Mon, Jul 17, 2023|Whitney Tilson

Markets Appear Convinced the Fed Can Pull Off a Soft Landing; A look at Disney; China's Economy Might Look Good on Paper, But It Feels Like a Recession; Pictures from Sweden

1) If you want to know why the market has been so strong recently, look no further than this Wall Street Journal article, which captures what I've been saying for months: Markets Appear Convinced the Fed Can Pull Off a Soft Landing. Excerpt:

Wall Street is more convinced than ever that inflation is subsiding.

That's giving investors hope that the Federal Reserve might be able to pull off what once seemed impossible: containing pricing pressures without tipping the economy into recession.

The economic data that came out this past week could hardly have been better. The consumer-price index, which tracks prices for everything from used cars to groceries, rose in June at the slowest year-over-year pace in more than two years. Inflation in wholesale prices cooled even more. An index measuring the prices fetched in June by warehouses, factories, farms, and energy producers rose at its slowest pace since August 2020.

The reports should help ease what has been one of investors' biggest fears over the past year. The Fed has been rapidly raising interest rates to try to rein in inflation. Many money managers have worried that the Fed's moves would lead to a recession. That is because when interest rates go up, so does the cost of borrowing money. That typically slows down spending and hiring among consumers and businesses – often to the point that the economy tips into a downturn.

The longer it takes for the Fed to bring inflation back to prepandemic levels, the more likely a recession seems. If inflation cools quickly enough, however, investors believe the Fed might be able to finish its interest-rate increases while leaving the economic expansion intact.

That's exactly what markets seem to be pricing in.

The S&P 500 rose 2.4% this past week, its biggest gain in a month. The index is up 17% for the year, while the Nasdaq Composite, which heavily weights technology stocks, has risen 35%.

2) Shares of entertainment giant Disney (DIS) have been more than cut in half since reaching an all-time high around $200 in March 2021. Today, below $90, they're at levels first reached nine years ago.

I love buying great companies when their stocks have been pummeled, so I took a quick look...

There's no question that Disney is an insanely great company – operating beloved amusement parks, ABC and ESPN networks, movie studios Walt Disney Pictures, 20th Century Studios, Marvel, Lucasfilm, Pixar, and Searchlight Pictures, and much more. Here's a video compilation of all the praise Warren Buffett and Charlie Munger have heaped on the company over the years.

But Disney is facing all sorts of headwinds under the leadership of CEO Bob Iger. He was CEO from 2005 to 2020, turned over the reins to his handpicked successor, Bob Chapek, and then as the stock crated, engineered Chapek's ouster and reassumed control. This in-depth story in the WSJ over the weekend captures the challenges: Bob Iger Isn't Having Much Fun. Excerpt:

Bob Iger is under pressure.

Eight months after his return to Disney, which was sold as a triumphant second act by a savior CEO, reality is proving a lot more troublesome.

Iger has described himself to associates at recent private gatherings as stressed from cleaning up a mess that is more extensive than he realized. At the office, he joked in one meeting that it was the wrong time to come back, according to people familiar with the matter.

Since returning, Iger, 72 years old, has strained to put out fire after fire, from accumulating losses in the streaming segment to a steep decline in Disney's traditional television business. He has clashed with the company's CFO and an activist shareholder.

The company is in the midst of painful layoffs and budget cuts. Crowds at Disney's Florida theme parks thinned during summer holidays. Its Pixar animation studio continued a yearslong box-office slump. And a legal and political battle with Florida has deepened as its governor, Republican Ron DeSantis, campaigns for president.

Here's another article in the WSJ about weak attendance at Disney parks, Disney World Hasn't Felt This Empty in Years, and one in Variety about box office woes: Disney's Harsh New Reality: Costly Film Flops, Creative Struggles and a Shrinking Global Box Office.

Disney currently has a $162 billion market cap plus $49 billion of debt (equal to 3.5 times EBITDA), offset by $10 billion of cash, and its stock trades at 2.4 times trailing revenue and 14.6 times trailing EDITDA.

I'm willing to pay those kinds of multiples for a solid growth story without too much "hair" on it... but not for a company with this many issues and such a large market cap, plus a big chunk of debt. I'm on the sidelines for now.

3) Here are three articles I sent over the weekend to my China e-mail list on the slowdown in the world's second-largest economy:

If you wish to subscribe to my China e-mail list, simply send a blank e-mail to: china-subscribe@mailer.kasecapital.com.

4) I arrived home from my 12-day trip to Europe yesterday, just in time to catch the afternoon showing of 20 Days in Mariupol and meet some of readers, who took advantage of my offer in Thursday's e-mail to come as my guests.

On my last full day in Sweden, I stumbled upon the annual classic car day in a little city of 25,000 people, Härnösand. Apparently, the Swedes are crazy about old American cars... It was a hoot!

Here is a collage of some of my pictures and here are two videos I took:

When I arrived in Stockholm on the overnight train yesterday morning, I learned that my flight home was delayed by two hours... so I rented a Lime scooter, pulled out the shoulder straps of my roller bag (a main reason I pack super light), and zoomed all around the city for a little over an hour, mostly on the waterfront and in the old city.

Nothing was open from 7:30 a.m. to 8:45 a.m. on a Sunday, but I was still able to see the Royal Palace (with marching guards), City Hall, the Nobel Prize Museum, and many other beautiful buildings and churches. Here are a few pictures I took:

Best regards,

Whitney

P.S. I welcome your feedback at WTDfeedback@empirefinancialresearch.com.