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An old boss during our broking days used to tell us the same thing every earnings season…

“Two things move markets: Interest rates and earnings.”

Well, we’ve had a gutful of interest rates moving markets recently… so let’s take a look at the earnings side of things instead.

Let’s see if there’s anything that gives us a clue about specific sectors and whether you as an investor can do anything about it.

But first…

Market Data

The S&P 500 closed down 0.8% to end the day at 4,347.35… the Nasdaq fell 0.9%, to close at 13,521.45.

For individual stocks, Microsoft closed down about 0.7% to $360.69… Apple ended lower by 0.2% at $182.41… and Tesla ended the day at $209.98, a 5.5% fall.

In commodities, West Texas Intermediate crude oil trades at $75.57… gold is $1,962.80 per troy ounce… and bitcoin is $36,532.

And now, back to our story…

A Fast-Changing Sector

Yesterday, two former giants of the media and entertainment industry reported earnings.

There wasn’t much to get excited about… Although it was less bad for one than the other.

That’s The Walt Disney Company (DIS) of the former semi-independent Florida enclave of the Reedy Creek Improvement District – before Governor Ron DeSantis put an end to that caper – and Warner Brothers Discovery Inc. (WBD) of Bugs Bunny and Wile E. Coyote fame.

Disney made a profit, beating analysts’ estimates. But Warner Bros. didn’t do either.

That explains why Warner Bros.’ stock price fell 19% during yesterday’s trading.

So, is either of them a good stock to buy now?

Both are diversified media companies. Both have struggled, are struggling, and will likely continue to struggle in a hyper-competitive market.

Disney at least seems to understand that. This quarter, for the first time, it published the revenue and earnings for its ESPN business unit. ESPN revenue was up 1% to $3.8 billion with operating income up 16% to $987 million.

We would think Disney is being more transparent about ESPN for one of two reasons.

The first is that Disney says it plans to begin moving ESPN to a standalone subscription streaming model by 2025 at the latest… although the ESPN+ subscription streaming service already exists. That service generally features different content from what’s available on the cable-accessed ESPN.

ESPN+ generated $33 million in the quarter for Disney. So it’s not a bad business.

The second is the possibility that Disney is putting ESPN in the market’s “shop window” for competitors to look at as a takeover target.

Either is possible. And there may not even be a “right answer” for which way Disney decides to go.

But Disney has had success with launching streaming products. The Disney+ streaming service has more than 150 million global subscribers.

ESPN+ has more than 25 million subscribers in the U.S. So it’s not as though Disney doesn’t know what it’s doing.

For comparison, Amazon Prime has more than 200 million global subscribers and Netflix has slightly less than 250 million.

So, Disney has done reasonably well, seeing as it was later to the game than the others.

The problem is that the more it moves towards streaming services, the more it directly competes with Netflix, Amazon, and Apple TV.

And the more it becomes a competitor for viewers, the more it will have to compete with them for content. That will be especially true on the sports side of the business, which is still mostly controlled by traditional networks.

One thing in Disney’s favor is the recently signed 10-year deal between ESPN and the National Football League (NFL). For $2.7 billion per year, ESPN gets to broadcast Monday Night Football for the next 10 years, plus it gets two Super Bowl broadcasts for Disney’s ABC network. (The last time ABC broadcast the Super Bowl was in 2005 when the Steelers beat the Seahawks.)

That buys Disney a bit of time… especially with Amazon paying $1 billion a year for the Thursday night game.

It’s worth noting that both the ESPN and Amazon contracts expire in 2033. By that time, any new deals will likely look completely different.

With so much having changed in media over the past 10 years, it isn’t a stretch to think things will change over the next 10 years.

So, what does all this mean? And why should you as an investor care… especially if you don’t own Disney (or Warner Bros), and you don’t plan to buy either stock?

Bad and Getting Worse?

We guess you could say it’s a live-action case study into how changes in technology and consumer behavior can have a big effect on a business.

And it’s not always possible to recognize the change in advance or to act on it in time even if you do.

Until recently, the belief was that “live-action” sports and other events were beyond the capability of streaming services. The thought was that those platforms were great for binge-watching TV series, movies, or old shows.

But live sports? Not a chance.

That has changed. Both Amazon, Netflix, and YouTube have shown they can broadcast live sports quite capably. Now, everything is fair game.

And that negative sentiment has spilled over into their respective stock prices. As the following chart shows, Disney is down 55% over the past two years, and Warner Bros is down 67%.

When you see charts like that, it’s tempting to be a contrarian and to think it can’t get any worse.

But it could get worse. The saying is often that “content is king.” Disney and Warner Bros. have plenty of content.

But so do Netflix, Amazon, Apple, and others. Not to mention Alphabet (GOOG) with its YouTube platform. It’s a dangerous competitor for all these other streaming platforms… especially when the barrier to entry for a YouTube content creator is so low.

Anyone with a video camera, some basic editing software, and an idea, can result in tens – or even hundreds – of thousands of subscribers… and millions of views.

Every minute a viewer spends watching YouTube is a minute they’re not watching one of the other platforms.

The more the industry matures, the more subscribers will look at how much they’re spending on each of these subscription deals.

One of the big motivators for people “cutting the cord” with cable companies was that they were paying for hundreds of channels and content they never watched.

Now folks are paying $5, $10, or $15 per month for each service, perhaps not watching more than a few hours on each. At which point does the consumer-subscriber start to question those costs as well?

Maybe it’s already happening. Disney+ and ESPN+ subscriber numbers are beginning to flatten out. Netflix global numbers continue to grow. But again, growth rates aren’t what they once were.

**Investors Don’t Really Hate EV Stocks… Yet**

If you’re especially keen on playing the contrarian investor, we mentioned in yesterday’s “unconnected dots” section of The Daily Cut how everyone seems to hate electric vehicle (EV) stocks.

And in our view, that sector makes for a much better potential contrarian play than media/entertainment.

That doesn’t mean EV stocks won’t fall further. With all the negativity around the sector, there’s a good chance they will. Investors seem to hate EV stocks… but they don’t really hate them yet.

Yet despite that, the move to EVs seems inevitable. Countries are passing laws to eliminate gas-powered cars within the next 10 years.

Whether those countries actually achieve those goals or not is another thing. But the direction and trend is clear.

Already, all the major car makers are developing EVs and retooling factories for increased production.

In a way, you could say they’re doing what Disney and Warner Bros. are doing. They’re responding to new market entrants and a changing consumer mindset.

The difference is the thing we mentioned earlier. The barriers to entry for creating video content are relatively low. The barriers to entry for designing and building a new car are extremely high.

That creates a big advantage for the incumbent carmakers in the U.S., Europe, and Asia.

It gives the EV sector a positive inevitability that the media sector lacks. If we were tempted to place a long-term trade on these sectors, it would be long EVs, and short media/entertainment.

We figure it’s an interesting idea. We’ll continue to watch it and update you on our thoughts.

One More Thing

At writing, bitcoin is trading around $36,500.

The market rumor mill is heating up about the inevitability of a bitcoin ETF listing on the U.S. market.

Last night Teeka Tiwari held a special presentation about the “Final Collapse” of the U.S. dollar.

The performance of bitcoin and the U.S. dollar are connected. To see why, go here.

Unconnected Dots

Our main task at The Daily Cut is to try to “connect the dots.” That is, we help you figure out what events are about, what makes them important, their consequences, and what it all means for you.

But sometimes, we see the individual “dots,” but can’t yet figure out how they connect to anything. Maybe they never will connect to anything.

Regardless, if those unconnected dots feel as though they could be important, we’ll mention them here. And we’ll let you draw your own conclusions.

Today’s unconnected dots…

Bloomberg reports:

Citadel founder Ken Griffin said the world is facing unrest and structural changes that are pushing it toward de-globalization and causing higher baseline inflation that may last “for decades.”

“The peace dividend is clearly at the end of the road,” Griffin said at the Bloomberg New Economy Forum on Thursday in Singapore, referencing the Russia-Ukraine and Israel-Hamas wars. “We are likely to see higher real rates and we’re likely to see higher nominal rates.”

The Daily Cut has warned about this for some time. Higher inflation isn’t, as they say, “transitory.” Inflation is still near 4%, and that’s just the official number.

In the real world, the rate is likely higher. There is still no proof the Federal Reserve has “beaten” inflation, or that the Fed even genuinely wants to beat inflation.

The cynic would say it is happy keeping inflation high in order to make it easier for the government to repay debts with devalued dollars.

We’ll continue to explore that idea another day.