SLL has said, several times, that paying out to shareholders in dividends and share buy-backs more than a company makes in profits is not a good business plan. David Stockman makes the same point in this analysis of the media companies. From Stockman at davidstockmanscontracorner.com:
If you don’t think the Fed and other central banks have transformed financial markets into debt besotted gambling casinos, consider the last few days of carnage in the media stocks. That sector is rife with bubble finance infections.
To wit, hedge fund speculators feasting on zero interest carry trades and cheap options own 10% of the 15 companies which comprise the S&P Media index. That happens to be the highest hedge fund ownership ratio among all 23 S&P industry sectors.
So given that the essential modus operandi of hedgies is leveraged gambling, not hedging risk, it is not surprising that they have ganged-up on the media stocks. Indeed, as Zero hedge noted with respect to this week’s sharp and unexpected sell-off:
The love affair between hedge funds and media stocks is being tested. As Bloomberg reports, hedge funds have been near-constant champions of the industry, drawn in by its high cash generation and buybacks, takeover speculation and the straight-up momentum of the stocks themselves. This week’s retreat represents the sharpest rebuke to that thesis — and one of its only setbacks in a bull market well into its seventh year.
Indeed, it has been a perfect fit. These companies—–such as Disney, Time Warner Inc., Fox, CBS and Comcast——are notorious financial engineers, using massive amounts of the dirt cheap debt enabled by the Fed to fund incessant M&A takeovers and prodigious stock buybacks. That’s exactly the kind of financial milieu in which hedge funds thrive; and one, by the same token, that would not even exist in an honest free market.
Not surprisingly, therefore, the S&P media index went parabolic in response to the Fed’s post-crisis money printing spree. From an aggregate market cap of about $135 billion at the March 2009 bottom, the index had soared by 520% to nearly $700 billion before this week’s $50 billion or 8% loss. Needless to say, it wasn’t the geniuses who inhabit Mickey’s house or the machinations of Rupert Murdoch that made all the difference.
No, the S&P media index was propelled upward during the last six years by an endless flood of fresh cash into the Wall Street casino that kept hedge funds and robo-traders upping their bets on the next M&A deal or stock buyback announcement. Viacom (VIA) is a poster boy for the latter.
To continue reading: Flushing Cash Into The Casino