Yearly Archives: 2016

Disney (DIS) from 30,000 feet

August 10, 2016 By in Cable, earnings conference calls, Entertainment, ESPN, Uncategorized Tags: , , , 1 Comment

I’d only followed DIS from afar until the company acquired Marvel Entertainment, which I held in my portfolio, for a combination of stock and cash in late 2009.  I kept the shares I acquired and also bought more while DIS was depressed by critics doubting the wisdom of its move. I’m tempted to write about how wrong that view was, but that’s for another day (not soon).

As I studied DIS’s financials, I found that ESPN accounted for about 75% of the firm’s overall operating profit.  The movie studio, run by a former monorail driver at the theme parks, was a mess.  Income from the parks was depressed by recession.  The Disney brand was also almost completely dependent on female characters, making Disney attractions less appealing to half the adolescent population.  ESPN, on the other hand, was/is the dominant sports cable franchise in the US and was going from strength to strength.  For a moment–until I realized the marketing advantages of having the Disney name in the public eye–I wondered why the company didn’t just rename itself ESPN.

In addition, the simple percentage of earnings seemed to me to understate the importance of ESPN to DIS.  The movie business is typically a hit-or-miss affair and therefore doesn’t merit a premium multiple.  Same with the hotels/theme parks, because they have a lot of operating leverage and are highly sensitive to the business cycle.  So I concluded the key to the DIS story was the progression of its secular powerhouse–and its one high-multiple business–ESPN.  Nothing else mattered that much.  (Of course, I didn’t understand the full power of Marvel, or the turnaround in the Disney studio, or the subsequent acquisition of the Star Wars franchise, but that’s a separate issue.)

In 2012, ESPN began an effort to expand its business in a major way into the EU by bidding large amounts for broadcast rights to major soccer games in the UK.  Incumbent broadcasters, however, realized (correctly) that no matter what the cost it would be cheaper to keep ESPN out of their market than to deal with it once it had a foothold.  So they bid crazy-high prices for the rights. ESPN withdrew.

ESPN’s failure was disappointing in two ways.  A new avenue of growth was closed off.  At the same time, the attempt itself signaled that ESPN believed its existing Americas business was nearing, or entering, maturity.  That’s when I began easing toward the door.

The issues for ESPN–cord-cutting and the high fees ESPN charges–are very clear today.  What I find most surprising is that it took the market three years, and an announcement of subscriber losses by DIS, for the stock market to focus on them.  So much for Wall Street’s ability to anticipate/discount future events, even for a major company.

I don’t think ESPN is helping its long-term future by seeking to boost ratings by having personalities shout at each other in faux debates.  Nor does covering WWE as if it were a real sport.  I think they’re further signs of decay.  My sports-fan sensibilities aside, the real issue is about price.

Suppose every cable subscriber pays $4 a month to get ESPN, but only 15% actually watch sports–or would pay for ESPN if it weren’t part of the basic package.  If so, the real cost per user is closer to $30 a month, most of which is being unwittingly subsidized by non-users.  There’s only one way to find out if current users would be willing to pay $30 for ESPN, which is by removing the service from the bundle everyone must buy, reducing the basic cable charge by $4 a month, and offering ESPN separately.  That’s what the cable companies want–and what ESPN is looking to avoid.

We’re nowhere near the end of this story.  I don’t think the final chapter will be pretty for ESPN.

On the other hand, as I see it, just after the UK rebuffed ESPN, DIS began to direct its ESPN cash flows away from cable and toward building up its film and theme park businesses.  For me, this was the sensible thing to do.  And it confirmed my analysis of the situation with ESPN.

My bottom line:  for four years ESPN has been the cash cow that’s funding DIS’s expansion elsewhere.  Wall Street only realized this twelve months ago.   But DIS’s reinvention of itself is still a work in progress.  Until the market begins to view DIS as an entertainment company that happens to own ESPN rather than ESPN-with-bells-and-whistles the stock will continue to struggle.

 

 

why productivity matters

August 9, 2016 By in economics, labor productivity, Uncategorized Tags: , , , , 2 Comments

This morning the Labor department issued its report for 2Q16 on productivity and costs.  The release shows that productivity in the US dropped for the third quarter in a row, coming in at -0.5% at an annual rate.

Why does this matter?

what productivity is

Productivity is a measure of the amount of output the average worker produces in a given period of time.  The government gets its aggregate figure by dividing its estimate of real output during a period by its estimate of total hours worked.

why it’s important

In broad terms, GDP can grow in two ways.  Either there can be more people working to make stuff, or workers can become more productive, that is, make more output per unit of time.

Worker productivity is not boosted by exhorting employees to make superhuman efforts from 9 to 5, as at least one of my former bosses firmly believed.  Instead, productivity increases come either from capital investment that provides workers with better tools or from workers getting training/education that allows them to work smarter.

consider Japan,

the poster child for advanced country GDP dysfunction.  The domestic workforce there is shrinking by about 0.7% per year.  So the country has to increase the productivity of existing workers by the same amount simply to prevent GDP from falling!

If we assume that continuing capital investment can increase productivity by 1.0% a year, which for Japan would be saying a lot, the country is locked into at best a miniscule 0.3% long-term annual GDP growth rate.  In other words, it is perpetually teetering on the edge of recession.

There’s no evidence of any increase in the Japanese birth rate;  in fact, it has been going in the other direction for a long time.  One obvious solution to stagnation is to allow immigration.  However, Japan has a xenophobic aversion to admitting foreign workers.  It’s opposed to allowing women having a significant role in corporations, too.   So it remains stuck in the same economic rut it has been in since 1990.

as for the US…

Just as the shoot-yourself-in-the-foot actions of the Japanese central bank in dealing with that country’s first decades (tightening policy too soon and nipping recovery in the bud), its response to its demographic dilemma should also be a cautionary tale for the EU and, ultimately, for the US.  In both areas, the same demographic forces are at work, though at a less advanced stage–and with the work force younger in the US than in the EU.

measurement problems?

In the early days of the personal computer era, productivity statistics showed the same kind of lackluster progression that they are exhibiting at present.  That turned out to be a problem with how productivity was being measured.  Maybe the same will turn out to be the case with the technological change the internet is bringing.  Or it may be that in creative destruction, the second part comes first.

a practical application

The long-term growth rate of the US economy is now about 2%, comprised in roughly equal parts of growth of the workforce and productivity increases. The Republican economic platform maintains that the GDP growth rate of the US can be doubled by:

–lowering the number of foreign workers who can enter the US and compelling, say, 5% of the current workforce to leave the country, and

–reintroducing obsolete 1970-era tools to American factories, attempting to create a domestic market for output by placing high tariffs on imports of modern products.

I’m not sure how fewer workers + older equipment = growth.  More immigration + worker training/retraining might be better.

Emperor Akihito and abdication

August 8, 2016 By in Japanese development, Uncategorized Tags: , , , 1 Comment

On the same weekend that Alex Rodriguez, 41, announced his retirement from baseball, Japanese Emperor Akihito, 82, made an address to the Japanese nation in which he indicated his desire to abdicate–a wish current Japanese law has no provision to grant.

an (incredibly) short history

Japan was ruled by an hereditary line of emperors until the late 12th century, when it was removed from power by the royal family’s chief military adviser, the Shogun.

The shogunate persisted until Commodore Perry’s black ships sailed into Tokyo Harbor in 1853, forcing Japan to end a long period of isolation.  In the turmoil that followed, the shogun was deposed and the emperor restored to the throne as a semi-figurehead.

In the post-WWII Japanese constitution, the emperor was allowed to remain, in a purely symbolic political role. He (the constitution requires a male emperor) confirms the Prime Minister, for example, but he can only anoint the candidate that the legislature presents to him.

a cultural/religious role

I began studying the Japanese economy and stock market in 1986.  To fight jet lag, every morning I would run from my hotel to the Imperial Palace, around the palace (two miles?) and back.  Unlike the situation today, back then there were no Japanese runners for company, only one or two other odd foreigners.  But at 6:30am there were always a dozen, sometimes many more Japanese citizens kneeling facing the palace and praying.

That’s because of the religious/cultural belief that when the emperor is crowned he mates with the sun god Amaterasu.  His communion with the source of light makes him semi-divine; it also assures the good will of Amaterasu–and Japan’s exceptionalism as the land/race on earth that maintains a uniquely harmonious balance between dark and light.

the calendar, too

When he ascends to the throne, the emperor chooses a name for his reign.  The traditional Japanese calendar is reset to be Year 1 of that era.  Emperor Akihito chose “Heisei” (peace everywhere) in 1989.  So 2016 = Heisei 28.  His father, Hirohito, was the Showa (enlightened harmony) emperor.

Akihito and abdication

Twenty-five years ago, a speech like Akihito’s would have sent shock waves through Japan, and would doubtless have had a negative effect on the stock market.  But while visitors to Tokyo still seek out the Palace Hotel because it’s the closest one can physically get to the Imperial Palace grounds, the morning worshipers have long since disappeared.  Japanese citizens appear to be overwhelmingly in favor of changing the law to allow Akihito to abdicate.  Bhe move will likely create as few economic ripples as the resignation of Pope Benedict did three years ago.

Employment Situation, July 2016

August 5, 2016 By in employment, Employment Situation report, Uncategorized Tags: , , , , , 1 Comment

This morning at 8:30 edt, the Bureau of Labor Statistics of the Labor Department released its monthly Employment Situation report for July.

The numbers were strong.

The economy created +255,000 new jobs last month.  Revisions to the prior two months’ data were also positive.  The very weak May figures that caused financial markets alarm bells to ring were bumped up from +11,000 new positions to +24,000; the extra-strong June results edged higher to +292,000 from +287,000.

The effect of this ES report, I think, is to dissipate all the concern about incipient economic weakness that caused the Fed to refrain from raising interest rates at its last two meetings.

Although I’ve never been a big fan of financial companies, traditional banking operations, where interest margins on loans have been severely squeezed by years of easy monetary policy, would seem to me to be the biggest beneficiaries of this development.  My guess is that the ES will also encourage the stock market to continue its drift away from mature cash-generative companies to more capital investment-intensive secular growth names.

the Federal Reserve and the election

August 4, 2016 By in Federal Reserve, Uncategorized Tags: , , , , , , 1 Comment

The Fed is in an awkward position.

From a monetary stimulus perspective, the US has been in the equivalent of hospital intensive care for eight years.  In fact, by some measures the amount of stimulus being applied to the economy today is greater than it was during the depths of the 2008-2009 recession.

On the other hand, there’s the cautionary tale of Japan, which has been in quasi-recession for almost three decades.  At least part of this is due to three instances–one monetary, two fiscal–where the Land of Wa withdrew stimulus prematurely and nipped recovery in the bud.  Japan’s history also seems to show that reversing a policy mistake once made doesn’t undo all the damage of having made it in the first place.  This is the cause of the Fed desire to err on the side of having too much stimulus or having it for too long.

The Fed knows, too, that the legislative and executive branches in Washington are dysfunctional–that there’s no hope of government spending that would attack pockets of economic weakness through, say, programs to retrain workers displaced by technological advance or on repairing aging infrastructure.  This is despite the fact that extra dollops of monetary stimulus only improve the overall economic tone of the country and are less and less effective at addressing specific issues of great concern like chronic unemployment and bad roads.  On the other hand, the Fed is enabling this craziness by monetary accommodation.

On top of all this, the Fed is hemmed in by the presidential election cycle.  It typically does not want to make a move that could be interpreted as an attempt to influence the November election, either by lowering rates to make the economy seem more vigorous (favoring the incumbent) or raising them to make it seem less so (favoring the challenger).  In today’s case, of course, it has no scope to do the former.  And the Republicans are the party that wants to eliminate the Fed as an independent body (a lunatic move, from an economic standpoint).

So, what is the Fed going to do?

Its recent rhetoric says it wants to raise rates again before yearend.  There are three scheduled meetings left in 2016:  September, November and December.  It would seem to me that acting after either of the first two amounts to meddling in the election.  That leaves either an unscheduled meeting in August or the scheduled one in December.