Unless you just now got back from a deep space mission, you’ll know by now that Oprah Winfrey is turning in her microphone and leaving the ‘The Oprah Winfrey Show’ behind after a 25 year run. Of course (and understandably so), Wall Street’s first questions were (1) what sort of financial impact will this have, and (2) does any stock need to be bought or sold as a result?

The answer to the second question is ultimately up to the individual investor. However, there are some answers to the first question that will help you come to a decision regarding the second one.

First and foremost, CBS - or CBS Television Distribution, to be precise - will forgo an estimated $50 million in annual licensing fees once Oprah leaves network TV. The amount is surprisingly small to some, considering Oprah’s a TV personality and television advertising is such a big business. However, show-by-show, the financial impact of each is really quite minimal. In other words, Oprah’s absence won’t make an enormous dent in total revenue for CBS despite the hysterics of her exit.

So who wins? Possibly Discovery Communications Inc. See. Oprah’s not leaving the business - she’s just changing the venue….. from a network presence to a cable presence.

Discovery is no stranger to various types of programming. The company fills the Science Channel, TLC, and Animal Planet with 24/7 television content, much of which is original. This is where the Oprah story gets really interesting….

It’s still unclear of Oprah is leaving the talk-show business altogether, or just leaving behind here current show. Her handlers will only say ‘The Oprah Winfrey Show’ is not moving to another network, which doesn’t preclude a similar talk show on a Discovery station. Winfrey and Discovery are thinking bigger though. Whether or not Winfrey does her own show, she is going to be the centerpiece of an all-new cable station called the Oprah Winfrey Network (or ‘OWN’, to the inner circle). The rumor is it will be a 50/50 partnership between Oprah and Discovery.

A couple of important generalizations can be made here about the fiscal impact and/or the opportunity.

Assuming the current show is worth $50 million annually to CBS - and it has a very wide viewer base - the value of such a show to Discovery - with a smaller viewer base (about 1.3) - can be no greater than $50 million, and is probably less. And, it’s still not knows if Oprah’s actually going to be hosting a show on the OWN.

On the flipside, what’s an entire cable channel worth? A TV show lasts one hour per day, five times per week. A channel offers eyeballs to advertisers 24/7.

We do know that Discovery’s annual revenue rate has been running at about $3.8 billion. And, we know the annual earnings run rate is on pace to total about $540 million. Dividing those figures by Discovery’s 13 cable channels translates into ‘per-channel’ revenue of $292 million, and earnings of $41 million. (It’s a very undetailed calculation, but you get the perspective on an average station’s value.)

Will attaching Oprah’s name to a channel mean a bigger-than-average draw of viewers as well as advertisers? Probably. But, even if OWN ends up being the company’s top network, after a 50/50 split it’s still not likely to be a game-changer for Discovery. Moreover, Discovery Communications is dumping one channel (albeit a weak one) to make room for OWN. So, it’s not even as if Oprah’s presence and associated revenue will be a 100% incremental addition.

In any case, if you wanted the details about the impact of Oprah Winfrey, there you go. She’s big news to be sure, but only a blip in terms of her impact on the television business.

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Back on August 28th when we last looked at market cap and style performance, small caps and value stocks were leading the way; large cap growth was dragging the bottom. In the meantime, we’ve observed a significant - perhaps trade-worthy - shuffling. Now it’s mid-caps on top, with large cap growth coming on strong.

The transition makes sense. Small caps tend to do well in the early stages of a recovery, and large caps tend to catch up later in the cycle. Considering we’re now eight months past the March bottom, it probably is time to acknowledge this would be a different stage within the bull/bear market cycle.

That being said, there are two key points to be made about the information provided by the chart below.

1. This kind of transition is the very reason we study these charts on an ongoing basis. Though the differential in performances is minimal so far, if this is the beginning of a longer-lasting disparity, we could see double-digit (trade-worthy) differences between the best and worst performers in a short period of time (weeks).
2. We’re still not convinced this recent shake-up is the shape of things to come. Let’s see if the current standings can survive a setback… in the form of a big market tumble. If large cap growth comes back swinging while small caps remain lethargic, that will verify the clues we’re finding here.

Anyway, here’s the chart. We’ll provide an updated version when it’s merited. In the meantime, we do think this is a glimpse of what’s to come.

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We got the final word for October on one of our favorite macro indicators yesterday - capacity utilization. The total crept to 70.7%, up from September’s reading of 70.5%. While the improvement wasn’t earth-shattering, it was an important one all the same. Even more important, however, is the trend.

After bottoming at 68.3% in June, we’ve seen four straight months of increases. That’s enough to call this new upward thrust a trend. Moreover, that’s enough (for us anyway) to say the capacity utilization data fully satisfies our criteria for the recession being over; an expansion phase has begun. Now if we can just get the other three criteria on board.

In any case, here’s the long-term chart. You can easily see how rising and falling capacity utilization (which is surprisingly involatile) inversely coincides with the market’s major ebbs and flows.

Inflation also moved higher in October…. or lower, depending on your perspective.

On a year-over-year basis (which is the common measure), the CPI fell 0.2%, meaning things cost 0.2% less than they did in October of last year. For some reason, however, the focus has recently turned to the month-to-month change. On that front, October prices are 0.3% higher than they were in September for the average basket of goods that makes up the CPI.

So which is wiser to use? We’re not big fans of switching horses mid-stream; it makes it too easy to draw a conclusion first, and then massage the data to support your theory. In this particular case though, we think both formats (yoy, and mtm) should be understood.

On the other hand, it may not matter which format you use to study inflation - both are moving upward now, hinting that reinflation is indeed underway. It’s been a muted recovery so far, as American dollar purchasing power has been under fire. The risk of deflation is a distant memory though, and won’t be the likely threat any longer. The risk now is rapid reinflation (remember, steady inflation at any level is more tolerable than rapid inflation at any level). Even that’s a remote concern at this point though, given overall tepid demand… inflation is relatively stagnated.

Anyway, here’s the inflation chart.

We’ll not worry about any inflation growth until it starts to move above the 2.5% area, provided interest rates move in the same direction, and by an equivalent amounts. Though the media chatter suggests it’s right around the corner, there are some legitimate forecsts that say inflation won’t be  problem until 2012 or later.

If either of these charts - or their underlying dynamics - change, we’ll let you know.

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We talk about sector rotation from time to time here at MicroCapPress.com; today we’re going to put it into action by pointing out how the financial sector is losing its luster, while the basic materials and energy sectors are taking on new leadership rolls. And what better way to do so than with a couple of before/after pictures?

Our first chart indicates the returns of each major sector since the March bottom. It’s no surprise that financials top the list; the average financial stock has gained about 115% since then, after they all took a beating in the months before the rebound. Take a look.

Based on the chart you see here, one would assume the best course of action if looking for the ‘best’ sector would be to just stick with the financials for now. That’s not necessarily true, however.

Now take a look at a chart that’s only been tracking sector performance since July’s low.

As you can see, financials have been replaced by the materials sector. In fact, financials aren’t even a distant second - they’re a distant third.

So what’s going on here? This is sector rotation…. the constant replacement of sector leaders. That’s not to say the financial sector is one to avoid for the foreseeable future, though if the group continues to lose its rank, that could become the best course of action. For now, we just need to bear in mind that energy and materials are trending stronger than any other group. That trend could end tomorrow, but more often than not these trends tend to stay in motion for weeks or months once they emerge.

On a related note, it’s interesting that materials and energy are strengthening now, at this stage of the recovery. Per our analysis in the newsletter a couple of weeks ago, these two sectors are supposed to perform well in the ‘late bull’ phase of the market cycle and the ‘early/mid recovery’ phase of the economic cycle. Though we’re likely to be past the early bull and early recovery phases at this point, we’re probably not to the late bull or mid recovery stages yet. In other words, materials and energy are perking up a little early, if the cycle model holds water.

In some regards it’s a valuable lesson… that models aren’t bulletproof. And, it’s also a distinct possibility that the model will basically hold true this time, but basic materials and energy are just getting an early start on a longer-than-usual period of outperformance. Either way - and regardless of historical tendencies - we think we’re closer to the prior bottom than we are to the next top.

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At the end of last week we learned that consumer credit levels once again hit multi-decade lows. Some are blaming the banks, who are indeed guilty of hoarding cash they were supposed to loan to borrowers. That may not quite be the case though.

Let’s review the overall health of the lending market before we start to pose a slightly unusual theory.

Consumer Credit Levels Down

It’s not a mere feeling - consumers have access to less credit than they did a year ago. They have less credit than they did 15 years ago, in fact. These charts from Briefing.com show the year-over-year percentage changes of revolving and non-revolving credit.

There’s no room for interpretation here…. credit is indeed contracting, which does not help any economic recovery effort.

Here’s the same information posed in a different manner…. the month-to-month dollar changes in total credit.

In September, total credit lines shrank by 14.8 billion, which was much bigger than the revised $9.9 billion contraction of credit for August. That said, the chart below does not show the August revision or September’s actual change; the new chart will be available within a few days.

With or without the updated version of the chart, the story is still the same - the trend of tightening credit is still well intact.

Before you blame the banks, credit card issuers, and ridiculously-tightened lending standards though, you should know something else….

The TED Spread

We’ve looked at it before, so there’s no need to fully describe it again. Let’s just say the TED Spread as the difference between interest rates for 3-month T-Bills and the 3-month LIBOR rate. The LIBOR rate (London Interbank Offered Rate) is what banks charge each other for short-term loans. Its importance to us is simply that the TED spread measures the lending market’s overall perceived credit risk.  The lower it is, the lower the perceived general risk is to lenders.

As you can see on the nearby chart (from Bloomberg.com), the spike in the TED Spread in late 2007 and most of 2008 has been negated; the TED Spread is back to where it was when things were just fine in 2006 and early 2007. Point being, it’s not as if banks and lenders are pushing people off their doorstep.

LIBOR-OIS Spread

Similar to the TED Spread, the LIBOR-OIS Spread is an indication of the perceived availability of funds for short-term loans… the one’s that keep things running smoothly in the interim for banks while they go out and sell bigger, longer-term, and less liquid loans. Again, lower is better.

As the nearby chart of the LIBOR-OIS Spread (also from Bloomberg.com) shows, it’s not like banks aren’t liquid either. In fact, banks are more liquid (cash heavy) now than they have been in years… including the middle of last year (right in the heart of the implosion).

Bottom Line

Point being, not that the banks deserve a pat on the back, but one should be careful about blaming completely them for the lack of consumer spending. They’ve done their fair share to stifle it, but that fact is, credit is there for those who really need and want it, and should have it; consumers just don’t want it. That’s understandable given the situation, but unless they start spending, this is going to be a very long recovery process.

The consumer credit levels (not the two ’spread’ charts, but the two consumer credit charts from Briefing.com) are now the missing piece of the puzzle. Those two charts will need to rise for the economy to truly start growing again.

As for what you can do with this information as an investor, there’s not a lot you should be doing with it immediately. However, this should be data and information you keep in the back of your head, before you dig in deep with assumptions and significant capital.

Bluntly, the economy isn’t nearly as healthy as some investors think it is not because no consumers can’t get credit, but because many consumers just don’t want credit. The banks aren’t entirely to blame, though they’re not off the hook completely.On that note, we’ll reiterate a point we’ve made several times recently…. the consumer credit contraction is not going to prevent an economic recovery. It can, however, cause it to be a tepid recovery process.

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