An Update on Brand Name Watching

By: Henry To | Fri, Jul 8, 2005
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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:

KO actually topped out in April 2004 in the latest cyclical bull market - the most recent action does not change the negative picture of KO as the price is again below that of its 20-week and 50-week EMAs.  Please note that relative strength also topped out soon after April 2004 and is now, yet again, below its 20-week EMA.

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:

After a brief bounce subsequent to our April 24th commentary, MSFT has now again declined below its important moving averages.  As we said last time, relative strength is nothing to write home about either.

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:

After coming off of a terrible earnings miss - an earnings miss that plunged the stock to its lowest levels since October 2002 - IBM still hasn't made any meaningful bounce, despite the fact that its valuation is the most compelling among the top three brand names.

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:

The fact that GE actually held up very well (above its 20-week EMA) all throughout 2005 but has now plunged beneath its 50-week EMA without an accompanying market decline is very ominous.  Note that the price action of GE has not been this weak since May 2004,  Relative strength also declined below its 20-week EMA convincingly - something which it has not done since May 2004.

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:

Following the plunge due to weakening guidance from AAPL in the last quarterly earnings report, AAPL has tried to stage a bounce in the most recent market rally but has also come up short.  The stock is now hovering/consolidating at its 20-week EMA - will it break for up or down?  We will find out soon enough.

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:

eBay is now falling back to support after the latest rally from mid-April.  Relative strength is still below its 20-week EMA.

Very impressive bounce, especially with record high oil prices.  However, the action still indicates that this is merely a bounce and not the beginning of a major rally.

The action in Amazon continues to be dismal.  Note the declining 20-week and 50-week EMAs, as well as the continuing downtrend of the stock.  In fact, the stock is now in the process of making a two-year low.

Yahoo probably has one of the better-looking charts out there - but note the lower high and the fact that relative strength may be rolling over to the downside.

Starbucks - one of my most favorite companies - has been getting weaker in recent weeks (despite a market that has held up well) and is now in the gravest danger since the bull market for Starbucks began in July 2002.  Starbucks led this bull market by as early as three months (or eight to nine months if one uses March 2003 as a starting point) - could it again lead this current bull market on the downside?

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.

Signing off,


Henry To

Author: Henry To

Henry K. To, CFA

Henry To, CFA, is co-founder and partner of the economic advisory firm, MarketThoughts LLC, an advisor to the hedge fund Independence Partners, LP. is a service provided by MarkertThoughts LLC, and provides a twice-a-week commentary designed to educate subscribers about the stock market and the economy beyond the headlines. This commentary usually involves focusing on the fundamentals and technicals of the current stock market, but may also include individual sector and stock analyses - as well as more general investing topics such as the Dow Theory, investing psychology, and financial history.

In January 2000, Henry To, CFA of MarketThoughts LLC alerted his friends and associates about the huge risks created by the historic speculative environment in both the domestic and the international stock markets. Through a series of correspondence and e-mails during January to early April 2000, he discussed his reasons and the implications of this historic mania, and suggested that the best solution was to sell all the technology stocks in ones portfolio. He also alerted his friends and associates about the possible ending of the bear market in gold later in 2000, and suggested that it was the best time to accumulate gold mining stocks with both the Philadelphia Gold and Silver Mining Index and the American Exchange Gold Bugs Index at a value of 40 (today, the value of those indices are at approximately 110 and 240, respectively).Readers who are interested in a 30-day trial of our commentaries can find out more information from our MarketThoughts subscription page.

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