The force is still strong



The major US indexes closed in the red on Thursday. Much of the selling came in the last half hour of trade. The decline in the US followed falls in Europe and Asia. Leading the way lower was the tech-heavy Nasdaq, down 0.88%, although the Dow was not far behind, slipping 0.80% while the S&P 500 fell 0.63%. The small-to-mid cap and more domestically focused Russell 2000 index slid 1.06%, while the Dow Transports dipped 0.42%.

Most of the major S&P 500 sectors were in the red Thursday. Energy, industrials, materials and technology led the way lower, while real estate and utilities bucked the trend with modest gains. Among industry groups, food retailers & wholesalers, mobile telecoms and home improvement retailers were the biggest gainers, while electronic office equipment, alternative fuels and autos were material fallers.

US/China trade war tensions were cited, but the reality is there has been nothing new on that front. If anything, the US market is becoming increasingly desensitised to rhetoric out of Washington. The same cannot be said for Asia with China and Hong Kong both down sharply on trade fears, which has probably got more to do with the fact that the US exports significantly less and therefore has less to lose. This is also one of the reasons the US has performed strongly this quarter, with the rest of the Europe and much of Asia sharply in the red – Australia aside.

21st Century Fox shares continued to edge up (+1%) after Walt Disney’s sweetened offer for most of its media assets earlier in the week trumped Comcast’s bid. After rising on Wednesday, both Disney and Comcast shares were in the red slightly on Thursday to the tune of 1.2% and 1.8% respectively.  I wrote yesterday of the strong fit of the Fox assets with Disney. The shareholder base of Fox can see through the short-term gain of the cash offer. I think this is ultimately why Comcast’s offer won’t succeed – also weighing is the fact that Fox shareholders won’t get CGT relief on their all-cash offer.

Separately, reports surfaced that Disney might be hitting the pause button on Star Wars standalone movies after Solo movie failed to deliver the box office takings hoped for. After almost 4 weeks in cinemas the global tally is $344 million, which falls far short of the other movies’ takings under Disney’s ownership.

It is likely Disney is simply taking some time to reflect on what could have been done differently with the Star Wars standalones before greenlighting others. In the meantime, the company is reported to be forging ahead with the existing trilogy as well as new trilogies under new directors. The other point is that the Indiana Jones brand will get a reboot next year.

The reason Disney is one stock to own is that all of its many brands will inevitably get repackaged and repositioned in an online offering that will be squarely aimed at the global consumer – not just the US home market. Like Netflix, I can see Disney’s customer base growing rapidly, and this will ultimately make the company way more profitable with the middlemen (cable TV providers) chopped out of the distribution equation. In short, I believe that the ‘force’ behind Disney is still a very strong one.

Capping the gain for the index were bank shares, with no relief from the Bank of Japan’s negative interest rate policy (NIRP) forthcoming just yet. A Nikkei newspaper report also discussed rising bad debt to card holders, although the Japanese consumer is in great shape with job security and the employment rate approaching record all-time highs. The megabanks Mizuho, Sumitomo and Mitsubishi UFJ slipped 1.2% to 2.4%.

Exporters such as air conditioning giant Daikin Industries and to a lesser extent, Sony, fared better, advancing 2.8% and 1.5% respectively. Video game developer Square Enix was a standout performer, soaring 7.4% on industry news flow regarding keenly anticipated games.

Internet giant Tencent Holdings dipped 0.8%, while lens maker Sunny Optical slumped 9% on no news.  The company’s shares have recently sometimes tracked ZTE Corp, which is struggling for survival (we do not hold), as ZTE is a customer of Sunny, but ZTE shares were muted in trading (-1%) on Thursday. Sunny made a release to the Hong Kong stock exchange saying it was unaware for the unusual price action and a relatively recent reverse road show only provided an update in general terms.

Disclosure: The Fat Prophets Global Contrarian Fund declares a holding in: Walt Disney, Mizuho, Sumitomo, Mitsubishi UFJ, Sony and Sunny Optical.

Carpe Diem!

CEO | Fat Prophets
Find out more about Fat Prophets Global Premium Stock Research by registering your details below: