News or Noise: Debates Make Headlines, but Cybersecurity Is the Real Story

Media coverage of events in Greece, China and elsewhere has calmed down slightly as much of the world takes off on August holiday. Closer to home, the 2016 presidential election cycle is underway. It will be many months before the election becomes newsworthy, but the U.S. media is excited about how it has started. The big event last week was the first in a series of Republican primary debates. The main debate between the top 10 (of 17 total) candidates was the most watched non-sports show in cable television history. Americans love reality TV, and with the debate’s big personalities and American Idol-style competition, viewers couldn’t help but watch.

Given the popularity of the debate, it is somewhat ironic that media stocks came under tremendous pressure last week for slowing growth. As we discuss in the second story below, trends toward streaming and unbundled TV have been evident for a long time, but seemingly last week investors simultaneously concluded that things are getting worse. Finally, we end with a story that does get coverage but, we would argue, not enough given the risks it poses. The first two stories we find interesting but not newsworthy. The update on cybersecurity we will marginally classify as news, not noise, mostly for the fact that it is underappreciated and seems to be moving up as a more serious issue.

No. 1: Presidential Election Cycle Underway

The Republican primary debate was clearly the “story” of the week with reports indicating more than 24 million viewers. An earlier debate with the seven candidates who didn’t qualify for the main event saw more than 6 million viewers. It surprised us that so many Americans are taking an interest at this early stage. Maybe it is because of the personalities involved, the large number of candidates or just a general interest in change in D.C. With the main debate totaling 10 candidates, the questions and answers were required to be both short and lacking in detail. This worked to the advantage of some, and hurt others.

So who was hurt and helped by their performances? All feedback we saw showed that Carly Fiorina was the clear winner of the seven candidates in the first debate. Whether she can parlay this into higher poll rankings and move to the top half of the candidates list is not yet clear. In the second event, our take is that several candidates did little harm—namely, Jeb Bush, Scott Walker and Marco Rubio. Chris Christie likely helped his cause marginally. John Kasich was probably the biggest winner, showing energy and delivering several good answers; but similar to Fiorina, he needs to quickly translate his success to better polling. The loser was clearly Donald Trump. Expectations for him were high, and it appears he alienated many marginal supporters. As the team at Potomac Research Group posted in their Friday morning report, his descent now begins, perhaps as rapid as his ascent.

No. 2: Media Stocks—Changes Slow, Then Fast

Sometimes the markets act strangely. It is hard to believe that the ability for Netflix to be a destructive force in the media space would come as a surprise. The stock is up 193x since the end of the technology crash in 2000–2002. But this week the traditional media stocks declined an average of 12% on disappointing earnings reports and a change in investor attitudes. Netflix has been growing rapidly for years and taking share from other media delivery channels, but it seemed like all of a sudden investors realized this could be a problem. The catalyst was the earnings release by Disney in which CEO Bob Iger said Disney had seen “some subscriber loss” and specifically around the hugely profitable ESPN brand. The three words prompted many more questions for Igor and then a series of analyst downgrades.

It seems that collectively investors realized that traditional pay-TV bundles could go the way of the music CD. Eventually, the consumption of most television could be done on a direct-to-consumer, on-demand and streaming basis. The Disney bombshell was followed by several weak earnings reports by other media companies such as Viacom, Time Warner and AMC Networks that solidified the weak performance.

No. 3: Cybersecurity Concerns

Americans seem to be growing numb to the increasing number of cyber-attacks, but we think these attacks remain a critical risk to the economy. We learned last week that a sophisticated attack caused the unclassified email system of the Pentagon to be shut down for two weeks. Though definitive evidence was not made public, U.S. officials seemed to implicate Russia in the attack. The pace and sophistication of recent attacks seem to be gaining momentum faster than the ability of the technology industry to engineer security enhancements.

In related news last week, it was reported that hackers at the Black Hat conference[1] in Las Vegas remotely hijacked a car and ran it off the road to bring attention to the security concerns over increasingly connected automobiles. Presenters showed a tutorial on car hacking, detailing how the 2014 Jeep Cherokee’s braking system was taken over. In one of the presentations at the conference, Alejandro Mayorkas, deputy secretary of the Department of Homeland Security, spoke about the need for the government and the data security community to bridge the gap of trust that exists so that more coordination to fight threats can be developed.

With the proliferation of online connected systems, it is only a matter of time before a significant, debilitating attack hits a key piece of infrastructure. We can’t predict the date, but each day we escape is another day closer.

Notes

1. According to its website, “the Black Hat Briefings are a series of highly technical information security conferences that bring together thought leaders from all facets of the infosec world—from the corporate and government sectors to academic and even underground researchers. The environment is strictly vendor-neutral and focused on the sharing of practical insights and timely, actionable knowledge. Black Hat remains the best and biggest event of its kind, unique in its ability to define tomorrow’s information security landscape.”

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What Is News or Noise?

Like most of you, we are inundated with information on our phones, in our email inboxes and on the Internet. Clearly, the world doesn’t need another investing blog to reprocess stale information or reformat the day’s useless headlines. Thus, in our investment blog, News or Noise, we’ve taken up the challenge of sorting through the infinite bits of background noise and seeking the few truly newsworthy nuggets of information. What are the stories today that are likely to be meaningful for investors in the future? A very small number of headlines are important, and of those, many are immediately processed by investors. Only a tiny fraction of all the new data is truly relevant and underappreciated.