Disney / Netflix / Bonds / British American Tobacco

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Hi fellow Finimizer, here's the news you need to know for August 10th. Reading time is 2:59 minutes.

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Disney & Netflix: Unhappily Ever After

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What’s Going On Here?

After reporting a slump in profits in its latest quarter on Wednesday, entertainment giant Disney said that it will be stepping back from its partnership with Netflix and launching its own streaming service. Unimpressed investors still sent Disney’s stock down by almost 4%…

What Does This Mean?

ESPN, a sports network that’s one of the biggest media brands in Disney’s portfolio, was again the culprit for Disney’s profit miss: more and more viewers are ditching their cable TV subscriptions, which means less cash for ESPN from cable providers.

Industry experts have argued that the mass migration away from cable is an important reason for Disney to launch its own streaming services. That means Disney plans to sever some of its ties with Netflix, which saw its stock drop by 1.5% (presumably as investors fear that the loss of content and a big new rival will hurt Netflix’s subscriber numbers).

Why Should I Care?

For markets: Disney warned that its investment in streaming will dent profits.
Disney also announced on Wednesday that it was spending $1.6 billion to take a bigger ownership stake in a streaming technology firm called BAMTech (Disney already bought about a third of the company last year for $1 billion). BAMTech’s expertise will help Disney build its streaming service. Eventually, that investment may turn out profitable; but for now, it’s just expensive, and will hurt Disney’s near-term profits.

The bigger picture: The streaming landscape is getting crowded quickly.
There are a lot of streaming options already: CBS All Access, HBO GO, Amazon and Netflix are in the game, while other media companies, like Viacom, are planning more launches. Consumers probably won’t pay for all of these services, so the market for streaming will likely have to shrink – and not everyone will be a winner.

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Smoking Hot Bonds

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What’s Going On Here?

In the latest sign that big corporations are borrowing record sums of cash this year, tobacco giant British American Tobacco (BAT) has raised $17 billion dollars from investors in the second biggest bond offering of the year!

What Does This Mean?

Selling bonds to investors is a way for companies to raise funds instead of, say, getting money from a bank through a loan. BAT wants to use the money it’s raised from selling bonds to help fund its recently agreed $50 billion purchase of US rival Reynolds American (with Reynolds American on board, BAT will become the world’s largest tobacco company).

Why Should I Care?

For markets: Companies are on track to raise a record amount via bonds this year.
Interest rates across the world remain near historic lows, and investors are scooping up companies’ bonds in a hunt for returns (corporate bonds pay out a bit more to investors than comparably “safer” ones like government bonds). The extra returns that companies’ bonds offer over government bonds are near their lowest level since before the 2008 financial crisis – suggesting that corporate bonds are unusually popular at the moment and hence people are exploiting almost all the potential extra returns.

The bigger picture: There’s a risk that companies are taking on too much debt.
Companies are taking advantage of this huge demand and are borrowing lots of money by selling bonds to investors. The problem is that this debt will eventually need to be repaid, in most cases with future profits or with more borrowed cash. If the economy takes a turn for the worse, however, companies’ profits would likely take a hit and investors would likely be more wary about lending money – so those original debts could go unpaid. Since companies have borrowed so much recently, the overall risk within the financial system – and to markets – is thus significantly increasing.

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Q&A

RE: Two Fund Managers Happily Married

Lucas asked:

“You say the market has exhibited very low volatility this year, but also that ‘there has been a bigger difference than usual between the returns of individual stocks.’ What gives?”

“The stock market has been on a steady climb higher this year: there have been very few days where the value of the overall market jumped or fell by more than 1%. Despite the lack of big moves, US stocks are up about 10% for the year so far. But underneath that calm surface, individual stocks and certain sectors have performed very differently from one another. For example, tech stocks have done distinctly better than the overall market, while energy stocks have performed much worse. So the divergence of stocks within the market is different than its overall volatility.”

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