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Flushing Cash Into The Casino - The Media Stock Swoon Shows That It Works Until It Doesn't
Submitted by David Stockman via 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.
Likewise, net income of $2.12 billion in 2011 has now slide to $1.77 billion on an LTM basis.
In fact, Viacom levitated its stock the new fashioned way. During the last 19 quarters it has plowed $17.6 billion back into the casino in the form of stock buybacks ($15.1 billion) and dividends ($2.5 billion). But before you praise VIA for its seemingly shareholder friendly ways, consider this: During the same period it only earned $10.2 billion of net income.
That’s right. It distributed 175% of its net income!
Under the rules of old-fashioned finance that kind of reckless self-liquidation would have been considered a flashing red warning signal to hit the sell button. That would have been especially appropriate in this case since Viacom’s business model has always depended upon the improbable capacity of its cable distributors to extract punitive monopoly prices from their residential customers indefinitely.
Yet when the fundamentals reared their ugly head in this quarter’s round of media company earnings releases, the gamblers professed to be downright shocked, Why the resulting sell-off, which lopped $8 billion off VIA’s market cap in a flash, was purportedly not on the level, at all:
People are shooting first and asking questions later…this indiscriminate selling, to me, is just nuts,” exclaims on billion-dollar AUM hedge fund CIO as media stocks faced a bloodbath this week.
Well, this week’s action wasn’t exactly shooting first; it was more like asking questions way too late. In fact, the entire $20 billion market cap bubble that the most nimble-footed hedge funds feasted upon was just the result of a leverage trick. Nearly the entire $7 billion gap between what Viacom earned and what it distributed to shareholders over the last 29 quarters was borrowed!
But here’s the thing. Viacom’s fundamentals are visibly deteriorating. Its $3.05 billion of revenue in Q2 2015 was down 10.6% from prior year and 17% from the June quarter two years ago.
Stated differently, Viacom’s peak price of $90 per share, which equated to about $40 billion of market cap one year ago, had nothing to do with “price discovery” in the equity capital markets. It was a pure case of debt-fueled speculation in the casino.
But VIA is a piker compared to most companies in the media index. Take Time Warner (TWX). Looking at the stock chart from March 2009 forward you would think that the company was a found of earnings growth and value creation. Alas, you would be wrong.
Time Warner’s pre-tax income was $4.5 billion in its most recent 12 month period—–compared to $4.4 billion way back in 2011. While 2% growth in three and one-half years is not much to write home about, the casino gamblers were not slowed in the slighted. Perhaps they were impressed with the 25% growth in its net income line, but if so they were capitalizing a one-time reduction in its tax rate—-from 34% to 19.4% over the period—-as if it represented permanent growth of earnings.
In either case, gamblers have been in a rambunctious mood. The companies stock price had rebounded by 6X from the March 2009 low. And even with this week’s sell-off, the TWX stock price had risen at a 35% compound rate during the last three years at a time when its actual pre-tax income was up by 2%.
Needless to say, there is no mystery as to how this disconnect occurred. The company simply pumped cash into the casino like there was no tomorrow. To wit, during the last six and one-half years, TWX distributed $29 billion in dividends and stock repurchases to shareholders compared to net income of just $20 billion.
So it was the same formula as Viacom’s. Distribute every dime of earnings, and then top it up with a big heap of money that could be borrowed on the cheap.
In TWX’s case, its net debt grew from $11.5 billion in 2009 to $20.7 billion in the quarter just ended. That is, it borrowed every single dime of its $9 billion of distributions over and above its earnings during the period.
The bottom line is pretty straight-forward. Just prior to this week’s correction TWX was valued at $90 billion versus operating free cash flow of $2.8 billion in the LTM period just posted. It could be said that 26X free cash flow is a pretty sporty valuation for a no-growth company.
But then you should try CBS. It too has been a stock market rocket, and it too flushed $11 billion into the casino in the last four and one-half years in the form of stock buybacks and dividends. That was 140% of it net income during the period.
Likewise, another member of the S&P Media index, Comcast, distributed $28 billion in stock repurchases and dividends during the last four and one half-years or just slightly less than its cumulative net income of $31 billion over the period. Needless to say, it made ends meet after hefty investments by borrowing; its net debt soared from $25 billion in 2010 to $45 trillion in the most recently ended quarter.
Even the mighty Disney had little use for its $31 billion of net income during the same four and one-half year period ending the recent June quarter. It flushed fully $27 billion or 88% of it net income back into the casino.
During the most recent quarter debt issuance by US companies reached an all-time high, raising a question as to why companies still need to borrow so much after selling $7 trillion of U.S. debt securities since 2008.
This weeks S&P Media index swoon leaves no doubt as to the answer. Companies have not been borrowing to grow; they have been borrowing in order to flush cash into the casino.
Charles Ponzi once had a scheme that was not essentially different. Yes, and it worked until it didn’t.
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The 'markets' because they are manipulated are like casinos. The house (the fed and banks) always wins!
End the fed! Get your money out of the banks and anything 'not real'. Buy Silver!!!
Teevee!
I'm going to take a really big guess and say that if one were to take a quick look at the SEC insider trading stats for these companies, one might discover that their "C" level guys have offloaded many billions of $$ worth of insider stock option sales in the past 5 years. Hmmm?
David Stockman is right, but this reign of kleptocrats started with Stockman's former boss, Ronald Reagan. The NWO intended to replace Reagan with his VP, George Bush, after Reagan turned soft on going to war in the Middle East, preferring instead to help out the Columbian dope dealers posing as Contras. The glitch in NWO plans was when John Hinckley (whose father was one of George Bush Sr.'s closest friends) failed to kill Reagan, his shots going wild. That misstep blocked Vice President Bush from becoming president sooner. Hinckley used a .22 revolver with frangible bullets, the weapon of choice that CIA killers use since you cannot do a ballistics test on these bullets as they split apart and the gun is near silent. For some reason, Hinckley's gun did not have a long enough barrel, limiting its accuracy. After Hinckley missed his target, the back-up shooter fired the near-fatal shot at Reagan, a hard target as he was already almost in the armor proofed limo. Also using a .22 frangible round. But the Bush/Saudi 9/11 plot finally put things right and now we are in an undeclared World War III in the Midle East.
An interesting imagination.
Just one small part of Ponzi-rama......
"Comcast, distributed $28 billion in stock repurchases and dividends during the last four and one half-years or just slightly less than its cumulative net income of $31 billion over the period. Needless to say, it made ends meet after hefty investments by borrowing; its net debt soared from $25 billion in 2010 to $45 trillion in the most recently ended quarter."
must be a typo, of course in this day and age who knows.
It is the FED's way to get money to the people. Oh, wait most people don't buy stocks....
Cut the cord a few weeks ago, well canceled my directv account that is. It was one of my largest monthly bills and just could not justify it anymore.
Yup, did that a year ago, quit paying for Cumcast's cable box and bought a $45 flat HD digital antenna that I stuck in the window and gives me 30 channels, if I happen to want to watch the boob tube.
2016 will be our 10th year without a cable connection...Do not and have not missed it one bit.
Still get Time Warners crap in the mail. Loathsome bunch!
Welcome back to the real world.
Gave up TV 15 years ago, can't watch it anymore. When I happen to see it in passing in the airport or bar I avoid it like the plague. It is truly the bread and circus box, non-stop propaganda and mindless distraction. Once you've been away from it for awhile, you really do see it as a matrix projection. It is bad for your brain.
Free your mind.
You can either make Money or watch other people make Munny.
I haven't had or watched television since 1984, 31 years. In fact, I've now lived more of my life without television than with, and I grew up in the 50s/60s.
Wait, so stocks going up 500% in 5 years, fueled by leverage, luring in "long term" "investors", somehow makes the stock market less stable? Retirement money, pension money; funding the junk debt market, and capital raised by junk debt issuance is ultimately being used to propel the equity prices to bubble prices, all the while everyday Americans are buying through their own 401k/pensions, buying this shit at even more bubblicious prices!?
Just remember the Fed policy is directly responsible, and it was forseeable.
Well you see it's vitally important to fund these buybacks so that none of our "Captains of Industry" are harmed by the coming depression; we'll never be able to grow our way out if we don't save these "job creators" and their stalwart stewardship of markets and ideas.
Lulz.
Dilbert explains it all...
So in the next crash .gov will bail out the TBTF Media companies?
I can see it now; "We have to save Mickey and Minnie, the Avengers, Batman, Superman, Game of Thrones! If we don't save the media there will be tanks in the streets!"
<Cut to stock footage of tanks in streets>
And now a word from our sponsor...
<Ad for General Electric, General Dynamics, General Malaise, ...>
Camping trip with my high school aged kids last week. Campfire discussions about ponzi schemes, pyramid schemes, and of course the "free market stock exchanges" we have.
Extra bonus points if you clued them in to the fact that the efficient market hypothesis is complete and utter bullshit.
And He Built a Crooked Casino
Might as well go to Vegas!!!!!!!!!
"its net debt soared from $25 billion in 2010 to $45 trillion in the most recently ended quarter"
Fuck you Comcast
Another great rant, Dave. Now what?
No one really needs cable or satellite TV or the other products and services provided by these Dr. Joseph Goebbels-inspired, evil, corrupt Richie Rich-controlled zombie companies. I would be very happy to see them all go into liquidation bankruptcy. Put another way, fuck them all with a rusty bayonet.
Oh, almost omitted this: Fuck them all and the Richi Rich hedge funds with a rusty bayonet.
Not only are theses traditional media cos debt leveraged to the moon the Albatross wasn't even mentioned - to wit their ad rev is disappearing at 10% per and following same trajectory as on line shopping.
I got rid of TV/cable years ago, but it's the kids and 20somes - their bread and butter - who no longer watch linear TV at all. All that ad rev is going digital.
No ad rev = no content = yr fucked
Paradoxically, this particular machine needs fixing when it makes less smoke than it used to...
Why didn't they just BTFD? Never mind - next week fer sure. I mean these things are now CHEAP. LMFAO
David...Please be careful...sometimes they shoot the messenger...
This got me to thinking that it is not correct to call Wall Street a casino. In casinos, you place bets, but this is more in the nature of a guaranteed money printing machine for those players large enough to feed at the Fed trough.
So, for example, if I could borrow money for free from the Fed and use it to buy control of a company, I could then plunder the wealth of the other shareholders by taking the profits and issuing stock buybacks-- the proceeds of which I could use to pay back the Fed and leave myself with what is effectively the same amount of money in the company due to the elevated price of the remaining shares.
I could also use my control of the company to borrow money on its credit and buy back even more of my shares. I could lay off all the help and dump most of the product lines for short term jumps in the net income, which would make the stock look good to outsiders. Then I could issue bonuses to management and elevated stock options as a reward for doing such a great job.
And that's just from one tranche of borrowed Fed money. I could go back for more and do it again someplace else even as I continued to enjoy the swollen swag gleaned from my first raid.
It's no wonder that the bulls are not dented by bad economic news. It literally does not matter to their business model. The only thing that does is the continued availability of free money. It certainly explains why they bail at the slightest whiff of rate hikes. The corporate tools which the Fed planned on using to Keynes their way back to man-created prosperity have turned the tables on their putative masters and now rule the game. Their reign cannot be ended without crashing the whole structure.
We have created an entire cadre of Chainsaw Als who are systematically looting the engines of economic growth and prosperity at the behest of monetary imbeciles who have gotten themselves into a box where their only remaining hope is to hold on and pray for some form of divine intervention.
But the only thing they worship is money.
"People are shooting first and asking questions later…this indiscriminate selling, to me, is just nuts,” exclaims on billion-dollar AUM hedge fund CIO as media stocks faced a bloodbath this week.
Huh? Isn't that what buyers did? What is a market based on massive financial fraud, really worth?