Tuesday, December 29, 2009

Tiger's Cost

A Sacramento Bee report on a UC Davis study showing the costs  to shareholders of Tiger Woods' marital infidelities demonstrates the folly of trying to say why stock prices move as they do.

In the study (.pdf, 11pp) Profs. Christopher Knittel and Victor Stango say that companies whose products are endorsed by Woods lost $5 billion to $12 billion in market value, relative to the market as a whole, from the Nov. 27 car accident that unravelled Tiger's cover to the Dec. 11 announcement that the athlete was taking an indefinite leave from golf.

Their study shows that out of eight companies studied, Woods' core sports-related sponsors -- Electronic Arts (ERTS, maker of the Tiger Woods PGA Tour game console product), Nike (NKE, the shoe people) and Pepsico (PEP, which makes Gatorade) -- lost over 4%.

The study's methodology makes sense, the researchers chose appropriate companies for their work, so what's not to like?

The weak link is in the assertion that the losses were due to the Woods Affair. The basis of that assertion is the calendar -- they studied prices at the peak of news reporting of and public interest in the affair -- and corporate connections to the golfer -- the three companies do in fact use Woods to promote their products.

Had the researchers lifted their eyes from their spreadsheets to the price charts, they would have seen a somewhat different situation.

ERTS did indeed go down during the study period, but it has been decline since Nov. 12, two weeks before Woods' car accident, and the 20-day moving average has been in a downward trend since Oct. 29.

NKE had been trading sideways since mid-October and continued to do so for seven days after the car accident. The price declined for two days running beginning Dec. 8, but afterward moved up to the same narrow trading range, where it remains to this day.

After a one-day downturn, PEP began to rise in price on Oct. 27, the day of the accident, and six days later stood 2.4% above the accident-day close. On Dec. 9, two days before the end of the study period, the price gapped sharply lower at the open after the company lowered the top end of its 2009 revenue and earnings projections.

The company said nothing about Tiger being the reason for the new guidance, and it would fly in the face of reason to assume that it would be. After all, PEP is a company that takes in $43 billion a year and has a market capitalization of $95 billion. Value of the Woods endorsement to PEP: $20 million.

NKE has revenue of $19 billion and a market cap of $32 billion. The Woods endorsement is worth $20 to $30 million to the company.

Likewise, ERTS revenue is $4 billion, its market cap is nearly $6 billion, and the Woods connection is worth $8 million

In each case the value of the Woods endorsement is an order of magnitude below the company's revenues. No wonder stocks either continued what they were doing or barely budged.

The Woods' martial problems are high profile, but to make them a cause of stock market loss (or gain) betrays a lack of insight into how markets work.

The UC Davis profs are far from being alone in this. Every day news outlets peddle stories with some variation of "stocks rise amid consumer optimism" or "stocks down after reports that...". My favorite was in the Black Monday market crash of 1987, when the AP financial wire had a stocks story blaming the stocks crash on bond market action, and a bond story blaming bond market action on the stocks crash.

Until business journalists are able to read millions of minds during the trading day, no one will be in a position to have any idea as to why shares trade as they do.

So if someone tries to tell you why the market is up or down or neither, remember that the reason they give t'ain't necessarily so.  And, as you and I as traders well know, the reason is irrelevant. Stocks will move for whatever reason, and our job is to capture a part of that move in our quickly changing portfolios as a way to capture profit.

Tiger Woods' standing with those companies is much like that of any employee who is laid off, or retires, or for whatever reason becomes less valuable.

He or she might be missed for awhile. There might  even be a need to adjust workplace procedures to account for the loss.

But ultimately, when a capitalist enterprise decides to throw a worker away, when a worker decides that enough is enough, when the fickleness of public sentiment transforms a good guy into an evil dude, no one -- absolutely no one -- is irreplaceable.

The enterprise goes tick-tocking along, creating value for its executive and shareholders. No decent management bets the farm on something as fleeting as celebrity and fame.

So, breathe a sigh a relief, Mr. Woods. You may be facing troubles over a number of things, but when it comes to stock market value, you're off the hook.

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