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Why the NFL and NBA Lockouts Are Bullish


The NFL, NBA are locked out. Europe can't resolve debt problems in Greece, Ireland, and Portugal. The US has hit its debt limit and can't reach an accord. This is all bullish.


The 1994 baseball strike, at the time, was my biggest disappointment in life. When August 12, 1994, marked the end of the baseball season, I was about to turn 13 years old. Matt Williams would never get a chance to break Roger Maris's record. The Expos would never get a chance to make the playoffs, dooming baseball in Montreal. And let's be honest, as a pre-adolescent in the early '90s, summertime meant TV, sports, video games, and Sour Patch Kids candy. And waiting for the mail to come to see who'd be on the cover of Sports Illustrated.

Only recently, thanks to inspiration from the folks at the Socionomics Institute, has the connection to economic cycles been obvious. Pro sports leagues are like any other large, herding economic institution. When leagues and owners are optimistic they expand -- hockey teams in Nashville and Atlanta? Sure! $70 million for Raef LaFrentz? Why not! However, when mood turns bleak and revenues decline they don't have the same options available to them that companies and governments do. They can't cut payroll as easily -- you still need 25 players on a baseball roster, and at least in baseball and basketball long-term contracts are guaranteed. The powerful card that owners can play is locking out players to rework revenue arrangements.

Here's a list of major pro sports lockouts in the US since 1974, which is a bit of an arbitrary date, but the notion of pro sports as a real business didn't really become commonplace until the early '70s after the merger of the AFL/NFL and free agency in baseball.

  • 1974: NFL - July-August (44 days)
  • 1981: MLB - June-July, games canceled
  • 1982: NFL - September-November, games canceled
  • 1987: NFL - September-October, replacement players/game canceled
  • 1994-95: MLB - August-April, World Series canceled, shortened 1995 season
  • 1994-95: NHL - October-January, shortened season
  • 1998-99: NBA - July-January, shortened season
  • 2004-05: NHL - season canceled
  • 2011: NFL, NBA - ongoing

There's an interesting pattern at work: 1974 represented the ultimate bottom of the late 1960s-early 1980s secular bear market. 1981-82 were the changeover years between secular bear and secular bull. The 1987 NFL strike ended less than a week before the '87 crash -- a harrowing event to be sure, but a speed bump in the grand scheme of things. 1994-95 coincided with the federal government shutdown and some funky times in the bond markets. The 1998-99 NBA lockout overlapped with the Russian debt default and the fall of Long Term Capital Management. And the 2004-05 NHL strike was arguably a response to hockey's aggressive expansion in the 1990's, but even so it happened after the conclusion of the dot-com crash.

What you'll notice is that with the exception of the 1987 crash, which was the mother of all buying opportunities anyway, it didn't pay to be bearish as any of these lockouts were ongoing. In fact, of all four sports the NFL has appeared to be the most socionomic -- its work stoppages occurred in 1974, 1982, and 1987, three of the best years to buy stocks in the past half century.

Kevin Depew has written extensively about the zombies theme prevalent in society over the past few years, and I piggybacked on the idea for a piece I wrote a couple months ago about it extending to pro sports, as teams like the Dodgers had been zombified (see Dodgers and Mets: The Greece and Ireland of Pro Sports). Well, that's over. If I could short the zombies meme I'd do so in size. Instead, we've moved firmly from zombie institutions to workouts and resolutions, which I highlighted in my 2011 outlook piece (see Resolution and Recovery: Disputes to Watch in 2011).

As we sit here in early July, many institutions are at an impasse. The NFL and NBA are locked out. Europe can't seem to figure out how to resolve the debt situations in Greece, Ireland, and Portugal. The US government has hit its debt limit, and can't seem to figure out how to reach an accord. The Minnesota state government is shut down. And the Los Angeles Dodgers -- a team that was purchased in 2004 for $0 down with a bunch of real estate assets as collateral -- has moved past the zombie stage and is now working through bankruptcy proceedings.

This is all bullish. As we look at economic conditions, we don't see exurban California town houses selling for $500,000 with people camping out for the right to purchase one, as we saw in 2006. We don't have the S&P 500 trading at a P/E of 28, as it did in 2000. Unemployment is already elevated. Governments are already cutting back. Social mood is already pessimistic -- we are already convinced that we are doomed to debt deflation, hyperinflation, another lost decade, the end of American hegemony and the dollar standard, a shortage of natural resources, climate change wreaking havoc on humanity, the implosion of the interlinked global economy, or something else that the in-the-pockets-of-the-elite media won't tell us about.

Maybe the US government will fail to lift the debt ceiling for a couple weeks longer than expected, or European banks will have liquidity crises again, causing asset markets to crash. And in fact, I think there's a pretty good chance of one or both happening over the next few months. But let's not confuse a short-term disruption to financial markets like we saw in 1987 or 1998 as being another Lehman Brothers instead of the situation we find ourselves in today, which is the slow, methodical transition of the economy to the next secular bull market.

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No positions in stocks mentioned.

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