TODAY’S S&P 500 SET-UP – August 29, 2014
As we look at today's setup for the S&P 500, the range is 37 points or 1.24% downside to 1972 and 0.61% upside to 2009.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
Indonesia moved to ban the exporting of unprocessed minerals in January bringing the expectation of a -$3Bn decrease in annual exports:
Nickel: +36% YTD
Copper: -8% YTD
Recent developments concerning Indonesia’s largest copper producers, Freeport McMoRan and Newmont Mining, suggest that the two companies may be at the negotiating table with the Indonesian government. This apparent optimism, coupled with China’s move to seek additional sources of production, suggest the market needs to continue absorbing a multi-year supply increase.
By the end of June, talks between Freeport McMoRan and the Indonesian government appeared to breakdown, fueling speculation over whether the country’s biggest miner even had a future in Indonesia.
Simultaneously, Newmont also reached an impasse as the U.S. miner decided to file for international arbitration. Jakarta retaliated by threatening to terminate Newmont's contract if the company did not withdraw its legal challenge.
Freeport chose to continue negotiations…
The government agreed to a framework valid for at least six months that could be used to renegotiate the contract under the next administration.
Now Newmont appears to be following suit to begin friendly negotiations…
Newmont announced Tuesday it has withdrawn an international arbitration claim against the government after a breakthrough in negotiations with the government.
Just how important is Indonesian mineral production?
Without a doubt, more important for nickel than copper…
Nickel +36% YTD (ETF: JJN)
Government officials have emphasized they have no plans to lift the ban on unprocessed nickel ore….
Defending his case, chief economic minister, Chairul Tanjung said that producing and refining and smelting within Indonesia is much more productive and lucrative than doing the same for unprocessed copper.
A recent report from Indonesia’s Investment Coordinating Board showed that they are in fact investing in the second-leg of the production process:
Indonesia’s share of global copper production is smaller but still significant…
Copper -8% YTD (ETF: JJC) Bullish TREND ($3.16 Spot Resistance)
According to the Copper Development Association the 2012 global production rankings are as follows:
Chile: 5.37MM tons (36% global total)
Reserves: 190MM tonnes
China: 1.5MM tons
Reserves: 30MM tons
Peru: 1.2MM tons
Reserves: 76MM tons
United States: 1.1MM tonnes
Reserves: 39MM tonnes
Australia: 970K tonnes
Reserves: 86MM tonnes
China is one of the largest producers, but it doesn’t have nearly the reserves compared to the rest of the top 5 which explains their sense of urgency in moving to secure supply lines elsewhere:
Copper Quant Set-UP --> Testing the Trend line On Heavy Selling
WHY WE NEED TO TURN TO THE QUANT:
Copper continues to trade on the outlook for the Chinese economy, and for good reason based on their share of global copper consumption. We published a note on July 28th, outlining the uncertainty behind the China catalyst.
An excerpt from that note is included below along with the link:
“Consensus macro leans on the strength of the Chinese economy as a leading indicator for base metal demand (as it should). China consumes over 40% of the world’s industrial metals (up from 5% in 1980).
2013 Consumption (% global demand):
An equally weighted index of Chinese GDP and industrial production to industrial metals prices (CRB metals index) is running an r-squared of 0.50 currently, down from a December 2011 peak. Although diverging from the 2011 highs, the relationship cannot be ignored as a market catalyst.”
We will be watching the following factors in the coming weeks for a read-through on the supply outlook:
1) Chinese economic outlook takes a more definitive turn positive or negative
2) The Indonesian copper bauxite export picture reaches a long-term resolution
3) Continued confirmation in a late-cycle mining cap-ex push from the largest miners
4) A continued positive Trend for the USD
With these fundamental factors in play, copper may be interesting on the short-side if our @Hedgeye $3.16 TREND line breaks and confirms.
Please feel free to ping us with comments or questions.
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Takeaway: Purpose: Determine P's actual US penetration levels (excluding duplicates). Results: P could see declining users/hours as soon as 2015
We ran a single-question poll using Google Consumer Surveys: "How many Pandora Internet Radio accounts have you ever created for your own use (Unique Usernames/Log-Ins)”?. The purpose of this question was to determine P's actual penetration levels, and the impact that users with multiple accounts had on P's registered user metrics.
We surveyed 20,000 people in the US; we then filtered the data down to 13,899 responses where demographic data was available (Google inferred). We present the data both as reported (unweighted), and weighted to represent the US Internet population.
At face value, the results are don't appear too surprising. But the total number of duplicate accounts is staggering.
While the duplicate percentage may seem too high to make sense, remember that P has over 250M registered accounts, which by most external estimates is almost the same size of the entire US population accessing the internet.
After backing out duplicates, and marrying the survey results with Census data, we estimate that Pandora is roughly 54% penetrated into the US Adult Internet Population. While that may sound like a lot of runway, the demographics of its remaining addressable market skew much older, which will make incremental user growth more challenging.
We haven't discussed teenagers yet, which are an inherently easier group to penetrate. However, we estimate that P has already penetrated a considerable portion of this segment. The table below details our analysis here. In short, P has likely penetrated over 70% of the non-adult US internet user base.
We have previously identified that P has historical retention issues, which we detail in the chart below. Over the last 3.5 years, P has added more than 160M registered accounts, yet only grew active users by 44M, suggesting total churn of at least 116M accounts, or 72% of its gross account gains during this period.
We do not have enough data to explicitly calculate its quarterly churn rate after 1Q11. However, we estimate using a rough back-of-envelope calculation that quarterly attrition over the past 3.5 years has averaged somewhere in the mid to high-teens as a percentage of its active users.
Currently, P has 76.4M active users as of 2Q14. If we a assume mid- to high-teen churn rate, then the company would need to sustain a run-rate of gross new quarterly account adds of 11M-13M to maintain its active user base. Even If that run-rate was possible over the long-run, and P could penetrate every internet user in the US, we estimate that P would exhaust its unpenetrated TAM within 7-10 quarters.
In a more likely scenario, we expect gross new account adds to slow given the high concentration of older users within P's unpenetrated TAM, which should lead to y/y declines in user and/or listener hour growth sometime in 2015.
We want to be extremely clear: Declining users and/or hours does not mean that revenues will decline. Even if users/hours decline, P can still generate revenue growth by improving sell-through rates on its ad inventory, which remains below 50% of total hours according to management.
The question is how much of this opportunity lies with improving sell-through rates in the major advertising markets vs. the minor ones (e.g. New York City vs. Topeka).
Put another way, if users in New York City are already receiving peak ad load (sell-through rate), then losing those users would likely outweigh any benefit of improving sell-through rates in Topeka.
Answering this question is the next leg of our analysis; stay tuned. In the interim, let us know if you have any questions, or would like to discuss in more detail
Hesham Shaaban, CFA
We've made several changes to our bench of longs and shorts on the Consumer Staples Ideas list.
Current longs are WWAV, DEO and THS
Current shorts are BNNY, K and HAIN
Changes to the long and short bench include:
Today Bloomberg reported that the Consumer Comfort Index climbed to a five-week high on the back of an improving labor market. Two days ago the Conference Board reported that their sentiment gauge registered a seven-year high, saying that “Americans are finding more reasons to be upbeat about their prospects for the rest of the year as recent reports pointed to a pickup in the job market and stock prices advanced to records.”
There are no major changes in recent trends across the consumer staples space:
Feel free to email or call with questions.
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