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How 3 Key FCC Decisions Could Affect Facebook, Netflix & Verizon


In this HedgeyeTV video excerpt, Potomac Research Group Senior Telecommunications & Cable analyst Paul Glenchur discusses how key FCC decisions on the set-top box market, net neutrality and sponsored mobile data could affect companies like Verizon, Netflix, and Facebook with Hedgeye Internet & Media analyst Hesham Shaaban. Glenchur also weighs in on what a Republican presidency would mean for mergers and acquisitions in the telecommunications sector. 


Paul Glenchur, Senior Analyst, Telecommunications-Cable


Paul Glenchur is ranked among leading telecommunications policy specialists, combining his legal background with industry experience. Prior to joining Potomac Research, Mr. Glenchur was the senior telecom and cable analyst with Schwab Washington Research and later the senior telecom policy analyst with the Stanford Group. Mr. Glenchur also has an extensive legal background – he served as an attorney on the FCC’s cable and common carrier bureau, as an associate with the Washington law firm of Miller and Chevalier, and as Counsel to the Assistant Secretary of Energy for Congressional Affairs. Before moving to Washington, he was a judicial law clerk to Judge Thomas Tang of the U.S. Court of Appeals for the Ninth Circuit. Mr. Glenchur is a graduate of the University of California at Berkeley and earned his J.D. at the University of California Hastings College of the Law, where he was an editor of the law review. Mr. Glenchur is a member of the Federal Communications Bar and has testified before House and Senate committees on telecommunications issues. He is also a member of the Supreme Court and Ninth Circuit bars.

INVITE | 1Q16 Internet Best Ideas Call

Takeaway: Please join us for our call Thursday, Feb 4th at 1:00pm EST. Dialing instructions will be published Thursday morning.

We will be hosting our quarterly INTERNET BEST IDEAS Update Call this Thursday, February 4th at 1pm EST.  We will be reviewing the major themes and incremental developments to our Best Idea Short theses (YELP, TWTR), and will be discussing two recently-closed Best Ideas that we have added to our Bench in the opposite direction (LNKD as a potential Short, P as a potential Long).  The emphasis of this call will be to outline our view over various durations (particularly 2016) as well as the upcoming catalyst calendar; identifying the major catalysts and risks to each company over the near-to-intermediate term.


Join us for our call Thursday, Feb 4th at 1:00pm EST.  Dialing instructions will be published Thursday morning. 




  • TWTR: Aggressive monetization tactics creating structural headwinds; why there is at least one more leg down to the short.
  • YELP: Sell-side refuses to acknowledge its attrition, so estimates still too high.  Question if mgmt will repeat 2015 mistake and guide to them
  • LNKD: Closed Long, Potential Short.  Selling environment appears to be deteriorating, could be beginning of challenging trend
  • P: Covered Short, Potential Long.  Dead money or Call Option? Depends on how mgmt chooses to proceed post Web IV


Hesham Shaaban, CFA


CHART OF THE DAY: This Doesn't Always Signal Recession But It Always Predicts Stock Crash

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


"... One of the most important relationships there is in macro is between PROFITS and STOCKS. And, unless it’s different this time, US stocks have always crashed (greater than 20% draw-down from prior peak) when US corporate profits go negative for 2 consecutive quarters."


CHART OF THE DAY: This Doesn't Always Signal Recession But It Always Predicts Stock Crash - 02.02.16 chart

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.

They Cannot Pretend

“The Americans cannot protect themselves as they cannot pretend to have a Navy.”

-Lord Sheffield


That’s a truthful British quote from 1783 in Observations of the Commerce of the American States (when the USA didn’t have a real Navy). It’s also the opening volley in a book I started reading this past weekend called Thomas Jefferson and The Tripoli Pirates.


I kind of feel like a pirate these days. ‘Argh! Here I am, permee-bulls – I’m here to take your booty!’ And the reason why I’m not fazed by any of these bear market bounces is twofold: neither the corporate profit (slowing) nor credit signals (widening) have changed.


The levered long beta bulls can crowd all their holdings into two stocks (Google and Facebook), but they cannot pretend to have either accelerating GDP or earnings growth in the 1st half of 2016. Ex-ing everything out won’t change that. Protect yourself.

They Cannot Pretend - FANG cartoon 01.15.2016

Click here to join Hedgeye CEO Keith McCullough live on The Macro Show at 9am. 


Back to the Global Macro Grind


If you have friends who want to ex-out the American Socialist vote in Iowa last night, they can do that too. People are partisan – the economic data isn’t. Yesterday’s ISM report of 48.2 for JAN signaled:


  1. The 4th straight “contraction” (survey reading below 50)
  2. A year-over-year decline of -6% (last JAN the ISM was at 53.9)
  3. A sharp slow-down in the Employment component at 45.9 (vs. 48.0 DEC and 54.1 in JAN of last yr)


But no worries, if you ex-that-out, and just call it “transitory” (like the 1H 2015 US Employment and Consumption growth cycle highs were), you might end up summarizing the current macro market risks as follows:


“At this point, it is difficult to judge the likely implications of this volatility.”

-Federal Reserve Vice Chair Stanley Fischer


“It will take some time here to understand what is going on.”

-Dallas Fed Head, Robert Kaplan


“It appears we have slower growth… and may need a longer period of accommodation.”

-San Francisco Fed Head, John Williams


That last quote cracks me up the most as there was no more cocksure Federal Reserve pro-cyclical (bullish on late cycle indicators post the peak) economist than our friend from Berkeley, John Williams. Only 5 weeks ago, the guy wanted 5 “rate hikes” in 2016. #lol


And I get it. For a day, the “market liked an easier Fed.” Or at least the US stock market liked not going straight down (it still closed down on the day mind you) as the US Dollar finally dropped -0.6% on that.


But most of the playbook “Dollar Down” ideas (like Oil for example) didn’t cooperate at all with the “Fed is easy, buy everything” narrative. It reversed last week’s bear market bounce, dropping -6.6% on the day (WTI is down another -2.3% this a.m. to $30.88).


The Fed can get less-hawkish, but they cannot pretend to have US profit growth.


We’re almost half way through earnings season (215 of 500 companies in the SP500 have reported) and here’s the score:


  1. Total SP500 SALES -2.4% y/y and EPS -3.7% y/y
  2. Energy (13 of 40 reported) SALES -34.8%, EPS -70.6%
  3. Materials (13 of 27 reported) SALES -14.2%, EPS -32.7%
  4. Industrials (36 of 65 reported) SALES -7.7%, EPS -4.8%
  5. Financials (45 of 90 reported) SALES +1.2%, EPS -3.4%
  6. Information Technology (36 of 65 reported) SALES -1.2%, EPS -2.5%


But if you ex-out all of that negative year-over-year earnings growth (i.e. 287 companies in the aforementioned sectors or 57% of the SP500), you can pretend that there’s nothing to worry about.


Reality is that there’s only one firm that mapped and measured the probability of this happening (from the July cycle peak) 7 months ago. And that same firm is reminding you that this US equity market (and long-term Bond Yield) selloff isn’t over.


One of the most important relationships there is in macro is between PROFITS and STOCKS. And, unless it’s different this time, US stocks have always crashed (greater than 20% draw-down from prior peak) when US corporate profits go negative for 2 consecutive quarters.


Our immediate-term Global Macro Risk Ranges are now (with intermediate-term TREND research views in brackets):


UST 10yr Yield 1.91-2.06% (bearish)

SPX 1 (bearish)
RUT (bearish)

NASDAQ 4 (bearish)

Nikkei 159 (bearish)

DAX 9 (bearish)

VIX 19.22-28.11 (bullish)
USD 98.48-100.01 (bullish)
EUR/USD 1.07-1.09 (bearish)
YEN 119.15-121.41 (bearish)
Oil (WTI) 27.62-33.21 (bearish)

Nat Gas 2.01-2.29 (bearish)

Gold 1098-1135 (bullish)
Copper 1.95-2.09 (bearish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


They Cannot Pretend - 02.02.16 chart

The Macro Show Replay | February 2, 2016


WisdomTree (WETF) | The Kuroda Kicker?

Takeaway: While the BoJ cut overnight lending rates into negative territory last week, DXJ assets improved only marginally.

No investable turn yet

While a single day doesn't make a trend, the Bank of Japan's move to negative overnight lending rates last week was hardly a stop gap in the ongoing slippery slope in fund flows at WisdomTree's Japan Hedged equity fund (DXJ). The +$19 million inflow last Friday into the DXJ following that BoJ announcement failed to markedly improve trends and the WisdomTree product still put in the worst month in its history losing -$967 million in the first month of '16 following the -$887 million outflow in December. Zooming out, these redemptions have resulted in DXJ's AUM falling from a high of $18.7 billion on June 8th, 2015 to $12.7 billion as of last week with competing hedged products continuing to pick up share. The DXJ lost another 2 points of market share through the end of the first month of 2016 with the 87% share from the beginning of December 2015 receding to 85% at the end of January 2016 (with iShares continuing to pick up incremental AUM).


WisdomTree (WETF) | The Kuroda Kicker? - Recolored 1


WisdomTree (WETF) | The Kuroda Kicker? - 2 DXJ AUM 2


WisdomTree (WETF) | The Kuroda Kicker? - 4 JPY AUM Share



Meanwhile the rate of change in fund flows at WisdomTree's hedged Euro product, the HEDJ, bounced off of December lows. While January still resulted in redemptions of -$814 million following December's 2015 loss of -$1.9 billion, total AUM is still headed in the wrong direction. The past several months have brought HEDJ’s AUM down to $15.3 billion from its August 5, 2015 high of $22.3 billion. Similar to its Japanese counterpart, HEDJ is losing share on the margin to competitors, with iShares and Deutsche Bank now totaling 14% of the market at the end of January 2016.


WisdomTree (WETF) | The Kuroda Kicker? - Recolored 5


WisdomTree (WETF) | The Kuroda Kicker? - 6 HEDJ AUM 2


WisdomTree (WETF) | The Kuroda Kicker? - 7 EUR AUM Share


Less bad for now but we need more evidence

Bigger picture, our research shows that industry hedged equity products are dependent on substantial dollar strength to provide value, and with only a marginal rise year-to-date, the U.S. dollar's ascent is stalling from several perspectives (namely a 3 sigma move on a 10 year timeframe and also at its historical +20% year-over-year real rate of change). In addition, the U.S. dollar in all but one instance has historically declined after initial Fed Fund rate increases (with the sole exception being the move in 1988).




WisdomTree (WETF) | The Kuroda Kicker? - 3 DXY 2


WisdomTree (WETF) | The Kuroda Kicker? - 10 2


WisdomTree (WETF) | The Kuroda Kicker? - JC roc us dollar 



The DXJ and HEDJ outflows contributed to overall firm redemptions of -$1.7 billion in January 2016, off of December lows but a far cry from +$4.0 billion in January last year. While the stock has discounted these current trends having dropped substantially from year-end, shares are far from any relative value yet. WETF still sports a 22.4x forward 12-month multiple on Street estimates of $0.54 per share. The asset management group trades currently at 14.1x '16 numbers which means that either WETF trends have to substantially improve or the stock still has meaningful downside. The stock remains on our Best Ideas list as a Short.


WisdomTree (WETF) | The Kuroda Kicker? - Recolored 8


WisdomTree (WETF) | The Kuroda Kicker? - 9 PE



WisdomTree (WETF) - More Questions Than Answers - We Remain Short 

WisdomTree (WETF) Black Book Presentation - Not So Smart Beta 




Please let us know of questions,

Jonathan Casteleyn, CFA, CMT 


Joshua Steiner, CFA




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