P | Covering Short

Takeaway: Bombed-out sentiment + no immediate catalysts = Cover. Question now is mgmt's commitment to diversifying its model


  1. BOMBED-OUT SENTIMENT: The Web IV expectation heading into the ruling amongst the sell-side was primarily calling for down to flat rates.  But we now realize that the actual buy-side expectation into the ruling was more aligned with our expectation (+.20c) than the sell-side’s since Web IV rates came in about 15% higher than 2015 rates, and the stock rallied.  But the rally was fairly muted, closing up 14% off a near two-year low on lower volume than its last earnings release; it lost roughly half of those gains the following day.  In short, we now realize that buy-side sentiment was bombed out into the ruling, and hasn’t really improved since. 
  2. NO IMMEDIATE CATALYST: We suspect mgmt sandbagged 4Q15 guidance to bring down 2016 estimates.  Consensus is now looking for revenue growth of only 23%.  The Ticketfly acquisition should provide incremental revenue growth of roughly 5%-6% based on the limited info mgmt has provided.  Net-net, consensus is only looking organic revenue growth in 2016 of ~17%, which is roughly half the rate at which P has onboarded sales reps YTD in 2015.  While we still expect Active Listeners to decline on y/y basis, potentially as early as 4Q15 (see notes below for supporting analysis), we can’t pinpoint the exact quarter when that happens.  
  3. HAS THE STORY CHANGED? Our thesis heading into the Web IV ruling was that P’s ad-supported model couldn’t survive the outcome.  We suspect P came to same conclusion following final arguments, and hastily took steps to diversify its model.  In the following months, P acquired both Ticketfly and Rdio’s assets, and extended multiple olive branches to the major labels in the pre-1972 settlement and publishing deals with Warner and Sony.  More importantly, P has continued to strike additional deals with the industry despite a favorable Web IV ruling, suggesting P may actually be committed to working toward direct/interactive licenses, and pushing into the higher ARPU/margin subscription market.  If that is the case, then P could be a different story.  


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


Hesham Shaaban, CFA




P: New Best Idea (Short)
12/22/14 03:56 PM EST
[click here]


P: User Penetration Survey (N=20,000)

08/28/14 04:12 PM EDT

[click here]

China, Copper and UST 10YR

Client Talking Points


Apparently the year-end markups on no volume lost their luster – China had already devalued Yuan to a 5 year low as the economy continued to slow – today the casino in Shanghai is halted (again) at -7% on the day – the “EM/China Growth” story reminds us of Ned Stark in Game of Thrones (it died early in this cycle call and it not coming back).


Copper was tagged for another -2.7% drop to kick off 2016 - friendly reminder that PMIs have not “bottomed” and the bearish credit cycle is still early relative to some of the crashes we’ve seen in commodity linked currencies, countries, and equities.


Our Best Idea in Macro for Day 1 of 2016 is the Long Bond, and it’s going to do its job this morning ahead of another bad ISM report this morning; immediate-term risk range for the 10YR = 2.16%-2.32%.


*Tune into The Macro Show at 9:00AM ET - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

With the Fed's 25 basis point hike in interest rates, in the financial sector, FII stands to benefit most from even this marginal change.


In essence, Federated Investors (FII) has a stable business for what we think will be a volatile 2016. 2015 finished with slight positive inflows into the firm's main business line, money market or cash products. This is reminiscent of the start of cash builds in 1999 and 2006 ahead of the negative returns in risk assets in 2000 and 2007.


RH is our top long idea in all of retail, and we view the recent weakness in the stock as a buying opportunity. All in we think the company will build to $5bn in sales at mid-teens operating margin which equates to $11 in earnings power. This growth and profitability comes from...

  •  ~30% Square footage growth with new full line design galleries.
  • New businesses, like Modern and Teen, that can be easily layered over its low cost infrastructure.
  • Leveraging occupancy from the "sweet heart" real estate deals the company is getting as a high end traffic driving tenant willing to take anchor size leases. 

The yield spread (10Y’s -2Y’s) compressed to a 52-week low of 120 basis points last week.  AGAIN, that’s a 52-week low in growth expectations right after “lift-off”. Into year-end, the bond market continues to price in what it has all year long: #Slower-and-lower-for-longer.


We continue to believe deflation will pressure the policy-fueled leverage embedded in junk and high yield bond markets. The cheap money, corporate credit boom inflated asset prices and it has more room to deflate. This deflationary run started in the second half of 2014, with the introduction of our #Deflation theme. Back then, was also the low in cross-asset volatility and the high in outstanding corporate credit (commodity producers chasing inflation expectations were the largest contributor).

Three for the Road


NEW VIDEO | Hedgeye @RutgersU: Howard Penney’s Bear Case on Chipotle $CMG… via @HedgeyeHWP



Impossible is just a big word thrown around by small men who find it easier to live in the world they’ve been given.

Muhammad Ali                   


Corn, hogs and wheat ended 2015 down -16.1%, down -18.5% and down -24.1% respectively. 

The Macro Show Replay | January 4, 2016


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

January 4, 2016

  • Bullish Trend
  • Bearish Trend
  • Neutral

10-Year U.S. Treasury Yield
2.32 2.16 2.27
S&P 500
2,003 2,090 2,044
Russell 2000
1,109 1,152 1,136
NASDAQ Composite
4,903 5,122 5,007
Nikkei 225 Index
18,111 19,108 19,034
German DAX Composite
10,109 10,807 10,743
Volatility Index
14.29 21.55 18.21
U.S. Dollar Index
97.41 99.41 98.75
1.07 1.10 1.09
Japanese Yen
118.81 121.23 120.20
Light Crude Oil Spot Price
35.05 38.35 37.07
Natural Gas Spot Price
1.71 2.36 2.35
Gold Spot Price
1,049 1,085 1,061
Copper Spot Price
2.02 2.12 2.13
Apple Inc.
104 108 105
648 695 676
Alphabet Inc.
749 797 778
Walt Disney Company, Inc.
102 108 105
Kinder Morgan Inc.
13.24 16.41 14.92
Valeant Pharmaceuticals Inc.
95.59 109.24 101.65


Hedgeye's Daily Trading Ranges are twenty immediate-term (TRADE) buy and sell levels, with our intermediate-term (TREND) view and the previous day's closing price for each name.  Click HERE for a video from Hedgeye CEO Keith McCullough on how to use these risk ranges.


To 2016 Success

“For Leaders, the humility to admit and own mistakes is essential to success.”

-Leif Babin


That’s so true. And such a great leadership thought for you, your families, and your respective teams to consider as we launch into another year of Global Macro Risk Management. Welcome to 2016.


The aforementioned quote comes from a US military leadership book I cracked open over the holiday: Extreme Ownership – “How US Navy SEALS Lead And Win”, by Jocko Willink and Leif Babin.


“We are by no means infallible leaders; no one is, no matter how experienced. Nor do we have all the answers; no leader does. We’ve made huge mistakes. Often our mistakes provided the greatest lessons, humbled us, and enabled us to grow and become better.” (page 8)


Amen, brothers. And on behalf of everyone in the Hedgeye family, thank you for your patriotism and service.


Back to the Global Macro Grind


In the early years (2008-2012) of Hedgeye’s inception, I had to do a lot of marketing (and fighting) for recognition. When you’re a nobody (and nobody on the Old Wall wants that to change), sometimes you just have to pick a fight (and win it).


I won’t apologize for that. I don’t like to apologize for all my mistakes either. I’d rather own them and learn from them. Last year alone in Real-Time Alerts I made 86 clean cut mistakes. That means I was very publicly wrong 23% of the time. #timestamped


To 2016 Success - RTA ytd


When you make mistakes, what do you do? Are you held to account? Or is that simply accounted for in your accounts? Either way, I’m a big believer in Extreme Ownership. It’s the only way our natural human frailty can be battle tested and hardened for victory.


Some of last year’s victors?


  1. US Dollar +9.3%
  2. German Stocks (DAX) +9.6%
  3. Japanese Stocks (Nikkei) +9.1%


Some of last year’s losers?

  1. The Euro -10.2%
  2. Oil (WTI) -38.8%
  3. Emerging Market Stocks (MSCI) -16.9%


Yeah. They know. US Farmers were big losers last year too:


  1. Corn -16.1%
  2. Hogs -18.5%
  3. Wheat -24.1%


Or was that #Deflation-not-Ex-Energy that was a big winner, making things like farming, corporate profits, and junk bonds losers?


The humility to admit and own the mistake of not understanding #StrongDollar Deflation could have saved a lot of people a lot of money, lots of times in 2015. Instead, there wasn’t a lot of accountability. There was, however, a lot of hubris.


Pro-cyclical Old Wall hubris, that is. Not only has there not been an admission and ownership of massive macro mistakes, but there’s now a doubling down on those mistakes as if nothing was wrong to begin with!


The cover of Barron’s this weekend had “The Best Income Ideas” for a “rising interest rate” environment. Meanwhile, long-term interest rates continue to fall, making a series of lower-highs as both growth and inflation expectations fall.


Last week alone, with the SP500 down -0.8%, here were the US Equity Market Style Factors that couldn’t beat bad returns:


  1. High Beta Stocks -1.9%, closing the year down -13.3%
  2. Bottom 25% Earnings Growers -1.6%, closing the year down -13.5%
  3. Small Cap Stocks -1.4%, closing the year down -14.2%

*Mean Performance of Top Quartile vs. Bottom Quartile Stocks in the SP500


The week itself finally ended one of the most peculiar “rip your face off rallies” Santa has ever seen. For December 2015, the SP500 closed down -1.75%. The Financials (XLF), which were supposed to “go up with rate hikes” dropped -3.0% on the month.




As you can see in today’s Chart of The Day, Thursday’s reading from the Chicago PMI of 42.9 DEC vs. 48.7 in NOV was recessionary. Nope, PMI’s didn’t “bottom” in OCT. Expectations for a Q4 “rally” in everything that didn’t work in 2015 topped in OCT instead.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.16-2.32%

SPX 2003-2090
RUT 1109--1152


VIX 14.29-21.55
USD 97.41-99.41
Copper 2.02-2.12


Best of luck out there this year,



Keith R. McCullough
Chief Executive Officer


To 2016 Success - PMI CoD

CHART OF THE DAY: A Leading Indicator of U.S. Recessions Flashes Red

Editor's Note: Below is a brief chart and excerpt from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more. 


"... As you can see in today’s Chart of The Day, Thursday’s reading from the Chicago PMI of 42.9 December vs. 48.7 in November was recessionary. Nope, PMI’s didn’t “bottom” in October. Expectations for a Q4 “rally” in everything that didn’t work in 2015 topped in October instead."


CHART OF THE DAY: A Leading Indicator of U.S. Recessions Flashes Red - PMI CoD

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