Flushing Cash Into The Casino – The Media Stock Swoon Shows That It Works Until It Doesn’t

Submitted by David Stockman – The Contra Corner Blog

If you don’t think the Fed and other central banks have transformed financial markets into debt besotted gambling casinos, consider the last few days of carnage in the media stocks. That sector is rife with bubble finance infections.

To wit, hedge fund speculators feasting on zero interest carry trades and cheap options own 10% of the 15 companies which comprise the S&P Media index. That happens to be the highest hedge fund ownership ratio among all 23 S&P industry sectors.

So given that the essential modus operandi of hedgies is leveraged gambling, not hedging risk, it is not surprising that they have ganged-up on the media stocks. Indeed, as Zero hedge noted with respect to this week’s sharp and unexpected sell-off:

The love affair between hedge funds and media stocks is being tested. As Bloomberg reports, hedge funds have been near-constant champions of the industry, drawn in by its high cash generation and buybacks, takeover speculation and the straight-up momentum of the stocks themselves. This week’s retreat represents the sharpest rebuke to that thesis — and one of its only setbacks in a bull market well into its seventh year.

Indeed, it has been a perfect fit. These companies—–such as Disney, Time Warner Inc., Fox, CBS and Comcast——are notorious financial engineers, using massive amounts of the dirt cheap debt enabled by the Fed to fund incessant M&A takeovers and prodigious stock buybacks. That’s exactly the kind of financial milieu in which hedge funds thrive; and one, by the same token, that would not even exist in an honest free market.

Not surprisingly, therefore, the S&P media index went parabolic in response to the Fed’s post-crisis money printing spree. From an aggregate market cap of about $135 billion at the March 2009 bottom, the index had soared by 520% to nearly $700 billion before this week’s $50 billion or 8% loss.  Needless to say, it wasn’t the geniuses who inhabit Mickey’s house or the machinations of Rupert Murdoch that made all the difference.

No, the S&P media index was propelled upward during the last six years by an endless flood of fresh cash into the Wall Street casino that kept hedge funds and robo-traders upping their bets on the next M&A deal or stock buyback announcement. Viacom (VIA) is a poster boy for the latter.

As shown below, this week’s body slam—triggered by the belated realization that the cable companies’ long suffering customers are now “cutting the chord”—— has taken VIA’s share price all the way back to its late 2010 levels.

But since customer defection has been a long-standing risk and wasn’t exactly new news, the question recurs. Exactly what was it that caused Viacom’s stock price to double in the interim and thereby shower upwards of $20 billion in market cap gains on the hedge fund gamblers who chased it?

The cause for the rip pictured below would most definitely not be growth of earnings or free cash flow. In the fiscal year ending in September 2011, Viacom posted $8.7 billion of EBITDA and that turned out to be the high water mark. Even as its stock price was soaring in the next two years, its EBITDA slithered downward to $8.2 billion in its most recent (June) LTM report.

The Recent ‘Dollar’ And The Corporate Bubble

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

Given the outward expression of the “dollar” in various proxies, it is not surprising to see the inward development continue in the same pattern. Interbank rates and estimates are in many cases surging, particularly in the second half of July which matches the acceleration in the outward projections. This direction is nearly uniform, which confirms that the latest “dollar” problems are widespread and penetrating (more on that below).

Repo rates have been especially interesting, and not just with the unnatural repetitionacross quarter-end periods. The GC repo rate for MBS and agency collateral has been at or above IOER for 10 consecutive trading days now for the first time since October 2012. The acceleration in rates is timed to this same period in question.

Repo rates have the “look” of an unstable market, which the repeating quarter-end, counterintuitively, suggested as all this roughness began. The jump in repo is matched by LIBOR, especially more recently at the end of July and into August. Three-month LIBOR soared nearly 2 bps after July 29, while 12-month LIBOR has surged almost 9 bps since July 8.

While this may simply be a continuation of the illiquidity that has plagued the system since either October 15 or December 1 last year, ruling out simple re-orientation to the will they/won’t they monetary policy, the effects are becoming quite visible in terms of shifting risk acuity. Junk versions of corporate credit have been selling in sustained fashion throughout July and into August. Leverage loans, as far as can be examined through the marketable proxy of the S&P index, are only a few index points above the mid-December lows.

A Prescription for Peace and Prosperity

Submitted by Dr. Paul Craig Roberts – Institute for Public Economy

The question is often asked: “What can we do?” Here is a prescription for peace and prosperity.

We will begin with prosperity, because prosperity can contribute to peace. Sometimes governments begin wars in order to distract from unpromising economic prospects, and internal political stability can also be dependent on prosperity.

The Road to Prosperity

For the United States to return to a prosperous road, the middle class must be restored and the ladders of upward mobility put back in place. The middle class served domestic political stability by being a buffer between rich and poor. Ladders of upward mobility are a relief valve that permit determined folk to rise from poverty to success. Rising incomes throughout society provide the consumer demand that drives an economy. This is the way the US economy worked in the post-WWII period.

To reestablish the middle class the offshored jobs have to be brought home, monopolies broken up, regulation restored, and the central bank put under accountable control or abolished.

Jobs offshoring enriched owners and managers of capital at the expense of the middle class. Well paid manufacturing and industrial workers lost their livelihoods as did university graduates trained for tradable professional service jobs such as software engineering and information technology. No comparable wages and salaries could be found in the economy where the remaining jobs consist of domestic service employment, such as retail clerks, hospital orderlies, waitresses and bartenders. The current income loss is compounded by the loss of medical benefits and private pensions that supplemented Social Security retirement. Thus, jobs offshoring reduced both current and future consumer income.

America’s middle class jobs can be brought home by changing the way corporations are taxed. Corporate income could be taxed on the basis of whether corporations add value to their product sold in US markets domestically or offshore. Domestic production would have a lower tax rate. Offshored production would be taxed at a higher rate. The tax rate could be set to cancel out the cost savings of producing offshore.

Under long-term attack by free market economists, the Sherman Antitrust Act has become a dead-letter law. Free market economists argue that markets are self-correcting and that anti-monopoly legislation is unnecessary and serves mainly to protect inefficiency. A large array of traditionally small business activities have been monopolized by franchises and “big box” stores. Family owned auto parts stores, hardware stores, restaurants, men’s clothing stores, and dress shops, have been crowded out. Walmart’s destructive impact on Main Street businesses is legendary. National corporations have pushed local businesses into the trash bin.

Monopoly has more than economic effect. When six mega-media companies have control of 90 percent of the American media, a dispersed and independent press no longer exists. Yet, democracy itself relies on media helping to hold government to account. The purpose of the First Amendment is to control the government, but today media serves as a propaganda ministry for government.

Americans received better and less expensive communication services when AT&T was a regulated monopoly. Free trade in communications has resulted in the creation of many unregulated local monopolies with poor service and high charges. AT&T’s stability made the stock a “blue-chip” ideal for “widow and orphan” trust funds, pensions, and wealth preservation. No such risk free stock exists today.

Monopoly was given a huge boost by financial deregulation. Federal Reserve chairman Alan Greenspan’s claim that “markets are self-regulating” and that government regulation is harmful was blown to pieces by the financial crisis of 2007-2008. Deregulation not only allowed banks to escape from prudent behavior but also allowed such concentration that America now has “banks too big to fail.” One of capitalism’s virtues and justifications is that inefficient enterprises fail and go out of business. Instead, we have banks that must be kept afloat with public or Federal Reserve subsidies. Clearly, one result of financial deregulation has been to protect the large banks from the operation of capitalism. The irony that freeing banks from regulation resulted in the destruction of capitalism is lost on free market economists.

The cost of the Federal Reserve’s support for the banks too big to fail with zero and negative real interest rates has been devastating for savers and retirees. Americans have received no interest on their savings for seven years. To make ends meet, they have had to consume their savings. Moreover, the Federal Reserve’s policy has artificially driven up the stock market with the liquidity that the Federal Reserve has created and also caused a similar bubble in the bond market. The high prices of bonds are inconsistent with the buildup in debt and the money printed in order to keep the debt afloat. The dollar’s value itself depends on quantitative easing in Japan and the EU.

Sign of the Bear: The Demise of Conspicuous Consumption

Submitted by Pater Tenebrarum  –  The Acting Man Blog

Luxury Goods and Status Symbols in Trouble in China

A friend recently mailed us an article from the Hong Kong Standard which describes how extremely high retail shop rents in Hong Kong can no longer be paid even by retailers of luxury brands.

Gucci store in Hong Kong, Central

Photo via flickr

Not only is this testament to the fact that Hong Kong’s real estate bubble has gotten out of hand quite a bit, but the waning demand for luxury goods is also highly interesting from a sociological and economic perspective. As the Standard reports:

Business is getting tougher for Hong Kong’s retailers with the value of total retail sales dipping 1.6 percent in the first half of 2015 from a year back, according to the Census and Statistics Department’s latest data.

Valuable gifts, including jewelry, watches and luxury goods, were hardest hit, with sales falling for 10 consecutive months. Sales value slumped 10.4 percent in June compared with a year earlier, despite efforts by several luxury brands – including Italian fashion house Prada – to boost sales by cutting prices. Squeezed by slimmer pickings in Hong Kong and the mainland market, top global luxury brands are looking to renegotiate store rents to cut costs.

The latest to plead for landlords’ mercy was French luxury goods conglomerate LVMH. Revenue from its signature brand Louis Vuitton slumped 10 percent year- on-year in Hong Kong, Macau and China for the first half while Europe and the United States saw stronger sales of fashion and leather goods. It is also planning to close a directly operated shop of its biggest watch brand, Tag Heuer, in Causeway Bay.

[…]

British high-end fashion house Burberry, which has 16 shops in the SAR, said it may trim its local store network and negotiate for lower rents after the Hong Kong market, which accounts for about one-tenth of the brand’s total sales, saw a double-digit percentage fall in sales over the period.

Meanwhile, Gucci owner Kering said it will consider closing its Hong Kong and Macau outlets if rents stay high.

[…]

Waning sales and whopping rents have sent Italian fashion label Baldinini packing. It shut its first and only flagship boutique in Hong Kong after just four months in operation, ending its three- year contract.

In June, visitor arrivals from the mainland were down 1.8 percent year- on-year. Adding to the woes of luxury goods vendors are the changing spending patterns of mainland visitors, who are now looking for more mid-priced products.

(emphasis added)

We don’t believe this is happening because prospective clients can no longer afford these goods. While Chinese consumers of ostentatious luxury items have probably taken a hit from China’s economic weakness and its wobbling real estate and stock market bubbles, they can surely still afford to buy Gucci bags and Tag Heuer watches. We believe that they rather no longer want to be seen adorned with such items.

The Dow Jones Luxury Index has actually peaked in May 2014 already – click to enlarge.

The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

• China Exports Fall 8.3% From A Year Earlier (Bloomberg)
• The Commodity Slump Is Killing Hedge Funds (Bloomberg)
• “The Top’s In”: David Stockman Warns Of “Epochal Deflation” (ZH)
• Gross Sees September Rate Rise, Global Economy In Deflation (Bloomberg)
• Shadow Banking Draws Canadians Where US Banks Are Warned Away (Bloomberg)
• Europe Moves to Cut Risk in $505 Trillion Derivatives Market (Bloomberg)
• Economic Reality Now Catching Up To Market Fantasy (Smith)
• EU Told Greece On Track For Possible Bailout Deal Next Week (Reuters)
• James Galbraith: ‘Not Even Schäuble Thinks It’s a Good Solution’ (Spiegel)
• Acting On Varoufakis Claim, Greek Police Find No Hacking Signs (Kathimerini)
• Europe’s Neo-Liberal Road Began At Mont Pélerin (Luciano Gallino)
• The US Is Destroying Europe (Eric Zuesse)
• Bank Shares Become Latest Thorn for Australia’s Market (WSJ) • Economists Think Brazil Will Get Downgraded to Junk in the Next Few Years (Bloomberg)
• Dutch Pension Fund Demands Full Fee Disclosure From Private-Equity Firms (WSJ)
• Merkel’s War on Germany’s Press and Parliament (Spiegel)
• Tourists and Refugees Cross Paths in the Mediterranean (Spiegel)
• UNHCR Warns Of Deepening Refugee Crisis In Greece, Calls For Action (UNHCR)
• Greek PM Calls EU For Help On Migrants Crisis (Reuters)
• ‘If We Don’t Help, Then Who Will?’ (Kathimerini)

Much more here: Debt Rattle August 8 2015 – TheAutomaticEarth.com