Spring Forward, or Fall Back?

Each December,
we pen our market expectation for the upcoming mid-year and year-end. Every
quarter, we like to revisit those views,
looking at which of our assumptions have proven to be either true or false.
With the winter of our discontent now over, let’s have a look at how our key
underlying assumptions – on Social Security Reform Employment and Interest
Rates – have played out:

Social Security Reform looked to have a solid chance of
passing post-election. Regardless of your views on the private account plans,
the prospect of 100s of billions of dollars in fund flow would have goosed the
markets – at least temporarily. Our mid-year Nasdaq target of 2620 and Dow
11,707 was in large part premised on some form of legislation getting passed.
There’s no other way to put this: The White House has dropped the ball, failing
to get any mileage even out of the surprisingly good Iraq elections. What
looked like a better than even chance of passage has slid to less than a 1-in-5
possibility. From our vantage point, Social Security Reform now appears to be

Employment surprised to the upside last month, but even that
positive number leaves us far below where we had hoped to be at this point of
the economic cycle. Wages remain soft, and job creation is overly-reliant on
Uncle Sam. As to the low unemployment rate, exhaustees and labor force
drop-outs make the unemployment rate appear much better than it actually is. It
is worse than even our pessimistic assumptions. A string of good Payroll
numbers (3 in a row) will allow us to revise this indicator upwards.

Interest Rates have ticked backed to where they were in the
first week of 2005. Fears of appreciably higher rates are certainly weighing on
the markets. The risk we have outlined (repeatedly) is the dampening effect on
the housing complex – which remains the most robust sector of the economy. With
a 7th tightening expected tomorrow, the Fed will soon be slowing down the
real-estate dependent U.S. economy by nearly as much as energy prices.

Given that our views on Social Security Reform and the
Employment outlook have proven to be overly optimistic, we are throttling back
our mid-year expectations. Our prior targets of DJIA 11,707, S&P 500 1,324
and Nasdaq 2,620 are each reduced accordingly: New DJIA midyear target is
11,215, SPX 1,255 and Nasdaq 2,470.

As we again stated last week,
as risk increases, it is a prudent course of action to reduce margin exposure
and where appropriate, marry puts to long positions.

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Adjusting the Dial



Wsj_radio03172005202250Here’s something enormously gratifying:  A front page WSJ article about why Radio sucks.

The reporter even got the cause & effect right. Satellite  and iPod’s successes came about because Radio was so bad. Even my whipping boy, The 1996 Telecommunications Reform Act, catches blame. You can also see the impact of the Wired article (mentioned here earlier in the month) on the overall flavor of the piece.

While I place a lot more emphasis on the actual reasons for the migration away from radio, this piece is very much in the Big Picture spirit. As someone who has been kvetching about this for years, I am very pleased to see this front page WSJ coverage.

One thing I note as missing is a discussion of the long term generational effect, and the threat to a possible radio recovery: Since 1996, radio’s decay has led to an entire generation of listeners who have essentially written off radio (at least, when it comes to music).

The other key issue: Radio as a source of new music, and its relationship to the labels. (Not really discussed). It used to be part of the draw — a relationship with a trusted DJ who plays music you like, combined with introducing you to new songs (trust is the key component in granting someone taste-maker status).   

I do not see how merely imitating the iPod’s shuffle feature will do the trick. Walk along the beach this summer — there are hardly any radios blaring — a peaceful easy feeling eerie quiet, and lots of white headphone cords.   

We discussed the The Hamburger Helper Effect previously. What will undo a complete shift of media consumption habits of an entire generation of listeners? Can the broadcast industry recapture these lost ears? (I dunno). If they can, then what will they have to so in order to bring back their lost audience?

1) Is it
even possible; b) how they might accomplish that trick?

I’m not sure that anything short of a massive unwinding of radio concentration, and a return to local managers, program directors, DJs and playlists will undo the damage. Even then, you have to win back the listeners who felt betrayed and abandoned. 

The 1996 Telecommunications Reform Act provides us with yet another example of the law of unintended consequences . . .



Hit by iPod and Satellite, Radio Tries New Tune: Play More Songs

After Mergers, Bland Sound Left Giants Vulnerable; Fewer Ads, Added Variety Engineering a ‘Train Wreck’

THE WALL STREET JOURNAL, March 18, 2005; Page A1

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