Paper Chase: This Is The Business Of The NBA
The NBA proves that you can be unimaginative in growing your business. They copied what everyone was doing and improved upon what people did to better adapt to their model.
There are signs of slowing growth for the economy. 4th quarter estimates were revised down from 3.2% to 2.4% which was more in line with analysts’ original estimates. Numbers for exports and the housing market came in weaker than expected. GDP is the broadest measure of the size and strength of America’s economy.
Janet Yellen stated the economy has softened though the effects of the weather muddles the picture some. The Fed will continue to slowdown their bond buying program.
Tesla is making plans to meet demand. The electric car company says four sun belt states are in contention for a billion dollar plant to build the battery for their car. Creating 6500 jobs, the finalists are Nevada, Arizona, New Mexico and Texas.
While the 4th quarter ended up being a backwards looking number, it is the baseline expectation for the 1st quarter. The economy is slow and at this point it can be said for reasons other than the weather. There will always be pulls and tugs during a slow growth market. It is reasonable to expect an entire year of slow, choppy growth.
Many people were very surprised at the preliminary release of the fourth quarter numbers so the revision is not unexpected. The economy has been growing modestly for quite some time.
Janet Yellen, as Ben Bernanke did before her, continues to use communication as one of the the Fed’s tools. This has been important in making changes in policy including, quantitative easing, tapering, and likely changes in interest rate policy more palatable.
I believe the Fed’s slowdown has been at the right speed. Quantitative easing had a role in 2012 and 2013, but the economy has to get back to normal. Look for rates to rise in early 2015. 2014 was supposed to be breakout year as many predicted for rates to rise at some point this year, but growth is not accelerating to that level. Growth for the second half of 2014 should be around 2.5%.
The Fed is focused on its two mandates. The first is price stability or inflation which is under control. This allows them to focus on the second being the labor market. While we are closing in on 6.5% unemployment, weaknesses such as labor force participation are persistent.
The bull market may be on the tired side. At the beginning of 2013, we had a fourteen times earnings market. While nothing is given, it was pretty straight forward in getting to 1800 for the S&P. This year’s market is at sixteen times earnings. Things aren’t as cheap as they were. There will be more volatility as we will still moving higher, but with a lot more activity.
Warm weather will speed up growth a little, but we are in a slow growth market. There is no pinned up demand and wait for warm weather to unleash sales is an illusion.
What I’m Doing
While it’s tough, I’m currently looking for income. It’s important not to reach too much for yield by lowering standards on credit or going too far out on the yield curve (longer duration or longer maturity fixed income investments). The risk is not compensated by the incremental increase in yield. I like high quality, shorter term fixed income that is essentially a cash equivalent. The option value of the liquidity has an appeal if we are to be in a volatile market. People can take advantage of the volatility rather than suffer from it.
The housing market, on a month to month basis, went straight up the first half of 2013. In the second half, it flattened and drifted south. Housing starts and existing housing numbers are soft, but new home sales are up. Prices are up thirteen percent. Mortgage rates are up one percent. There will be continued growth but at at a slower pace. Data is seasonally adjusted so the weather is an impact, but again this is not all weather related. We have been in this pattern since August or Septenber 2013.
This is still a good time to buy. Mortgage rates are low but are expected to rise to five percent by the end of the year, Affordability is high. There is inventory on the market because of new home construction providing a lot more selection for buyers. There will be fewer investors because they have retrenched. Buyers have more wiggle room in terms of price and may not have to be as aggressive with that initial first offer.
It is better to look at housing market by market rather than nationally. San Francisco, Phoenix and Las Vegas are in the midst of good markets for buyers. There is a lack of supply in places such as Cleveland and northeast for traditional reasons of less land to be developed
The best cities to buy a house with best being defined by lower than average unemployment, population growth greater than two percent over the past 2 years, home value growth 2% over the next 12 months are Austin, Seattle, Boston, Portland, Jacksonville and Miami. Add North Dakota to the list in my opinion as it has the lowest unemployment in the country and the most oil drilling.
Buyers are in the driver’s seat as sellers have challenges this year because of more competition. The housing market recooped 1.9 trillion in home sales in 2013. Rising prices have added optimism which will keep the housing market rolling. It’s funny how everyone feels good when prices go up in housing, which intuitively makes no sense as there are both buyers and sellers.
Business of the NBA
Before David Stern, the NBA’s annual revenues were 78 million dollars, there were 23 teams, and games were televised in less than 10 countries. When David Stern retired as the NBA’s commissioner, annual revenues were 5,5 billion dollars, there were thirty teams, and games were televised in 215 countries.
Growth can continue for the NBA. The NBA learned from every other corporation that was doing business. They then adopted a best practices, which at the time in the early 80’s, meant accomodating for markets outside of the United States. When television grew outside of the united states, demand for u.s. products grew outside of the United States.
The growth will come from the delta between where the NBA is in the market and the potential of the market. 80-90 percent of the NBA market is still domestic. They expect major growth in China, and their is still enormous growth left in all sectors in which they operate. The NBA now has three big broadcasters in ABC, ESPN and TNT. They also have enormous rights deals at the local level which the NFL does not have. Negotiating the expiring renewal of the NBA television deal will be huge as they are the last major sport whose television rights are up for grabs.
Unlike other businesses at the time, the NBA owns no manufacturing facilities. They felt that licensing was a better idea for their own branded products in terms of quality control. The growth of retail sales rose from 40 million to 2,2 billion under Stern’s tenure.
Cash gifts hit an all time high reaching $3.50 per tooth. That is a 44% rise from the $2.42 of 2013. The tooth fairy actually outperformed the S&P 500.
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