August 1, markets are high, rates are high. Generally speaking, they don't work together. How do we make a call?

By looking at a file in detail. I'll take Netflix, which we've often examined in this publication, and which is one of Wall Street's darlings this year.

1. Sales Growth +3% this quarter, compared with +4% last quarter. That's less than inflation. If that's a company of growth, I don't get it.
2. Number of subscribers : is no longer of any interest, because Netflix mixes full-price subscribers without ads and half-price subscribers with ads. So whether they've gained/lost X million subscribers tells us nothing. We're concentrating on sales, see previous comment.
3. Advertising : "advertising revenues are immaterial over 2023." No comment.
4. The competition : it's called Youtube, Disney, Hulu, Amazon Prime. All big names. Their hallmark: all significantly cheaper than Netflix. Price is everything, and even more so when inflation attacks purchasing power. And some are de facto already paid for (Amazon where it's included with Prime etc).
5. Results : a positive operating cash flow of $3.5 billion for the first six months of the year. Excellent news! But where does it come from, given that sales aren't growing? Mostly content spending. Last year, Netflix spent $8.3 bn over the half-year, compared with $6.1 bn this year.

And content is the key: if I cut content, the quality of the product drops, I lose pricing power and subscribers leave for cheaper offers.

In a nutshell, the future is going to be anything but easy for Netflix.

The above observations are factual and therefore indisputable.

Then there's the emotion, which is open to all nuances. It valued Netflix at over $200 billion two years ago, less than $80 billion a year ago, and close to $200 billion again today.

The cherry on top: long rates, which drive down the value of any asset when they rise, have risen from 2% two years ago, to 3% a year ago, to 4% today.

My conclusion is simple: this rise is 100% emotion and 0% fundamentals.

The Netflix case illustrates the market as a whole.

And the main problem with emotion is that it varies, as Marivaux used to say.

Most of our indicators point to the end of the game - volatility at record lows, tighter credit conditions, 1st sign of job losses.

On the last point, a few words from Manpower CEO Jonas Prising at his results presentation last week.

 

"ManpowerGroup's latest Employment Outlook Survey, conducted this spring among 40,000 employers in over 30 countries, reveals that companies are planning more measured hiring for the third quarter, as they face a range of local and macroeconomic challenges, from supply constraints to uneven consumer confidence and shifting purchasing priorities amid continued high inflation. Labor market and other economic data often lag behind the cautious employer trends that impact our sector in the first place.

[…]

I think from the customer's point of view, and I'm sure for many of us, there are so many mixed signals about the economy that it's hard to say when things are going to turn around. But from our point of view, if you look at our data, as an industry and as a company, we've already been operating in an environment that indicates what we would call the garden-variety level of recession for a number of quarters now in the US and more quarters in Europe. And if you look at the overall labor market indicators in the U.S., you see that our industry is going down to a lower level. The number of hours worked is falling. More part-timers are looking for full-time jobs. So all the indicators are there to point to a slight deterioration in the job market."

 

Do you think Manpower's CEO is credible when it comes to employment trends? I think he is.

Finally, on credit, a figure I came across yesterday that stuck with me: in 2019, Telecom Italia (the equivalent of Orange over there) issued debt at 3%. Now they've just issued again, but at 8%.

With interest expenses more than doubling, there will come a time when this will have consequences.

My goal, as it is every year, is to make money. Today, with the level of valuation reached and the fall in volatility, the best way to achieve this objective seems to me to be to buy puts and long US government bonds - the safe haven par excellence. This is what we do in Monocle.