When the economy cratered last September, News Corp Chief Executive Rupert Murdoch quickly told investors his media empire would feel the pain.
After that, silence. With a week to go until quarterly results, investors wonder how bad things will be and are girding for sharper-than-expected profit declines, asset writedowns and perhaps more severe job cuts.
Punishing drops in the stock market, coupled with a slump in advertising spending, make it likely that News Corp will join peers such as Time Warner Inc and CBS Corp forced to revalue the assets on their books, analysts say.
So far, Murdoch has resisted big cuts for his 60,000-plus employees: News Corp has made limited cuts, including several hundred jobs at Fox Interactive Media, home of the MySpace social network. Media reports say more are on the way at The Wall Street Journal and New York Post newspapers, while Australian newspapers are also trimming staff numbers.
If Murdoch wants to keep the business healthy, it is time to make "hard decisions" and prune older media like papers, Pali Capital analyst Rich Greenfield said.
"We are concerned that the News Corp growth story, propelled by cable networks and Sky Italia, will be far less exciting over the next few years," Pali Capital analyst Rich Greenfield wrote in a note.
"It just feels like the legacy assets are weighing too heavily," Greenfield added in an interview. "I think they've been the most aggressive in trying to develop businesses with long-term returns on capital...where others initially didn't believe or thought the start-up costs were too high."
Journal cuts
One unit seen ripe for a writedown is Journal parent Dow Jones, which News Corp bought in 2007 for $US5.6 billion ($8.8 billion), or a 65% premium to its market value then. More recently, News Corp has been trying to cut costs at Dow Jones, including freezing employees' salaries this year.
US newspaper publishers have seen their shares lose half to nearly all their value in the past 12 months, prompting some to write down 20% or more of their assets.
Besides The Wall Street Journal, which has typically performed better than other newspapers, Dow Jones also counts local US papers, the Dow Jones Newswires, the Barron's financial weekly among its assets. News Corp also owns The Sun and Times of London and The Australian.
UBS analyst Michael Morris pointed to a $US25 billion writedown at Time Warner and a $US14 billion one at CBS. Assuming News Corp writes off a similar percentage, he estimated that it could write down $US10 billion, or about a sixth of its assets.
"In particular, we see possible issues at the broadcasting and publishing businesses, including Dow Jones," he said.
A writedown would not affect News Corp's daily performance, but it would be an admission the company paid more for acquisitions than it should have. That in turn could weigh on the stock price.
Bad news
News Corp's shares have fallen 67% in the past 12 months, underperforming peers such as Time Warner, Viacom Inc and Walt Disney Co.
Murdoch in recent months managed down shareholder expectations. In a statement in November, he said operating income would fall in the low to mid teens percentage points, instead of rising 4% to 6%.
He also warned that weaker overseas currencies, particularly the euro and pound, could hurt the New York-based News Corp. A little more than half its fiscal 2008 revenue came from North America and about a third came from Europe.
Many media companies have warned of more advertising sales declines. Magazine publisher and broadcaster Meredith Corp said automotive ad sale pacings are down 70% this quarter - a dire sign for companies such as News Corp.
Wachovia analyst John Janedis expects a 26% drop in operating income for fiscal 2009, which ends on June 30. Greenfield forecast a 30% drop, along with an 80% decline in TV profits.
Barclays analyst Anthony DiClemente forecast a 35% drop in revenue for News Corp's Fox TV stations in the second half of fiscal 2009.
In recent years, investors tolerated Murdoch's love of newspapers because his cable, satellite and interactive businesses were growing.
But MySpace competitor Facebook is grabbing more share of the Internet social media space. And Sky Italia's satellite business could suffer because of the weaker euro and a troubled Italian economy.
As if that were not enough, MySpace's $US900 million Internet search advertising deal with Google Inc expires in 2010, about the time economists expect the markets to recover.
"We do not believe a new Google search deal is likely to be as favorable," DiClemente said.
Since the destruction of Sodom and Gomorrah, we’ve tended to moralise disasters - to see them as the just deserts for our natural sinfulness. Even in today’s secular age, debate on how to handle two crucial issues - the financial crisis and climate change - remains heavily (and unfortunately) moralised.
It’s true that both crises will test our moral qualities. In particular both call for the intellectual courage that’s necessary to see new problems afresh. And we need the moral courage, particularly among those aspiring to lead us, to forge new social consensuses around solutions which embody those insights.
Unfortunately the moralisers usually want us to take intellectual (and moral) shortcuts. They might give some of us a self righteous inner glow. But they’ll only hold us back. In fact they could make things worse.
Activists make climate change politically compelling by moralising it and making it All About Us. They were scathing about the Government’s commitment to reduce its claim on emissions entitlements to 95 per cent of 2000 levels by 2020. That represents a per capita reduction of 25 per cent which seems pretty challenging to me - but there’s no accounting for (moral) tastes.
But here’s the thing. Arresting climate change isn’t all about us. As Garnaut has insisted, what really matters is building a truly global and binding agreement. And for nearly 20 years the major developing countries have resisted binding commitments insisting “you created the problem, you take the lead in fixing it”. Twenty years!
That underlines a further problem with moralism. The moralisers in rich countries feel queasy about forcing poor countries into binding commitments. Their real enthusiasm is the way the looming crisis might make rich societies mend our profligate ways.
But with China soon to be the largest global emitter that’s absurd. Imagine people being excused from water restrictions because they were poor. That’s effectively where moralism has got us in climate change negotiations. (None of this means we should be unprepared to offer compensation or to allow developing countries to temporarily increase their emissions - taking a heavier load ourselves - as we gradually decarbonise production.)
But what really matters is not how heavily we beat our breast in self denial, but how we maximise the chances of engaging the major developing countries. That’s why Garnaut’s most important recommendation was that we commit ourselves to unilaterally reducing our entitlements to emit whilst undertaking to dramatically intensify our efforts if a truly global agreement were reached.
Though Australian policy now embodies this conditional generosity in a diluted fashion, if the idea catches on with other developed countries, we might have made the game-changing difference that enables a truly global system to evolve.
Moralism also threatens to befuddle our response to the financial crisis.
Right back to Adam Smith economists have preached the virtues of prudence and thrift which are the building blocks of investment for the future. That message has, if anything grown in relevance in the last generation as household savings have steadily declined and foreign debt has grown to fund consumption and mining investment.
And at a time like this it would be nice to have less foreign debt so we are less beholden to investor sentiment. But alas, that’s for the medium to long term. Saint Augustine’s prayer - Lord make me chaste, but not yet - may be comical, but this is one situation in which it’s the right prayer. Now is no time to increase our savings.
And yet, appealing to moral notions of thrift, neither the Government nor the Opposition has had the moral backbone to come clean and unreservedly endorse deficit financing as an appropriate response to the crisis. We should be prepared to run substantial deficits and it may be appropriate to run them for some time. It all depends on how things develop - in the international economy and our own.
But that’s not all that should happen. Because we can’t know when it should occur, we should begin now building institutions - for instance independent advisory bodies like the Productivity Commission - to impose disciplines on politicians to move from fiscal accelerator to brake and to increase savings as recovery takes hold.
Doing something like that would make all the difference - between genuinely learning from the mistakes of the past, as opposed to engaging in a bit more empty moralising about them.
First published in the Australian Financial Review on January 13, 2009.
The collapse in Morgan Stanley's shares late last week has led to a wave of bets being taken on the blue-chip investment bank failing to meet its financial obligations. Investors fear that the bank's debt would return only a fraction of its face value in the event of a bankruptcy filing and are pushing up the cost of insuring its bonds against default.
The annual cost of insuring $10m (£5.8m) Morgan Stanley senior bonds against default rose on Friday to $2.8m, up from a price of $1.9m on Thursday. Such an insurance contract, known as a credit default swap (CDS), can now only be purchased in relation to Morgan Stanley when payment is provided upfront — further indication of the precariousness of the bank's perceived solvency prospects.
The 47% jump in the price of credit protection — mirrored on Friday by a 22% slump in Morgan Stanley's share price — came as the complex unwinding process for CDSs linked to failed US rival Lehman Brothers provided further cause for concern.
The payout price for those financial firms that sold insurance, sometimes called "protection", on Lehman credit was set on Friday night at 91.4 cents in the dollar — much higher than market expectations.
Meanwhile, Morgan Stanley is not the only big-name institution that is on the critical list in the credit derivatives market. There are now 135 companies where protection can only be bought on payment upfront, according to price data firm Markit. This compares with a previous peak of 67 in March, suggesting the number of large corporations on the brink of collapse has more than doubled.
The Mother of All Bailouts may be necessary to unfreeze our capital markets, but it won't unfreeze the American economy.
Bailout or no bailout, we're heading into deep recession. One of the first initiatives that Congress and the next administration will need to take will be an economic stimulus package. But not even this will remedy the underlying problem: The earnings of most Americans haven't kept up with the cost of living. That means there's not enough purchasing power to keep the economy going.
Adjusted for inflation, the incomes of nongovernment workers are lower today than in 2000. They're barely higher than they were in the mid-1970s. The income of a man in his 30s is now 12 percent below that of a man his age three decades ago.
Per-person productivity has grown considerably over the past three decades and has continued to rise even in the lackluster recovery of this decade.
But most Americans haven't reaped the benefits of these productivity gains. The benefits have gone largely to the top.
The top 1 percent of American earners now take home about 20 percent of total national income. In 1980, the top 1 percent took home just 8 percent. Inequality on this scale is bad for many reasons, but it is also bad for the economy.
The wealthy devote a smaller percentage of their earnings to buying things than the rest of us because, after all, they're rich and already have most of what they want. Instead of buying, the very wealthy are more likely to invest their earnings wherever around the world they can get the highest return.
The last time the top 1 percent took home 20 percent of total income was 1928. After that, the economy caved in.
The underlying earnings problem has been masked for years as middle- and lower-income Americans found means to live beyond their paychecks. The first coping mechanism was to send more women into paid work. The percentage of American working mothers with school-age children has almost doubled since 1970, to more than 70 percent. But there's a limit to how many mothers can maintain paying jobs.
So Americans turned to a second coping mechanism - working more hours. Americans have became veritable workaholics, putting in 350 more hours a year than the average European, more even than the notoriously industrious Japanese.
But there's also a limit to how many hours Americans can work. So we turned to a third way of coping. We began to borrow. With housing prices rising briskly through the 1990s and even faster this decade, we turned our homes into piggy banks.
But now, with the bursting of the housing bubble, we're reaching the end of our ability to borrow, just as lenders have reached the end of their capacity to lend.
That means there's not enough purchasing power in the economy to buy all the goods and services it's producing. We're finally reaping the whirlwind of widening inequality and ever more concentrated wealth.
The only way to keep the economy going over the long run is to increase the real earnings of middle- and lower-middle-class Americans.
The answer isn't to protect jobs through trade protection. That would only drive up the prices of everything purchased from abroad. Most routine jobs are being automated anyway.
Nor is it to give tax breaks to the very wealthy and to giant corporations in the hope they will trickle down to everyone else. We've tried that and it hasn't worked. Nothing trickled down.
The long-term answer is for America to invest in the productivity of our working people - enabling families to afford health insurance and have access to good schools and higher education, while also rebuilding our infrastructure and investing in the clean-energy technologies of the future. We must also adopt progressive taxes at the federal, state and local levels.
Call it bottom-up economics.
It would be a sad irony if the Wall Street bailout robs us of the resources we need to invest in average Americans and rebuild America from the bottom up.
Gov. Arnold Schwarzenegger and California's top finance officials reacted cautiously Friday to congressional approval of the $700 billion Wall Street bailout package.
They have been worried that the credit market will hurt the state's ability to get short-term loans to cover basic operating expenses, a step California takes each fall until the bulk of its tax revenue arrives in the spring.
Even with the bailout plan passing, Schwarzenegger predicted a difficult path ahead in the financial markets.
"California's not out of the woods yet," he said during a news conference in San Diego, noting that California soon will begin seeking loans on the open market. "It will be difficult. We will be going through challenges in the future."
He said he would convene a meeting on Wednesday with the four legislative leaders to discuss the state's financial situation.
While California seeks short-term loans every year, the situation is especially precarious this year because the nation's credit market has seized up under the strains of the housing-related economic meltdown and because state lawmakers delayed passing a budget for nearly three months.
The record-long budget impasse prevented the state from going to the bond market sooner.
On Thursday, Schwarzenegger sent a letter to Treasury Secretary Henry Paulson asking the federal government to protect California if the state is unable to secure financing for routine borrowing.
"Absent a clear resolution to this financial crisis that restores confidence and liquidity to the credit markets, California and other states may be unable to obtain the necessary level of financing to maintain government operations and may be forced to turn to the Federal Treasury for short-term financing," Schwarzenegger wrote.
A spokesman for the state treasurer's office said pursuing a federal loan is just one option if the credit markets do not respond as Paulson predicted. California also will seek private loans within the next few weeks, spokesman Tom Dresslar said.
Unless it can secure those loans, the state is expected to run out of cash Oct. 29.
Earlier this week, the controller's office said California will need to borrow $7 billion to pay its expenses throughout the fiscal year, which ends June 30.
"We hope that (the bailout plan) will be sufficient to loosen the tight credit market so that the treasurer can issue the $7 billion we need," said Hallye Jordan, a spokeswoman for the state controller.
