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Morning Review - 110510
Morning Review - 110510
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Christine Clark: 212 448 6085 or cclark@convergex.com
Beth Reed: 212 448 6096 or breed@convergex.com
Stocks rallied Thursday after the Fed’s decision to purchase an incremental $600 billion in Treasuries and Morning Markets Briefing
President Obama’s assertion that he is open to an extension of the Bush tax cuts for all income levels (S&P
500 +1.9%, Dow +2.0%, Nasdaq +1.5%). Materials, energy and industrials led all 10 S&P sectors higher,
while the VIX fell nearly 5% to trade near 18, and a lower dollar dove crude prices to a 6-month high above Market Commentary: November 5th, 2010
$86 a barrel. On the economic front, jobless claims rose 20K to 457K last week following the prior week’s A snapshot of the markets through the
(upwardly revised) 437K. The 4-week moving average added 2K to 456K. Nonfarm productivity for the 3rd
lens of ConvergEx.
quarter advanced an annualized 1.9% after a decline of 1.8% in the prior quarter, and unit labor costs fell
an annualized 0.1%. Meanwhile, October chain store sales figures were largely better-than-anticipated
with Zumiez (+21%), Limited (+9%), Saks (+8%) and Costco (+6%) leading the pack.
Summary: One of the most intractable problems in financial analysis is the challenge of valuing brands. What is a logo really worth, anyway? While complex discounted
cash flow models are still the preferred financial tool for assessing brand value, we’d like to add a new measurement to the discussion: Google AdWords pricing. The
search engine company charges advertisers a market-based rate to display their ads when someone types in a search for anything, including a popular brand name. By
measuring what advertisers are willing to pay to have their ad shown next to a popular brand, you can get a useful, and market-based, assessment of the hierarchy of
brands in cyberspace. Moreover, this notion of brand is flexible enough to include people, sports teams and even vacation hot spots and measure their ‘brand value,’ at
least in cyberspace. Some relative brand values, courtesy of AdWords: NY Jets beat NY Giants, Phil Mickelson trumps Tiger Woods, and Blackberry trounces iPhone. Coke
versus Pepsi? Read below.
To borrow from the old song in the classic movie Casablanca, the world may always welcome lovers, but it is rivalries that really interest people. Notre Dame
and Michigan. Yankees and Red Sox. Republicans versus Democrats. Many things that gather human attention do so because they exist in opposition to something else.
The rivalries sway back and forth, and attention grows as the struggle ages. It was always thus.
In the corporate world, competition is often fought under the banner of a brand. Coke or Pepsi. Mercedes or BMW. McDonalds or Burger King. Companies invest
mightily in advertising their brands, trying to convince consumers that their offering is superior to the alternatives. But measuring the return on advertising and the value
of a brand are an imprecise science at best. Frank Woolworth, one of the first mass market merchants in America, famously noted that half of his advertising dollars were
wasted but he didn’t know which half it was.
Market Commentary – Pages 1-3, Equities/Conferences & Earnings – Page 4, Fixed Income – Page 5, Options – Page 6, Exchange-Traded Funds/Indexes – Page 7, Social
Media & Internet Blogs Top Stories – Page 8
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©2010 BNY ConvergEx Executi`on Solutions LLC. May not be redistributed without express permission. All rights reserved
Nicholas Colas (Chief Market Strategist): 212 448 6095 or ncolas@convergex.com
Christine Clark: 212 448 6085 or cclark@convergex.com
Beth Reed: 212 448 6096 or breed@convergex.com
The discussion is salient to investors as well as operators, as brand value is often a good proxy for competitive position and sustainable financial returns. Good
brands can charge more for their product than less popular offerings. They can enter new geographic markets with lower advertising costs if knowledge of the brand
precedes its launch. And they can extend their offering to new products – think Diet Coke and regular Coca-Cola. And, of course, consumers will be loyal to brand if they
have an emotional connection to it.
But that difficult problem of explicitly valuing the brand persists, just as it did in Woolworth’s 19th century America. Yes, spreadsheets and consumer surveys and
Facebook friend counts exist now, but business managers still struggle with assessing just how valuable their brands really are. And, more importantly, how they stack up
against the competition.
I’d like to propose one novel way to assess brand value: Google AdWords. Google still dominates the online search business and monetizes that position by charging
advertisers to post links for their offerings next to search results. (Don’t go buy Google’s stock on that observation, by the way. I’m pretty sure everyone knows this.)
Google has a variety of automated algorithms to assess how much to charge these advertisers and they essentially compete in a constant and real time online auction to
see who is willing to pay the most to get their ads shown along with user search results. The cost is expressed in a “cost per click” – how much the highest bidder is
willing to pay Google every time someone clicks on their advertisement.
With that basic description in place, let’s look at some classic brand rivalries to see which “side” gets a higher AdWords price. Moreover, the appeal of this
approach (aside from simplicity) is that we can look at people, places, sports teams, as well as corporate brands through the same lens.
A word of caution before I give you the winners and losers: you have to do a lot more work than this to evaluate a company as an investment. I am just trying
to highlight a different way of thinking about brand value, not pick a winning stock. There - you have been warned.
Those pieces of (hopefully obvious) caution aside, here are the brand winners according to their price in Google AdWords:
• The search term ‘Coke’ costs an advertiser more than double for the search term “Pepsi.” The cost per click (as of yesterday morning) for the Coke search
term was $1.48, while Pepsi garnered only $0.58 per click.
• Want to put up an ad when someone types in ‘Blackberry?” That will cost you $2.53/click. The same cost for an ad placed next to the search term
‘iPhone’: $1.39.
• Not all big time corporate rivalries diverge as much as these examples. Mercedes and BMW are pretty much neck and neck, as are Colgate and Crest. A few
more examples follow in the accompanying table.
Casting a broader net with the AdWords tool, we can venture into the world of professional sports to see where advertisers are willing to plunk down the big
money to piggyback on a given team’s popularity, as well as the desirability of their fans as potential customers.
Here’s the AdWords box score for a few teams and pro sports personalities, offered without comment:
• NY Yankees $1.48, NY Mets $0.88.
• NY Jets $1.06, NY Giants $0.95.
• Phil Mickelson $0.56, Tiger Woods $0.45
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Nicholas Colas (Chief Market Strategist): 212 448 6095 or ncolas@convergex.com
Christine Clark: 212 448 6085 or cclark@convergex.com
Beth Reed: 212 448 6096 or breed@convergex.com
We can turn this lens to investment asset classes for some interesting observations about how the pricing structure for AdWords is shaped by how advertisers
monetize the traffic from their ads. The search term ‘stocks’ is worth almost 3x more than the word ‘gold’ - $3.86/click versus $1.31/click – but not because stocks are
necessarily better investments. It is because online brokers use stock research as a traffic draw to their websites and offerings. Incremental customers and their trading
flow come through at large incremental margins, so paying up for their traffic is good business. Conversely, gold merchants have predominantly variable costs since they
are selling a coin or ingot of precious metal. They are therefore less able to pay more for incremental business than the online brokers.
I’ll close out with some vacation hotspot search words, just to show that this approach works for even something as intangible as a piece of real estate.
“Aspen” and “Vail” search words both cost about the same – just over $2.00. But if you are a fan of the French Riviera, get used to taking a back seat to the Amalfi coast.
Advertisers covet people looking for a little Italian coastal downtime much more than all those Brits and Americans that flock to the rocky shores between St. Tropez and
Monte Carlo.
• Amalfi Coast: $1.96/click. Riviera: $1.39/click.
GOOGLE ADWORDS: RIVALRY EDITION
C’est la vie.
Search Term Cost Per Click Global Monthly Searches Local Monthly Searches
Brands
Coke $1.48 1,830,000 823,000
Pepsi $0.58 2,240,000 1,220,000
Mercedes $0.88 16,600,000 3,350,000
BMW $0.95 30,400,000 5,000,000
Porsche $0.57 6,120,000 1,830,000
Ferrari $0.49 6,120,000 823,000
Colgate $1.09 550,000 201,000
Crest $1.04 1,830,000 1,220,000
iPhone $1.39 68,000,000 13,600,000
Blackberry $2.53 30,400,000 7,480,000
Nike $0.69 20,400,000 5,000,000
Reebok $0.62 2,240,000 823,000
Sports
NY Yankees $1.13 135,000 110,000
NY Mets $0.88 60,500 49,500
NY Jets $1.06 90,500 90,500
NY Giants $0.95 135,000 135,000
Roger Federer $0.98 550,000 90,500
Rafael Nadal $0.91 450,000 74,000
Phil Mickelson $0.56 110,000 74,000
Tiger Woods $0.45 4,090,000 2,240,000
Investment Rivalries
Stocks $3.86 2,740,000 1,830,000
Gold $1.31 30,400,000 13,600,000
Bonds $3.28 2,240,000 1,220,000
Vacation Destinations
Aspen, CO $2.18 49,500 40,500
Vail, CO $2.07 40,500 40,500
French Riviera $1.39 90,500 33,100
Amalfi Coast $1.96 135,000 60,500 3
Nicholas Colas (Chief Market Strategist): 212 448 6095 or ncolas@convergex.com
Christine Clark: 212 448 6085 or cclark@convergex.com
Beth Reed: 212 448 6096 or breed@convergex.com
U.S. EQUITIES
Energy stocks were among the top performers Thursday, as oil prices hit a 6-month high above $86 a barrel. HAL (+3.6%), SLB (+4.9%), CVX (+3.0%),
COP (+3.1%) and XOM (+2.1%) all showed substantial gains. In tech news, QCOM added 5.8% after it announced unexpectedly strong profits and at
least 6 brokerages raised their price targets on the firm. Also, MSFT (+0.4%) lifted its sales forecast for video game device Kinect, and Baird initiated
coverage of AAPL (+1.8%) with an “Outperform” rating. On the earnings front, TWC (+4.5%) posted a better-than-expected rise in net income after
adding more Internet customers, while WFMI jumped 15.1% as it beat Street estimates on strong sales in established markets.
Prior Day SPX (High – 1221.25; Low – 1198.34; Close – 1221.06): Three Day (High – 1218.75; Low – 1179.50):
FIXED INCOME
Treasuries rose Thursday, pushing 2- and 5-year note yields to record lows after the central bank’s announcement on Wednesday that it will purchase
another round of assets. Five-year yields dropped 8 bps to end the day at 1.02% after sliding to an all-time low of 1.0148%, while the benchmark yield fell
11 bps intraday before ending at 2.48%. The government’s $10 billion TIPS auction drew a yield of 0.409% and saw strong coverage of 2.91 times versus
2.80 times at the September 2 sale. Meanwhile in a Washington Post opinion piece, Fed Chairman Ben Bernanke assured that the central bank’s additional
asset purchases should stimulate economic growth and higher stock prices and that concern over significant increases in inflation is “overstated.”
SPX – The underlying index turned in a decidedly positive performance, ending near the day’s high, up almost 2%, within a range of +0.1% to +2%. The implied volatility, as measured by
the VIX, responded to the strong upward move in the underlying with a steady retreat throughout the day, ending -5%. Today’s action will likely narrow the gap between the recent
experienced historical volatility (which was below 5% on a 10 day average last night), and the implied volatility, (which was at 17-18% for atm SPX November and December options last
night). There were two large buyers of put spreads today in the November SPX options. The November 1160/1180 put spread was bought 44,000 times @ $2.90, and later the 1180/1190
put spread was bought 44,000 times @ $5.10. There were also several substantial sellers of options such as the Jan 1150 puts which were sold @ $19.8and 19.7 over 5,000 times and the
Dec 1250 calls, also sold over 5,000 times.
ETF – The Market experienced a broad rally, and options traded briskly with volume significantly exceeding expectations. In the ETF space, we highlight a large print in XLF (Financials) as
paper bought 125,000 Jan 15 / 17 call spreads. In international flow, EEM (Emerging Markets) continued to see active trading with one investor buying the Dec 47 / 43 put spread 60,000
times. Sector based ETFs generally saw bullish flow, for example in XHB (Homebuilders) paper bought 11,200 Dec 17 calls, while in SMH (Semiconductors) an investor sold the Jan 27 puts
~10,000 times.
Exchange-Traded Funds/Indexes
Prior Day Peformance of Largest ETFs by Assets S&P 500 Sector ETFs
Name (Net Assets*) Ticker Category Daily Return Sector Ticker 1-Day Perf YTD Perf Sector Ticker 1-Day Perf YTD Perf
SPDRs SPY Large Blend 1.78% Energy XLE 3.18% 8.75% Telecomm IYZ 1.16% 12.94%
SPDR Gold Shares GLD N/A 3.39% Health XLV 0.51% 1.87% Technology XLK 1.49% 9.55%
iShares MSCI Emerging Markets Index EEM Diversified Emerging Mkts 2.27% Industrials XLI 2.30% 3.45% Consumer Discretionary XLY 1.57% 22.04%
iShares MSCI EAFE Index EFA Foreign Large Blend 2.27% Utilities XLU 1.07% 3.35% Financials XLF 3.26% 5.69%
iShares S&P 500 Index IVV Large Blend 1.85% Consumer Staples XLP 1.21% 10.54% Materials XLB 3.28% 9.70%
Prior Day Top Volume ETFs Currency ETFs
Name Ticker Category Shares Traded Currency Ticker 1-Day Perf YTD Perf Currency Ticker 1-Day Perf YTD Perf
SPDRs SPY Large Blend 191,684,282 Australian Dollar FXA 1.29% 12.91% Mexican Peso FXM 0.29% 6.63%
Financial Select SPDR XLF Specialty - Financial 157,750,434 British Pound Sterling FXB 1.21% 0.58% Swedish Krona FXS 1.06% 9.39%
iShares MSCI Emerging Markets Index EEM Diversified Emerging Mkts 70,636,376 Canadian Dollar FXC 0.45% 4.58% Swiss Franc FXF 1.23% 7.68%
PowerShares QQQ QQQQ Large Growth 69,977,497 Euro FXE 0.57% -0.99% USD Index Bearish UDN 0.61% 1.53%
Direxion Daily Financial Bull 3X Shares FAS Specialty - Financial 49,776,013 Japanese Yen FXY 0.62% 15.06% USD Index Bullish UUP -0.77% -4.81%
Prior Day Top Performers VIX ETNs Fixed Income ETFs
Name Ticker Category Daily Return Name Ticker 1-Day Perf YTD Perf Bonds Ticker 1-Day Perf YTD Perf
ProShares Ultra Silver AGQ N/A 11.67% iPath S&P 500 VIX VXX -6.71% -66.95% Aggregate AGG 0.48% 5.55%
Direxion Daily Semicondct Bull 3X Shares SOXL N/A 9.18% Short-Term Futures ETN Investment Grade LQD 0.95% 8.59%
Direxion Daily Financial Bull 3X Shares FAS Specialty - Financial 9.15% High Yield HYG 1.30% 2.13%
Direxion Daily Energy Bull 3X Shares ERX N/A 8.84% iPath S&P 500 VIX VXZ -3.68% -11.23% 1-3 Year Treasuries SHY 0.02% 1.81%
ELEMENTS MLCX Biofuels Index TR ETN FUE N/A 8.33% Mid-Term Futures ETN 7-10 Year Treasuries IEF 0.81% 12.66%
20+ Year Treasuries TLT 0.78% 10.90%
Others
ETF Ticker 1-Day Perf YTD Perf ETF Ticker 1-Day Perf YTD Perf
Gold GLD 3.39% 26.76% Crude Oil USO 2.04% -4.56%
Silver SLV 5.70% 54.97% EAFE Index EFA 2.27% 7.56%
Natural Gas UNG 1.27% -44.54% Emerging Markets EEM 2.27% 17.06%
SPDRs SPY 1.78% 9.56%
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Nicholas Colas (Chief Market Strategist): 212 448 6095 or ncolas@convergex.com
Christine Clark: 212 448 6085 or cclark@convergex.com
Beth Reed: 212 448 6096 or breed@convergex.com
Calculated Risk
Weekly Initial Unemployment Claims Increase to 457,000 - http://www.calculatedriskblog.com/2010/11/weekly-initial-unemployment-claims.html
U.S. Light Vehicle Sales 12.26 Million SAAR in October - http://www.calculatedriskblog.com/2010/11/us-light-vehicle-sales-1226-million.html
Zero Hedge
Rosenberg Joins Chorus of Those Accusing Bernanke of Asset (Read Stock) Price Targeting - http://www.zerohedge.com/article/rosenberg-joins-chorus-
those-accusing-bernanke-asset-read-stock-price-targeting
Great Start to QE2: Goldman reduces NFP Forecast to +25K from +50K - http://www.zerohedge.com/article/great-start-qe2-goldman-reduces-nfp-forecast-
25k-50k
Presenting the Fed’s Balance Sheet through 20112 – Fed Will Surpass China as Top Holder of US Debt by the End of the Month -
http://www.zerohedge.com/article/presenting-feds-balance-sheet-through-2012-fed-will-surpass-china-top-holder-us-debt-end-mon
Bernanke Confirms that the Key Goal of the Fed, and QE2, Is to Boost Stock Prices - http://www.zerohedge.com/article/bernanke-confirms-key-goal-fed-
and-qe2-boost-stock-prices-create-wealth-delusion
8
Nicholas Colas (Chief Market Strategist): 212 448 6095 or ncolas@convergex.com
Christine Clark: 212 448 6085 or cclark@convergex.com
Beth Reed: 212 448 6096 or breed@convergex.com
GENERAL DISCLOSURES
This presentation discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions. It is provided for general
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Past performance is not indicative of future results, which may vary significantly. The value of investments and the income derived from investments can go down as
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