Advertisers and the Economy: Interpublic and Omnicom

A few observations to begin with today. On the commute home yesterday I walked past a shop I walk past quite often but noticed, in the window, a small sign that read “Help Wanted”. It was a simple little sign, an 8 ½” x 11” piece of paper in landscape format printed from a computer with simple lettering. There was no phone number, email address or website. The sign was a throwback to a time when the web didn’t exist. It said two things, the first: if you’re interested in working here, come in and talk to us, in person. The other thing it said is that we are looking to hire someone. A job, job creation, a small, possible subtle sign, that job destruction is coming to an end. Maybe for its quaintness, maybe for its possible indicative quality, I’m not sure but I can tell you that seeing that sign made me feel good.

I noticed something else yesterday. It was about the WSJ, which as you’ve probably guessed I read every day. It had nothing to do with the print or the layout or any of the articles. It was about the weight of it; noticeably heavier. I had the previous day’s Journal in my bag so I checked and the first section yesterday was 28 pages long, the day before it was 22. I’m not trying to grab at straws here but that’s a 27% increase.

I know it’s September, summer is over and it’s the beginning of high season in New York City but there wasn’t that much more news yesterday than the day before so that leaves ad pages to account for the difference. People spending money on ads means: a) they have the money to spend, b) they are spending it and c) they expect those ads to generate revenue. Small signs, both of these anecdotes, but at least they’re on the positive side.

Staying with advertising for a moment, it is interesting that people tend to spend money on it less when they need it more and vice versa but regardless it is one of those industries that has a pretty big ripple effect in the economy, especially one as service-based as the one in the States. The creative guy has an idea, the artist draws it up, the crew films it, the catering guy shows up at the filming site to make sure everyone is fed and then the clean up crew comes afterwards to make it look like nothing happened there. All that from the need to advertise.

The 2010 elections are coming as is the Olympics. Both of these will create demand for advertising and while both are events with a specific end date, they are coming at a time when more of the $787 porkulous package is kicking in and unlike the income redistribution that characterizes most of Congress’ effort at reinvigorating the economy, an increase in ad spending will give real people real work which will then filter to other real people.

Two names in the advertising space included in the CEC universe are Interpublic Group (IPG) and Omnicom Group (OMC). The CEC Strategy is currently long both of these. IPG’s CDS closed last night at 505bps. A relatively high level as CDS spreads go but roughly 1/6th of the 3017bp level seen on January 23rd of this year. The stock moved from its $3.20 low on 2/3 to $6.32 on 5/1 when the CDS had declined to 732bps. From there the stock went sideways a bit before breaking above the May high in mid-August. It’s been a bit choppy but the most recent break above the $6.56 close of 8/25 has been followed with continued strength and the stock closed last night at $7.36.

OMC, the other ad firm in the Portfolio, looks similar with regard to the path of the CDS and equity levels with some slightly different numbers. The CDS/equity high/low for OMC occurred on March 9th, a rare, perfectly synched turn. The CDS was 379bps and the stock $22.06 on that day. The stock rose to $32.84 by 5/6 just a day before the CDS hit an interim bottom of 85bps. The sideways thing happened for a while before the stock broke above its May highs in mid-July. OMC’s CDS closed at 55bps last night. The stock closed at $37.93.