Disney is in ‘the eye of the storm’ — analyst warns parks may not open until January

Concerns about a long recovery period for Walt Disney Co.’s parks segment have prompted at least the third downgrade of the media giant’s stock this month.

UBS analyst John Hodulik became the latest analyst to move to the sidelines on Disney
shares, as he lowered his rating to neutral from buy in a Monday note titled “The Eye of the Storm.” The shares are off 3.7% in morning trading.

Hodulik warned that all aspects of Disney’s business face risk from the COVID-19 outbreak, but none more so than the company’s parks segment. His base case now assumes that the company won’t be able to reopen its parks until Jan. 1, 2021, and he expects the company’s attractions business to remain pressured even beyond then.

Don’t miss: Disney+ may be the only plus for Disney as coronavirus slams other businesses

”[T]he economic recession plus the need for social distancing, new health precautions, the lack of travel and crowd aversion are likely to make this business less profitable until there is a widely available vaccine,” Hodulik wrote, while cutting his price target on Disney’s stock to $114 from $162.

Hodulik said that the parks may be able to “regain their recent operating cadence in ~18 months, coinciding with the earliest expectations for a widely available vaccine for COVID-19.”

He also has concerns about the company’s media business. The lack of live sports content is already negatively impacting Disney to the point where its weak advertising trends “will lead the industry down,” in his view.

It’s unclear when sports leagues will resume and whether a return to competition would be permanent. Any changes to professional or college football seasons could have repercussions across the business, Hodulik said, not only hurting advertising revenue but also likely pressuring affiliate revenues “given greater cord-cutting and distributors’ reluctance to pay.”

Don’t miss: Disney has a ‘unique vulnerability to COVID-19,’ analyst cautions

He sees “real risk to the college football season this fall given the decentralized nature of college athletics, the coordination required across schools and conferences and the amateur status of the players (i.e. it’s much harder to quarantine unpaid players).”

As for Disney’s film business, he notes that the timing of the outbreak “could have been worse” for Disney seeing as the company had a somewhat weaker film slate anyway for the balance of the year following a very strong 2019. He expects a gradual recovery for the box office but said that the pandemic gives media companies a chance to try out new release strategies by narrowing the window between when movies are released to theaters and when they become available for purchase at home.

He also sees the company’s new Disney+ streaming service as “a bright spot” as he now models 70 million subscribers by the close of the fiscal year, which ends in September, compared with his prior estimate for 45 million. The company announced in early April that Disney+ had topped 50 million subscribers.

Hodulik’s ratings change comes after analysts at Guggenheim and Wells Fargo also downgraded Disney’s stock earlier in April, with both citing concerns about the parks business. Of the 27 analysts tracked by FactSet who cover Disney’s stock, 18 rate it a buy and 9 rate it a hold, with an average price target of $129.96, 26% above recent levels.

Read: Disney downgraded as analyst says parks attendance could take 2 years to ‘normalize’

Disney shares have lost 29% over the past three months as the Dow Jones Industrial Average
, of which Disney is a component, has declined 19%.

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Home price growth ramped up yet again in January, Case-Shiller index shows

The numbers: The pace of home-price appreciation once again ramped up in January, according to a major price barometer.

The S&P CoreLogic Case-Shiller 20-city price index posted a 3.1% year-over-year gain in January, up from 2.8% the previous month. On a monthly basis, the index increased 0.3% between December and January.

Because of the two-month lag in the data included in the price index, the effects of the coronavirus pandemic on the housing market were not yet reflected in the data.

What happened: Phoenix led the nation once more with a 6.9% annual price gain in January. Close behind were Seattle, Tampa, Fla., and San Diego, where prices rose by 5.1%. In total, 14 of the 20 cities in the index reported higher price increases year-over-year in January versus December.

On a regional basis, home price growth was strong in the West and the South, while comparatively weak in the Midwest and the Northeast, said Craig J. Lazzara, managing director and global head of index investment strategy at S&P Dow Jones Indices.

The big picture: The Federal Housing Finance Agency released its own monthly home-price index last week, which showed a 5.2% year-over-year gain in January. While home-price growth has accelerated in recent months, a year ago the pace of appreciation was actually slightly higher in most regions across the U.S., the FHFA report showed.

As the low supply of homes on the market has been met with high demand, home prices have been pushed higher. Low mortgage rates in recent months have encouraged that trend, because the low rate environment can make higher prices more palatable to buyers who might otherwise find them too expensive.

The question for the market now is whether home prices will take a hit as a result of the coronavirus pandemic. While real-estate economists broadly expect sales volume to plummet, it’s unclear what effect the COVID-19 national health emergency will have on prices. A recent report from Zillow

ZG, +2.79%

 that analyzed what happened to the economy of regions affected by past disease outbreaks suggests that home prices may not fall along with sales.

What they’re saying: “Home prices increased nearly every month in 2019 and continued to push upward in early 2020 with strong demand,” said Bill Banfield, executive vice president of capital markets at Quicken Loans. “It’s yet to be seen how home prices will react through, and after, the current health crisis. I suspect once the stay-at-home orders are lifted, homebuyer demand will regain its footing, provided employment rebounds quickly.”

Market reaction: The Dow Jones Industrial Average

DJIA, +0.36%

 and the S&P 500

SPX, +0.21%

  both opened lower Tuesday as coronavirus concerns lingered. The 10-year Treasury note’s yield

TMUBMUSD10Y, -5.37%

  was also down Tuesday morning.

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ETF Deathwatch For January 2020

By Ansh Chaudhary

The ETF Deathwatch list decreased in size in January. Ten exchange-traded products (“ETPs”) were added to the list, and 23 funds were removed. Of the removals, 17 were removed due to increased health and six were due to asset managers closing their funds. Equities continued to rise in January, so the decrease in the size of the Deathwatch list was to be expected.

The funds added in January were a mix of actively managed, international, and niche products. One fund was added because its assets under management (“AUM”) was consistently below $5 million for three months. The rest were added due to low average daily volume. These additions may have enough AUM to keep them from closure; however, our system takes into account both AUM and volume, so it’s likely that should volume and interest remain low, these funds may be considered for closure. The low volume in these funds could be due to the nature of the investment product. Many of the funds on the Deathwatch list are actively managed funds. Because equity markets have been strong recently, investors may be opting to stick with passive equity funds rather than actively managed funds and strategies that offer downside protection.

The addition of niche ETF products to the list wasn’t a surprise. The returns in the overall U.S. equity market have been strong, giving investors less reason to move money to actively managed and niche products. January has been rough for investors due to the outbreak of the coronavirus, fears of escalating tension between Iran and the U.S., and the impeachment trial of President Trump. Despite the overall negative sentiment at the start of January, U.S. equities continued their rally until the last week of January, when fears about the coronavirus increased. The fact that there were more removals from the Deathwatch than additions indicates January has been a strong month for markets. With so many negative headlines, it wouldn’t have been a shock for it to have been a little rougher for overall volume in ETFs. What we saw instead is that investors are still confident in this economic expansion.

Fifty-three ETFs and ETNs on the January Deathwatch list have been in the market for more than 10 years. This is a long time for ETPs to exist while remaining on our Deathwatch list. Leveraged and short ETF instruments, as well as a number of commodity ETPs, dominated our list of funds older than 10 years. It’s possible that the fund companies managing these products will allow them to remain active, as they may play a larger role for clients interested in active management.

The average asset level of the threatened ETFs on ETF Deathwatch decreased from $8.35 million to $8.01 million, and 66 products had less than $2 million in assets. The average age of products on the list increased from 50.53 months to 51.45 months, and the number of products more than 5 years of age remained at 131. The largest ETF on the list had an AUM of $25 million, while the smallest had assets of just $492,000.

Here is the Complete List of 468 ETFs and ETNs on ETF Deathwatch for January 2020 compiled using the objective ETF Deathwatch Criteria.

The 10 ETFs/ETNs added to ETF Deathwatch for January:

  1. ProShares UltraShort MSCI Japan (NYSEARCA:EWV)
  2. iShares Evolved US Consumer Staples ETF (BATS:IECS)
  3. Principal International Multi-Factor Core Index ETF (NASDAQ:PDEV)
  4. Principal US Large-Cap Multi-Factor Core Index ETF (NASDAQ:PLC)
  5. Principal US. Small-MidCap Multi-Factor Core Index ETF (NASDAQ:PSM)
  6. FlexShares Emerging Markets Quality Low Volatility Index Fund (NYSEARCA:QLVE)
  7. First Trust RiverFront Dynamic Asia Pacific ETF (NASDAQ:RFAP)
  8. Barclays Return on Disability ETN (BATS:RODI)
  9. ProShares UltraShort Basic Materials (NYSEARCA:SMN)
  10. Barclays ETF Linked to the S&P 500 Dynamic Total Return Index (BATS:VQT)

The 6 ETFs/ETNs that were closed:

  1. WisdomTree Dynamic Bearish U.S. Equity Fund (BATS:DYB)
  2. Virtus Glovista Emerging Markets ETF (NYSEARCA:EMEM)
  3. Cushing 30 MLP Index ETNs due June 15 2037 (NYSEARCA:PPLN)
  4. NYSE Pickens Oil Response ETF (NYSEARCA:RENW)
  5. WisdomTree CBOE Russell 2000 PutWrite Strategy Fund (BATS:RPUT)
  6. WisdomTree Balanced Income Fund (NYSEARCA:WBAL)

The 17 ETFs/ETNs removed from ETF Deathwatch due to improved health:

  1. AlphaClone Alternative Alpha ETF (BATS:ALFA)
  2. ProShares MSCI Emerging Markets Dividend Growers ETF (BATS:EMDV)
  3. First Trust S&P International Dividend Aristocrats ETF (NASDAQ:FID)
  4. LibertyQ Global Dividend ETF (NYSEARCA:FLQD)
  5. WisdomTree US Short-Term High Yield Corporate Bond Fund (BATS:SFHY)
  6. WisdomTree Fundamental US Corporate Bond Fund (BATS:WFIG)
  7. X-Links Monthly Pay 2xLeveraged Alerian MLP Index ETN (NYSEARCA:AMJL)
  8. AdvisorShares Focused Equity ETF (NYSEARCA:CWS)
  9. iShares US Dividend and Buyback ETF (BATS:DIVB)
  10. Direxion Daily Industrials Bull 3x Shares (NYSEARCA:DUSL)
  11. Global X MSCI SuperDividend EAFE ETF (NASDAQ:EFAS)
  12. Principal Millennials Index ETF (NASDAQ:GENY)
  13. iShares Evolved US Discretionary Spending ETF (BATS:IEDI)
  14. Defiance Quantum ETF (NYSEARCA:QTUM)
  15. Global X MSCI SuperDividend Em (NYSEARCA:SDEM)
  16. ProShares Ultra FTSE Europe (NYSEARCA:UPV)
  17. ProShares Ultra Industrials (NYSEARCA:UXI)

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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Tradeweb Government Bond Update – January 2020

In a month filled with central bank decisions and notable political events, yields on 10-year benchmark bonds fell in January across sovereign bond markets. The biggest move came from Australia’s 10-year note, whose mid-yield plunged 48.5 basis points to finish January at 0.91%. Despite the economic disruption caused by the country’s bushfires, the Reserve Bank of Australia left the cash target rate at 0.75%, following three prior cuts in 2019.

Canada’s 10-year government bond yield experienced the second-largest drop, ending the month nearly 43 basis points lower at 1.27%. The Bank of Canada maintained its overnight rate target at 1.75%, where it has stayed since October 2018. The central bank noted that while business investment had a “strong” third quarter in 2019, hiring had slowed with “unexpectedly soft” consumer confidence and spending indicators. It also reduced its growth forecast for the fourth quarter to an annual rate of 0.3%, but said that the economy would expand by 1.6% in the coming year.

Significant moves were also on display throughout Europe. The yield on Italy’s 10-year benchmark bond tumbled 39 basis points to close the month at 0.92%, while its French equivalent declined 30 basis points to -0.18%. Meanwhile, Germany’s 10-year Bund saw its yield drop 29 basis points to finish at -0.47%. After keeping monetary policy unchanged at its January meeting, ECB President Christine Lagarde indicated that negative interest rates would stay in place for some time. The current deposit rate is -0.5%.

In the U.S., the 10-year Treasury yield dipped 39 basis points to end January at 1.52%. The Federal Reserve left the target range for its benchmark interest rate unchanged at 1.50-1.75%, with Chairman Jerome Powell citing stabilizing growth and reduced uncertainty around trade. While his statement did not describe any immediate changes to the Fed’s USD 60 billion monthly Treasury bill purchases, he said it would scale back that amount later this year.

Elsewhere, the UK’s 10-year Gilt yield fell by 30 basis points to 0.52% as the country prepared to formally exit the European Union on January 31 despite uncertainty around trade agreements and financial market access. Falling the least among its counterparts, the yield on Japan’s 10-year benchmark note dropped four basis points to -0.07%. The Bank of Japan kept its interest rates and asset purchase targets unchanged, but raised growth projections.

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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Why the stock market’s January slump matters to your 2020 return

Maybe there is something special about January after all. For years I have been searching for a plausible theory for why the January Barometer should work — for why the stock market’s direction in the first month of the year should foretell its direction from February through December. On numerous occasions I have argued that, even if the January Barometer’s track record met traditional standards of statistical significance, we still shouldn’t follow it unless such a theory existed.

My wait may finally be over, courtesy of a study that appeared in October 2017 in the International Review of Financial Analysis. Entitled “The January Sentiment Effect in the U.S. Stock Market,” the study was conducted by two finance professors: Zhongdong Chen of the University of Northern Iowa and Phillip R. Daves of the University of Tennessee.

The professors’ theory is that many investors make 401(k) asset allocation decisions in January for the entire year, so what they decide in January affects how much of each of their subsequent 11 monthly 401(k) contributions goes into the stock market. They found support for this theory by focusing on the University of Michigan Index of Consumer Sentiment (ICS): When that index rises in January, the stock market produces above-average performance from February through December.

They found further support for their theory when measuring the impact of a sentiment increase in each of the other 11 months. They found no impact similar to what they found for January.

The professors add that the January Sentiment Effect (JSE) is more statistically powerful than the January Barometer. In fact, after controlling for the JSE, they found that the January Barometer disappears — but not vice versa. That is welcome news this year, since the January Barometer is forecasting a decline through the end of the year and the JSE is slightly positive.

This research into the JSE contains both good and bad news for 2020 in particular. The good news is that the ICS end-of-January reading was higher than the end-of-December reading, which suggests the stock market should have an upward bias for the rest of 2020.

The bad news is that the January ICS increase was quite modest — to 99.8 from 99.3, an rise of just one-half of one percent. Per the econometric model the professors constructed from the historical data, this translates to only a modest boost in expected stock-market return: Just 10 basis points per month above normal for the rest of 2020, equal to only a bit more than 1% for the full February-to-December. That may not be enough to even pay for transaction costs.

In any case, a big qualification is in order: The surveys on which each month’s ICS reading is based are not exclusively conducted in that month. The data cutoff for the Jan. 31 release was the 27th of the month, for example, and for December’s reading it was before Christmas. So the increase from 99.3 to 99.8, modest as it was, is not a pure reflection of how investors’ moods changed in January. Some of the January increase might actually have happened in late December; by the same token, sentiment shifts in the last four days of January won’t show up until the February reading.

Furthermore, Daves said in an interview, in some of the early years of the ICS the interviews were typically done in the first half of the month. For that reason, he and his colleague conducted their study on the assumption that they needed to wait until the end-of-February reading before estimating whether consumer sentiment had increased or decreased in January. Further research is needed to know with confidence that the relevant variable today is the difference between the end-of-January and end-of-December readings.

Daves added, however, that he will worry if the ICS experiences a big drop in February. In the meantime, you may not want to use the ICS increase in January as the occasion to throw caution to the wind. Still, given that the January Barometer is negative, there is some solace in knowing that another January-based seasonal pattern finds at least bit of a reason to be optimistic.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

Read: Longtime bull says he’s sitting on cash ahead of a possible market correction

More: Excessive optimism in the stock market suggests there are more declines ahead

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