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Winning Super Bowl Stocks

By Jim Fink on February 7, 2012

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I’m a New York Giants fan so I’m still basking in the glory of the Giants’ 21-17 “stomp out” of the New England Patriots in Super Bowl XLVI (46). You know you spend too much time watching the stock market when you see XLVI and immediately think of the SPDR Select Sector Health Care ETF (NYSE: XLV). Anyway, it was a great game with Big Blue and MVP quarterback Eli Manning defeating the “Spy Gate” bad boys from Boston for the second time in four years.

Las Vegas Sports Bookies Were Losers (Maybe)

Besides the Pats, there were two other losers that made my day: (1) Las Vegas bookies and (2) hedge fund quants. Las Vegas bookies almost always win because they take a 4.5% commission on every bet (which lowers the bettor’s odds below fair value). In fact, prior to this year the bookies had made a handsome profit in 18 of the past 20 Super Bowls – the only two losers occurring in 1995 — when the 49ers beat the Chargers by 23 points (49-26), which more than covered the largest spread in Super Bowl history (18 ½ points), and 2008 —  when the Giants upset the 18-0 Patriots, commonly believed at the time to be the greatest team ever (or at least since the undefeated 1972 Miami Dolphins).

This year, the bookies suffered many sleepless nights because a substantial number of die-hard Giants fans had bet on the Giants to win the Super Bowl at odds as high as 100-to-1 near the end of a four-game regular-season losing streak that left them with a 6-6 record and virtually no chance of reaching the playoffs let alone the Super Bowl. Unfortunately, despite these long-shot bets on the Giants that paid off big time, the bookies might have squeaked out a profit anyway on a flood of last-minute (and losing) bets in favor of the Patriots, but the fact remains that they made a lot less money than they would have if the Pats had won. Let us be thankful for small victories.

Quants Bet Big on Simple Models

The other deserving Super Bowl losers were the arrogant quants – also known as hyper-frequency traders – whose mindless algorithms were responsible for the “flash crash” of May 2010. Quant types were also responsible for the collapse of the Long-Term Capital Management hedge fund in 1998 as well as the 2008 financial crisis, which was caused by impossibly-complex mortgage securities that defaulted despite having been given triple-A ratings based on (intentionally?) flawed mathematical models of the housing market.

The problem with quants is that they study how things have behaved in the past and extrapolate the past to the future, leveraging up ten or twenty-fold on bets that the future will be the same as the past. When Genius Failed author Roger Lowenstein described the flawed thinking of the quants working at the Long-Term Capital Management hedge fund this way:

Prices and spreads vary with the uncertain progress of companies, governments, and even civilizations. They are no more certain that the societies whose economic activity they reflect. Dice are predictable down to the decimal point; Russia is not; how traders will respond to Russia is less predictable still. Unlike dice, markets are subject bit merely to risk, an arithmetic concept, but also to the broader uncertainty that shows the future generally. Unfortunately, uncertainty, as opposed to risk, is an indefinable condition, one that does not conform to numerical straitjackets.

With regard to this year’s Super Bowl, quants working at Los Angeles-based hedge fund Analytic Investors were certain that the Patriots were going to beat the Giants because their quantitative model – which had correctly predicted which Super Bowl team would cover the spread for eight consecutive years – predicted that the Patriots would cover the spread. Since Las Vegas odds had the Patriots as favored to win by 3 points, predicting that the Patriots would cover the spread meant that the Patriots were going to win the game. According to Steve Sapra, the mastermind behind the quantitative model, the 3-point spread was too narrow because:

Bettors are extrapolating the Giants’ recent string of upsets into the Super Bowl,” he said. This makes no more sense than betting that a coin which has come up heads five times in a row is more likely to come up heads tomorrow.

Unbelievable! This “mastermind” is making the exact mistake Lowenstein talks about in When Genius Failed – it’s as if Sapra had never read the book. Let me repeat: real-life events are complex and not anywhere near as simple as rolling dice or flipping a coin. Quants who make investment (err, gambling) decisions based on simplistic mathematical models are doomed to blow up and investors should run – not walk – away from such “analytic” money managers.

The Power of Momentum and Human Psychology

Furthermore, anyone who doesn’t believe in the power of momentum – be it in stocks or sports teams – is uninformed to put it mildly and doesn’t appreciate the importance of human psychology. In Big Profits from Momentum Investing I cited academic research from both Clifford Asness and James O’Shaughnessy proving that stocks with momentum outperform over the next 12 months. In sports, the academic research says that momentum is a myth but I don’t care. Most of these academics have never played sports and don’t have a clue.

I played competitive baseball throughout high school and college and time after time I saw errors cause players to “freeze up” and commit more errors. Just watch the movie Harvard Beats Yale 29-29 about the 1968 edition of “The Game” to understand how psychological momentum takes on a life of its own to cause players to act differently than they normally would. As Yale tackle Tom Peacock said after that horrible 1968 game where Harvard scored 16 points in the final 42 seconds:

You just got the feeling that the universe had shifted somehow, that something portentous, significant, weird was taking place.

Throughout my years of playing ball, I also saw how one player’s success could inspire the rest of a team to play at a much higher level than their natural talent would normally lead them to play. Confidence and the lack thereof are huge determinants of sport outcomes. Academics who don’t understand this remind me of those who say that the stock market is efficient and that Warren Buffett is just lucky to have outperformed for 45 years.

Thanks to Bentley University economics professor Jeffrey Livingston, I still have hope that academics will come around to the reality of sports momentum. In his 2010 study The Hot Hand and Cold Hand in Professional Golf, Livingstone concludes that sports momentum does, in fact, exist sometimes depending on the individuals involved:

Mean impacts can mask differences in how players of various experience levels react to their own recent results. Overall, across the four tours, there are many examples of large and statistically significant effects of previous performance on current performance for players of a particular level of competitive experience.

Bottom line: Don’t be fooled by averages; subsets of data can contain meaningful patterns. And never underestimate the importance of psychology in sports or stock investing!

Super Bowl Indicator Says 2012 Will Be an Up Year for Stock Market

In Best ETFs for the Super Bowl, I discussed the “Super Bowl indicator” which has historically been a very effective predictor (78%) of how the stock market will perform in the upcoming year (35 correct calls in 45 years). Specifically, the indicator predicts that the stock market will rise if an original NFL team wins the Super Bowl and will fall if an original AFL team wins. If an expansion team (i.e., post 1970 NFL-AFL merger) wins the Super Bowl, the original league affiliation of the losing team is used to make the prediction. If both Super Bowl teams are expansion teams, well, that has never happened so let’s not go there.

The theory behind the Super Bowl indicator is that original NFL teams – which have existed much longer than their AFL brethren – are more experienced and richer and consequently “should” win. If the NFL team doesn’t win, then investors get upset because the universe isn’t operating as expected and they sell off stocks in reaction. Of course, this rationale makes no sense today when original AFL teams have had several decades of experience and are just as rich as many original NFL teams. Most view the indicator’s historical effectiveness as a “spurious correlation” that has no real causative effect. As New York Times columnist Floyd Norris once wrote:

Anyone foolish enough to bet on a game based on the stock market, or credulous enough to believe that a football game can forecast the stock market, probably should hire an investment manager, a psychiatrist, or both.

Spurious correlation or not, the Super Bowl indicator has spoken: 2012 should be a positive year for the stock market because the New York Giants won and they are an original NFL team. But the Giants won the Super Bowl in 2008 thanks to an 83-yard scoring drive with 2:39 left in the game, and yet 2008 turned out to be one of the worst market years on record, so don’t bet the farm on this indicator! The Giants also won it all in 1987 and 1991, which were two positive years for the S&P 500 (up 5.7% and 29.4%, respectively) but keep in mind that 1987 was the year of the great October crash that saw stocks lose 22% in a single day. Stocks’ strong start in 2012 is the best since 1987 which is a little creepy given what happened later in 1987 after the strong start.

One thing is certain: a positive signal from the Super Bowl indicator says absolutely nothing about stock market volatility!

Best Super Bowl Commercials

It turns out that the Super Bowl can predict more than just the direction of the overall market; it can also predict which individual stocks will outperform the market. Last year in Best ETFs for the Super Bowl I talked about stocks with popular television commercials outperforming over the following week. Based on the best Super Bowl commercials during this year’s game, PepsiCo (NYSE: PEP) and Anheuser-Busch InBev (NYSE: BUD) should be bought right now. The TV commercial indicator only works for the upcoming week, however, so it is nothing more than a short-term trade.

Stocks of Companies Located in the Cities of the Game and Winning Team Outperform

TV commercials are, however, not the only data point from the Super Bowl that can be sued to pick outperforming stocks. Research has shown that companies headquartered in the game’s host city (e.g., Indianapolis) as well as the winning team’s city (e.g., New York City) are good bets to outperform the S&P 500 over the coming year, with host-city stocks performing slightly better than winning-team stocks. This one-year trade is arguably more useful than the one-week trade involving TV commercials, although it appears to require buying all of the 60-odd stocks in the Bloomberg NY City stock Index (BNYCM) and/or the Bloomberg Greater Indianapolis stock index (BGIX).

Host-city stock superiority makes sense since the host city receives direct and substantial economic benefits from visitors spending cash in the two-week party prior to kickoff time which totals between $250 and $450 million (including multiplier effects). In contrast, a winning team may create a positive psychological impact on its city’s workforce which increases worker productivity and incomes, but this has a less direct and smaller effect on corporate bottom lines than actual customer spending would.    

Below is a list of ten popular stocks, five headquartered in Indianapolis and five headquartered in New York City:

Winning Super Bowl Stocks

Stock

Industry

Market Cap

Headquarters

Eli Lilly (NYSE: LLY)

Drug

$44.2  billion

Indianapolis

Simon Property Group (NYSE: SPG)

Shopping Center REIT

$40.4 billion

Indianapolis

WellPoint (NYSE: WLP)

Health Benefits

$22.5 billion

Indianapolis

Duke Realty (NYSE: DRE)

Industrial REIT

$3.6 billion

Indianapolis

Finish Line (NasdaqGS: FINL)

Sportswear

$1.2 billion

Indianapolis

Pfizer (NYSE: PFE)

Drug

$161 billion

New York City

JP Morgan (NYSE: JPM)

Bank

$145 billion

New York City

Verizon Communications (NYSE: VZ)

Telecommunications

$108 billion

New York City

News Corp. (NYSE: NWSA)

Media

$49 billion

New York City

Colgate-Palmolive (NYSE: CL)

Household Products

$44 billion

New York City

 

Honorable mention goes to insurer MetLife (NYSE: MET) which has the naming rights to Giants stadium.

 

I’m a New York Giants fan so I’m still basking in the glory of the Giants’ 21-17 “stomp out” of the Patriots in Super Bowl XLVI (46). You know you spend too much time watching the stock market when you see XLVI and immediately think of the SPDR Select Sector Health Care ETF (NYSE: XLV). Anyway, it was a great game with Big Blue and “elite” quarterback Eli Manning defeating the “Spy Gate” bad boys from Boston for the second time in four years.

Besides the Pats, there were two other losers that made my day: (1) Las Vegas bookies and (2) hedge fund quants. Las Vegas bookies almost always win because they take a 4.5% commission on every bet (which lowers the bettor’s odds below fair value). In fact, prior to this year the bookies had made a handsome profit in 18 of the past 20 Super Bowls – the only two losers occurring in 1995 — when the 49ers beat the Chargers by 23 points (49-26), which more than covered the largest spread in Super Bowl history (18 ½ points), and 2008 –  when the Giants upset the 18-0 Patriots, commonly believed at the time to be the greatest team ever (or at least since the undefeated 1972 Miami Dolphins).

This year, the bookies suffered many sleepless nights because a substantial number of die-hard Giants fans had bet on the Giants to win the Super Bowl at odds as high as 100-to-1 near the end of a four-game regular-season losing streak that left them with a 6-6 record and virtually no chance of reaching the playoffs let alone the Super Bowl. Unfortunately, despite these long-shot bets that paid off, the bookies might have squeaked out a profit anyway on a flood of last-minute (and losing) bets in favor of the Patriots, but the fact remains that they made a lot less money than they would have if the Pats had won. Let us be thankful for small victories.

The other deserving Super Bowl losers were the arrogant quants – also known as hyper-frequency traders – whose mindless algorithms were responsible for the “flash crash” of May 2010. The same types of people were responsible for the collapse of the Long-Term Capital Management hedge fund in 1998 as well as the 2008 financial crisis, which was caused by impossibly-complex mortgage securities that defaulted despite having been given triple-A ratings based on (intentionally?) flawed mathematical models of the housing market.

The problem with quants is that they study how things have behaved in the past and extrapolate the past to the future, leveraging up ten or twenty-fold on bets that the future will be the same as the past. When Genius Failed author Roger Lowenstein described the flawed thinking of the quants working at the Long-Term Capital Management hedge fund this way:

Prices and spreads vary with the uncertain progress of companies, governments, and even civilizations. They are no more certain that the societies whose economic activity they reflect. Dice are predictable down to the decimal point; Russia is not; how traders will respond to Russia is less predictable still. Unlike dice, markets are subject bit merely to risk, an arithmetic concept, but also to the broader uncertainty that shows the future generally. Unfortunately, uncertainty, as opposed to risk, is an indefinable condition, one that does not conform to numerical straitjackets.

With regard to this year’s Super Bowl, quants working at Los Angeles-based hedge fund Analytic Investors were certain that the Patriots were going to beat the Giants because their quantitative model – which had correctly predicted which Super Bowl team would cover the spread for eight consecutive years – predicted that the Patriots would cover the spread. Since Las Vegas odds had the Patriots as favored to win by 3 points, predicting that the Patriots would cover the spread meant that the Patriots were going to win the game. According to Steve Sapra, the mastermind behind the quantitative model, the 3-point spread was too narrow because:

Bettors are extrapolating the Giants’ recent string of upsets into the Super Bowl,” he said. This makes no more sense than betting that a coin which has come up heads five times in a row is more likely to come up heads tomorrow.

Unbelievable! This “mastermind” is making the exact mistake Lowenstein talks about in When Genius Failed – it’s as if Sapra had never read the book. Let me repeat: real-life events are complex and not anywhere near as simple as rolling dice or flipping a coin. Quants who make investment (err, gambling) decisions based on simplistic mathematical models are doomed to blow up and investors should run – not walk – away from such “analytic” money managers.

Furthermore, anyone who doesn’t believe in the power of momentum – be it in stocks or sports teams – is a fool and completely ignorant of human behavior.  In Big Profits from Momentum Investing I cited academic research from both Clifford Asness and James O’Shaughnessy proving that stocks with momentum outperform over the next 12 months. In sports, the academic research says that momentum is a myth but I don’t care. Most of these academics have never played sports and don’t have a clue. I played competitive baseball throughout high school and college and time after time I saw errors cause players to “freeze up” and commit more errors. Just watch the movie Harvard Beats Yale 29-29 about the 1968 Game to understand how psychological momentum takes on a life of its own to cause players to act differently than they normally do. As Yale tackle Tom Peacock said after that horrible game where Harvard scored 16 points in the final 42 seconds:

You just got the feeling that the universe had shifted somehow, that something portentous, significant, weird was taking place.

I also saw how one player’s success could inspire the rest of a team to play much better than their talent level would predict. Confidence and the lack thereof are huge determinants of sport. Academics who don’t understand this remind me of those who say that the stock market is efficient and that Warren Buffett is just lucky to have outperformed for 45 years. Thanks to Bentley University economics professor Jeffrey Livingston, I still have hope that academics will come around to the reality of sports momentum. In his 2010 study The Hot Hand and Cold Hand in Professional Golf, Livingstone concludes that sports momentum does, in fact, exist sometimes depending on the individuals involved:

Mean impacts can mask differences in how players of various experience levels react to their own recent results. Overall, across the four tours, there are many examples of large and statistically significant effects of previous performance on current performance for players of a particular level of competitive experience.

Bottom line: never underestimate the importance of psychology in sports or stock investing.

In Best ETFs for the Super Bowl, I discussed the “Super Bowl indicator” which has historically been a very effective predictor (78%) of how the stock market will perform in the upcoming year (35 correct calls in 45 years). Specifically, the indicator predicts that the stock market will rise if an original NFL team wins the Super Bowl and will fall if an original AFL team wins. If an expansion team (i.e., post 1970 NFL-AFL merger) wins the Super Bowl, the original league affiliation of the losing team is used to make the prediction. If both Super Bowl teams are expansion teams, well, that has never happened so let’s not go there.

The theory behind the Super Bowl indicator is that original NFL teams – which have existed much longer than their AFL brethren – are more experienced and richer and consequently “should” win. If the NFL team doesn’t win, then investors get upset because the universe isn’t operating as expected and they sell off stocks in reaction. Of course, this rationale makes no sense today when original AFL teams have had several decades of experience and are just as rich as many original NFL teams. Most view the indicator’s historical effectiveness as a “spurious correlation” that has no real causative effect. As New York Times columnist Floyd Norris once wrote:

Anyone foolish enough to bet on a game based on the stock market, or credulous enough to believe that a football game can forecast the stock market, probably should hire an investment manager, a psychiatrist, or both.

Based on the Super Bowl indicator, 2012 should be a positive year for the stock market because the New York Giants won and they are an original NFL team. But the Giants won the Super Bowl in 2008, which turned out to be one of the worst market years on record, so don’t bet the farm on this indicator! The Giants also won it all in 1987 and 1991, which were two positive years for the S&P 500 (up 5.7% and 29.4%, respectively) but keep in mind that 1987 was the year of the great October crash that saw stocks lose 22% in a single day. Stocks’ strong start in 2012 is the best since 1987 which is a little creepy given what happened later that year after the strong start.

It turns out that the Super Bowl can predict more than just the direction of the overall market; it can also predict which individual stocks will outperform the market. Last year in Best ETFs for the Super Bowl I talked about stocks with popular television commercials outperforming over the following week. Based on the best Super Bowl commercials, PepsiCo (NYSE: PEP) and Anheuser-Busch InBev (NYSE: BUD) should be bought right now. 

TV commercials are, however, not the only data point from the Super Bowl that can be sued to pick outperforming stocks. Research has shown that companies headquartered in the game’s host city (Indianapolis) as well as the winning team’s city (New York City) are good bets to outperform the S&P 500 as well, with host-city stocks slightly better than winning-team stocks. This makes sense since the host city receives direct and substantial economic benefits from visitors spending cash in the two-week party prior to kickoff time which totals between $250 and $450 million (including multiplier effects). In contrast, a winning team creates a positive psychological impact on its city’s workforce which has supposedly increased worker productivity and incomes, but this is a less direct and smaller effect than actual spending.    

Below is a list of ten stocks, five headquartered in Indianapolis and five headquartered in New York City:

Winning Super Bowl Stocks

Stock

Industry

Market Cap

Headquarters

Eli Lilly (NYSE: LLY)

Drug

$44.2  billion

Indianapolis

Simon Property Group (NYSE: SPG)

Shopping Center REIT

$40.4 billion

Indianapolis

WellPoint (NYSE: WLP)

Health Benefits

$22.5 billion

Indianapolis

Duke Realty (NYSE: DRE)

Industrial REIT

$3.6 billion

Indianapolis

Finish Line (NasdaqGS: FINL)

Sportswear

$1.2 billion

Indianapolis

Pfizer (NYSE: PFE)

Drug

$161 billion

New York City

JP Morgan (NYSE: JPM)

Bank

$145 billion

New York City

Verizon Communications (NYSE: VZ)

Telecommunications

$108 billion

New York City

News Corp. (NYSE: NWSA)

Media

$49 billion

New York City

Colgate-Palmolive (NYSE: CL)

Insurance

$44 billion

New York City

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