What Is Advertising Telling Me?
In my column yesterday,
“Three Things For The Bears To Consider,” I stated that investors should
take the currently cautious corporate outlook with a grain of salt, as business
managers have little upside in expressing optimism about the future despite
improving fundamentals. Well today, I would like to add one more piece of
evidence to my “watch what they do, not what they say” theme, and discuss recent
positive developments in advertising.
Why Advertising?
Business spending on advertising is very
discretionary–that is, very flexible–and, therefore, ad budgets are usually
the first casualties during economic contractions. Conversely, when companies
are feeling more optimistic about future business trends, they begin to spend
more on advertising. As a result, trends in this sector are often considered
good indicators for future business activity.
What Is Currently Happening In
Advertising?
For the past three years, business spending on
advertising has steadily declined, as companies have cut non-essential costs in
an effort to restore profitability to their firms. Recently, however, there have
been some positive developments in advertising, suggesting that sentiment is
also improving–again, despite what managers have been saying.
According to Advertising Age, the major
television networks, ABC, FOX, CBS, and NBC, have pre-sold 80% of their
available prime-time commercial slots. This development is significant because
it is telling us that companies are scrambling to reserve ad space at what they
consider to be “cheaper” pre-pay rates, instead of waiting until the last minute
and pay a variable rate, which is contingent on supply-and demand-factors. These
companies are therefore anticipating a pickup in future demand and higher
prices, which would in turn indicate a pickup in business spending . Moreover,
advertising activity is picking up in other mediums as well, as can be evidenced
by the 41% increase in Internet ad revenues from the previous quarter.
This pickup in advertising spending is partly in
anticipation of an increase in consumer spending in the months ahead as a result
of the recent tax cuts signed into law. And in all likelihood, the
retail/consumer sectors are the ones that are feeling most of the optimism
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