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Why Advertising Growth Forecasts Are Looking More Bullish

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With the worst case on tax increases avoided, forecasters might need to raise their expectations for 2013.

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Advertising-supported media stocks soared on Monday and Wednesday as the stock market rallied sharply as the fiscal cliff negotiations led to a deal. Estimates for 2013 advertising growth had been coming down steadily since summer. Mostly, prognosticators, including Wall Street analysts, were focused on the possibility of a weak consumer spending environment in early 2013 if tax increases kicked in.

The final agreement does raise taxes sharply on income above $400,000 for individuals and $450,000 for joint filers. This impacts less than 2% of households. Lower and middle income taxpayers did not avoid a tax increase. The 2% cut in payroll taxes, from 6.2% to 4.2%, was not renewed. Overall, Ned Davis Research believes the hit GDP will take in the first quarter will be about 0.5%, including a hit of $85 billion to consumer spending.

This is far from the worst case scenario. I believe it is a better outcome than many of the recent forecasts of ad growth for 2013 assume. I also believe it is better than the many cautious comments from executives at major advertisers, ad agencies, and ad buyers that have received a lot of press over the past several months.

Executives at media owners have remained uniformly bullish on advertising trends, especially related to national TV advertising. Media owners point to the strong recoveries for autos and housing and normal levels of upfront cancellations. Uniformly, executives point to a healthy scatter market with pricing above upfront levels, with double digit gains for networks with good ratings.

It is always hard to get a read on what is really going with ad demand and pricing as the players on all side will talk their book in public. Stock prices of cable and broadcast network owners have acted quite well even when pessimism about the fiscal cliff and 2013 outlook was rising. To me, that suggested that ad markets were staying healthy. There is no guarantee; as we learned in 2007-2009, strong markets can get very weak, very quickly.

With the fiscal cliff resolved -- at least the tax portion -- estimates for 2013 advertising growth seem set to rise. This explains the big pop in media stocks including gains (as of 3:10 p.m. ET on January 2) of 2.3% for CBS (NYSE:CBS), 2.6% for Discovery Communications (NASDAQ:DISCA), 3.7% for News Corp (NASDAQ:NWSA), 2.9% for AMC Networks (NASDAQ:AMCX), 2.2% for Scripps Networks Interactive (NYSE:SNI), 2% for Disney (NYSE:DIS), 3.3% for Time Warner (NYSE:TWX), and 5.8% for Viacom (NASDAQ:VIAB).
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No positions in stocks mentioned.
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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