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*CORRECTION P | Sony Agreement ≈ Non-Event

Takeaway: We read this wrong. This is publishing deal, which is a very small part of P's content costs, and not the same rights covered by Web IV.

KEY POINTS

  1. PUBLISHING DEAL, NOT RECORDINGS: We appologize for the confusion.  The Sony Agreement is actually for Music Composition, which is less than 10% of P's content costs, with Sony representing some percentage of that.  The Web IV proceeding is for Music Recordings (92% of P's content costs).  So this agreement is largely a non-event relative to the much bigger Web IV issue.  Point 2 below was mostly historical context, so no updates there outside of removing the last two sentences.  Once again, we appologize for the confusion.  
  2. WAVING THE WHITE FLAG? Very recent development suggest that P is now expecting to lose.  P has committed over 60% of its cash reserves to the Ticketfly acquisition ($191M) + the Pre-1972 settlement ($90M), which is a fairly reckless move without knowing the Web IV outcome.  That is unless it was already planning to blow up its existing model prior to an expected Web IV defeat.  Also note that the pre-1972 settlement also covers the 2016 period, and it is pricing in a considerable rate increase (+40%).  Note that P’s CFO suggested during the 3Q15 call that expected future rates were considered as part of the settlement.  

<chart1> 

 

Let us know if you have any questions, or would like to discuss further.  See notes below regarding recent developments for P and our Web IV analysis.

 

Hesham Shaaban, CFA


@HedgeyeInternet 

 

 

P: Can We Still Be Friends? (3Q15)
10/23/15 08:14 AM EDT
[click here]

 

P: Dumb or Defeated? (Ticketfly)
10/07/15 11:02 AM EDT
[click here]

 

P: It's All About the Benchmarks (Web IV)
10/02/15 12:22 PM EDT
[click here]

 

P: Fool's Gold (Web IV)
09/21/15 02:05 PM EDT
[click here]

 


INITIAL JOBLESS CLAIMS | NEGATIVE ENERGY

Takeaway: A second wave of energy job losses has begun. Energy company hedges are rolling off as we move into year-end.

Moving into the end of the year when energy companies will likely experience losses as they roll over their hedges, the energy sector has seen an uptick in job losses recently. The spread between indexed claims in energy states and the U.S. as a whole in our chart below has widened in 9 consecutive weeks so far. That includes the most recent week ending October 24 where the spread widened to 25 from 22. Additionally, the Challenger job cuts announcement this morning reported oil-related cuts made up more than one quarter of the 50.5 thousand total layoffs announced in October. That marks a six-month high in oil-related layoffs. 

 

INITIAL JOBLESS CLAIMS | NEGATIVE ENERGY - Claims18

 

The Data

Initial jobless claims rose 16k to 276k from 260k WoW. The prior week's number was not revised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 3.5k WoW to 262.75k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -7.0% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -9.1%

 

INITIAL JOBLESS CLAIMS | NEGATIVE ENERGY - Claims2

 

INITIAL JOBLESS CLAIMS | NEGATIVE ENERGY - Claims3

 

INITIAL JOBLESS CLAIMS | NEGATIVE ENERGY - Claims4

 

INITIAL JOBLESS CLAIMS | NEGATIVE ENERGY - Claims5

 

INITIAL JOBLESS CLAIMS | NEGATIVE ENERGY - Claims6

 

INITIAL JOBLESS CLAIMS | NEGATIVE ENERGY - Claims7

 

INITIAL JOBLESS CLAIMS | NEGATIVE ENERGY - Claims8

 

INITIAL JOBLESS CLAIMS | NEGATIVE ENERGY - Claims9

 

INITIAL JOBLESS CLAIMS | NEGATIVE ENERGY - Claims10

 

INITIAL JOBLESS CLAIMS | NEGATIVE ENERGY - Claims11

 

INITIAL JOBLESS CLAIMS | NEGATIVE ENERGY - Claims19

 

Yield Spreads

The 2-10 spread rose 1 basis points WoW to 142 bps. 4Q15TD, the 2-10 spread is averaging 143 bps, which is lower by -10 bps relative to 3Q15.

 

INITIAL JOBLESS CLAIMS | NEGATIVE ENERGY - Claims15

 

INITIAL JOBLESS CLAIMS | NEGATIVE ENERGY - Claims16

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


P: Waiving the White Flag? (Sony Agreement)

Takeaway: Terms are confidential, but to settle this close the Web IV decision suggests someone realizes that it's going to lose. That's likely P

KEY POINTS

  1. CONFIDENTIAL DEAL, ODD TIMING: All we know is that the two sides have come to terms, but we don't know what those terms are.  According to the press release, P will be paying a higher royalty rate and will have more flexibility in its product offerings.  We're guessing the latter would mean an interactive license, which we believe would be a step in the right direction for P.  The obvious question is the magnitude of the increase.  Note, P had previously said that a direct deal wasn't likely prior to the Web IV decision.  Given that we're only one month away from the decision, and that this deal will have precendential value in the next Webcaster proceeding, we suspect one of the parties realizes that it's going to lose, and the negotiated rates are heavily tilted toward one of the party's Web IV proposals.
  2. WAIVING THE WHITE FLAG? Very recent development suggest that P is now expecting to lose.  P has committed over 60% of its cash reserves to the Ticketfly acquisition ($191M) + the Pre-1972 settlement ($90M), which is a fairly reckless move without knowing the Web IV outcome.  That is unless it was already planning to blow up its existing model prior to an expected Web IV defeat.  Also note that the pre-1972 settlement also covers the 2016 period, and it is pricing in a considerable rate increase (+40%).  Note that P’s CFO suggested during the 3Q15 call that expected future rates were considered as part of the settlement.  So that said, we wouldn't assume that P is getting anything close to a sweetheart deal here.  If anything, it may be P's next step toward deemphasizing its ad-supported model (first one being Ticketfly).  

P: Waiving the White Flag? (Sony Agreement) - P   1972 settlement 

 

Let us know if you have any questions, or would like to discuss further.  See notes below regarding recent developments for P and our Web IV analysis.

 

Hesham Shaaban, CFA


@HedgeyeInternet 

 

 

P: Can We Still Be Friends? (3Q15)
10/23/15 08:14 AM EDT
[click here]

 

P: Dumb or Defeated? (Ticketfly)
10/07/15 11:02 AM EDT
[click here]

 

P: It's All About the Benchmarks (Web IV)
10/02/15 12:22 PM EDT
[click here]

 

P: Fool's Gold (Web IV)
09/21/15 02:05 PM EDT
[click here]

 


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Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

INVITE | Gold Flush? Materials Sector Launch Call (NEM, ABX, Gold Miners)

 

INVITE | Gold Flush?  Materials Sector Launch Call (NEM, ABX, Gold Miners)  - Materials Launch Image

 

We are hosting a kick-off call for Hedgeye Materials coverage on Monday, November 9th at 1:00 P.M., and will illustrate our investment process in the Gold Mining industry.

                    

Gold Bugs Bitten:  Gold prices in dollars have declined since 2011, despite two incremental rounds of quantitative easing and perpetual zero interest rates.  US long bonds have performed well in a similar environment.  What are the gold bugs missing?  We’ll put forth our data-driven take in our Materials launch deck.

 

Differentiated Sector Approach: The Materials coverage team of Jay VanSciver and Ben Ryan applies our experience in cyclicals, macroeconomics, and commodities to produce Best-Idea focused, process-driven Materials sector research. 

 

Our research process has three key components:

  • Structural Weakness/Strength: Identify structural vulnerability or resiliency in commodity related business (e.g. over/under capacity, demand susceptibility, deteriorating/improving structural position) that should have a dominant impact on market prices.
  • Unidentified Supply/Demand Changes:  We then look within those industries to see if consensus estimates for production or consumption are likely to prove incorrect based on our data-driven proprietary forecasts ranges.
  • Identify Companies Valued Inappropriately Relative To Forecast:  Deep-dive company specific valuation work oriented toward finding effective exposure our broader commodity thesis.  We align with our firm's top-down macro view when applicable.

 

Coverage To Broaden: While we believe the Gold Mining Industry provides a clear platform to demonstrate our process, our coverage will expand in coming quarters to areas where we see the best alpha opportunities.  We plan to host at least one Best Ideas call per quarter and to publish daily/weekly sector highlights, in addition to key research notes.

 

Call Details:

 

Toll Free:

Toll:

Confirmation Number: 13623545

Presentation Link: Materials Launch

 

As always, our prepared remarks will be followed by a live, anonymous Q&A session. Please submit your questions to . Also, for those of you who cannot join us live, we will be distributing a replay video of the call shortly after it concludes.

 


INVITE | Gold Flush? Materials Sector Launch Call (NEM, ABX, Gold Miners)

 

 

INVITE | Gold Flush?  Materials Sector Launch Call (NEM, ABX, Gold Miners) - Materials Launch Image

 

GOLD BUGS BITTEN:  Gold prices in dollars have declined since 2011, despite two incremental rounds of quantitative easing and perpetual zero interest rates.  US long bonds have performed well in a similar environment.  What are the gold bugs missing?  We’ll put forth our data-driven take in our Materials launch deck.

 

DIFFERENTIATED SECTOR APPROACH: The Materials coverage team applies our experience in cyclicals, macroeconomics, and commodities to produce Best-Idea focused, process-driven research. 

 

Our research process has three key components:

  • Structural Weakness/Strength: Identify structural vulnerability or resiliency in commodity related business (e.g. over/under capacity, demand susceptibility, deteriorating/improving structural position) that should have a dominant impact on market prices.
  • Unidentified Supply/Demand Changes:  We then look within those industries to see if consensus estimates for production or consumption are likely to prove incorrect based on our data-driven proprietary forecasts ranges.
  • Identify Companies Valued Inappropriately Relative To Forecast:  Deep-dive company specific valuation work oriented toward finding effective exposure our broader commodity thesis.  We align with our firm's top-down macro view when applicable.

 

COVERAGE TO BROADEN: While we believe the Gold Mining Industry provides a clear platform to demonstrate our process, our coverage will expand in coming quarters to areas where we see the best alpha opportunities.  We plan to host at least one Best Ideas call per quarter and to publish daily/weekly sector highlights, in addition to key research notes.

 

CALL DETAILS:

 

Toll Free:

Toll:

Confirmation Number: 13623545

Presentation Link: Materials Launch

 

As always, our prepared remarks will be followed by a live, anonymous Q&A session. Please submit your questions to . Also, for those of you who cannot join us live, we will be distributing a replay video of the call shortly after it concludes.

 

Macro Team


ICI Fund Flow Survey | Passive is Massive and Cash is Becoming King Again

Takeaway: The shift from active to passive in equities continues to rage and cash balances continue to perk up in 2H15.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

In the 5-day period ending October 28th, investors flocked to equity ETFs inserting +$9.5 billion in passive stock products, the third largest weekly contribution this year. Conversely, active equity mutual funds continue to be the source of funds, with another -$2.8 billion being redeemed from all U.S. stock fund managers. This shift from active to passive has been rolling for almost a decade now however with still over $7 trillion in active equity mutual funds versus $1.6 trillion in U.S. equity listed ETFs, there is still plenty of market share to be gained. The chart below outlines that the -$595 billion in redemptions in U.S. mutual funds since 2007 has resulted in +$855 billion in new inflow into all passive products (index mutual funds and ETFs). This trend has continued throughout 2015 with a -$125 billion redemption in active U.S. mutual funds versus the +$88 billion subscription to U.S. ETFs. We recommend a short position in shares of T. Rowe Price as a way to express this ongoing shift (see our TROW reports).

 

ICI Fund Flow Survey | Passive is Massive and Cash is Becoming King Again - top chart 

 

Cash continues to build on the sidelines as well as of the most recent survey with another +18 billion recorded by ICI in cash products as of October 28th. Money funds have now brought in +$48 billion in the fourth quarter to date, following a $67 billion build in the third quarter. In addition, the news of Bank of America transferring its +$80 billion money fund portfolio to BlackRock could be a trend to come as banking organizations start to move pools of assets that trigger capital charges under forming rule sets. We continue to like the cash management space and out of favor Federated Investors (see our FII report) on a combination of positive balance builds and profitability inprovements in the business for '16/'17.

 

 

ICI Fund Flow Survey | Passive is Massive and Cash is Becoming King Again - ICI1

 

In the most recent 5-day period ending October 28th, total equity mutual funds put up net outflows of -$2.7 billion, trailing the year-to-date weekly average outflow of -$412 million and the 2014 average inflow of +$620 million. The outflow was composed of international stock fund contributions of +$62 million and domestic stock fund withdrawals of -$2.8 billion. International equity funds have had positive flows in 46 of the last 52 weeks while domestic equity funds have had only 9 weeks of positive flows over the same time period.

 

Fixed income mutual funds put up net inflows of +$3.9 billion, outpacing the year-to-date weekly average inflow of +$201 million and the 2014 average inflow of +$926 million. The inflow was composed of tax-free or municipal bond funds contributions of +$1.2 billion and taxable bond funds contributions of +$2.7 billion.

 

Equity ETFs had net subscriptions of +$9.5 billion, outpacing the year-to-date weekly average inflow of +$2.1 billion and the 2014 average inflow of +$3.2 billion. Fixed income ETFs had net inflows of +$917 million, trailing the year-to-date weekly average inflow of +$1.2 billion and the 2014 average inflow of +$1.0 billion.

 

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.



Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2014 and the weekly year-to-date average for 2015:

 

ICI Fund Flow Survey | Passive is Massive and Cash is Becoming King Again - ICI2

 

ICI Fund Flow Survey | Passive is Massive and Cash is Becoming King Again - ICI3

 

ICI Fund Flow Survey | Passive is Massive and Cash is Becoming King Again - ICI4

 

ICI Fund Flow Survey | Passive is Massive and Cash is Becoming King Again - ICI5

 

ICI Fund Flow Survey | Passive is Massive and Cash is Becoming King Again - ICI6



Cumulative Annual Flow in Millions by Mutual Fund Product: Chart data is the cumulative fund flow from the ICI mutual fund survey for each year starting with 2008.

 

ICI Fund Flow Survey | Passive is Massive and Cash is Becoming King Again - ICI12

 

ICI Fund Flow Survey | Passive is Massive and Cash is Becoming King Again - ICI13

 

ICI Fund Flow Survey | Passive is Massive and Cash is Becoming King Again - ICI14

 

ICI Fund Flow Survey | Passive is Massive and Cash is Becoming King Again - ICI15

 

ICI Fund Flow Survey | Passive is Massive and Cash is Becoming King Again - ICI16



Most Recent 12 Week Flow within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2014, and the weekly year-to-date average for 2015. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:

 

ICI Fund Flow Survey | Passive is Massive and Cash is Becoming King Again - ICI7

 

ICI Fund Flow Survey | Passive is Massive and Cash is Becoming King Again - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, the healthcare XLV ETF took in +6% or +$757 million in contributions. The energy XLE on the other hand lost -4% or -$477 million.

 

ICI Fund Flow Survey | Passive is Massive and Cash is Becoming King Again - ICI9



Cumulative Annual Flow in Millions within Equity and Fixed Income Exchange Traded Funds: Chart data is the cumulative fund flow from Bloomberg's ETF database for each year starting with 2013.

 

ICI Fund Flow Survey | Passive is Massive and Cash is Becoming King Again - ICI17

 

ICI Fund Flow Survey | Passive is Massive and Cash is Becoming King Again - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a positive +$2.0 billion spread for the week (+$6.8 billion of total equity inflow net of the +$4.8 billion inflow to fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is +$1.4 billion (more positive money flow to equities) with a 52-week high of +$27.9 billion (more positive money flow to equities) and a 52-week low of -$19.0 billion (negative numbers imply more positive money flow to bonds for the week.)

  

ICI Fund Flow Survey | Passive is Massive and Cash is Becoming King Again - ICI10

 


Exposures:
The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:

 

ICI Fund Flow Survey | Passive is Massive and Cash is Becoming King Again - ICI11 



Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA







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