Monday, December 7, 2009

Follow-up on Last Post (Trading Thoughts and Personality Brands)

This is too long to be a regular update to my last post, so it gets to be on its own.

Quick trade update on the ETF convergence that I described. It would have worked. The long GDX opened at $49.39, or a 2.56% drop. The short GDXJ opened at $26.25, or a 3.28% drop. In other words, as suggested, the long did better than the short. This was still true at 9:45 which was the last time I looked at it. Obviously, one needs to have pretty low transaction costs (this is 2 round-trips) and exceptional execution to win at this. One might also recommend doing it only with other people's money.

Another risk factor that came to mind about this trade is that since I do not know the exact composition of either ETF, the juniors might be more heavily weighted towards Canadian companies, which introduces a cross-currency dynamic.

On to the personality brands discussion.

One, I stated that I think the famous golf brand that has been in the news is safe. I retract this statement as more news of the less-flattering variety have emerged over the weekend. This has become the perfect illustration of one of my favorite theories in finance, the cockroach theory. There is always more than one (problem).

Two, this would make an excellent business school case. There are a lot of multi-disciplinary tracks that our "future business leaders" can discuss smugly. Marketing/branding is one. Then there is PR, media and entertainment angle: what kind of a story can sell more copies? The legal aspect: prenup with earn-outs, contracts with pay-outs, high-powered fixers.

I am just surprised that such prominent ambulance chasers like Jesse Jackson and Al Sharpton are not all over this, like they were around that white-gloved entertainer's funeral. The latter activist would be perfect to "define down deviance": he is quoted as telling the kids of the dead entertainer "wasn't nothing strange about your daddy." May be the brand tried to be post-racial just like the current presidential brand.

There is just too much money bet on this horse to let things be.

Three, let's look at payouts for the women.

The golfer is the productive asset here, and the re-distribution scheme is very logical. Basically, the key to getting a higher payout is a combination of exclusivity and access ("access" overlapping with being a threat by means of that access).

Highest payout: the wife. Legally exclusive relationship, full access to the asset; on top, she had access to the pro-circuit as hired help that got lucky. Payout: she and her kids are set for life

The payouts for the rest of the women in the story are also based on exclusivity and access. The story each one of them can tell is likely the same story, so being first REALLY mattered. It is rumored that the NYC woman got a huge sum, while the 1st cocktail waitress got $100k from the media, and now it sounds like the Perkins waitress gave her story for free. How much value is there to each subsequent story? Not the $1 mm the first one allegedly got, unless there is something even more scandalous.

So, ranking the payouts, Scandinavian model-wife>> NYC party girl >> Vegas cocktail waitress >> local Perkins waitress. It is almost too logical as it follows the likely lifetime earnings potential of each.

Perkins, for the benefit of the non-US readers, is a low-to-mid priced family restaurant chain in the US.

Four, the sponsors in this case were either incompetent, complicit or a combination of both. There should be brand managers fired over this. Where is the due diligence?

This reminds me of lobotomized pensions managers blindly accepting the AAA stamp on whatever they were buying. Everyone is doing it so we're really happy were able to get our hands on some of these nice, safe securities.

Here the sponsors got played a little bit too, in my view. Since the brand can only be linked to one company in most categories (i.e. apparel and equipment, autos, credit card), there is a sense of competition and urgency between the sponsors, who then went on to pour millions of dollars into brand building.

The biggest fallout should be with Nike. They really built their golfing business out of nowhere on the strength of this brand, much like they built the basketball business on Jordan and the soccer business on Brazil. GM, AmEx, TagHeuer and Accenture should not hurt too bad. The golf brand was not essential to them in my view.

Since Nike has the most to lose, chances are they will try to stick with their investment as much as possible. There is also the danger that the sponsors exit en masse. A bit of game theory, if one blinks, all stand to lose. Surely interesting to watch on the side.

Five, there is quite a bit of wisdom passed on from Ben Franklin, some of it R-rated. In this letter, he spells out some battle-tested advice on the choice of a mistress, if one absolutely must have one. Discretion is high on the list of qualities he lists, and for a good reason.

The golf brand should have approached other brands who have a lot to lose if the affair becomes public: top-brand athletes like Maria Sharapova, Gabrielle Reese or Mia Hamm would have been perfect, as it seems that the golf brand was not seeking emotional connections.

Six, and more philosophical. This whole story is one of false idol worship. So, to note that man-made idols are nothing new, I leave you with Percy Shelley's sonnet Ozymandias which describes even the physical fallibility of self-described, alleged and even actual "greatest's."

I met a traveller from an antique land
Who said: Two vast and trunkless legs of stone
Stand in the desert. Near them, on the sand,
Half sunk, a shatter'd visage lies, whose frown
And wrinkled lip, and sneer of cold command
Tell that its sculptor well those passions read
Which yet survive, stamp'd on these lifeless things,
The hand that mocked them and the heart that fed.
And on the pedestal these words appear:
"My name is Ozymandias, king of kings:
Look on my works, ye Mighty, and despair!"
Nothing beside remains. Round the decay
Of that colossal wreck, boundless and bare,
The lone and level sands stretch far away.

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