WEEKLY ISSUE: Positioning for Fed Stress Test Result

WEEKLY ISSUE: Positioning for Fed Stress Test Result

Key Points in this Issue

 

Positioning for the Fed Stress Test Results

Over the last few weeks, as the last of the March quarter earnings have been reported, investors have been focused on fresh economic data as well as the escalating back and forth on trade and tariffs. As that escalating conversation has taken up more headlines, it’s rankled the market with uncertainty, which has led the market to once again move up and down in the span of not weeks, but days.

Odds are not all investors have been paying attention to the Federal Reserve’s annual stress tests for banks.  As we’ve seen in the past, the likely outcome of these tests is a dividend increase, a boosted share repurchase program or a combination of the two.

This very topic was the focal point of a piece in Barron’s over the weekend. While the article touched on several banks, including Citigroup (C) and Goldman Sachs (GS), it clearly called out expectations for JPMorgan Chase & Co. (JPM):

“Among the biggest banks, JPMorgan Chase may raise its dividend by about 50%, boosting its yield to 3%… Overall, banks are expected to return an average of 100% of their earnings to shareholders over the next 12 months, the highest capital return of any major industry group.”

The results of the first round of annual stress tests by the Federal Reserve were released last week, and the second set, which takes into account capital adequacy in stressed environments after planned distributions to shareholders, will be announced after today’s market close. That means in the coming days, JPMorgan and others are likely to make their capital return announcements.

With investor sentiment bouncing between Fear and Greed amid escalating trade talks, as I shared in yesterday’s Tematica Investing weekly issue, odds are we will see a rocky 2Q 2018 earnings season as companies do their best to guesstimate the potential impact. Harley Davidson (HOG) was the canary in the coal mine for this. As that happens,  I suspect the investing herd will once again flock to higher dividend yielding stocks and other safer ports in an earnings storm.

The prospects of a higher dividend and stepped up share repurchase program at JPMorgan combined with the likelihood of greater investor demand is a mixture to drive JPM shares higher. To capitalize on that, I’m adding the JPMorgan Chase & Co. August 110.00 calls (JPM180817C00110000)that closed last night at 1.37. As we add these calls, I’m setting a stop loss at 0.90.

  • We are issuing a Buy and adding the JPMorgan Chase & Co. August 110.00 calls (JPM180817C00110000) that closed last night at 1.37 to the Tematica Options+ Select List. As we add these calls, we are setting a stop loss at 0.90, and will look to adjust that higher as the underlying JPM shares and the calls move higher.

 

 

Comcast still circling 21stCentury Fox keeps these two call positions in play

As we all know, Disney (DIS) recently upsized its bid to acquire 21st Century Fox (FOXA) and Fox quickly endorsed the new deal. Even as the proposed transaction received conditional approval from the Department of Justice provided that Disney divests 22 of its regional sports networks, I am hearing that Comcast could be making another counteroffer. This likely means there could be more media M&A drama in the short-term, but nonetheless, one of the bidders for Fox will be left on the dancefloor and that will more than likely lead to another round of takeovers. As such, I continue to have a Buy on both on both AMC Networks (AMCX) September 2018 $65 calls (AMCX180921C00065000)and Discovery (DISCA) October 2018 30.00 calls (DISCA181019C00030000)

 

 

Positioning for the post AT&T-Time Warner ruling

Positioning for the post AT&T-Time Warner ruling

 

KEY POINTS FROM THIS ISSUE:

 

Earlier this week, a court ruling paved the way for at least two things that are poised to alter the entertainment/media industry. I’m talking about the victory had by communications company AT&T (T) over the US Department of Justice in its bid to acquire content company Time Warner (TWX). The gist of the merger between these two companies is it brings together one of the biggest programmers of movies and television with one of the biggest mobile carrier in the US. From a thematic perspective, this combines our Connected Society and Content is King under one roof, and the result is likely to be rather disruptive.

What does it mean?

Those are two legs to a combination that I am increasingly referring to as the Digital Lifestyle, which also includes our Cashless Consumption investing theme – a powerful three-legged stool that reflects the consumer digital footprint. Consumers will not only be able to get content when, where and whatever device they want, but AT&T will now have a content moat around its business. We’ve seen this strategy in play before, most notably when Comcast (CMCSA) acquired NBC Universal from General Electric (GE), but also in the combination of Disney (DIS) and ABC/Capital Cities in the mid1990s. We’ve also witnessed the power of captive content in Netflix’s (NFLX) business model, and we’re seeing companies from Amazon (AMZN) and Facebook (FB) to even Apple (AAPL) tapping into it, igniting a would-be arms race for content.

This means the competitive lines are being redrawn, and in our view serves to confirm something we have long said here at Tematica – sector investing is dead. A simple question proves the point – what sector will the new AT&T-Time Warner be in? Communications? Media/Entertainment?

That brings us to the second thing – this court ruling and potential combination of AT &T with Time Warner will more than likely send shock waves throughout these industries, leading to the usual copycat merger and acquisition activity that we tend to see. Much like a game of musical chairs, companies will look to partner up in one form or another so as to avoid being out in the cold by themselves. Of course, in this game of pick up, the longer one takes to partner up, the lower quality partnership choices one faces. This likely means companies such as T-Mobile (TMUS), which is finally combining with Sprint (S), will need to at least consider making a similar move to acquire a content-producing engine. We could see Verizon (VZ) doing the same to go beyond just its digital properties under the Oath brand, which includes the old AOL and Yahoo! web properties. As I pointed out above AT&T will be competing with those companies that are already challenging their businesses and are not tied to their legacy business models of telephone and TV services.

Odds are this means we will see a pronounced pickup in acquisition activity. Aside from AT&T-Time Warner, we are seeing another M&A attempt heat up between Disney and 21stCentury Fox (FOXA) as Comcast (CMCSA) has re-entered the bidding fray. We’ll see how this resolves itself, but odds are the company that loses the bid will look to shore up its content position. It takes time to build one’s own content library and character pool, which is another reason to expect a pickup in M&A activity and again competitors will not want to be caught flat-footed especially after the AT&T- Time Warner ruling.

How to play it?

While there are several content companies out there including CBS (CBS) and Viacom (VIAB), the vast majority of them have market capitalizations over $20 billion, which can make for an expensive proposition. Well below that threshold, however, is AMC Networks (AMCX), which is home to AMC, WE tv, BBC AMERICA, IFC, and SundanceTV and boasts a growing roster of original content, including The Walking Dead franchise, Love After Lockup, Killing Eve, McMafia, Brockmire, Dietland, Better Call Saul, Nosferatu, and others, under its AMC Studios business. That businesses’ content library also includes Mad Men and Breaking Bad, as well as its burgeoning gaming business.

To me, all of the above makes AMC Networks a likely takeout candidate and that means we are adding the AMC Networks (AMCX) September 2018 $65 calls (AMCX180921C00065000) that closed last night at 2.05 to the Tematica Options+ Select List. We’ll set a wider than usual berth with our stop loss at given the recent move from $57 to the current share price over the last several trading days, which popped the September calls from roughly $1.00 on May 23 to last night’s closing price. Factoring that in, I’m setting the stop loss at 1.25.

 

Look out DirecTV Now, here comes Hulu’s live TV streaming service complete with ESPN

Look out DirecTV Now, here comes Hulu’s live TV streaming service complete with ESPN

The race to replace broadcast TV with streaming services has become even more competitive with Hulu tossing it’s hat in the ring alongside the soon to be launched DirecTV Now from AT&T that is likely to benefit from the announced Time Warner acquisition. To drive viewers, it’s all about the content and increasingly proprietary content like we’re increasingly finding at Netflix and Amazon. While the Disney relationship brings ESPN into its fold, it sounds to us like Hulu needs to get that balance sheet going.

Hulu said today it has partnered with Disney and 21st Century Fox for its upcoming live TV streaming service, launching next year. The deals involve Fox’s news, entertainment, sports, and other properties, along with Disney’s portfolio of networks from is ABC Television Group and ESPN, among other things. In total, the two agreements will bring more than 35 TV networks to Hulu’s live TV service.What this means for consumers who are considering cutting the cord with pay TV is that they’ll gain access to two of the top broadcast networks, Fox and ABC, on Hulu’s new streaming platform.In terms of sports, the two deals will include Fox Sports networks (Fox Sports 1 and 2), BTN, ESPN networks, including ESPN1, ESPN2, ESPN3, ESPNU, ESPN-SEC, and Fox’s regional sports networks in dozens of markets. Meanwhile, other popular cable TV channels will also be included, like Disney Channel, Disney XD, Disney Junior, Fox News, Fox Business, Freeform, FX, FXX, FXM, National Geographic and Nat Geo Wild.

Source: Hulu’s live TV streaming service will have channels from Fox & Disney, including ABC, ESPN & more | TechCrunch

FOX Sports GO Live Streaming App Offers MultiView on Apple TV 

Another step in the appification of TV that also offers the ability to watch multiple games at the same time. Paired with the new Papa John’s ordering app also on Apple TV, it’s another reason not to get off the couch once NFL season kicks into gear.

With FOX Sports GO, Apple TV users who receive FOX Sports TV networks through their pay-TV subscription can now access FOX Sports, FS1, FS2, FOX Sports Regional Networks, FOX College Sports, FOX Deportes, and FOX Soccer Plus on their Apple TVs directly through the app. In total, users can watch more than 3,000 live events — including content from the NFL, MLB, UFC, NASCAR, Big 12 and Pac-12 Football, Big East Basketball, FIFA World Cup, and UEFA Champions League soccer — along with hundreds of hours of studio shows and original content. In addition, FOX Sports GO on Apple TV offers several new features, including a 60 frames-per-second streaming rate and a Multiview Display option, which lets users watch up to four FOX Sports live streams on one screen at the same time.

Source: FOX Sports GO Live Streaming App Arrives on Apple TV | High-Def Digest