How do you know when the stock market is at the top? When Rupert Murdoch shops for new acquisitions using a strong share price as currency. But what it does mean for the market if the ‘Murdoch Indicator’ falls through? More on that in a moment!
First, there are some trade deficit numbers to deal with. Australia ran a $1.68 billion trade deficit in June. It was the third straight month of deficits. In fact, the June quarter saw a total of $4.7 billion in deficits. That wiped out the three months of surpluses ($2.9 billion) in the March quarter. Where to from here?
To gas! That is, liquid natural gas (LNG) must get its act together and lead the economy to export glory now. Metals and minerals exports were $487 million in June, down by 7%. But ‘other minerals’, which includes fuel and LNG, were up by $326 million, or 14%. If all that investment in LNG pays off, and the gas begins flowing this year, so will the cash.
But will that turn Australia’s chronic trade deficit into a chronic trade surplus? Probably not. China remains Australia’s largest export destination, taking 38% of all exports in June. Most of that is not gas. It’s iron ore, coking coal, and thermal coal. If prices for those commodities continue to fall, or even if they stabilise, the ‘rivers of gold’ from minerals exports won’t flow as strongly. The deficit will worsen.
And what about imports? Well, they actually fell by 1% in June. That’s why the total trade deficit was lower than economists expected. But as you know, in GDP terms, lower imports and lower exports won’t help GDP. ‘Everything is proceeding as I have foreseen,’ as the Emperor said.
Meanwhile, back in Gotham, the Dow Jones Industrials are now down 4.1% from their July 16th high. Monday’s rally looked like short-covering by the time Tuesday trading finished. I expect August to be a grim month for shares. You may not see a full 20% correction in the market. But another 10% fall? That’s doable.
One non-scientific indicator of market tops is that Rupert Murdoch tends to go confidently shopping. When he does, it results in billions of dollars in write-downs a few years later and the destruction of shareholder value. It’s an impressive and perplexing track record.
For example, in July of 2005 News Corp. bought social networking site MySpace for $580 million. In 2006, MySpace added its 100 millionth user. It looked like an advertising gold mine. But by April 2008, Facebook had come from Mark Zuckerberg’s dorm room to pass MySpace in popularity with users. News Corp. sold MySpace for $35 million in 2012. It’s hard to stay on top for long in the tech space.
In 2007, Murdoch realised a life-long dream and bought the Dow Jones companies (the Wall Street Journal) for $5.7 billion. Two years later, as the entire publishing industry felt the crunch of the GFC, News Corp. wrote off $2.8 billion in the value of the acquisition. The trophy asset was on the wall. But it was an expensive trophy.
The company took another $2.8 billion write-down in August of 2012. This was mostly a non-cash write-down in the value of ‘goodwill’ and ‘intangibles’. And it mostly reflected the declining value of the Australian newspapers in the company’s media stable. In September 2013, a $350 million fall in ad revenues for the Aussie newspaper business led to another $1.4 billion write-down.
The pattern of over-paying for acquisitions and then taking non-cash write-downs later is partly attributable to how tough the publishing business is in the age of the internet. The period between 2005 and 2009 saw the rise of Google’s advertising network. This devastated the revenue generated from classified ads (cars, homes, want ads). It was a direct (and nearly mortal) blow to the revenue models of the traditional newspaper businesses.
One of the few newspaper businesses to get the transition to the digital world right, ironically, was the Wall Street Journal. It split into two operating segments, the digital product and the print product. Both survived.
Both used a subscription-based revenue model, although the print model still depends heavily on circulation and advertising. The digital business has repeatedly outperformed the print business since then, mostly because accurate and timely financial news and reporting is one of the few types of newsgathering still worth paying for.
But you can’t explain over $7 billion in write-downs as bad luck. Part of it is bad judgement, or at least the failure to appreciate exactly how the economics of the media business were changing. In truth, part of it may just be ego, too. News Corp. appeared to be making purchases to satisfy the vanity or the ego of its head. The destruction of shareholder value was incidental, collateral damage of the trophy hunting.
All of that is history now. What’s present is that News Corp. split into two businesses last year. The television and media assets went into 21st Century Fox Inc. (NASDAQ:FOX). The newspaper and publishing assets, including about 130 separate titles, stayed in News Corp. (NASDAQ:NWSA). Take a look at the respective charts of both businesses below. Which one is the better business to own?
21st Century Fox has just been knocked back by Time Warner in an $80 billion takeover bid. It was a cash and scrip offer, which tells you something. In a bull market, a strong share price is like a strong currency. It’s therefore rational, if you’re seeking earnings growth through acquisition, to purchase that growth when the purchasing power of your shares is high.
This another way of saying that Murdoch launching a bid for Time Warner because Fox’s share price is/was strong is a sign of a top in the market. As is, Time Warner reckoned the Fox offer undervalued its growth. It wanted at least $100 per share, meaning Fox would have to issue more shares or pony up more cash to make the deal. The deal is off.
Fox’s shares actually fell 11% when the takeover was announced. Time Warner’s rose by almost 25%. This reminded me of a trading strategy from an old colleague. He would sell the shares of a company announcing a takeover and buy the shares of the takeover target. It was all short-term. But the logic was that takeovers are almost always immediately negative for the acquirer but bullish for the acquired (in that existing shareholders can sell at a premium).
That’s an interesting trading strategy to keep in mind for future takeovers and mergers. But what about the two businesses above? Which is the better investment? Tomorrow, I’ll discuss steamy graphic romance novels and movies and the willing suspension of disbelief. Until then!
For The Daily Reckoning Australia