At a quick glance, it wouldn’t seem as if the recent market volatility would affect media stocks and exchange traded funds (ETFs) too much. They seem as if they would behave more like health care or consumer-staples sectors because everyone uses media, right?
While that might be true, in actuality, media stocks and ETFs such as PowerShares Dynamic Media (PBS) have been dramatically affected by the subprime mess and subsequent credit crunch. That’s because many media companies have giant loads of credit debt. As credit standards tighten, it could become more difficult for companies to borrow money and more expensive to pay interest on the existing debt, says Paul R. La Monica for CNN Money. Walt Disney (DIS), the fifth largest holding in PBS at 5.0%, is $13.7 billion in debt. Time Warner (TWX), the sixth largest holding at 4.8%, has $36 billion worth of debt. If the credit crunch were to tighten further, it could pull media stocks and their umbrella ETFs down even more.
The good news here is that the downward spiral can’t last forever. Historically, once the market volatility reaches its peak, media stocks have shot up quickly, more than making up for their previous losses. Judging by the chart, could the worst be behind us already?
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.