May 15-19 2023

Sowell’s tactical model remains impartial in a defensive neutral position (60/40). As with dampened volatility, stabilization in the Fed’s INFLATION tightening, and expectation of a soft landing, signal confidence is gaining ground toward a possible pivot in the future.

Leading with the debt ceiling debate, inflation report, and political gridlock in what might have been a header week of pandemonium was uneventful, with stocks and bonds returning -0.24% and -0.23%, respectively. Investors were ambivalent about the overall decline in reported CPI and Core CPI year-over-year change of 4.9% and 5.5%, respectively. But under the hood, there were more complexities taking place as banks and energy companies lost in excess of 1% on recession and banking crisis fears as crude oil fell by almost $4 per barrel and PacWest and the Regional Bank Index fell by 21% and 3.5%. On the uptrend, Communication stocks gained +4%, led by Google’s +11% surge on new AI releases expected to sustain Google’s lead in search.

As for the economy, for weeks and possibly months ahead, attention will pivot toward how banks’ liquidity, deposits, and lending will slow down the economy’s overall growth. The latest Federal Reserve reports on deposits continued to decline as investors moved into money market funds which will tighten banks’ lending practices and further add to the stress of regional banks and beyond what regulation can do to calm the markets. Gary Cohn, former Goldman Sachs President, recently also said on Face the Nation, “So if you can’t enforce the rules, you already have on the books and it’s hard to enforce the rules because there are so many rules, do you want to create more and more rules when you can’t enforce the ones you already have?” Although bank stocks are yet calm after the storm, don’t forget the adage and opportunity to buy low.

The main events for the week ahead will largely spotlight quarterly earnings from bellwether companies like Home Depot, Cisco, Deere, Target, and Walmart to complete the quarterly earnings picture, which largely has been mixed to positive. Economic reports on key measures include Industrial Production, US Leading Indicator, and Capacity Utilization. Importantly, investors will be examining Friday’s speech from Fed Chair Powell and whether he will hint at the future of interest rates.

We have had dozens of debt ceiling crises-or not crises, where we had to raise a debt ceiling. And a majority of the recent ones, they attached some budget cuts to it, or they attached some debt reduction. And so – and in every single one of those times, they did it without a crisis. Now clearly, it’s a hairier situation than any of those dozens before. But the fact that history suggests that they did it how many dozen times without sending the country and the world into global chaos, that puts me at the tippy bottom.” – New York Times columnist David Brooks, PBS Newshour Political Analysis Brooks and Capehart, May 12th, 2023.

The House of Mouse turned 100 in 2023

For many of us, Disney has represented all the best of entertainment excellence. True to Walt Disney’s vision, Disneyland, Disney World, and the Disney movie franchise represented an experience that people escaped to. Disneyland was the destination of choice for every child of every generation. First, it was Snow White, Pinocchio, and Fantasia, then Cinderella and Peter Pan. There hasn’t been a decade that marked even higher success for Disney’s productions and movie franchises as they pioneered everything from advances in animation and live action. Surely there were ups and downs, but is there an American company other than Apple whose name was associated with generational successes? Each success greater than the previous, Little Mermaid, Toy Story, then Lion King and Touchstone films like Sister Act and Armageddon culminating in a decades-long string of mergers and acquisitions, starting with Capital Cities/ABC/ESPN, then Pixar, Fox Family Worldwide, and ending with Marvel, LucasFilm/Star Wars, and 20th Century Studios.
These acquisitions were part of huge box office franchise successes like Pirates of the Caribbean, Star Wars: The Force Awakens, Iron Man, Captain America, and the Avengers. As a result, Disney stock hit all-time highs and, with a brief downturn during Covid, peaked in 2021 at almost $200.

But something has changed, and it may not just be about Disney but the democratization of content and its access. In today’s world, the “content creation” landscape is fiercely competitive with players like Netflix, HBO Max, Showtime, Apple, Amazon Prime, and YouTube.
Creativity, choice, and how content is sourced combine to supply many more entertainment options.

In a flash, Disney stock has fallen to $100, and in the last year, replaced a CEO and became embroiled in national politics. On May 10th, Walt Disney Company reported the second fully diluted and excluding certain items down to $0.93 from $1.08 a year ago.

Both revenue and earnings matched analyst estimates. DIS trades at Forward P/E of 24x and currently pays no dividend but has been signaling that a dividend is coming. Current and past CEO Bob Iger has directed a restructuring that included job cuts and a strategy to compete against growing streaming and falling cable subscriptions. Wall Street seems disappointed in Disney+ subscriber growth despite the immense Disney library.

Over the last five years, revenues have grown annually by about 8%, but profitability sings a different tune as EBITDA has dropped 30%. This can only mean that margins are dropping and can be traced to the streaming service expenditures, resulting in Iger’s attempt to cut costs.

Disney’s bread and butter, theme parks, experiences, and products divisions saw an increase of 17% to $7.7 billion in revenues. Guests are spending more money and more time at the parks and cruises. At the moment, Disney faces some legal challenges in Florida and might be faced with production shutdowns due to the writers’ strike.

Given 100 years of Mouse history, this may be the time to look at Disney as the price is pressured back down to levels not seen for almost ten years. May the force be with Disney!

Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.


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