Disney Reaction Shows Recession Assumptions Baked-In

| About: The Walt (DIS)


Disney fell despite solid earnings, as did other media stocks like Time Warner.

Traders are expecting a deep recession, even a depression, despite strong economic indicators.

Cheap oil still good when we're importing one-third of our needs.

"Hope for the best, expect the worst. The world's a stage, we're unrehearsed."

Mel Brooks may be the only analyst who can explain a market where Walt Disney (NYSE:DIS) reports record earnings and the stock plunges in response. Other media stocks, most notably Time Warner (NYSE:TWX) have had the same problem.

What's happening is that market analysts are anticipating a recession, some a real depression, partly due to bad bets made by hedge funds and oil traders, bets that must be unwound, and partly based on fear that Bernie Sanders or Donald Trump might actually become president.

Populism scares Wall Street - that's been true since at least the days of William Jennings Bryan. But the economy didn't collapse in the wake of Bryan's "Cross of Gold" speech and there are many reasons to believe it's not going to collapse now.

Unemployment is not at 42%, as Trump said on winning New Hampshire. It's 4.9%. The latest unemployment report shows many workers are actually getting raises, some by simply changing jobs. That's the way the market is supposed to work.

There are huge benefits to lower oil prices, in an economy that still imports about one-third of its needs. Car sales are strong, retail sales are strong and getting stronger. The labor participation rate actually rose in the fourth quarter. There will be a lot of cars driving to Disney World this spring, and buying Disney merchandise. The company is strong and growing stronger.

The assumption baked into the market right now, of a recession verging on depression, is simply false. Bear markets have predicted 9 of the last 4 recessions. They're often wrong. And when they toss out good, strong, growing companies whose year-over-year earnings are up 36%, with revenues up 14% and operating cash flow up 27%, it means they're tossing out the past and predicting a bitter end for the economy, evidence be damned.

Some of this is political nervousness. When Jim Cramer compares Bernie Sanders' win to Vladimir Lenin entering Czarist Russia, he's engaging in hyperbole and he knows it. You should know it, too. I'd be more worried about Donald Trump raising Smoot and Hawley from the grave, frankly, but that's just me.

What smart traders need to understand is the difference between hot political rhetoric and actual economic activity. The two sides of our political spectrum want to go to war with one another, but the safe prediction is both will still be standing after November. Agreements will be made and deals will be cut, regardless of what politicians say.

Most Republicans rejected Trumpism last night, and the differences between "radical" Sanders and "incrementalist" Hillary Clinton are mainly rhetorical. But people left out of the current recovery want to make political war with one another -- have fun.

Disney, with a big assist from Comcast (NASDAQ:CMCSA), which owns the wires Disney bears are so frightened of yet remains at about break-even for the year, is going to figure out its ESPN problem. Fewer viewers will pay more for the service, the losses on "skinny bundles" will be more than offset by Internet content subscriptions, and a year from now you'll be amazed you could have gotten into Disney for under $90.

Or you could buy some chairs, stick your gold in them, and hope you can find them again after the revolution.

Disclosure: I am/we are long DIS, CMCSA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.