Is the media depression over?

The mood of the media business is gloomy. Journalism has not moved easily into the digital age. Losses have been common and layoffs widespread over the past few years.

Question is, is the media depression over? That's what the stock market seems to be saying.

Of course, we know that the stock market--the collective judgment of millions and millions of investors worldwide world risking money and reputation daily--isn't always right. (The late, lamented real estate bubble attests to that. The same goes for the dot.com boom and bust.) Nevertheless, the market is a wondrous competitive "system of telecommunications" in economist Friedrich Hayek's apt metaphor. The price signal should be taken seriously.

Baron Biggs, the long-time investor and hedge fund manager, gives these striking examples of the equity markets ability to sense major turning points in his book, Wealth, War and Wisdom. The British stock market bottomed out in late June 1940 and it climbed higher even before the Battle of Britain was over. The Dow hit bottom in the spring of 1942 and started rising before the tide of war changed with America's victory over Japan in the Battle of Midway. Stocks traded in Berlin peaked as German forces reached the outskirts of Moscow in early December, 1941. "`Those were the three great momentum changes of World War II -- although at the time, no one except the stock markets recognized them as such,'' he writes.

Well, over the past 12 months the benchmark S&P 500 index is up 45%. Yet the Powershares Dynamic Media Portfolio has soared 88% over the same time period. I've drawn the chart over a two year period to show the decline, the rebound, and the recent outperformance of the Media Portfolio vs. the S&P 500. (The S&P is the brown line; the Media Portfolio is the blue line.)

Here is a list of the holdings in the exchange traded fund.

PBS - Dynamic Media Portfolio

As of 4/5/2010

% of Fund

Viacom Inc. 5.33%

Comcast Corp. (Cl A) 5.15%

Walt Disney Co. 5.07%

News Corp. (Cl A) 4.97%

Time Warner Inc. 4.94%

McGraw-Hill Cos. 4.68%

DIRECTV 4.61%

HSN Inc. 3.46%

RCN Corp. 3.39%

Warner Music Group Corp. 3.03%

Lamar Advertising Co. (Cl A) 2.89%

Entercom Communications Corp. (Cl A) 2.87%

E.W. Scripps Co. (Cl A) 2.86%

Interpublic Group Of Cos. 2.84%

Washington Post Co. (Cl B) 2.82%

Gannett Co. Inc. 2.79%

Valassis Communications Inc. 2.78%

CBS CBS Corp (Cl B) 2.76%

SNI Scripps Networks Interactive Inc. Cl A 2.76%

HHS Harte-Hanks Inc. 2.74%

MNI McClatchy Co. (Cl A) 2.64%

OMC Omnicom Group Inc. 2.63%

DISH DISH Network Corp. (Cl A) 2.61%

JW.A John Wiley & Sons Inc. (Cl A) 2.56%

NYT New York Times Co. (Cl A) 2.53%

SCHL Scholastic Corp. 2.21%

SIRI Sirius XM Radio Inc. 2.08%

IHS IHS Inc. Cl A 2.54%

Google Inc. (Cl A) 4.88%

AOL Inc. 2.59%

What's going on? It could be that the media company cuts have been so draconian that even a modest uptick in the economy will translate into higher profits. It's a reasonable bet. But it could also be that investors are gambling that media companies through trial and error have a better grasp of their digital strategies, from establishing partnerships to embracing multimedia. And, of course, the optimists could be simply wrong.

The stock market suggests this is a story worth pursuing. Stay tuned.

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