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P | Web IV ≠ Powder Keg

Takeaway: We were looking at Web IV as the last leg to our short, but it didn't go our way. We’re evaluating the position from here

KEY POINTS

  1. THIS TIME REALLY WAS DIFFERENT: The CRB ruled for a bifurcated rate structure, which took us by surprise since there is no historical precedent for a dual rate structure outside of the Merlin or Pureplay agreement, and P was the only involved party requesting such a rate structure.  The 2016 Web IV ad-supported/subscription per-track rates for 2016 are .17c/.22c vs. .14c/.25 under the Pureplay Rates, which translate to an effective rate of .18 for 2016 vs. the .23 that the Web III remand CRJs (same as Web IV CRJs) ruled for the 2015 period.  In short, Web IV is massive reset off Web III.
  2. WEB IV ≠ POWDER KEG: The 2016 Web IV blended effective rate is .18c vs. .15c under the Pureplay Rates that P is paying today; translates to a manageable ~15% increase in royalty rates.  P will continue to pay lower ad-supported rates (vs. subscription), which is how P structured its model.  In short, the structure of the Pureplay agreement is largely intact, but the Web IV rate structure has essentially shifted more of P's margin profile further away from the ad-supported business into the subscription business.  
  3. NOW WHAT? We were looking at Web IV as the last leg of our short.  We wouldn't necessarily look at the pre-market squeeze/relief rally as a short opportunity since P would still be trading at basically a 2-yr low.  We'll be monitoring consensus estimates to decide what to do with the position from here.  

 

Let us know if you have any questions or would like to discuss further.

 

Hesham Shaaban, CFA


@HedgeyeInternet 

 

P | Web IV ≠ Powder Keg - P   Web IV Rate comparison


ICI Fund Flow Survey | Bull Market in Money Funds

Takeaway: In the week before the Fed's first rate hike this cycle, almost all risk asset classes saw withdrawals

Investment Company Institute Mutual Fund Data and ETF Money Flow:

Almost all risk asset classes experienced net withdrawals in the 5-day period ending December 9th while investors shored up +$13 billion of cash in money market funds, the 8th inflow into cash products in the past 10 weeks aggregating over $85 billion. Other than money markets, only equity ETFs and municipal bond funds saw net positive flows with equity ETFs taking in +$4.1 billion and muni bond funds collecting +$825 million during the week. Meanwhile, taxable bond funds lost -$7.3 billion, their largest outflow of the quarter, on fears of high yield credit exposure. Domestic equity mutual funds lost another -$5.2 billion, bringing the YTD cumulative flow to -$160.2 billion.

 

With 30-40 day duration in most of their money fund portfolios, Federated Investors will now be able to add roughly 6 cents per quarter in new earnings starting in the middle of 1Q16 as new benchmark rates filter through the system (see our FII report HERE).

 


ICI Fund Flow Survey | Bull Market in Money Funds - ICI1

 

In the most recent 5-day period ending December 9th, total equity mutual funds put up net outflows of -$6.4 billion, trailing the year-to-date weekly average outflow of -$1.1 billion and the 2014 average inflow of +$620 million. The outflow was composed of international stock fund withdrawals of -$1.2 billion and domestic stock fund withdrawals of -$5.2 billion. International equity funds have had positive flows in 41 of the last 52 weeks while domestic equity funds have had only 8 weeks of positive flows over the same time period.

 

Fixed income mutual funds put up net outflows of -$6.5 billion, trailing the year-to-date weekly average outflow of -$58 million and the 2014 average inflow of +$926 million. The outflow was composed of tax-free or municipal bond funds contributions of +$825 million and taxable bond funds withdrawals of -$7.3 billion.

 

Equity ETFs had net subscriptions of +$4.1 billion, outpacing the year-to-date weekly average inflow of +$2.4 billion and the 2014 average inflow of +$3.2 billion. Fixed income ETFs had net outflows of -$39 million, trailing the year-to-date weekly average inflow of +$1.1 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 | Bull Market in Money Funds - ICI2

 

ICI Fund Flow Survey | Bull Market in Money Funds - ICI3

 

ICI Fund Flow Survey | Bull Market in Money Funds - ICI4

 

ICI Fund Flow Survey | Bull Market in Money Funds - ICI5

 

ICI Fund Flow Survey | Bull Market in Money Funds - 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 | Bull Market in Money Funds - ICI12

 

ICI Fund Flow Survey | Bull Market in Money Funds - ICI13 2

 

ICI Fund Flow Survey | Bull Market in Money Funds - ICI14

 

ICI Fund Flow Survey | Bull Market in Money Funds - ICI15

 

ICI Fund Flow Survey | Bull Market in Money Funds - 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 | Bull Market in Money Funds - ICI7

 

ICI Fund Flow Survey | Bull Market in Money Funds - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors withdrew -5% or -$306 million from the long treasury TLT ETF ahead of the Fed's first rate hike in seven years. Additionally, the industrials XLI also lost -5% or -$315 million.

 

ICI Fund Flow Survey | Bull Market in Money Funds - 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 | Bull Market in Money Funds - ICI17

 

ICI Fund Flow Survey | Bull Market in Money Funds - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a positive +$4.1 billion spread for the week (-$2.4 billion of total equity outflow net of the -$6.5 billion outflow from fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is +$858 million (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 | Bull Market in Money Funds - 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 | Bull Market in Money Funds - ICI11 



Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA







An open letter to the CEO of Chipotle from his peer group

Dear Mr. Ells,

 

Thank you so much for making a TV appearance the other day as part of your apology tour.  It’s great to see you since, well, never.  I also read your full spread ad in the paper yesterday.  It’s a nice Mea culpa but begs the question “Why weren’t you more serious about food safety earlier?” 

 

You normally fly under the radar screen, unless of course you could take advantage of a platform to publicly admonish your peers about "food with integrity” — much to our dismay (and we were jealous as you picked off our sales).  But mostly we were dismayed since we didn’t agree with the entirety of your approach.

 

We (the industry) didn't believe your approach was legitimate or sustainable at your scale and please note that we have been at the foodservice thing for a long time.  Dining out wasn’t invented yesterday for god’s sakes.

 

We let you run with it though, just like we let you run your mouth.

 

We mostly remember you as the guy proselytizing: “Spending money dining at my joint is better than spending it at your joint. Why?  Because I say so.  I know how things should work. If you don’t believe me, just ask me.  I based my brand on authentic, local and protein friendly."  Nevermind that much of your marketing nonsense is just that — nonsense.

 

We also find it interesting that you are going to save the planet and all the lovely critters on it as well. Especially, you know, the special critters — swine, bullock and fowl.  Mr. Ells, how come you don’t take credit for birthing all these animals so you can kill them and stuff them into your burritos?  If not for you, this protein wouldn’t exist for you to harvest.  We understand it’s a tough marketing message — We are responsible for raising a large number of critters for a specific purpose — to grow them, kill them and eat them (but we smother them gently)."

 

However, Mr. Ells, we must remind you that you forgot to include the most basic rule of foodservice in your brand architecture.  You know…like the number #1 rule?

 

Rule #1: Don’t make the guest sick.

Rule #2: Don’t forget rule #1.

 

It’s interesting that the food sold by most chains and supplied by conventional sources seems to be safer than yours.  Other than a hamburger chain 20+ years ago we don’t recall a chain of your size that successfully created so many cases of acute abdominal distress in such a short time. 

 

Take Subway for instance, especially since they use the same style production line.  We can’t recall an issue there on the scale of yours, and they are a heck of a lot bigger.  Perhaps you can learn a few tips from the chains you are fond of trashing.  They appear to practice foodservice basics you ignore.  Perhaps they can’t claim they are GMO free, but lets come clean…neither can you.  Right?

 

Mr. Ells, congratulations on the successful transformation of an enviable brand into “just another foodservice joint”.  You set a land speed record doing that.  You lost the halo you didn’t deserve and betting odds are it will stay lost.  And make no mistake about it — that is exactly what you are today, just another foodservice joint and an expensive one at that.

 

Sincerely,

 

Your Peers

 


investing ideas

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Cartoon of the Day: Surf's Up!

Cartoon of the Day: Surf's Up! - rate hike cartoon 12.16.2015

 

"The Fed should have raised rates into the acceleration of 2013 and be cutting rates now," said Hedgeye CEO Keith McCullough while hosting Fed Day Live, which featured in-depth analysis and an interactive Q&A following the Fed's rate hike.

 

Click here to watch the replay.


NSC | Biased Sources

Takeaway:  The CP bid may have already created value for NSC by forcing NSC management to drive more efficient operations.  Performance metrics have already improved notably, with NSC velocity higher than CP’s in December.  While NSC shareholders should be very skeptical of both CP claims and bulge bracket analyst coverage, we also think that NSC management is giving an overconfident read on the regulatory hurdles.  We plan to ignore the biased NSC shouting and instead focus on the potential for improved operating performance, consolidation, or both.

 

 

 

Since our September NSC Long Black Book, shares of NSC have outperformed in what is an increasingly obvious industrial contraction.  The rail discussion has shifted from a bearish volume decline narrative to a bullish consolidation narrative.  Improved operating performance at NSC is underway, and we suspect the valuation premium associated with merger potential is unlikely to fade near-term.  While a long NSC position requires tolerance for tedious conference calls and headline driven volatility, we continue to expect the shares to perform well relative to a challenged sector.  Sure, fourth quarter coal volumes are going to be weak – anyone who has gone outside in North America can put that together; weak coal is why the shares are in the 80s instead of in the triple digits.  Market focus has already shifted to 2016 and beyond.

 

NSC | Biased Sources - NSC Velocity

 

 

CP & Ackman Bias:  While he gets some negative press, we think Bill Ackman’s participation in the rail industry of late is productive.  He deserves credit for helping the consolidation narrative. We agree with CP that NSC is an attractive asset, particularly in the mid-70s to low 80s, with significant potential to improve performance.  However, Ackman is also a smart and self-interested activist fund manager; NSC holders should view CP’s input with overwhelming skepticism.  Ackman is correctly pushing his book since that is his obligation; he is long CP, on the CP Board, and wants NSC on the cheap.  We can respect that.  But do we care what CP or Ackman says about a potential BNSF bid for NSC? Nope.  Are they about to bid for CSX? Probably not, and it wouldn’t necessarily be a negative for NSC long-term.  Is the CP offer “highly attractive”? Obviously not.  Do they present their bids with a misleading headline number? That is our take.  Is EHH the only person who can fix NSC?  No, and even he is pretty hot on his COO’s skill set.  We’ll stick to just the number, however structured and presented; the number is still too low.

 

 

“I think the analyst community can be very helpful in what you say and what you write.” - Ackman 12/8/15

 

 

Careful Trusting Bulge Bracket Analysts, Too:  Holders of NSC should also view traditional Street coverage with more skepticism than usual, as we see it.  First, the Street typically loves the volume, volatility, attention, fees and deals generated by a circus atmosphere.  Second, CP’s use of Street analysis in the deal valuation and suggestion that “the analyst community…weigh in” with the NSC Board (along with long calls that get analyst’s names in the transcript) could be viewed as a not-so-subtle effort to get the Street in line.  We’d love to hear the off-line conversations/pressure. 

 

 

“Let's look at analysts' estimates going again back to Citi, quote, based on our math, NS' target for a sub-65% OR in 2020 was largely priced into the valuation prior to CP's proposal …. So, if you want that plan, that's worth CAD 90 a share according to analysts' estimates. The stock is trading above that. You should sell your stock in NS.” Ackman 12/8/15

 

 

HLF Contradiction:  According to analyst estimates, HLF is worth $70 a share (12 month price target average).  By the above logic, shorts should cover…and get long HLF.  Also, we would point out that Street price targets for NSC were much higher last year, with the average at around $120.  Street valuations follow share prices, not the other way around.  We would be surprised if Mr. Ackman uses bulge bracket valuations for…well…pretty much anything in his fund’s investment decision-making.

 

 

“We estimate the total value of the stock and cash consideration to NSC shareholders to be worth $125 to $140 per share at the closing of the transaction in May 2016. The revised transaction offers a 37% to 53% premium to today's closing price of $91.52 and a 58% to 77% premium to the unaffected price of $79.14 per share.” – CP Press Release 12/8/15

 

 

Why NSC Rejected Bid, As We See It:  We believe the NSC Board has rejected the bid because the price is too low.  Efforts to obfuscate the bid by pitching the possible operating performance and synergies have not confused the market – CP is not bidding $125 + CVR or $140 + CVR.  They are instead guessing at how the market will value the combined company; we aren’t sure where a regulator would come down on that framing, but we note its absence from the press release today.  The addition of the CVR today adds a bit of value, but we think that it would take a bid in excess of, perhaps, $100 per share to get the NSC Board to take the risks of the proposed transaction with engagement.  If NSC goes the sale route, they would have an obligation to seek full and fair value, and to explore the potential other suitors.  No one knows how the regulatory process will play out; taking on additional regulatory scrutiny is not a good idea without a substantial reward.

 

 

What We Do See:   NSC management also has an agenda (keeping their jobs) and is probably overstating the challenges to the deal.  After all, no one really knows what the regulators will say – most likely including the regulators.  Management should encourage a higher offer to maximize shareholder value, and not much else.  But NSC management has one huge advantage – performance is dramatically improving.  We don’t really care if Mr. Squires was a lawyer or a pole-dancer as long as he improves NSC’s performance.  Speeds are soaring and dwell is plummeting – both are key to what Mr. Harrison is targeting for NSC.  Perhaps the best part of the CP bid is that it has forced NSC management to set long-term targets and move toward hitting them to keep their jobs.

 

NSC | Biased Sources - NSC Dwell

 

 

Upshot: The CP bid may have already created value for NSC by forcing NSC management to drive more efficient operations.  Performance metrics have already improved notably, with NSC velocity higher than CP’s in December.  While NSC shareholders should be very skeptical of both CP claims and bulge bracket analyst coverage, we also think that NSC management is giving an overconfident read on the regulatory hurdles.  We plan to ignore the biased NSC shouting and instead focus on the potential for improved operating performance, consolidation, or both.

 

 


MUST-SEE: 8 Cartoons Highlighting the Rate Hike Absurdity

With the Fed decision fast approaching, we thought it prudent to reiterate the absurdity of hiking interest rates into an economic slowdown. Hedgeye CEO Keith McCullough will host Fed Day Live today at 2:10 p.m. to dissect the FOMC statement. (Join us this afternoon by clicking here. It's free!) 

 

Instead of running through all the data to support our #GrowthSlowing theme (yet again), here's a "best-of" visual representation of sorts from Hedgeye Cartoonist Bob Rich. Enjoy!   

 

1. yellen & Co. Are confused about economic growth...

MUST-SEE: 8 Cartoons Highlighting the Rate Hike Absurdity - Rate hike cartoon 11.30.2015

 

2. the fed has its own rosy economic projections...

MUST-SEE: 8 Cartoons Highlighting the Rate Hike Absurdity - Rate hike cartoon 11.06.2016

 

3. dEFLATION AND SLOWING GROWTH are "TRANSITORY"?

MUST-SEE: 8 Cartoons Highlighting the Rate Hike Absurdity - rate hike cartoon 11.05.2015

 

4. our own reality-based measures suggest otherwise...

MUST-SEE: 8 Cartoons Highlighting the Rate Hike Absurdity - Rate hike cartoon 11.27.2015

 

5. SO WE AUDITED THE FED'S OWN FORECAST NUMBERS...

MUST-SEE: 8 Cartoons Highlighting the Rate Hike Absurdity - fed tightening noose

 

6. AND WOULDN'T YOU KNOW IT, THEY'RE WRONG 70% OF THE TIME...

MUST-SEE: 8 Cartoons Highlighting the Rate Hike Absurdity - Rate hike cartoon 09.04.2015

 

7. THE RISK? THE FED TIGHTENS INTO A SLOWDOWN today...

MUST-SEE: 8 Cartoons Highlighting the Rate Hike Absurdity - Rate hike Grinch 12.03.2015

 

8. you know where we stand. we'll see what happens at 2pm...

MUST-SEE: 8 Cartoons Highlighting the Rate Hike Absurdity - rate hike cartoon 12.04.2015

 


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