☀️☕️ Streaming and Ads — Pain Again at Warner Bros. Discovery

Happy Happy Monday!

Market Roundup 📊 27-Feb-23

US large-cap S&P 500 closed 1.05% DOWN 🔻
Tech-heavy Nasdaq Composite closed 1.69% DOWN 🔻
Pan European STOXX Europe 600 closed 1.04% DOWN 🔻
HK’s Hang Seng Index closed 1.68% DOWN 🔻
Japan’s Nikkei 225 closed 1.29% UP ▲

— The MoneyFitt Morning (@MoneyFitt)
Feb 27, 2023

📝 Focus

Streaming and Ads — Pain Again at Warner Bros. Discovery

📊 In the Markets

Nokia: New logo, Old story?

📖 MoneyFitt Explains

🎓️ Hedge Funds

📝 Focus

Streaming and Ads — Pain Again at Warner Bros. Discovery

Warner Bros. Discovery (WBD) lost US$2.1 billion in the fourth quarter of last year, including $217mn from its streaming division, reflecting pain felt elsewhere in the highly competitive streaming sector (even industry pioneer and its sole profit-making business, Netflix, has been cutting subscription plans in some countries.) But the biggest pain point driving the cut in forecasts was ad market weakness.

“The biggest unknown continues to be in the ad sales environment”

Gunnar Wiedenfels, CFO of Warner Bros Discovery

WBD added just 1.1 million streaming subscribers against predictions of 1.6 million net additions, bringing the new total to 96.1 million — still far behind Netflix at 230 million globally, despite the success of HBO’s “The Last of Us.”

Back in April last year, AT&T’s WarnerMedia unit and Discovery Inc completed their merger into Warner Bros Discovery as a standalone media business including familiar names such as HBO, CNN, Discovery Channel, Animal Planet, Food Network and Cartoon Network.

The merged companies also came with US$58 billion in debt. In addition to the debt dumped in WarnerMedia from AT&T’s disastrous 2016 takeover of Time Warner Inc, there was $30bn that Discovery raised for the merger. In other words, the “merger” was actually a “leveraged buyout” or LBO, with Discovery buying WarnerMedia for $43bn. Warner Bros. Discovery currently owes $45 billion to its creditors and, after a 64% rally this year, has a market value (number of share X share price) of US$38bn.

Image credit: The Last of Us / HBO via Tenor

Leveraged Buyouts (LBOs) – Mini-explainer

In a leveraged buyout, LBO, buyers form a new company to take over a target company, with bankers adding a lot of debt in the form of high-yield (“junk”) bonds.

The target company’s assets are used as collateral for the bonds issued to take it over, with the target’s cash and cash flow used to pay the interest.

This is because, after the buyout, the target becomes a subsidiary of the new company (or the two merge into one company) and all the target company’s assets and borrowings are replaced by the new company’s assets and borrowings.

📊 In the Markets

US markets opened down and pretty much stayed there all day as traders quickly digested the 8:30am release of hotly-anticipated and stubbornly-high inflation figures. (The NYSE and NASDAQ both open for regular trading from 9:30am to 4:00pm) leading to their biggest weekly fall this year with the S&P 500 index down 2.7% and the tech-heavy Nasdaq Composite off 3.3%. Markets have now dropped for three consecutive weeks.

Interestingly, these three weeks (admittedly a very short time when investing) come right on the heels of a report by Goldman Sachs of hedge funds 🎓covering their short positions after an “unexpectedly” strong start to the year, and doing so at a faster pace than height of 2021 meme stock frenzy. This means that before the slide that began about three weeks ago, hedge funds were frantically cancelling out their bets that the markets would go down, after markets went up on them and lost them money.

Short-selling – a mini-explainer

If you believe that a stock will go down for whatever reason (perhaps it is expensive relative to its prospects or if you suspect fraud), you can sell the shares you have.

But if you don’t own any of its shares, you can still sell them by first borrowing shares for a fee from an existing shareholder via your broker and then selling them on the market. (This can also be done through derivative instruments.)

If you’re right, you can repurchase them (known as covering your shorts) at a lower price and pocket the difference, less the fee you paid to borrow the shares.

If you’re wrong, you lose money and may have to cover your shorts at a higher price. Worse, everyone else may know you are short and buy those shares up, so you repurchase them higher and higher in what’s known as a “short squeeze.”

What came out on Friday was The Fed’s preferred measure of inflation, core monthly personal consumption expenditures, “PCE”, which rose more in January than Wall Street’s Finest expected. Prices increased 0.6% compared to December, the most since June, and above market expectations of 0.4%. Compared to January 2022, they were 4.7%, far ahead of the average forecast of 4.3%.

Not how inflation is forecast, but for a sense of scale, 12 consecutive months of 0.6% increases would come to 7.4% in a year. 12 at 0.4% would come to 4.9%. The Fed’s target is 2%.

As we mentioned on Friday, “The Fed has just two things to look after: inflation and jobs. Not growth, not profits, not elections, not climate change.” And the jobs market is still looking red-hot.

With stubbornly high consumer prices and retail spending, markets fear that the Fed will likely keep interest rates “higher for longer.” Exactly. As. The. Fed. Has. Been. Warning.

The blue boxes are the highest probability in each upcoming meeting, implied by future prices. Image credit: FedWatch Tool via The MFM

Friday’s stock market selloff was broad-based, led by the tech sector, which is especially sensitive to higher interest rates. At the same time, the global bond market rally since the start of this year has evaporated more or less.

Investors at the start of the year all listened to the smartest strategists on the planet and reached their own conclusions that the US Federal Reserve and other major central banks would soon be ending their aggressive campaign of interest rate hikes. When interest rates start coming down, bond prices go up. Of course, investors can buy bonds before rates actually come down in anticipation of that move… which is exactly what investors did en masse in the first few weeks of 2023.

But then, as data showed signs of persistent inflation, those expectations fizzled out, and bond investors fear that the Fed will likely keep interest rates “higher for longer.” Exactly. As. The. Fed. Has. Been. Warning.

Global bond markets since the start of the year – Image credit: Vanguard Total Bond Market Fund (USD) via TradingView

Nokia: New logo, Old Story

On Sunday, Nokia changed its logo and brand identity for the first time in 60 years. It is focusing on aggressive growth in business technologies like private 5G networks and equipment for automated factories, competing with Microsoft and Amazon.

This should turn the business around. (Stock is 93% down from its all time high in April 2000.) – Image credit: Nokia

In 2007, Forbes Magazine published an issue asking, “can anyone catch the cell phone king?” Nokia was, at the time, the undisputed market leader in the booming cell phone market. 2007 was also the year in which Apple announced the original iPhone.

And in a textbook example of the Innovator’s Dilemma destined for MBA case studies for infinity and a day, Nokia was unwilling to cannibalise its very successful handset business, failing to recognize the shift toward the powerful smartphones that dominate consumers’ attention to this day.

Ironically, Nokia had been a great example of a business pivoting to where the opportunity was, having started with durable rubber boots and car tyres and going via televisions to the world’s cell phone king and the biggest network infrastructure company on the planet. ​​In 2014, Microsoft bought Nokia’s mobile phone business and by the end of the year had dropped the brand. (Modern Nokia branded phones are made under licence.)

Forbes cover 10 years ago. https://t.co/EBlHpdRDsl

— @mikko (@mikko)
Nov 12, 2017

📖 MoneyFitt Explains

🎓️ Hedge Funds

A hedge fund is a type of investment fund that pools capital from multiple investors, like mutual funds, but because they use various complex strategies to generate returns, are not regulated like traditional investment vehicles and are typically only available to accredited investors (i.e. rich folks).

Many of them lock up investor money for relatively long periods of time and charge high fees, such as “2-and-20”, meaning an annual management fee of 2% of assets plus a 20% share of all gains made in the portfolio. This rewards, on purpose, either long-term thinking or a high-risk / high-return investing mindset.

Hedge funds are often run by highly experienced investment managers who use sophisticated investment strategies, such as short selling and derivatives, to generate returns. One element of that is the use of leverage, borrowing money to increase the size of their investments, which can amplify returns but also increases risk if the trades go wrong.

One of the benefits of hedge funds is that they have the potential to generate high returns, which can be especially attractive to investors looking for ways to either turbocharge or diversify their portfolios (or both.) On the downside, hedge funds can be highly risky, partly due to the leverage taken.

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