The Economy

Their linear networks, which includes ESPN and ABC (also includes Disney Channel, Disney Jr.), are not the only assets that earn the company money. It makes far more money from its parks, experiences and products. The networks are the company's most reliable source of cash flow, and maybe it makes no sense to spin them off or sell them. But the only argument I could see for not selling would be because they are spending so much money on a few other things, most notably streaming, and they essentially are funding it with the cash that their networks generate. And that's not really an argument at all, because Bob Iger was probably brought back to clean up the mess they have made of the company.

The argument for selling would generally be that putting aside direct-to-consumer, which is killing the company as a whole with how much they have spent, you have a disjointed company that is trying to do too many things. And each of the segments would likely benefit from them being separated from the others. You have the content licensing and sales, which isn't doing very well at the moment, but which traditionally has been a cash cow. You have the networks. And you have the parks and resorts and hotels. Out of them, the parks and resorts has been the area that has been flying recently and actually keeping Disney from doing even worse than it has. It's just really economically sensitive and is subject to ups and downs; the good times are probably going to be ending soon.

ESPN and ABC are a cash cow, not a grower, though, and they are just different from everything else the company does. The other profitable parts of Disney rely on owned IP. The argument the Wells Fargo analyst was making is that it would leave behind a pure play IP company. The networks also might be vulnerable, which drags down how people value Disney overall, because direct to consumer is what investors are focused on (which is why Disney has invested so heavily), and rightly or wrongly they aren't excited about linear networks. It's actually been a bit of a weight on Disney at times because companies get valued to a degree on where investors think the future is, not on what they are doing today.

 

Bingo. "Good news" = bad news.

It's all tea leave reading, though, and one day-fluctuations based on random economic reports are more often that not getting reversed quickly, because underlying it all is still. ... obviously high consumer price inflation.

Also, the Fed raising rates isn't the big threat to risk assets (including the equity market) at this point. It's the balance sheet, which they have talked a big game on, but are reducing at a slower than slow pace. If they actually follow through, that is when the stock market will collapse (which is why there is a lot of money betting they are not serious).

They have spent almost a decade and a half creating money out of thin air and using it to buy treasury and mortgage debt, which has been the main mode of suppressing interest rates. The cheap money that unleashed has blown the mother of all equity bubbles. The size of their balance sheet topped at around $9 trillion worth of asset purchases. They are not expanding the balance sheet, which is why the stock market has buckled. But to deal with their inflation problem, they need to actually let the bonds they bought mature and roll off their books rather than reinvesting the principal. They have talked about it, tried to prepare markets for it, are still talking a big game. ... but if they follow through, things are going to break. Worse than they did in 2008 when the bubble they had blown was much smaller.

Unfortunately, they are backed against a wall, because of the pressure to deal with the consumer price inflation (which was a consequence of the monetary inflation behind that huge balance sheet). But if they do it. ... there are going to be credit defaults and a lot of failure, and people are going to hear "too big to fail" talk again. The only question is what area the first explosion occurs, because they are so many leveraged areas of the economy on the back of a decade and a half of mispriced debt markets. It's impossible to predict, but the corporate leveraged loan market is a prime candidate. A lot of that debt has relied on rolling over their debt every few years, which wasn't a problem in a zero interest rate policy environment. ... In the coming year, if the Fed keeps it up, their funding costs are going to have risen dramatically, and the sudde ncredit concerns that the distorted markets pushed into neverland are going to make it much more difficult for them to find that funding. I suspect we're going to find that 1) there are a lot of people swimming naked, and the tide is about to go out, and 2) the amount of bad debt is going to make 2008 look relatively quaint.

Which is why markets (the bond market is the smart money, and the inverted yield curve says it all -- it is cheaper to borrow for 30 years than for 2 years) are actually betting that the Fed is going to do what the Fed always does, and try to kick the can down the road. ... they will turn tail rather than deal with the economic chaos they are reponsible for, and at this point if it means runaway consumer price inflation, they will prefer to try to inflate away the debt (on the back of all of us) rather than let the defaults happen.