Additional References
April 2000, EWFF
IS THE BREAK IN THE BIG BRAND NAMES
A WARNING FOR THE OVERALL MARKET?
Three months ago, the concept of the “old economy” barely existed. Now, it is the focus of daily speculation on the strength or weakness in the stock market. When the Dow falls, it is because the “bastions of safety are crumbling under this new economy.” When the Dow rises, it’s a “New Bull Market for [the] Old Economy.” The chart below shows, however, that in lumping everything in the “old economy” into a single group, observers are missing an important distinction that could hold the key to the direction of the overall market. The chart below breaks the “old economy” into two distinct sectors: companies that rely heavily on famous brand names and those that do not. Our “Old Economy” Famous Brands Index consists of 21 stocks that generate their business from well-established brand names. It encompasses hundreds of different products that have built identities as major American brands dating as far back as the mid-1800s. The table on page 3 lists some of their key products and their year of establishment. Our “Old Economy” Non-Brands Index consists of the 35 “old economy” stocks from the S&P 100 that are not dependent on branded products. Its membership includes established firms like Bethlehem Steel, Boeing and Columbia Healthcare.
Without the drag of issues that rely heavily on brand names, stocks in the “Old Economy” went to a new high in 1999. In recent days, the brand-free “Old-Economy” group also moved back above its high of April 1998. The Famous Brands Index never exceeded its April 1998 peak and is now down more than 30% from that point. In the years preceding its all-time high, the longer-term chart on page 3 shows how the index kept pace with the bull market. One by one, however, each of these stocks has decoupled from the rising trend of the averages. Through March 10, the date of the NASDAQ’s all-time high, all 21 had suffered serious declines. The numbers on the chart correlate to the table below to show the steady progression. Procter & Gamble, the granddaddy of American brand marketing, was one of the last to drop. It turned down two days before the Dow’s January peak and has since lost 51%.
The exciting news is that the break in the brand stocks has established ideal conditions for a real-time test of a socionomic theory discussed in the chapter on “Impulsivity and Herding” in Prechter’s book, The Wave Principle of Human Social Behavior. According to the idea of “social visioning,” which Bob proposed on the basis of studies and observations from a host of social theorists (see Chapter 9), “it may be that shared fantasy images are an intermediate step between mood change and resulting action.” When these images dissolve, he added, the trends they are “based upon undergo violent reversals.” They may even “reflect mood quite immediately, before the public could mobilize itself enough to act in the economic and political arenas.” This study takes the question to the market itself. Can a basket of equities backed by a broad cross-section of commercial images developed over the course of a bull market reflect the end of that bull market ahead of other major indexes? Since companies with major brands represent near-total investments in the techniques of crafting and maintaining icons that are amenable to the long uptrend in social mood, it seems quite possible. Their shares should be extremely sensitive to any loss of potency in the symbols, sayings, jingles, tastes or subliminal appeals they have created over the course of a long bull market. At downturns of lesser degree, EWFF’s “case study” of Coca Cola (see EWFF December issue) showed how readily the complex and highly subjective process of building a business around a bull market icon can break down.
Only the market can answer, of course. But at this point, we can make an initial confirmation of “the intermediate step” described in the book because it also describes the form that social visioning must take. “Herding people feel a certain way and can express themselves impulsively to reflect those feelings,” it says. “If social visioning is an intermediate step between social mood and social action, the dynamics of its manifestation would have to follow the Wave Principle, which governs its cause.” The decline from mid-1999 does, in fact, bear the trademark of an Elliott impulse wave. Notice wave 0 on the chart. It is a clear five waves down within the larger five. The rally off that low went to a fourth wave of one lesser degree and then stopped cold even as the Dow rocketed higher and the index of non-brand old economy stocks moved back above its April 1998 high. What we are saying is that the Brands Index has taken on a character of its own.
This character reflects the two sides of a major, major peak. While the media have not noticed that the brand name issues of the old economy have been rolling over one after another since the peak of the a/d line in April 1998, the idea of branding has actually grown bigger than ever as the rationale for tolerating losses in the new economy. Rivers of red ink at internet companies are not just tolerated but in fact demanded by investors who insist that “new economy” companies “need large marketing expenditures to build brand awareness.” Proof of this assertion is that stocks of Internet companies that build brands with losses have consistently outperformed stocks of Internet companies that turn a profit. Another indication that a historic extreme in brand awareness has reached its zenith is that in recent months, even individuals have become brands. A number of them, including Dick Clark, Donna Karan, Tommy Hilfiger, Ralph Lauren, Martha Stewart and C. Everett Koop, have become publicly traded companies. All are down substantially from their close on their first day of trading, but the effort literally to buy heroes continues to spread. The latest development is at the venture capital level, where numerous promoters are busily launching Internet investment funds with superstar athletes because “athletes have tremendous brand presence.” Many venture capitalists and investors expect to get in on the ground floor of the “new paradigm,” but the elevator is actually on the penthouse floor. If the bull market is topping as we assert, then these are the final death throes of brand name imaging per se.
|
