Remember '74? It Was Ugly - Like Today

Cable World, Sept 9, 2002

Byline: PAUL KAGAN

Twice in recent columns I've noticed a similarity between the economic atmospheres of 1990 and 2002. But last week brought back ugly memories of 1974, a crisis similarly brought on by a new outbreak of Mideast hostilities that led to soaring oil prices. The lights in America went out that year, due to inadequate energy sources. This time around the U.S. wants to put somebody else's lights out, with a challenge to make war on Saddam Hussein.

Combine that with rumors that Ted Turner may be gaining traction once again inside AOL Time Warner, and higher CNN ratings can't be far behind.

Cable is inevitably linked with world news, ever since CNN's shining hours transmitting from Baghdad. At the very moment the industry's programming became most popular, its bankers were pulling plugs on over-leveraged MSOs.

The viewers won. When the banks got their own balance sheets in order, three years later, cable was in such good shape that Bell Atlantic agreed to buy TCI at retail. The telco backed out only after the FCC tightened cable regulation and John Malone wouldn't lower his price.

Back in 1974, when public cable was a baby, there was a double bottom in the stock market, first in September and again in December, which proved to be a rock-solid foundation for a bull market that lasted for the next 25 years. What most people don't realize is that both the Dow Jones Avg. and the Kagan MSO Avg. enjoyed exactly the same bull run, even if they drifted apart periodically in the middle.

The Dow bottomed at 578 on Dec. 6, 1974, and MSOs sank to a mere 2 at the end of that month. The Dow topped out at 11,723 on Jan. 14, 2000, and cable peaked at 6,096 on Jan. 21. Please note: the Dow's move over 25 years was 1,930%. Cable's was 304,700%. We don't need to get back to the top.

The Dow's still-lofty level, at 8,425, down only 28% from its high, could lead to a lingering bear. The Dow is back to where it was in Aug. 1998, but cable is worse. At 1,327 on Sept. 4 it was down 78% from the top and where it was exactly five years ago, in Sept. 1997.

For the two years following 1974, there was constant anguish over each interim correction of the rally, but by 1977 cable consolidation was on in earnest, building up a momentum that has never stopped. Today, the underlying story is unchanged. Individuals, corporations and financial institutions remain intensely dedicated to the notion of bigger and better cable systems, while disenchanted bond and stock investors rearrange their portfolios into fashionable defensive positions.

Most significant of all is that the long road to new technology, better programs, higher definition and access speed is all taking place as predicted, if slower than hoped because of the quadrennial bloodletting of the bulls.

Analyst Paul Kagan is an active investor and money manager and often owns securities mentioned in his columns. He owns shares in AOL Time Warner. He may buy or sell before and after his columns are published, and his positions may change at any time. Information in his columns does not represent a recommendation to buy or sell securities, nor is it a solicitation of any securities transaction. Kagan is vice-chairman of Primedia Ventures, an affiliate of the owner of Cable World.