U.S. equities continue to stagger around like a brave-hearted boxer who's taken a few too many shots to the head. They're not quite ready to keel over, but it's hard to shake the impression that one more stiff jab could knock them right over on their back, out for the count.As long as the November lows hold, however, the bulls still have a chance. So for everyone looking for any glimmer of hope that all is not lost, let me note that there is a compelling historical case to be made for at least one more rally. The big back-to-back decline of the Dow Jones Industrials on Friday last week and Monday this week set the benchmark index back by -4.1% over five days. That setup has occurred 15 times in Decembers since 1929 and paradoxically has bullish implications. Tony Kolton, who is founder and head honcho at Logical Information Machines in Chicago, says that in every instance the Dow was up by an average of 4.2% over the next 20 days. That yields a target of 13,720 on Jan. 16. These instances occurred in 1932, 1933, 1937, 1941, 1957, 1973, 1974, 1975, 1980, 1982, 1996, 1997, 2000 and 2002. The largest returns were in 1937, 1982 and 1996. The most recent, in 2000 and 2002, were positive by 0.7% and 1.9%, respectively. While those aren't the kind of numbers that will make bulls absolutely ecstatic, they should at least give bears a pause. They essentially suggest that the broad market will be higher four weeks from now, so it's probably not a great time to press big bets on the short side right away.
Now if a sideways market does emerge to taunt the bears, our attention turns to potential winners within the Dow. One that catches my eye is Walt Disney ( DIS). It's been fairly nonvolatile all year, putting in a disappointing -1.3% performance that's well below the Dow's 6.1% gain this year. The most it was ever up this year was around 5% in May, and shares have just lolled around ever since -- never being pulled under by the credit crunch, but not rising as a safe haven, either. If it were a Disney World attraction, you'd have to call it something like Mr. Iger's Mild Ride. I have always liked Disney because it consistently creates first-rate content. Disney characters continue to be among the most popular in the world, and most of the company's new ventures, including its ABC television network and ESPN sports network, will keep it at the forefront of American industry for a long time. Mickey never goes off patent and will not be surpassed in quality or cost by a cheap Asian import. Indeed, Disney does exactly what you would expect from a modern business -- it's never content to make just one product stand on its own. It integrates each product and wrings as much value out of it as possible. New ideas start with the theatrical release of an animated or live-action movie, then you have DVD sales, TV licensing deals, sequels, merchandising and often a theme-park attraction. And, of course, all of the filmed portions add to an outstanding, growing library that can be reused in countless ways at increasing profit margin.
The ESPN brand is a total standout for the company. ESPN is the "worldwide leader in sports," just as the slogan claims, as it has managed to become credible in college and professional football, basketball and baseball, as well as golf, tennis, auto racing and oddball loose ends like poker. Its recent takeover of Monday Night Football has been a creative and ratings success, and it has also spun off additional channels and restaurants, not to mention a great website. You could not ask for more. It's pure genius. Although Disney's film division struggled for awhile after ex-leader Jeff Katzenberg left to form Dreamworks, the purchase in 2006 of Pixar for $7.4 billion has filled that void. The company got Pixar superstar director John Lasseter in the deal, and he has slowly returned the studio to its former glory in animation. He has also spearheaded efforts to distribute Disney content through digital channels, making the company's films and TV shows the first to be sold to the iPod generation via the iTunes platform. On the executive front, the company bumbled around in the latter years of the Michael Eisner era, but it has been rejuvenated under the guidance of new top dog Robert Iger. Groomed internally in a manner that seems wonderfully old-fashioned, he was the right man for the job, and has won a lot of fans on Wall Street with a reputation for integrity, showmanship and hard work.
So why is the stock still 25% below its 2000 highs, and failing to thrive this year? The problem is that despite all of its good deeds, growth at the company remains modest and yoked to the tortoise-like pace of U.S. gross domestic product. Thus, revenue is up only around 5%. Margins are improving ever so slightly, but with the company's fortunes tied to consumer strength at a time of a discretionary spending slowdown, robust growth paths remain elusive. Disney is a very capital- and labor-intensive business, so there are only so many expenses that you can cut before you start to chip away at your core. Movie-making remains a very up-and-down business, no matter how much marketers attempt to reduce risk by picking what they believe to be audience-friendly topics, actors and merchandising approaches. And there's no getting around the fact that the TV business is an ad-driven medium subject to weakness as companies husband cash by cutting marketing budgets. Put it all together and you have a reasonably interesting combination of a well-run, high-profile company for whom expectations are low. With positive late December seasonality as a tailwind here, that could be good for a relatively low-risk move back to the $35.25 area over the next four weeks, which would be a 6.5% gain. Not exactly "to infinity and beyond," as Buzz Lightyear would say, but not bad in a stubbornly weak environment.