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P: Notes from WebIV Closing Arguments

Takeaway: We doubt anyone left thinking P had the upper hand yesterday, but what we learned is P is largely on its own, and SX is going for its throat

KEY POINTS

  1. ECONOMICS VS. LAW: Bulls vs. Bears: trying to prove that P has the better economic argument vs. considering the legal parameters of the Copyright Act that governs the WebIV proceeding.  During closing arguments yesterday, both SoundExhange (SX) and the Services (P included) each presented what could be viewed as compelling economic arguments depending on who you were rooting for. But the big difference is the legal arguments, with SX literally citing multiple passages from the Copyright Act stating that the copyright owner’s (the labels) rights takes precedent.  P’s only rebuttal here was that SX was being too literal, and asking the judges to operate outside of their mandated roles.
  2. P = ODD MAN OUT: The parties representing the “Services” are not all on the same side of the table. The NAB's priority is clearly on simulcast rates, which SX isn’t really challenging (NAB council made a point to call this out).  IHRT's core platform is terrestrial radio, and the focus of its WebIV filings are largely on simulcast as well.  Note that IHRT’s rate proposal is largely based on the iHeart-Warner deal, which we believe leverages IHRT's much larger terrestrial radio platform (link), which is outside the scope of WebIV.  However, the agreement touts the leverage terrestrial radio (by extension simulcast) has over the labels, which was probably IHRT's agenda.  We suspect all parties are tacitly horse trading; SX is yielding simulcast in exchange for less pushback from NAB/IHRT on webcasting, making P the odd man out.  
  3. LOSING THE KEY DEBATE: Does P have a basis to request lower ad-supported royalty rates (vs. subscription rates)? We've always contended that this debate has been both P’s weakest argument and where it has the most to lose.  P’s only basis is trying to use the Pandora-Merlin agreement as a benchmark, which SX spent much of its time yesterday attacking.  Note that SX already provided rebuttal testimony from the involved Merlin parties stating the agreement is a derivative of the Pureplay Agreement, which is inadmissible for WebIV.  Note that of all the major parties involved, P is the only one asking the judges to distinguish rates by how the copyright buyer chooses to monetize those tracks, which the judges of Web III Remand essentially ruled out (see link below for exact quote).  

 

Let us know if you have any questions, or would like to discuss in more detail.  

 

Hesham Shaaban, CFA

@HedgeyeInternet 

 

 

P: Losing the Critical Debate?

04/08/15 08:53 AM EDT

[click here]

 


June-boree | Demand ↑, Supply ↓, Price ↑

Takeaway: Today’s triple header of housing data tells a congruous story of ongoing demand improvement, tight inventory, and accelerating price growth.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume. 

 

June-boree | Demand ↑, Supply ↓, Price ↑ - Compendium 072215 

 

Today's Focus: June Existing Home Sales, FHFA HPI & MBA Purchase Apps

 

1. EHS follows PHS to new highs. 2. EHS Inventory & FHFA corroborate HPI acceleration. 3. Purchase Apps signal stable demand trends to start 3Q.   

 

Today’s triple header of housing data tells a congruous story of continued improvement in demand trends with price and inventory data supportive of accelerating price growth. 

 

Existing Home Sales, which headlined this morning’s data, rose +3.2% sequentially and accelerated to +9.6% YoY as transaction activity in the existing market made a new post-crisis high. 

 

Taking a composite view of today’s releases, there are a few key takeaways:

 

PHS vs EHS | Predicting the Present:  The strength in June EHS was not unexpected and was well telegraphed by the multi-month strength observed in PHS.  As we’ve highlighted repeatedly, Pending Home Sales are a strong leading indicator for Existing Home Sales and EHS re-coupling to PHS after short-term dislocations has been as high probability a call as one could make.  The re-convergence between the two series is largely complete following the advance in EHS in June.  We show the divergence-convergence trend over the last 18 months in the 1st chart below.

 

1st-time Buyers | Worse …. No, wait, Better .. it depends:  Last month’s rise in 1st-time buyer share to 32% of sales (a 33-mo high) proved a quasi-headfake as their share of sales in June retreated moderately to 30%.  Given the rise in total sales, the decline in absolute sales to 1st-time buyers was more modest and belies the magnitude of ongoing improvement for this demographic.  Indeed, sales to 1st-time buyer are up a notable +17.4% YoY – a premium to the +9.6% YoY growth in EHS in aggregate as distressed/investor/cash sales continue to decline and the slow march to market normalization progresses.  So long as labor/income fundamentals continue to improve and the employment recovery for 25-34 years continues to mature, headship rates among young adults should rise with single-family purchase demand manifesting on a lag.  As can be seen in the 2nd chart below, mean reversion to 40% share for 1st-time buyers implies upside to >6.0 mm in EHS.  

 

Inventory ↓ = Future HPI ↑:   Units of inventory rose +0.9% MoM in June to 2.3 mm but with sales growing at a premium to supply for a second month, inventory on a month-supply basis dropped -2.2% to 5.03-months – representing a second month of tightening supply and the 34th month below the canonical balanced market level of 6-months.  Tight - and tightening - supply in the 90% of the market that is EHS remains supportive of improving HPI trends.  Indeed, the FHFA HPI series for June released this morning showed price growth accelerating +30bps sequentially to +5.6% YoY in June (vs +5.3% prior) and playing catch-up to the (more leading) CoreLogic HPI series which has shown accelerating improvement in each of the last 3-months.  Improving 2nd derivative trends in HPI augurs positively for housing related equities given the strong contemporaneous relationship between the two. 

 

Rates:  Interest rates on the 30Y FRM contract held flat at 4.23% for a 3rd straight week.  Rates remain -2.3% lower than the corresponding period last year with the current rate of 4.23% comparing to the full year 2014 average of 4.35% and the 1H15 average of 3.97%. 

 

Purchase Applications = Less Noise, More Signal:  Purchase applications rose +1.0% WoW while accelerating to +17.8% YoY, taking the index up to 198.3.  Given the typical peri-holiday volatility in the data, this week represents the first clean read on underlying demand for 3Q.   In short, transaction activity appears stable and roughly in line with the 2Q15 average. 

 

While good on an absolute basis, flat sequentially in 3Q15 represents an end to the large-scale, positive reversal we’ve seen over the last ~3qtrs.  Whether #Good Is Good Enough against harder comps and pervasive seasonality remains a tough call, especially with rates providing no discrete head or tailwind to affordability at current levels. 

 

 

June-boree | Demand ↑, Supply ↓, Price ↑ - EHS vs PHS

 

June-boree | Demand ↑, Supply ↓, Price ↑ - EHS 1st time buyer upside

 

June-boree | Demand ↑, Supply ↓, Price ↑ - EHS 1st time buyers

 

June-boree | Demand ↑, Supply ↓, Price ↑ - EHS Inventory Mo Supply

 

June-boree | Demand ↑, Supply ↓, Price ↑ - EHS Inventory Units

 

June-boree | Demand ↑, Supply ↓, Price ↑ - EHS LT

 

June-boree | Demand ↑, Supply ↓, Price ↑ - EHS Median Price YoY

 

June-boree | Demand ↑, Supply ↓, Price ↑ - EHS regional

 

June-boree | Demand ↑, Supply ↓, Price ↑ - EHS Units   YoY TTM

 

June-boree | Demand ↑, Supply ↓, Price ↑ - PHS Comps

 

June-boree | Demand ↑, Supply ↓, Price ↑ - Purcahse   Refi YoY

 

June-boree | Demand ↑, Supply ↓, Price ↑ - Purcahse YoY

 

June-boree | Demand ↑, Supply ↓, Price ↑ - Purchase 2013v14v15

 

June-boree | Demand ↑, Supply ↓, Price ↑ - Purchase Index   YoY Qtrly

 

June-boree | Demand ↑, Supply ↓, Price ↑ - Purchase LT

 

June-boree | Demand ↑, Supply ↓, Price ↑ - 30Y FRM

 

June-boree | Demand ↑, Supply ↓, Price ↑ - FHFA HPI YoY

 

 

About Existing Home Sales:

The National Association of Realtors’ Existing Home Sales index measures the number of closed resales of homes, townhomes, condominiums, and co-ops. Existing home sales do not take into account the sale of newly constructed homes. Existing home sales account for 85-95% of all home sales (new home sales account for the remainder). Therefore, increases in existing home sales tend to signify increasing consumer confidence in the market. Additionally, Existing Home Sales is a lagging series, as it measures the closing of homes that were pending home sales between 1 and 2 months earlier.

 

Frequency:

The NAR’s Existing Home Sales index is published between the 20th and the 22nd of each month. The index covers data from the prior month.

 

About MBA Mortgage Applications:

The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis. 

 

Frequency:

The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.

 

 

 

Joshua Steiner, CFA

 

Christian B. Drake



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CHART OF THE DAY: USD/EUR Cross Rate

Editor's Note: The chart and excerpt below are from today's Early Look written by Hedgye Director of Research Daryl Jones. Click here for more info on subscribing. 

 

...Our Sector Heads by and large currently have negative fundamental biases towards the sectors and companies they cover. This, when combined with our macro view, continues to make us cautious (at best) about equity market returns in the near future.

 

CHART OF THE DAY: USD/EUR Cross Rate - Z COD 07.22.15 chart


Character Is King

“Be more concerned with your character than your reputation, because your character is what you really are, while your reputation is merely what others think you are.”

-John Wooden

 

I picked up a copy of New York Times columnist David Brooks’ new book, “The Road to Character,” while on vacation last week. In it, Brooks discusses the obvious human bias towards being self-centered.  In today's digital day and age, this is probably best personified by the #Selfie.  The idea of taking your own picture has become so prevalent that U.S. Senator Cory Booker is apparently on a quest to take #selfies with every other member of the Senate.

 

Brooks himself admits that he is “paid to be a narcissistic blow hard.”  He makes his point in the context of society over the last couple decades, which by some quantifiable measures has become 30% more narcissistic.  Even more interesting (alarming?) is the growing desire among many to be famous.

 

According to Brooks:

 

“In a survey in 1976, people ranked being famous 15th out of 16 possible life goals. By 2007, 51% of young people said it was one of their principal ambitions. On a recent multiple-choice quiz, nearly twice as many middle-school girls said they would rather be a celebrity’s personal assistant than the president of Harvard University.”

 

Those are some pretty eye-opening trends. 

 

Clearly, we are all guilty at times of too much self-focus and not enough selflessness.   Hedgeye as a group is no exception.  Yesterday, though, we suspended the self-focus and took a half day off to raise money in our second annual Hedgeye Cares Charity Golf Challenge and had a very selfless partner in The Lincoln Motor Company.

 

In recognition of The Lincoln Motor Company’s very generous support as title sponsor of the tournament for a second straight year, I found myself watching some of Lincoln’s commercials on YouTube and latched on to McConaughey’s quote below. (Watch the video here

 

“It’s not about hugging trees, it’s not about being wasteful either, you just got to find that balance.  Where taking care of yourself, takes care of more than just yourself – that’s the sweet spot.”  

 

The quote just about nails the balance that we all strive for, but sometimes do not achieve in the age of the ubiquitous #Selfie.

 

I’d also like to call out the top corporate sponsorships we received from both Salesforce.com and Bloomberg. They came in big for a second straight year. In addition, many individuals like you were kind enough to lend a helping hand by either buying a foursome, donating outright, or providing items for our silent auction.

 

A deep thank you from all of us for your support!

 

Character Is King - Lincoln Blum

 

We invite our Early Look readers to experience www.lincoln.com today and contact the Lincoln Concierge to find out about the new Lincoln Black Label line of vehicles and schedule a test drive.  Additionally you can follow Lincoln on Facebook, Twitter and Instagram @LincolnMotorCo.

 

Back to the Global Macro Grind...

 

Inasmuch as I'm critiquing blowhards this morning, in part, it is our job at Hedgeye to broadcast and communicate our investment ideas.  Accordingly, I wanted to highlight some notable commentary from a few of our Sector Heads over the last few weeks:

 

On 7/21, our restaurant and consumer staples guru Howard Penney added Starbucks $SBUX to his short idea bench. He wrote the following:

 

“SBUX obviously has significant growth potential, and has had industry leading innovation as of late. But we are growing increasingly concerned by the valuation of the stock, which trades at nearly 2 standard deviations above the five year average EV/NTM EBITDA of 12.9x.  The current valuation more than adequately reflects the company’s long-term growth potential.  That being said, we do have some reservations about the current growth strategy.”

 

Earlier this month, our healthcare team led by Tom Tobin presented a new best idea short of Computer Programs and Systems $CPSI.  According to Tobin:

 

“CPSI’s market is saturated with 94% of all hospital having an EMR. It holds 35% market share in its core markets of <100 bed hospitals and is 56% penetrated into independent hospitals of the same bed size cohort. CPSI is selling into a shrinking market and to a financially strapped customer. Virtually all of the remaining upside is already baked into the stock. With severe underinvestment in growth (essentially zero R&D vs. peers at ~10% of sales), we’re modeling sales and cash flow contraction going forward suggesting an unsustainably high dividend (~4.6%). We see -35%-50% downside from here.” 

 

Finally, ahead of the Las Vegas Sands (LVS) quarter tonight, our Gaming Sector Head Todd Jordan had this to say yesterday:

 

“For the first time in many quarters, for any Macau operator, we’re actually in line with Street EBITDA estimates for a quarter.  That’s the good news.  Lucky play on the Macau VIP tables could be a $30m contributor to EBITDA (3%) and is probably the reason we’re in line.  Not exactly bullish but it may be good enough.  We’re actually not sure how the stock will react to Wednesday’s Q2 earnings release.  However, we believe estimates are ultimately headed materially lower owing to declining [high margin] base mass, falling market share (already happening in July), too optimistic non-gaming expectations and a full valuation.”

 

In conclusion, while it may seem like I’m now being a bit of a blowhard in emphasizing these recent calls by our research team, the key point I want to make is that the three highlights above are not just highlights, they are indicative of a trend.

 

Our Sector Heads by and large currently have negative fundamental biases towards the sectors and companies they cover. This, when combined with our macro view, continues to make us cautious (at best) about equity market returns in the near future.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.22-2.45%

Nikkei 20

VIX 11.71-19.01
USD 97.06-98.69 
Oil (WTI) 49.09-51.86

Gold 1082-1139

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Character Is King - Z COD 07.22.15 chart


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