What We Learned This Week

Disney to Take the Rest of Hulu: As expected, Disney is poised to acquire the remaining 33% of Hulu it did not own from Comcast (resulting from Disney’s 2019 acquisition of Fox). Hulu has been positioned somewhat independently alongside Disney's other proprietary streaming platforms, Disney+ and ESPN+. We view this development optimistically, seeing the opportunity for Disney to further integrate these brands into a more unified package. Disney's use of its robust IP portfolio in streaming, evident in its Disney+ productions, underscores its potential. We anticipate that full ownership of Hulu will further enhance these offerings. Our long-term confidence in Disney stems from its consistent performance in the parks and experiences sector, coupled with its adept leveraging of its extensive brand portfolio across various verticals.

US Retail/Consumer Picture is Evolving: Feedback from various consumer-focused businesses in the US indicates a shifting and increasingly intricate landscape for American consumers. Certain sectors are thriving while others are experiencing challenges. Premium brand names (e.g., Starbucks) are currently performing well, as higher-end consumers have been relatively shielded from the economic challenges affecting the wider population. Additionally, premium value offerings (e.g., Costco) are finding success. In contrast, mid-tier, commodity-type products are facing significant hurdles, a trend likely to persist through the upcoming holiday season. Conversely, retailers like Target are adopting a more cautious approach as consumers exercise restraint, especially concerning essential everyday goods. Alongside Starbucks and Costco in this context, we hold a favorable view of TJX (parent of TJ Maxx, HomeGoods, and Marshalls), given their premium value offerings are well-suited for budget-conscious consumers as we approach the holiday season.

Some Relief on Rates: Stocks experienced a rally towards the end of the week, coinciding with a slight relief in interest rates. The benchmark 10-year treasury yield, which had peaked over 5%, retracted to 4.5% over the past few days. We commend the treasury department's decision to favor shorter-term paper (3 and 10 years) rather than longer-term notes (20 and 30 years) to fulfill immediate spending needs. Concentrating on the shorter end of the yield curve, where demand is higher, has provided respite on the longer end, consequently alleviating the pressure on equity markets influenced by rising interest rates.

Apple Story Remains Firmly Intact: Apple's recent quarterly report echoed some of the concerns related to discretionary spending. Current quarter figures slightly exceeded expectations with weaker product sales being more than offset by higher services revenue. The stock is down slightly due to the company's conservative guidance for the upcoming holiday quarter. Our focus with Apple has shifted toward its installed base (i.e., number of products currently in use), which reached another all-time high, surpassing 2 billion. This metric significantly enhances customer lifetime value by fostering brand loyalty and driving growth in Apple's higher-margin services segment. Unlike product sales, services revenue is more stable, aligning with our long-term value creation thesis.

Challenges in Commercial Real Estate Not Letting Up: Data on the current funding environment in commercial real estate paints an increasingly challenging picture. Banks are notably stringent when it comes to financing new development projects, and developers are encountering difficulties refinancing loans due to the elevated interest rates. Consequently, numerous projects are being shelved, and new construction activity is sharply declining. The pandemic has adversely impacted specific sectors within commercial real estate, leaving investors apprehensive about the industry's future. In this climate, one can't help but anticipate opportunities arising from the higher-quality collateral damage in this challenging environment.