P: Webcaster IV = Powder Keg

Takeaway: Anything short of the best case scenario won't be good enough. P may have to exit certain markets in 2016, curbing its long-term prospects.


  1. WORLDS APART: In mid November, P disclosed the progress of its Webcaster IV proceedings with SoundExchange regarding music licensing rates starting in 2016.  The two sides are world apart, particularly on ad-supported music, where SoundExchange is proposing rates 125% above that proposed by P.  We estimate that roughly 90% of P's music is streamed by ad-supported users. 
  2. A COMPROMISE WON'T BE GOOD ENOUGH: We're not suggesting that SoundExchange gets the rates it's proposing.  But anything short of the best case scenario for P won't be good enough.  P's model can't absorb any more cost, and we expect P will have to cut listener hours to curb content costs in 2016.  Once P cuts the chord on those users, it will much tougher to get them back, especially with growing competition for listener hours.



In mid November, P disclosed the progress of its Webcaster IV proceedings with SoundExchange regarding music licensing rates starting in 2016.  The two sides are worlds apart.    

  1. Pandora: Greater of 25% of revenue or $0.0011-$0.0013 for ad-supported streams and $0.00215-$0.00240 for Pandora One subscribers.
  2. SoundExchange: Greater of 55% of revenue, or $0.0025-$0.0029 for all streaming music.

The most glaring difference between the two sides is that SoundExchange is not distinguishing between ad-supported and subscription hours, which is a deviation from the current agreement.


SoundExchange's proposal translates to an increase of roughly 125% in ad-supported licensing rates, which is a major concern given that roughly 90% of P's listener hours are ad-supported.  


P: Webcaster IV = Powder Keg - P   Webcaster rates


If SoundExchange's proposed rates were in effect in 2014, we estimate P would have paid out nearly all its YTD revenues in licensing costs (at least 91% under the SoundExchange proposed rates vs. the 52% P actually incurred YTD).



We're not suggesting that SoundExchange gets the rates they're proposing.  But anything short of the best case scenario for P won't be good enough; P can barely support its business model at its current content cost structure.  


P: Webcaster IV = Powder Keg - P   Cash Flow


It is important to note that P has to pay for every song it streams regardless of whether it is monetizing that listener.  Management had previously suggested that is monetizing less than 50% of its listener hours, so any material increase in content costs would drain a lot of cash out of the model.  While P's relatively low monetization levels suggests a ton of runway for future revenue growth, incremental monetization of those hours will require incremental investment in its salesforce.  


Below, we aggregated P's content acquisition costs and sales & marketing expenses (net stock-based comp) into a single expense line (expressed as a percentage of revenue).  Whatever leverage P has achieved in content acquisition costs over time has been lost to incremental investment in its salesforce.  That essentially means there is no leverage in its model.  


P: Webcaster IV = Powder Keg - P   Op Leverage.


So, what are P's options when its largest single expense is facing a considerable rate hike, prior to the company achieving any meaningful operating leverage, or generating consistent positive operating or free cash flow?


The most likely outcome is that P will have to directly cut it content costs, especially since it is monetizing less than half of the associated hours.  That likely means implementing listening caps, or exiting certain geographies altogether.  Once P cuts the chord on those users, it will much tougher to get them back, especially with growing competition for listener hours.  



We are hosting our P Short Best Ideas call this Thursday at 1pm EST.  Please let us know if interested in joining the call.



Hesham Shaaban, CFA


Don’t Be a Macro Meatball: Resist Your Inner Consensus Urges

Editor's note: This is a brief excerpt from our morning research. For more information on becoming a subscriber click here.

*  *  *  *  *  *  *

The 10-year Treasury yield is at 1.88% now. It started the year at 2.17%. And yet, Old Wall consensus is still saying it’s going to 3.06% by year end?


Significantly, the non-commercial net SHORT position in futures/options contracts (CFTC data) is as big as it’s been in six months at -250,163. Meanwhile, consensus is long SPX Index and Emini contracts on the other side of that!


Don’t Be a Macro Meatball: Resist Your Inner Consensus Urges - mball


Please. Whatever you do. Don’t be consensus.


Our most important macro call remains: Global #GrowthSlowing + #Deflation = Long The Long Bond

McCullough to Underperformers: Stop Whining

In the Q&A portion of today’s Morning Macro Call, Hedgeye CEO (and Mite Hockey Coach) Keith McCullough discusses the drastic performance divergences in early 2015 and offers his insight for investors who are under-performing early in 2015. Keith also reveals where he has received the most pushback on the 1Q15 Macro Themes and why the bond market is refuting those concerns.

Keith's Macro Notebook 1/13: UST 10YR | Gold | Copper


Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.


Takeaway: In today's Macro Playbook, we check in w/ the Chinese economy and officially introduce our bullish bias on the Chinese A-Shares market.


Long Ideas/Overweight Recommendations

  1. Consumer Staples Select Sector SPDR Fund (XLP)
  2. Health Care Select Sector SPDR Fund (XLV)
  3. PowerShares DB U.S. Dollar Index Bullish Fund (UUP)
  4. iShares U.S. Home Construction ETF (ITB)
  5. iShares 20+ Year Treasury Bond ETF (TLT)
  1. LONG BENCH: Vanguard REIT ETF (VNQ), Utilities Select Sector SPDR Fund (XLU), Vanguard Extended Duration Treasury ETF (EDV)

Short Ideas/Underweight Recommendations

  1. iShares TIPS Bond ETF (TIP)
  2. CurrencyShares Japanese Yen Trust (FXY)
  3. SPDR Barclays High Yield Bond ETF (JNK)
  4. Industrial Select Sector SPDR Fund (XLI)
  5. iShares MSCI Emerging Markets ETF (EEM)
  1. SHORT BENCH: SPDR Oil & Gas Exploration & Production ETF (XOP), CurrencyShares Euro Trust (FXE), WisdomTree Emerging Currency Fund (CEW)



Checking In With China: Overnight, China reported its DEC trade data, which came in much stronger than anticipated:


  • Exports: +9.7% YoY from +4.7% YoY in NOV vs. a Bloomberg consensus estimate of +6%
  • Imports: -2.4% YoY from -6.7% YoY in NOV vs. a Bloomberg consensus estimate of -6.2%
  • Trade Balance: $49.6B from a $54.5B in NOV vs. a Bloomberg consensus estimate of $49B


Aside from the obvious sequential strength and positive surprises, there was another “positive” data point embedded in the release:  China imported record volumes of commodities – across the spectrum – in 2014.


You mean the same ‘commodities’ that dropped -17.9% in 2014 (CRB Index) or crashed -26.5% from their TTM closing high on June 20th? Yes, those same ‘commodities’. It would appear counter to the lazy Consensus Macro narrative that Chinese demand is not getting investors paid on the long side of commodities. Hopefully you sold down your commodity exposures when we began making this asset allocation call back in early August.


But, of course, you already knew that Chinese demand is far less important to commodity prices than consensus among the investment community assumes. Whether you’ve followed our work since the beginning (2008) or you’ve been reading our research for only 2-3 weeks, you know that we’ve proven the U.S. dollar is factors #1, #2 and #3 in determining last price, as well as the outlook for both supply and demand in/across global commodity markets:






Generally speaking, both supply and demand for commodities as we have come to know them over the past decade or so are both functions of cheapening-USD credit expansion in and across emerging market economies. How this interplays with China specifically is three-fold:


  1. The confluence of the CNY’s peg (now managed float) vs. the USD and China’s 2001 entry into the WTO allowed the country to dramatically boost its export base, effectively creating massive inflation of the current account surplus
  2. Those USD’s were transformed into CNY liabilities in the Chinese domestic banking sector due to China’s capital account restrictions
  3. Those CNY liabilities were then levered and transformed Chinese domestic banking sector assets, which largely financed the greatest fixed assets investment bubble the world has ever seen


Well, as we show on slides 42-44 in our recent bearish presentation on emerging markets, all three of those factors are being unwound, at the margins:








That unwinding is perpetuating a broader slowdown in Chinese growth, which you can see by the general hue of red across the following tables:






Key highlights:


  • The smoothed, amalgamated YoY rate of change for iron ore, rebar and coal prices – arguably the key leading indicator for the Chinese economy – continues its trend of crashing
  • Official manufacturing PMI data slowing on both a sequential and trending basis
  • Capital flows, money supply growth, fixed assets investment growth – all three of which remain forever linked – are all slowing on both a sequential and trending basis
  • The Chinese property market is an unmitigated disaster at the current juncture; the only indicator that is accelerating on either a sequential or trending basis is finished supply (i.e. housing completions)
  • Continuing with the 'disaster' theme, housing starts and unit demand are tacking down -9% YoY and -8.2% YoY, respectively


Shhh! Don’t tell any of that to the A-Shares, which continue to melt-up on a trending basis (up +58% since the end of June). It’s pulled back a full -4.1% from its 1/7 high on recent official rhetoric that was counter to consensus expectations for perpetual monetary and fiscal easing.




At best, this is the equivalent of throwing a cold towel upon a blazing inferno; our expectations for the “downward pressure” upon the Chinese economy continue to be as bearish as anyone’s with actual credibility in calling China’s economic cycle. As such, we expect cries for stimulus and subsequent stimulus measures to continue dominating macro news flow headlines over the intermediate-term as policy makers are forced to defend their +7% real GDP growth floor.








With this note, we are officially introducing our bullish bias on the Chinese A-Shares market, having effectively authored the thesis two weeks ago. U.S. domiciled investors can play this trade via the Morgan Stanley China A-Share Fund (CAF).


***CLICK HERE to download the full TACRM presentation.***



Global #Deflation: Amidst a backdrop of secular stagnation across developed economies, we continue to think cyclical forces (namely #StrongDollar driven commodity price deflation) will drag down reported inflation readings globally over the intermediate term. That is likely to weigh heavily upon long-term interest rates in the developed world, underpinning our bullish outlook for U.S. Treasury bonds.


The Hedgeye Macro Playbook (1/12)


#Quad414: After DEC and Q4 (2014) data slows, in Q1 of 2015 we think growth in the US is likely to accelerate from 4Q, aided by base effects and a broad-based pickup in real discretionary income. We do not, however, think such a pickup is sustainable, as we foresee another #Quad4 setup for the 2nd quarter. Risk managing these turns at the sector and style factor level will be the key to generating alpha in the U.S. equity market in 1H15.


The Hedgeye Macro Playbook (1/8)


Long #Housing?: The collective impact of rising rates, severe weather, waning investor interest, decelerating HPI, and tighter credit capsized housing in 2014.  2015 is setting up as the obverse with demand improving, the credit box opening and 2nd derivative price and volume trends beginning to inflect positively against progressively easier comps. We'll review the current dynamics and discuss whether the stage is set for a transition from under to outperformance for the complex.


Mortgage Apps | Seasonal Wheel-Spinning (1/7)


Best of luck out there,




Darius Dale

Associate: Macro Team


About the Hedgeye Macro Playbook

The Hedgeye Macro Playbook aspires to present investors with the robust quantitative signals, well-researched investment themes and actionable ETF recommendations required to dynamically allocate assets and front-run regime changes across global financial markets. The securities highlighted above represent our top ten investment recommendations based on our active macro themes, which themselves stem from our proprietary four-quadrant Growth/Inflation/Policy (GIP) framework. The securities are ranked according to our calculus of the immediate-term risk/reward of going long or short at the prior closing price, which itself is based on our proprietary analysis of price, volume and volatility trends. Effectively, it is a dynamic ranking of the order in which we’d buy or sell the securities today – keeping in mind that we have equal conviction in each security from an intermediate-term absolute return perspective. 

Retail Callouts (1/13): WWW Guidance Sandbag, ICSC, EBAY, GME

Takeaway: WWW-4Q review. Revenue? Check. Sperry? Check. Revenue guide? Check. Earnings guide?... Annual sandbag trend continues.

WWW - 2014 Preliminary Results, 2015 Guidance


Takeaway:  Here's a key chart to keep an eye on while watching WWW management try to argue that it's 2015 guidance is not overly conservative. Every single year since at least 2007, WWW has issued initial guidance for the upcoming year in Jan. and every single year it has guided down (with the exception of 2011).  And every year sans one, it beat the high end of its guidance. And in 5 years it posted earnings above where they were before the guide-down. 


Retail Callouts (1/13): WWW Guidance Sandbag, ICSC, EBAY, GME - 1 13 chart1


Seriously, the company ended on a great note, with revenue +9%, and Sperry up in the HSD. Cash flow looked outstanding, and debt is now down below 700mm vs 1.2bn in 4Q12. 


Revenue guidance looked solid at MSD -- conservative -- but solid in WWW terms. The company is getting better confidence in the contribution of Sperry, Keds, Saucony and Stride Rite outside of the US (the crux of the long call). 


But then, lo and behold, the company manages to guide to flat EPS in '15, despite easy comps, better revenue growth, and lower interest expense. 


For such a well managed company, WWW either has horrific internal forecast accuracy, or it does not understand the concept of guidance. 


Either way, we think that 2015 will come in ahead on both revenue (high-single) and EPS (mid-teens at a minimum). 


As a kicker, WWW is likely to buy something in 2H, and while we're not a fan of deals in general, we'd note that a) WWW is very good at them, and b) a new brand will divert attention from Sperry, which can't come soon enough.





Takeaway:  Another strong data point to start the year though the 2.8% reading this week was a 70bp deceleration on the two year trend line.  As we comp the first 14 Polar Vortex weeks of 2014, comps are relatively easy at 1.9% compared to the balance of the year at 2.7%. Our sense is that this was driven by promotional activity due to greater than usual excess inventory available after the Holiday. That's been supported by the traffic trends we saw during December, where the day after Christmas was the best shopping day of the month according to Euclid Analytics.


Retail Callouts (1/13): WWW Guidance Sandbag, ICSC, EBAY, GME - 1 13 chart2





BEBE- bebe stores, inc. Announces 8% comp sales for 2Q15



TLYS - Guides Q4 to range of $0.21 to $0.23, vs prior $0.15 to $0.19



EXPR - Express Guides Q4 to 3-4% comp sales decline from prior mid to high single digit decline, EPS $0.43 to $0.46 from prior $0.38 to $0.45



EBAY - EBay Unveils Retail Platform: All About Omni



Nasty Gal Taps Sheree Waterson as CEO



DLTR, FDO - Dollar Tree Threatens to Abandon Deal If Vote Delays Persist



GME - GameStop to stream video game content to mobile devices




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