Wentz Weekly Insights
Wentz Weekly: Disney’s “Significant Transformation”

After two years of giving the Chief Executive Officer position to another Disney veteran, Bob Chapek, longtime Disney CEO Bob Iger was back at the top position and used the company’s first quarterly earnings report since his comeback to announce a “significant transformation” of the company, reversing the approach taken by Chapek and giving more power to the content creators and adding a greater emphasis on its sports portfolio through organizational restructuring.
Iger said the company would remove a division created under Chapek, Disney Media and Entertainment Distribution, and said it will be replaced with a new division Disney Entertainment which Iger says reshapes the company around the creators and creativity. Iger said his plan puts creativity back in the hands of its content creators and makes them more responsible and accountable for the performance of their content, giving them authority over how the content is marketed and distributed.
Iger also stated the company was too focused on subscriber growth since it rolled out its streaming services. He said the changes are meant to focus more on curating its general content and focusing more on its core franchises like Pixar movies and Marvel superheroes. With its changes, the company says it is debating a change in the prices of subscriptions.
Iger also said it will reorganize ESPN into its own division in effort to grow its international sports. Iger said ESPN is a differentiator and creates value, opposing the idea of spinning the division off – something he said the company has debated, but ultimately decided against.
In all, the transformation will eliminate $5.5 billion in costs, about $3 billion coming from cuts to non-sports content spend and the other $2.5 billion from general and administrative costs. The cost cuts include cutting 7,000 jobs, mostly from the Media and Entertainment Distribution segment created by Iger’s predecessor. Importantly for income investors, Iger said they have proposed to the Board reinstating the dividend. Disney suspended its dividend in 2020 due to Covid.
The news was cheered by investors, who originally sent the stock nearly 6% higher. However, the gains dwindled and the stock was in the red by the end of the day as the broader market declined. Disney stock performance after its earnings is just another example of how the broader stock market has performed over the past two weeks. The amount of uncertainty is leading to these choppy markets, making it more difficult to determine the direction. Most of the uncertainty last week centered around the Fed and earnings. Investors were still digesting the strong labor market report from the week prior, along with Chairman Powell’s public Q&A in which he reiterated a lot of what was said in the recent FOMC meeting – bringing inflation down will be a process and it will not be a smooth ride, the strong jobs report being evidence of that.
In addition to the uncertainty over the Fed’s path forward, markets are also dealing with the uncertainty around earnings. The earnings growth rate for the fourth quarter so far is -5.0%, despite the 4.6% increase in sales, and less than the -3% when the quarter began. In addition, more companies are providing mixed forecast, or no forecast at all, for 2023, making earnings projections more difficult.

This week turns back to inflation data. On Tuesday we will see the consumer price index followed by the producer price index on Thursday. Inflation is expected to have picked back up in January due to rising energy prices and elevated shelter costs (home prices, etc), with core prices remaining elevated, particularly in the services sector. We expect volatility to continue and still favor value and income producing assets.

Week in Review:

The decline that started after the jobs report two Fridays ago continued into last week. Markets continued to digest the wave of headlines from the prior week which caused Treasury yields to move higher, the 2-year and 10-year yields both up 10 basis points to 4.48% and 3.63% respectively, back to December levels. Fed speak picks back up with the first appearance from Minneapolis’ Kashkari who suggested rates may go higher than originally projected after the strong jobs report. As a results stocks fell 0.61% during the day’s session.
Beside a couple smaller earnings reports, Tuesday’s markets focus was on the Q&A session by Chairman Powell where he stayed on course with his message that disinflation has began with goods, but there is no evidence of disinflation is happening in the core services sector. One of the market’s big questions was how does last Friday’s employment report change the Fed’s view, which Powell said it just means there is still significant work left to do. Stocks traded to session highs, then session lows during the Q&A, before ultimately finishing higher with the S&P 500 gaining 1.29%. Bonds had the same reaction, with the 10-year yield up slightly to 3.67%. The other headline was in regards to Artificial Intelligence and Microsoft announcing the release of its ChatGPT technology in its Bing search which created a lot of buzz around AI.
President Biden gave his State of the Union address Tuesday evening, calling for a billionaire’s tax and a higher surtax on stock buybacks, as well as other market related agenda items, but markets as usual were little changed from the speech. Wednesday was a more uneventful day, with companies like Google responding to Microsoft’s new AI feature, but markets as a whole still focused on the Fed’s path and shrinking earnings. Stocks closed down 1.11% while the 10-year yield fell to 3.63%.
Making most the headlines on Thursday was Disney’s earnings report after the close Wednesday with its significant reorganization plan and cost cutting measures new CEO Bob Iger announced in his first earnings report since coming back as CEO after two years away from the company. Outside of individual earnings it was a quiet day. Shorter term yields continue to rise after Friday’s very good jobs report causing a deeper inversion in the yield curve (now the largest inversion since early 1980s). Stocks opened higher but the gains faded and the S&P 500 ended up closing down 0.88%.
It was another relatively quiet day on Friday, outside of earnings that continue to roll in. The preliminary February survey of consumer sentiment was slightly better than expected, with current conditions improving but outlook falling, while inflation expectations moved up, creating additional inflation concerns. The S&P 500 ended a choppy session higher with the S&P 500 up 0.22%.
Stocks had a mixed week but finished mostly lower, with growth underperforming, over concerns of potentially higher rates and concerns inflation may take longer to cool after the strong jobs report. This caused yields to move higher along the curve, particularly on the short end. The 2-year Treasury note yield rose 20 basis points to 4.50% while the 10-year note rose 22 basis points to 3.74%, resulting in the widest spread since the early 1980s. Oil rose four of the five days last week, finishing 8.6% higher with gains coming after Russia said it would cut production by 500k barrels/day. For the week the major US stock indices finished as follows: Dow -0.17%, S&P 500 -1.11%, NASDAQ -2.41%, Russell 2000 -3.36%.

Recent Economic Data

  • The U.S. trade deficit was $67.4 billion in December, close to expectations of a $69 billion deficit and larger than the $61 billion deficit in November. The wider deficit in December was due to a 1.3% increase in imports (to $317.6 billion) and a 0.9% decline in exports (to $250.2 billion). For calendar year 2022, the good and services deficit increased $103 billion, or 12.2%, from 2021. Exports increased $453.1 billion, or 17.7%, while imports increased $556.1 billion, or 16.3%.
  • Consumer credit increased $11.56 billion in December, about half of what was expected and follows a large $33.1 billion increase in November, to a new record high of $4.78 trillion. Revolving credit, for things like credit cards, rose $7.2 billion or slowing to an annual rate of 7.3%, the first time annual rate was below 10% in months. Non-revolving credit, like mortgages, auto loans, student loans, rose $4.3 billion, or at an annual rate of 1.5%. For all of 2022, consumer credit rose 7.8% with a very strong 14.8% increase in revolving credit and a 5.6% increase in nonrevolving credit. This report confirms recent data that consumers slowed spending in December.
  • Consumer credit increased $11.56 billion in December, about half of what was expected and follows a large $33.1 billion increase in November, to a new record high of $4.78 trillion. Revolving credit, for things like credit cards, rose $7.2 billion or slowing to an annual growth rate of 7.3%, the first annual rate below 10% in months. Non-revolving credit, like mortgages, auto loans, student loans, rose $4.3 billion, or at an annual rate of 1.5%. For all of 2022, consumer credit rose 7.8% with a very strong 14.8% increase in revolving credit and a 5.6% increase in nonrevolving credit. Recent data has shown us consumers slowed spending in December and this data supports that view again but is also importantly still increasing as consumers’ excess savings continue to dwindle.
  • The number of unemployment claims filed the week ended February 4 was 196,000, a slight increase of 13k from the prior week with the four-week average at 189,250. The number of continuing claims was 1.688 million, up 38k from the prior week, with the four-week average up slightly to 1.645 million.
  • The 30-year prime mortgage rate held relatively unchanged for the latest survey week, now at 6.12%, up from 6.09% the prior week.
  • The preliminary read on the consumer sentiment index for the first week of February survey was 66.4, up from 64.9 in January. The current conditions index was 72.6, rising from the prior month and the highest since 2021, likely helped from stocks solid start to the year. The expectations index fell, however, to 62.3 which was below expectations and falling from 62.7 in January. The important one year ahead inflation expectation increased for the first time in several months, rising to 4.2% from 3.9% in January which may add to concern regarding the inflation picture. The 5-10 year ahead inflation expectation held steady at 2.9% as expected.

Company News

  • Google said it would unveil a chatbot for feedback called Bard AI, as it follows through on its earnings call when it said it is pushing further into artificial intelligence. It follows a wave of AI announcements, most notably, Microsoft’s multibillion dollar investment in ChatGPT maker, OpenAI, which is expected to roll out on Bing soon. Later in the week shares of Google fell after a promotional video on the service shared incorrect information and after the launch event failed to impress.
  • After a WSJ report, CVS said after its earnings release it agreed to a deal to acquire Oak Street Health, a primary care clinic, for $39/share, representing a value of $10.6 billion. It was in early January that Bloomberg reported a deal for $10 billion was close, but a week later Axios said a deal would likely not happen.
  • After cutting prices on some of its Model Y version in effort to increase demand, Tesla said it will raise the price after changes in tax rules expanded the number of people who can take advantage of the $7,500 tax credit under the “Inflation Reduction Act.”
  • Apple is reportedly expanding its testing efforts for its new buy now pay later service to its retail employees, a sign the service will be fully rolled out soon. The service was initially going to be launched with iOS 16, but at the time the company was having significant technical challenges in rolling out the service.
  • Warner Bros Discovery said it will keep Discovery+ a stand-alone service, after it was thought it would be combining it with HBO Max into a single service. The company came to this conclusion after changing their view that most of the over 20 million Discovery+ subscribers would not pay a higher price for a combined service.
  • The antitrust authority of the UK (the CMA) said it provisionally found competition concerns around the combination of Activision Blizzard and Microsoft and said it will welcome responses over the next six weeks of possible remedies, which regulators would consider certain divestitures as feasible remedies in the case.
  • Earnings highlights:
  • Video game developer Activision Blizzard easily beat expectations with strong performances from its flagship Call of Duty franchise, but avoided providing guidance due to its pending acquisition from Microsoft.
  • Uber quarterly results beat expectations, its free cash flows and EBITDA were positive thanks to better bookings and more trips than expected. The company’s EBITDA forecast was well above estimates driven by its cost cutting efforts, better driver supply, and stronger growth.
  • It was a complete opposite quarter for Lyft – the company missed expectations in the quarter but its guidance for Q1 was well below estimates due to reduced pricing from competitive efforts.
  • Chipotle was lower after missing expectations with comparable store sales that were lower than expected, +5.6% versus the consensus of +7.0%, and follows +10.1% and +7.6% in the prior two quarters.
  • CVS results beat expectations, revenue much greater than consensus and reaffirms guidance that is in line with analysts’ consensus estimates. Confirmed its $10.6 billion acquisition of Oak Street Health.
  • Buy now pay later servicer Affirm reported quarterly results that missed expectations while it lowered guidance for the full year for the second straight quarter citing execution issues around pricing, higher funding costs, slowdown in discretionary spending, but announced cost cutting plans including a 20% reduction in its workforce.
  • Casino stocks like MGM and Wynn were higher after reporting better than expected quarterly results driven by strength in Las Vegas and a recovery in Macau over pent-up demand in China after Covid restrictions were eased.

Other News

  • In one of the longer State of the Union speeches of the past few decades, which lasted one hour and twelve minutes, President Biden discussed many topics, but the most followed by the markets were his remarks on the debt limit and his push for a tax on billionaires and stock buybacks. The address could be seen as the start of his reelection campaign, sounding optimistic on his aggressive agenda, which will be far more difficult given the divided Congress. Biden called out the tax system again and proposed quadrupling the surtax on corporate stock buybacks, which is currently 1%, as well as proposing a new billionaires’ tax – not giving any more detail, both of which remain very unlikely. The debt limit was a major headline, gaining boos from Republicans, with Biden bringing up no change to entitlements like Social Security and Medicare but not mentioning cuts to spending.
  • Russia said in a statement last week it will cut oil production by 500k barrels/day in response to international sanctions, equal to about 5% of its output. The statement said it is “fully selling” the volume it has produced, but will not sell to those directly or indirectly following western nations’ price cap, which it cited as the reason for its production cuts. Western nations agreed to ban finance, brokering, and insuring seaborne Russian oil that is priced over $60/barrel which has been in place since the first week of December. Crude oil closed last week just under $80/barrel.
  • Fed Talk:
  • Chairman Powell’s Q&A at the Economic Club of Washington DC was the main event last week that reiterated much of what we already heard, but markets were particularly focused since this was Powell’s first remarks since the very strong employment report the Friday prior. Regarding the labor report, Powell said the strong jobs gains shows why this is a process, will take a significant period of time, and “is not going to be smooth.” He explained how the disinflation process has started with goods, how disinflation is expected to have begun with core housing but not yet showing in the numbers, but there is still no signs of disinflation occurring in core services excluding housing, which is the biggest concern. However, market appear more focused on his comments that inflation is expected to continue to move lower this year and the “disinflation process” has started. It was a choppy trading session after Powell’s comments, with stocks and bonds trading higher, then lower, then moving higher toward the close.
  • Atlanta Fed President Bostic said Monday a robust labor report “would translate into us raising interest rates more than I have projected right now”, adding if that strength persists it means the Fed has even more work to do which would translate to raising rates further. He said it is still the base case though, that rates will rise to 5.1% (two more hikes).
  • Minneapolis Fed President Kashkari said the stronger jobs report shows the Fed has more work to do in tightening policy, with the economy and wage growth still too hot. He is now expecting the rate should be increased to 5.4% (3 more hikes). He said so far, the data hasn’t shown anything yet to lower the path of rate hikes, and the Fed still needs to raise rates “aggressively to put a ceiling on inflation” then let policy work its way through the system.
  • NY Fed President Williams said inflation has been easing in recent months, but it is still not enough to stop the Fed from raising rates, calling for another two rate increases for a peak rate in line with Fed projections.
  • Fed Governor Waller had similar remarks, saying he is not seeing signals the inflation is declining as much as some people think, it is a real problem, and those are reasons for the ‘higher for longer’ message. He noted he is preparing for a “longer fight” against inflation.
  • It is also worth noticing interest rate options show investors are starting to bet rates will reach 6% by the end of the year (a full percent above the Fed’s projections, and 1.5% above the markets projections).

Did You Know…?

Tightening Lending Standards

The January Senior Loan Officer Opinion Survey on Bank Lending Practices, which is a survey that measures changes in lending standards for loans to businesses and households over the past three months, showed lending standards tightened on loans to households as well as businesses. In addition, demand for these loans weakened, particularly in real estate. Over the fourth quarter the survey showed a “significant net share” of banks reported tighter lending standards for credit card loans, including higher minimum credit score requirements along with tightening credit limits, while a moderate share of banks reported tighter standards for auto loans and other consumer loans.

WFG News

Updates on 2022 Tax Documents

Please note tax documents will not start mailing until January 31. Most retirement accounts will see 1099-R and form 5498 mailed on January 31. Retail accounts will see 1099 and related documents mailed by February 15. Certain accounts with more complex securities may have 1099’s mailed as late as March 15. Please see this email for more details. If there are any questions on tax documents, please reach out to us at 330-650-2700.

Introducing Our Newest Team Member!

We would like to welcome our newest team member Aimee Ingersoll as of January 2, 2023. Aimee is a graduate of The Ohio State University with a degree in Human Ecology and has a career background in customer service. She is excited to be working on Bud’s team specifically and really enjoys building relationships with all of our clients. Aimee’s constant smile has brightened the office already.

The Week Ahead

More fourth quarter earnings reports and updated data on inflation will highlight the week ahead. Close to 15% of S&P 500 companies will be reporting results this week with notable reports from Airbnb, Coca-Coca, Global Foundries on Tuesday, Cisco, Kraft Heinz, Shopify on Wednesday, DoorDash, DraftKings, Datadog, Hasbro, Paramount on Thursday, and Deere on Friday. Inflation data will be the highlight on the economic calendar with the consumer price index on Tuesday, and producer price index on Thursday. Economist expect inflation picked up in January due to higher energy prices, rising 0.5% in the month, while the key core prices over the past 12 months are expected to be up 5.5%, slightly lower than the 5.7% increase the 12 months ending December. Also on the calendar is several manufacturing readings including industrial production on Tuesday as well as the Empire State and Philly Fed manufacturing surveys. We will also see updates on the housing market with the housing market index on Wednesday and housing starts and permits on Thursday. Elsewhere, Wednesday has January’s retail sales data, and business inventories, Thursday we will see weekly jobless claims, and finally Friday data on import and export prices. In between all the data releases will be another week of Fed speak with several policymakers in public appearances.