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Netflix Steps Up

Written by Briton Ryle
Posted December 10, 2018 at 9:00AM

I first saw it about a month ago. And I will admit: It didn't really sink in. But then yesterday, I saw it again.

It was midway through the second quarter of the Raven/Chiefs game. (Which, by the way was a fantastic game. Baltimore didn't get the win. And I almost don't care because I was thoroughly entertained for nearly four hours. )

It was a standard movie trailer for a modernized version of the Kipling classic, The Jungle Book. This new version — called Mowgli — looks like it uses a lot of CGI and features the voices of Benedict Cumberbatch, Christian Bale, and Cate Blanchett. 

Only, when it came time to say, “Coming to theaters near you,” it actually just said, “Available on Netflix.”

Interesting...

Netflix is now advertising itself as a destination for new movie debuts. Bad for the movie theaters, especially when Disney starts doing this, too. 

Disney has had a remarkable run of blockbuster movies over the last couple years, thanks to Marvel and Star Wars. And because there are so many different story lines, these two franchises lend themselves to more frequent installments that are maybe a little less “epic.”

In other words, perfect for a streaming service. I've done a lot of “dinner and a movie nights” with my kids over the years. Easily 100 bucks every time. Disney's streaming service comes online sometime early next year. The whole “home entertainment” thing is getting a makeover. For Netflix, it's probably about survival. Cash burn is high, margins are weak, stock is expensive.   

But for Disney, it's about leverage. Theme parks, sports, sports betting, Star Wars, and the Avengers. Disney can bring you the whole package right to your living room — and you're gonna pay them for it. Sweet!

I know I said the Santa Claus rally was on last week. And then the markets immediately got hit with another wave of selling. Now, I'm not gonna try and wriggle out of this one with same fancy verbal-work (even though technically, the Santa Claus rally occurs between Christmas and New Year's, you know, as if Santa brought it).  

The fact is, the market is weaker than I thought, and the president is not helping things by constantly pounding the trade war drums. 

It's times like these that we should be paying attention to stocks that are showing really good relative strength. The logic goes that if a stock holds up well during a correction, it should do really well when the correction ends and an upside story emerges. 

Disney is one such stock. Disney hit all-time highs in October and November, while most stocks were selling off. It's currently down less than 6%. Apple is down like 25%. 

I think this is because investors see a really nice future for Disney. If the bleeding at ESPN stops, Disney can easily run 50% in 2019. 

Twitter is another stock that's bucked the trend. It's been downright frisky. In fact, Twitter shares were actually putting in their lows when this correction began in early October. It's up around 20% since and riding its 50-day MA higher. If you're looking for a trade, this is a good one. 

And, as much as I dislike Facebook as a company and a product, that valuation is starting to whisper sweet nothings in my ear.

Semiconductors look AWFUL. In my opinion, this is the worst-looking sector out there, with the possible exception of the banks. And you don't have to look any further than the aforementioned Apple to see why. 

Apple isn't breaking out sales numbers for iPhones anymore. Investors don't like that, sounds too much like there's something to hide. And sales projections for new phones do not seem to be strong. That, of course, means a wide range of chip companies aren't showing a lot of growth. 

Nvidia (NASDAQ: NVDA) reported a large inventory build last quarter. 2019 earnings for Cypress Semi (NASDAQ: CY) have been cut by over 12%, and the shares are under $13 (we sold CY in The Wealth Advisory at $15.65 for a 43% gain). Skyworks (NASDAQ: SWKS) probably has the biggest dependency on Apple — it has been nearly cut in half since March highs. 

I've talked up AMD (NASDAQ: AMD) before, and I'll stick with it. Because AMD has very little Apple exposure. Its catalyst is data center server chips. That space seems fine so far...

For the financials, it's debt. Citi says corporate debt is now a problem. Debt levels have been rising at twice the normal rate since 2010. And now that the Fed is hiking (making debt more expensive) and global growth is slowing, foreign investors are pulling back. 

So, what revelations will there be about how bad corporate debt really is? Like, back at the end of 2007, it was just housing prices. Yeah, housing prices were going to pull back, banks won't lend as much for a little while, these things happen...

But then in 2008, we started to learn that every bank and every insurance company had basically traded their cash reserves for mortgage-backed securities (MBS). Whoops. 

So what now? Are we going to learn that every bank is holding a crap-wad of ABS? Apple-backed securities?

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.

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