I will never forget last week’s stock market carnage. Global equities lost $5.2 trillion in value. The Dow Jones plunged 2000 plus points, with two 1000 point falls, its worst week since the post-Lehman meltdown in October 2008. The Chicago Volatility Index (VIX) has tripled to 34 as I write as fear replaced greed with a vengeance. The 2/10 US Treasury note spread has widened to 75 basis points, a telltale signal that investors fear inflation risk. Like Paul Volcker, Alan Greenspan and Ben Bernanke before him, Fed Chairman Jay Powell takes office amid a financial crisis.
The era of central bank easy money is over. The Fed will yank $20 billion a month from the money markets as it shrinks its balance sheet. This has led to higher US short term rates and a bloodbath in the Treasury bond market. Readers of this column should not be surprised since I outlined precisely this scenario in 2017. The valuation metrics of US equities have fallen from 18.5 to 16.4 times forward earnings, though post tax reform EPS growth will be robust.
The swift, brutal 10 – 13% fall in US and global equities is a correction in a secular bull market, not the primal scream of a bear market. Friday’s close was a positive as buyers emerged when the S&P 500 index traded down to its 200 day moving average at 2540. Yet I hear about busted hedge funds, radioactive vol ETF’s, horror stories on trading desks, margin calls – the spikes in volatility and volumes alone tell the tale. The untold billions in risk parity asset funds will have to liquidate equities since volatility has spiked above their target range. Yet Ursa Maxima will only come with recession, impossible in 2018.
The risk reward calculus on the Stoxx Europe 600 index at 368 (as I write) is utterly compelling. Europe now trades at a 3 full point discount to Wall Street at 13.8 times forward earnings. True, the spike in the ten year German Bund yield means that valuations should compress – as they did so traumatically last week when risk did a Rip Van Winkle with a vengeance. Yet Europe is also a play on the acceleration in the global economy as the rise in German and French exports attests? Italy? Political noise, even though the idea of Silvio Caesar as an octogenarian kingmaker in Rome is surreal. German politics? A non-issue. The Grand Coalition will ultimately embrace the Merkel-Macron vision of “mehr (more) Europe”.
The failure of the US dollar to attract a safe haven bid and Brent crude’s resilience at $67 tells me that last week was a stock market event, not a 2008 style systemic financial crisis. High yield spreads have widened but not gone ballistic – for now. I expect the ECB will postpone the end of its planned taper in September and thus ease pressure on the uber-Euro, which will be a steroid shot for the Stoxx Europe 600. The index’s volatility at 18 also makes now an attractive entry point for Europe. The national PMI’s demonstrate the Eurozone economic growth momentum is intact. I need to see Spanish and Italian indices outperform the German DAX and the French CAC-Quarante to green light my European high beta basket and, as always, track the earnings revisions cycle in real time. There is a time to own America and there is a time to own Europe. This is the time to own Europe.
I was horrified to see the world’s bluest of blue chip biotechs slammed even before the latest market swoon. Nathan Mayer Rothschild advised that “buy when there is blood on the street – and there is definitely blood on this street. This is the ultimate event driven (FDA approvals, pipeline milestones, new drug compounds, royalty and licensing deals etc.) so I will not name names but note that ImmunoGen shares went up four times in 2017.
I was stunned to see the Nikkei Dow’s 700 point rise flame out in Tokyo on Wednesday. Yet this does not change my conviction that the Empire of the Rising Sun will be one of Asia’s great investment themes for me once Mr. Market (Market – San?) calms down. I have made no secret of my conviction that Kuruda-san (the second arrow of Abenomics!) will be reappointed governor of the Bank of Japan in April, that the yen will trade in a 107 – 116 range against the US dollar and that Sony, Toyota and Softbank are my favourite Dai Nippon blue chippu’s. Arigato gozaimas!
Market View – Walt Disney and the remaking of global media
Walt Disney will be reinvented by CEO Bob Iger’s $66 billion deal to acquire Twenty First Century Fox’s cable, film and television assets, just as it was transformed by the acquisitions of Pixar, Marvel and Lukasfilms. Star TV, Sky, Hulu.com, $2 billion in cost savings from Fox’s awful Hollywood movie studio, the world’s deepest content film library mean the Magic Kingdom will easily surpass Netflix as the world’s preeminent video streaming and direct to consumer digital producer. Is this template of the future remotely priced into Disney’s stock price at 103? Absolutely not. This makes the House of Mouse my favourite Dow canine, a megacap Goofy of Wall Street.
2018 will be a hot year for Disney. The star producers of the Game of Thrones will create two Star Wars movies. Four Marvel movies are on the studio’s agenda. True, ESPN’s franchise value has eroded with subscriber cord cutting but the delta for 2018 has bottomed with the launch of the new web service and streaming product. At $4.99 a month, ESPN Plus service is certain to be a global hit. Disney’s theme parks in Paris (which I dreaded as a Daddy), Anaheim and Orlando, Hong Kong and Shanghai are on a roll and posted a 21% rise in operating income.
Disney has the best managed, most profitable movie studio in Hollywood (Fox was the worst, hence the cost synergies!) True, the Last Jedi missed its whisper number but Thor and Pixar’s Coco will mint box office gold.
Disney was positioned itself to be the world’s preeminent media/entertainment firm in a world where Netflix and Amazon dominate the digital video market. Note that Parks and Resorts, no less than the third of Disney revenues and 26% of earnings, is an undervalued growth engine. Disney will now own video streaming firm (Hulu.com), the world’s highest growth television network (India’s Star TV), the most valuable film library in the world and the biggest pay for view satellite broadcast network in Europe (Britain’s Sky). Bob Iger suggested Disney will spend $7 billion on content at least $2 billion more than Amazon’s Prime video services. Disney’s new streaming service ESPN Plus will also offer subscribers NHL, major league baseball/soccer, rugby and cricket, though not NBA and NFL games. Mark my words: Disney will dominate the future of Next Gen global television and the global market for e-sports.
It is ironic that investors have derated Disney since early 2015. Its ESPN woes meant the shares have gone nowhere in the past three years as the S&P500 index has risen 25%. Yet the Fox deal will give Disney some of the world’s hottest media brands, technologies and distribution platforms. As the fall in cable subscribers is offset by higher broadcast affiliate fees, I expect investors will focus more on Disney’s new global footprint, direct to consumer streaming video future and reinvented television network model. Hulu creates a revolutionary new tech platform for the global distribution of Disney’s programming.
Disney’s fourth quarter $1.89 EPS on $15.35 billion in revenues beat the Street whisper number but were announced amid frenzied panic selling in global markets last week. My response? Yummy. Price is misaligned from value, a real time scenario that now exists in the media colossus of Burbank. It makes no sense to me that Disney trades at a valuation multiple of 15 times 2018 projected earnings (EPS) at a time when its operating margins, growth drivers, cable networks, technological backbones and global markets will be transformed by the Fox deal and new product offering.
True, babies get thrown out of the bathwater when Mr. Market has a nervous breakdown even if the baby in question is Luke Skywalker, Princess Leah (RIP Carrie!), Darth Vader, Mickey Mouse, Donald Duck, Solo, Captain America, Sleeping Beauty, World of Avatar and Tomorrowland. I consider Mr. Walt Disney one of the most wonderful human beings who ever lived for the sheer joy he brought to so many untold millions of people worldwide since the 1930’s. What could be a nobler mission in life than to make the world’s children (and yes, adults) laugh? Now Bob Iger, married to my Penn classmate, the model Willow Bay, is guardian of that priceless legacy. The Magic Kingdom will surely rock again!
