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PREMIUM INSIGHT

About Everything Replay | Q&A with Neil Howe: Augmented Reality: Better Than Virtual?

About Everything Replay | Q&A with Neil Howe: Augmented Reality: Better Than Virtual? - AE thumbnail

In this complimentary edition of About Everything, Hedgeye Demography Sector Head Neil Howe discusses the media hype surrounding virtual reality versus "the next big thing [that] may already be sitting in your pocket: augmented reality." Howe breaks down the key takeaways and explains the broader implications for investors.


The Macro Show with Keith McCullough & Demography Sector Head Neil Howe Replay | August 17, 2016

CLICK HERE to access the associated slides.

 

 

An audio-only replay of today's show is available here.


JT TAYLOR: Capital Brief

JT TAYLOR:  Capital Brief - JT   Potomac banner 2

 

“I don't know much about Americanism,

but it's a damn good word with which to carry an election.”

                   -  Warren G. Harding

 

SHUFFLING THE DECK CHAIRS ON THE TITANIC: Donald Trump’s campaign is undergoing a major overhaul...again. This time with an addition of two top officials to oversee his sinking campaign and bringing aboard conservative Brietbart news head/former Goldman investment banker who will serve as chief executive as well as a veteran Washington pollster who will take the helm as the traveling campaign manager. Paul Manafort, who has been in the spotlight for damaging stories with respect to a former client, will stay on as campaign chairman. You’re going to hear a lot about the importance of Trump’s latest pivot in the coming days as he’s has come to the realization that his campaign is at a crisis point with the election slipping away and a change in strategy is needed. If Clinton is continuously hit with damaging email revelations and Trump stays mostly on message, a comeback could be in the making - but don’t count your chickens just yet - a teleprompter and a campaign shakeup don’t mean a thing unless he stays on a disciplined course.  

 

CHANGE IN PLANS: Hillary Clinton and her super-Pac, Priorities USA, are suspending campaign ads in VA, CO, and PA as she’s posted healthy leads in quadrennial battleground states, making it an easy decision to decamp and focus resources elsewhere. Clinton and her team will alter her blueprint and reach out to new voters through expanded voter registration and GOTV efforts in many key states. They see an opportunity to not only win this election, but also the chance to increase the probability of Democratic victories down the road by registering voters now. Diverting funds to GOTV outreach is expected to help inoculate Clinton from Democrat complacency setting in should the race not tighten up going into Election Day.

 

TICK-TOCK, TICK-TOCK: With only 82 days left until Election Day, time is running out for Trump. Polls have him trailing Clinton by as much as 9 points nationally…and let’s not even get into state polls. But his victory over an impressive roster of Republican candidates during primary season showed that he can’t be fully counted out and underscores the political elites repeated underestimation of his strengths - yet his own troubles add to his sagging poll numbers daily. One opportunity to improve his standing may be right around the corner – the first of the three presidential debates scheduled for late September followed by two more in October.

 

DREAM ON: We don’t mention Bernie Sanders much anymore, but it’s worth noting that he and his supporters are still critical to winning the 2016 election. The Sanders camp is a prized possession for Clinton and is now committed to traveling all 50 states to stump and raise money for her in addition to down-ballot races. The harmony amongst the Sanders and Clinton campaigns and the DNC is vital to helping the party win the election (think unity, fundraising, message), especially after a rocky relationship between Sanders and former DNC Chair Debbie Wasserman Schultz throughout the primary. The 50-state strategy is set to build the party up for a massive influx of Senate, House, and “local sheriff races” that are up for grabs in 2018, 2020, and so on.

 

BILLS ARE COMING DUE: Congress returns to DC in just under three weeks and despite it being in the thick of election season, they must divert their attention to pass a continuing resolution by October 1 to prevent a government shutdown. Congress hopes to pass a six- to eight-month CR, setting budget caps at levels enacted from last year, but with the bulk of Washington devoted to the presidential race, we can only hope Congress keeps their eye on the prize and follows through.

 

THE TRUTH IS STRANGER THAN FICTION: You can’t make this stuff up. The Bank of Japan is now a top five holder in 81 of 225 companies in the Nikkei. Meanwhile, we’re up to $13.4 trillion in negative yielding bonds globally (up from $13.1 trillion last week). All hail central-market planning! This should end well. No matter the unique brand of central bank shenanigans we’re talking about, all have failed to alleviate slowing economic growth. The bond market knows this. A classic #GrowthSlowing indicator is the compression of the spread between 10-year and 2-year sovereign bond yields. On that score, the U.S. Treasury 10s/2s yield spread sits at 83 basis points (-39bps year-to-date), the U.K. equivalent is 42 bps (-89bps YTD), German is 58bps (-33bps), and Japanese is 12bps (-16bps). Can central planners save the day? Unlikely.

 


Early Look

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EVENT | Pandora Media (P) Best Idea Long

Thursday, August 25th at 1:00PM ET

Watch a replay below:

CLICK HERE to access an audio-only replay. 

CLICK HERE to access the associated slides. 

 

 

 

 


P | New Best Idea (Long)

Takeaway: We're buying into what we hope will be a bigger model transition, but if P doesn't execute, growing take-out pressure should buoy the stock

SUMMARY: We're not fans of P's ad-supported model, but mgmt's recent/recurring comments around up-selling its users along the demand curve suggest P may see the ad model as more of a funnel rather than a longer-term opportunity, even though mgmt would never publicly admit to it.  We're hoping P's interactive foray is part of a concerted push to prioritize the sub model, but the longer-term sub opportunity really depends on how aggressively P plans to pursue it.  However, we're going long the initial-year ramp of its interactive/expanded subscription launch, with expected headlines around direct license agreements likely propelling the stock higher in the interim.  But if P can't get its interactive deals in place in order to launch by 4Q16/1Q17, we expect increasing take-out pressure and/or speculation to buoy the stock, if not force P to entertain offers.  We're adding P as a Best Idea Long with an expected holding period through 2017.  We will be hosting a call Thursday, August 25th at 1pm EDT to run through our analysis in more detail.

  

KEY POINTS

  1. BIG OPPORTUNITY VS. WEAK CORE: The two themes here are ARPU and distribution costs; collectively where the ad-supported model struggles.  Regarding ARPU, P plans to offer new sub products at varying price points; very little sub conversion at pretty much any price point will go a very long way vs. P’s paltry ad-supported ARPU (TTM average of $1.12/month), especially in the initial year(s) following its expanded launch.  Regarding distribution costs, the sub commission rate (aka Apple Tax) tops out at 30%, but Apple just reduced the rate to 15% after the initial year.  Further, the commission only applies to in-app purchases; P's effective commission rate over the LTM is ~20%, so P can work around the tax.  P's ad-supported model on the other hand still hasn't achieved any leverage, and its 2Q results basically confirm that its revenue growth is tied to its salesforce growth (2nd note below).  P also paid out ~27% of its Ad revenue in Sales & Marketing expense over the LTM (ex commissions, direct marketing, and SBC).  In short, we're not buying the longer-term sub opportunity, but the initial-year upside of comping against the ad-supported model, which is so poorly monetized that very little sub conversion would really move the needle (1st note below).
  2. P = CALL OPTION: P reiterated its expected interactive launch date multiple times during its last call, suggesting that mgmt realizes it needs to go to market on schedule to appease the street; especially given growing pressure to sell the company amidst softening core fundamentals.  If P hopes to go market by late 4Q16/1Q17, we suspect it needs to strike at least one deal with one of the three majors before 3Q results.  Any deal announced with any of the major labels will likely drive the stock higher, especially since the street would likely assume that the rest will follow suit.  But there is a risk that the stock sells off if mgmt can’t get any deals done by the 3Q release and/or it pushes out its expected interactive launch date when it reports.  But if that happens, we expect certain activists to step up the pressure to sell the company, and any associated headlines should help put a floor into the stock.  Further, mgmt doesn’t really have many tools to fight off an activist effort; there are no super-voting class B shares, and mgmt doesn’t own enough of the common stock to have any real say.  So if the interactive opportunity doesn’t come to fruition as quickly as expected, we suspect the activist sell-camp may find growing support, and P may be forced to the table.  

 

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

 

Hesham Shaaban, CFA
Managing Director


@HedgeyeInternet  

 

 

P | Fixing the Story
04/06/16 08:47 AM EDT
[click here]

 

P | Call Option? (2Q16)
07/22/16 08:05 AM EDT
[click here]

 


Cartoon of the Day: The Financial Market Olympics

Cartoon of the Day: The Financial Market Olympics - Financial olympics cartoon 08.16.2016

 

  1. Total equity market volume was down -7% versus its 1-month average yesterday
  2. Gold is up +25% year-to-date
  3. Global growth continues to slow
  4. The best efforts of central bankers have failed to stimulate global economic growth
  5. The earnings recession continues (for Q2 2016, 458/500 S&P 500 companies have reported an aggregate earnings decline of -4.1%)
  6. Oil prices continue to fall on bearish fundamentals (and pop on OPEC oil production freeze rumors)

 

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