in case you missed it
Hedgeye Healthcare Analysts Tom Tobin and Andrew Freedman discuss some key takeaways from a recent conversation they had with an Orthopedic Surgeon and the implications for Zimmer Biomet Holdings (ZBH).
The team also provides updates to their short thesis on AMN Healthcare Services (AHS).
WATCH THE REPLAY HERE
Takeaway: P basically conceded that its recent actions are hedges against Web IV, but also implied that a big risk to our short thesis isn't imminent
- CHANGING ITS TUNE: P hosted a call yesterday following the annonucement of its planned acquisition of certain Rdio assets, but the purpose of the call was to discuss the direction of the company moving forward. P is diversifying away from its ad-supported model through ticketing and a harder push in the subscription market. Mgmt also essentially admitted that the acquisitions of both Ticketfly and Rdio's assets are hedges against the Web IV outcome. In short, P is trying to pitch another story to the street before the WebIV decision is out.
- DIRECT DEALS AREN'T IMMINENT: P also suggested that it aiming to enter the interactive market (e.g. Spotify), but doesn't expect it will be able to offer an interactive product until late 2016. That likely also means that a direct non-interactive license isn't imminent either; mitigating a big risk to our short thesis of P announcing a direct license agreement alongside the Web IV decision (or shortly after). That said, P will likely be saddled with what we expect to be considerable increase in statutory royalty rates for at least the first half of 2016. There's also no guarantee P will get favorable terms on any direct deal (or even deals with each of the majors) given that P has waited till the 11th hour to try to smooth things over with the labels following a historically contentious relationship.
- BUT STILL MISGUIDED? P suggested that it doesn't plan to scale back its Local Radio Advertising push in the event of an adverse Web IV decision. Maybe P is waiting for the Web IV decision before publicly conceding that it will be deemphasizing its ad-supported model. Given that P's viability in a post Web IV world will be dependent on its cash reserves, we're not exactly sure how P is actually planning to sustain that effort after committing 80% of its current cash to acquisitions and the pre-1972 settlement, while onboarding Rdio's employees at the same time. Collectively, these actions suggest P is expecting a Web IV defeat, and is preparing to blow up its model. P has committed too much capital to assume its recent actions are just a hedge.
See charts and notes below for supporting detail/analysis on P's model and Web IV. Let's us know if you have any questions or would like to discuss further.
P: Can We Still Be Friends? (3Q15)
10/23/15 08:14 AM EDT
P: It's All About the Benchmarks (Web IV)
10/02/15 12:22 PM EDT
P: Fool's Gold (Web IV)
09/21/15 02:05 PM EDT
P: Losing the Critical Debate? (Web IV)
04/08/15 08:53 AM EDT
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Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to subscribe.
"... Darius Dale and I were doing the rounds, seeing sharp Institutional Investors in Boston yesterday, when what was looking like another flat to down day for US stocks turned into some rip roaring fun to the upside.
It’s a good thing they bounced them. That was the 1st real up day (albeit on slowing volume – see Chart of The Day for details on Total US Equity Market Volume being -12% vs. its 1yr average) for the US stock market in the last 9."
“The economic mechanisms of an efficiently inefficient market are fundamentally different from those of neo-classical economics.”
-Lasse Heje Pedersen
That’s a mouthful, but it makes a lot more sense than the bill of linear-economics goods I was sold in college. I’m looking forward to debating real-world market practitioners at our inaugural Global Macro conference tomorrow in Stamford, CT – it’s called Macrocosm.
The principles of neo-classical economics are fun to consider, mainly because they’re so easy to disprove. Pedersen’s book, Efficiently Inefficient, is a great primer on the fundamental differences between econ PhD dogmas and real world markets.
Does capital structure matter? How about funding frictions and liquidity constraints? When do you need to be aware of phase transitions in economic, profit, and credit cycles? These are all questions we non-linear people will be considering at Macrocosm.
Back to the Global Macro Grind…
Darius Dale and I were doing the rounds, seeing sharp Institutional Investors in Boston yesterday, when what was looking like another flat to down day for US stocks turned into some rip roaring fun to the upside.
It’s a good thing they bounced them. That was the 1st real up day (albeit on slowing volume – see Chart of The Day for details on Total US Equity Market Volume being -12% vs. its 1yr average) for the US stock market in the last 9.
With the SP500 +1.5% on the day, the real pin-action (beta chasing) was in that good ole “reflation” trade:
- Oil (WTI) popped +3.1% on the day after collapsing another -7.9% last week
- Energy Stocks (XLE) proceeded to ramp +3.3% > 2x the SPY move in turn
- Utilities (XLU), the only major S&P Sector to close up last week, closed +1.7% too
What was it that drove this ramp? Was it NY Fed Head Bill Dudley turning tail saying the Fed doesn’t really have to raise rates in DEC due to “well below target inflation.”
Click here to join Hedgeye CEO Keith McCullough live on The Macro Show at 9am.
Was it a bird or a plane? Was it simply that US and European Equity markets signaled immediate-term TRADE oversold into Friday’s close? Or some combination of all of the above?
I’m pretty sure it wasn’t another set of US Retailers (XRT) missing numbers yesterday (Dillard’s (DDS) down -15% on the Friday/Monday “low gas prices” combo – and Urban Outfitters (URBN) seeing US demand being so bad that they’re buying a pizza chain).
No, I couldn’t make up that pizza-pivot if I tried. That stock is going to keep crashing today.
Copper is still crashing this morning too, down another -0.4% to $2.10, taking its YTD and 6-month #Deflations to -26% and -28%, respectively. But we really shouldn’t talk about that when we can be debating how Qe4 is going to drive the next bull market in Energy.
Seriously, that’s on the table.
That was the main contention in our client debates yesterday – the line of questioning went something like this:
- “So, let’s just say you’re right and the probability is rising of a US recession by mid-2016…
- And let’s assume that the Fed isn’t dumb enough to keep raising into a slow-down…
- Wouldn’t you guys being right on the economy mean the Fed needs to start easing again?”
Yep. Why not?
Oh, right. There’s that thing called the US Presidential election where:
- If the US is dropping below 1.5% GDP growth (towards 0.4% - Hedgeye’s low-end scenario for Q4 to be reported in Q1)
- The probability rises that a Republican could win…
- And if that Republican contender is anti-Federal Reserve, how does Janet (a Democrat) go to Qe4 during the debates?
Well. Since she’s un-elected, I hope everyone realizes that she can have the “courage to act” however she damn well pleases. That said, this whole central-planning catalyst calendar is going to get really gnarly if she tries going there.
Remember that if/when the Fed pivots back to dovish from pretend-hawkish, they have to tell the American People why they are doing that. Say it with me now – Super #LateCycle Growth Slowing…
In other news, neo-classical linear economists still have +3-4% US GDP growth forecasts for 2016.
Our immediate-term Global Macro Risk Ranges are now (with intermediate-term TREND research views in brackets):
UST 10yr Yield 2.17-2.36% (bearish)
SPX 2020-2073 (bearish)
RUT 1139--1167 (bearish)
NASDAQ 4 (bullish)
Nikkei 181 (bullish)
DAX 101 (neutral)
VIX 16.59-20.25 (bullish)
USD 97.99-100.08 (bullish)
EUR/USD 1.05-1.07 (bearish)
YEN 121.53-123.99 (bearish)
Oil (WTI) 39.79-43.55 (bearish)
Nat Gas 2.23-2.40 (bearish)
Gold 1070-1101 (bearish)
Copper 2.08-2.20 (bearish)
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Takeaway: Please join us TODAY at 11 a.m. EST for our latest Best Ideas call on shares of PRA Group (PRAA).
We will be hosting a call Today at 11:00am EST to present a new name we've added to our Best Ideas List - PRA Group, Inc. (PRAA) - as a short.
- Supply/Demand Headwinds: The market for buying defaulted receivables is especially unfavorable. Demand for paper has exceeded supply for a few years now, mirroring the environment last seen from 2005-2007 when shares of PRAA tumbled ~70%.
- Growing Debt: Leverage at the company has risen quickly in the wake of the Activ deal.
- Insiders Dumping: Widespread insider selling suggests that insiders see similar intermediate/longer-term headwinds.
- History's Guide: Our analysis of the interplay between labor markets, terminal IRRs and pre-tax margins will shed light on what to expect fundamentally from a timing standpoint.
- Regulatory Pressure: The CFPB is expected to set new rules for debt collectors in 2016.
- Current Value Unsustainable: The ERC less cost to collect and taxes is currently ~$400mn below the net debt of the company.
- Toll Free Number:
- Conference Code: 13622076#
- Materials: CLICK HERE (Materials will be available approximately one hour prior to the start of the call)
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
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