Entertainment stocks on the decline

No surprise they're falling with interest rates, expert says

The Federal Reserve has cut interest rates six times by a total of 300 basis points since mid-September, the fastest pace of reductions in two decades.

Along with the past four declines in interest rates though also has come a big drop in entertainment stocks, even though lower rates are supposed to stimulate the economy and the business of economy-driven sectors, such as ad-dependent media and consumer spending-reliant entertainment firms.

The Hollywood Reporter's Showbiz 50 stock index closed Monday at $1,184.10, compared with its year-high of $1,375.53 that it hit just after the Fed's second rate decrease in the current easing cycle. That's a drop of 13.9%.

But industry expert and investor Hal Vogel said he isn't all too surprised that media stocks and rates have moved in tandem in recent months. "Despite the conventional Wall Street wisdom, declining interest rates are accompanied by declining stock prices perhaps half the time," he says.

Also, rate cuts take time to work their magic, and some investors actually might have been spooked out of stocks by the fast Fed cuts under chairman Ben Bernanke given that some on the Street have seen them as a sign of panic.

"Since the biz is driven by advertising, it is most directly linked to the economy," which despite the cuts has so far "obviously weakened meaningfully over the last six months if not gone into recession," Stanford Group analyst Fred Moran said. "Also, the credit crunch which started in August is a huge overhang for the more indebted, smaller media companies who become at risk of default."

Now, Wall Street expects the Fed at a regularly scheduled meeting Tuesday and Wednesday to cut interest rates another 25 basis points to 2% before taking a breather. Street folks say this will allow the Fed to see how tax rebate checks that start going out this week and the rate cuts to date will affect the U.S. economy.

Plus, because prices for everything from food to gasoline have been on the rise, and rate cuts increase inflationary pressures, the Fed will want to see how inflation plays out from here. During the past 12 months, consumer prices have risen by 4%.

It would be wrong to assume though that a reduction in the pace of rate cuts will necessarily boost stocks, including media shares.

In the easing cycles of the past two recessions, "the S&P 500 on average was down 1%," Merrill Lynch North American economist David Rosenberg said.

Nonetheless, at least some hope that media and entertainment stocks will start emerging from the doldrums as the year continues to unfold. After all, these stocks are generally considered to be so-called early cyclicals. That means they tend to move up faster than others once an economic downturn shows signs of coming to an end.