have not been able to download my free copy of Google Earth yet. Even though Longhorn won't be released until 2006, MSFT is definitely not resting on its heels. That being said, what has MSFT done since our April 24th commentary? Apparently, not much:
Can this current rally sustain itself without the strength of the two most valuable brand names in the world? That's a good question, let's bring the third most valuable brand name into our discussion before we even try to make a conclusion. The third most valuable brand name according to Interbrand in their July 2004 study was IBM - a company which transformed from a computer company in the early 1990s to a born-again services/consulting company which is also one of the great outsourcing companies in the world. When we wrote our April 24th article, IBM was just coming off of a terrible earnings miss of 5 cents per share (released on April 14th). How has the stock performed since then, you may wonder? Surely, it has had at least a good bounce? The following weekly chart suggests otherwise:
The fact that a company such as IBM did not even manage a significant bounce in the late April to June rally suggests to me that investors are still very cautious - and that we will need a more significant correction ahead in order to sustain a "better-quality" rally going forward. This failure to rally is all the more important given that IBM shares actually offer pretty good compelling value relative to both KO and MSFT.
In our last analysis, we did not discuss the action of GE - thinking that having the top three brand names in our analysis was enough to cover what we wanted to cover in looking at the top most valuable brand names. However, the recent action in GE shares has prompted me to raise a red flag on the stock:
Please keep in mind that GE, as well as being the fourth most valuable global brand, also has the distinction of being the company with the highest market capitalization and the most diversified businesses. When GE is not doing well, one should heed the warning.
Similar to our April 24th analysis, we now turn to Apple - one of the hottest stocks on the NASDAQ in recent years and definitely one of the hippest companies currently out there (although some would now disagree with me since they have now chosen to use Intel processors in their computers going forward). As of July 2004, Interbrand claims that Apple has a brand name worth $6.87 billion, an increase of 23.7% from 2003:
In the above chart, I mentioned that APPL is now hovering at its 20-week EMA - will it break for up or down? Please note that relative strength vs. the S&P 500 is also having the same dilemma. However, let me say this: The fact that it has not been able to rally much in recent weeks - coupled with the continuing dismal performance in the most valuable brand names suggests that it will break for down rather than up - at least in the next couple of months anyway.
Let's now go ahead and wrap up this commentary by taking a quick look at the weekly charts of eBay, Harley Davidson, Amazon, Yahoo!, and Starbucks - the other major brand names that we looked at in our April 24th commentary:
Conclusion: As I am writing this conclusion, I have been notified that there has just been a terrorist attack in the transit system of London. Our thoughts and prayers are now with the people of London and of Great Britain, as well as our English subscribers. Please do drop me an email if you want to share your thoughts and what you believe the implications may be of this tragic event going forward.
Based on the above analysis of the major global brand names, our message remains the same - the ST trend remains down - which today's tragic events would not help as they will definitely add a significant amount of uncertainty in the stock market going forward. For now, remain in cash - as both of the implications of the terrorist attack and the continuing dismal performance (which has not occurred since the cyclical bull market began until very recently) of the major global brand names are nothing to sneeze at. I will most probably have a clearer idea of the potential geopolitical and economic implications of this latest attack this weekend? One of our first questions should be: Will this worsen the global economic slowdown? It is still too early to tell (although it definitely sounds very possible) - readers please stay tuned.
Henry K. To, CFA