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Macro Over Micro: How a Fundamental Investor Stays Focused


With the stock market showing a near total focus on macro factors, a fundamental investor takes a deep dive in media stocks.

For much of 2011, until the big rally that started in September, the stock market was characterized by "risk on, risk off" trading. This is an environment where investors are either in or out -- buy the market or sell the market. This type of market leads to excessive volatility and maximum frustration for investors.

Frustration is highest for an investors like me, where analyzing individual company business trends -- what the Street calls fundamentals -- is how excess return is created. I suspect that many of my readers are in the same boat as me. You might work for a media or communication company or analyze the industries and not care as much about the goings on in Europe or China.

A good example of global macro, risk on, risk off trading is the relationship between the Australian dollar and the Japanese yen.

Believe it or not, a lot of market volatility is related to program trading built off the movements between these currencies. The relationship is seen as a proxy for global GDP growth. A stronger Australian dollar is bullish. A stronger yen is bearish.

I remember one day back in 2009 when I was long Disney (DIS) and the stock took a quick dive along with the market. I called an institutional sales trader and asked what was going on with the company. The response was that it was being sold because the Australian dollar suddenly weakened. This led to program trades selling baskets of stocks deemed unusually sensitive to global economic growth. With its theme park operations and advertising revenue, Disney was in the baskets. The fact that Disney did not have any meaningful business in Australia or Japan was irrelevant. The program traders were in charge.

I have gotten used to this new way the market works but I have not changed my style much. I still look for fundamentals to dictate stock prices. I just accept more short-term volatility and possibly longer time until the stocks work to my targets.

This past week I have been trying to get a better understanding of the lawsuits and regulations in the industry. Maybe it is because we are in the slow period of the third month of the calendar quarter but it sure seems we are hearing an awful lot about Hopper, Aereo, and as of this morning the Viewability Rule.

Hopper is the new Dish Network (DISH) DVR. Besides being a giant DVR creating the ability to automatically record entire networks of programming, Hopper is now being positioned as a way to automatically skip commercials in broadcast networks. The always combative Charlie Ergen of Dish Network is offering the commercial skipping to subscribers as a way to push back against rapidly rising retransmission fees charged by the broadcast networks. Yesterday, DirecTV (DTV) CEO Mike White indicated some support for Ergen's position. Fox (NWSA) is leading the broadcast net legal response with a lawsuit suggesting copyright infringement. Retransmission revenues are critical to the broadcast net economic model. Threatening to undercut the ad business is a way to pressure the broadcasters to ask for lower retrains fees.

Aereo is a way for consumers to bypass buying local TV stations from the cable or satellite company and instead view all the programming online. It is an over-the-top solution that could be coupled with a Netflix (NFLX) subscription to produce a low cost alternative to a multichannel TV subscription. Broadcasters should have an easier time dealing with Aereo if for no other reason than they can tie up the company in expensive litigation for many years. I also wonder whether the economics of Aereo really work for many households. Sure you could dump your cable subscription but you would need to pay Aereo, Netflix, maybe another OTT service and your broadband subscription would go up in price by at least $20 when you dumped cable. Of course, you would also lose massive access to programming. I see less problems here for the industry than form Hopper.

One other legal/regulatory issue was resolved this week when the FCC voted unanimously to sunset the Viewability rules. This relates to the 10-15 million homes who still rely on an analog signal to receive must carry TV signals of broadcasters. Cable operators want to reclaim all the spectrum for digital use and supported sunset. Cable already provides and has committed to continue providing digital converters. The cost of this is small relative to the potential benefit of reclaiming the spectrum. This is a relatively small matter but a win for the industry during a time when Wall Street is worried about threats to the TV business model for all participants.

This column was previously published by SNL Kagan on
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Position in DTV
Entermedia is a long/short equity hedge fund focused on media, communic= ations, and related technologies. Steve Birenberg is co-portfolio manager o= f Entermedia, owns a stake in the Funds' investment management compan= y, and has personal monies invested in the Funds. CBS and Discovery Communi= cations are widely held by Northlake Capital Management, LLC, including in = Steve Birenberg's personal accounts. Steve is sole proprietor of Nort= hlake, a long only registered investment advisor.

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