CHART OF THE DAY | U.S. 2016 Growth Estimates: Us Versus Consensus

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye Director of Research Daryl Jones. Click here to learn more.


"... So to summarize, our view is that key economic statistics will begin to miss consensus estimates as the year progresses. We’ve highlighted our view on GDP growth for 2016 in the Chart of the Day below. Specifically, while we were in line with consensus for Q1 2016 GDP growth, we are close to 100 basis points below consensus for the remainder of 2016E. In our views it’s hard to see how disappointing data will buoy the stock market, especially when the growth rates being reported are barely above recessionary levels in the best case scenario."


CHART OF THE DAY | U.S. 2016 Growth Estimates: Us Versus Consensus - 4 22 16 EL

The Macro Show with Darius Dale Replay | April 22, 2016

CLICK HERE to access the associated slides.

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

FCC Action on Special Access Next Week (T, CTL, VZ, LVLT, WIN, CMCSA, TWC, CHTR, S, TMUS)

At next week's agenda meeting (April 28), the FCC will likely consider the imposition of new special access pricing regulations, rejecting incumbent phone carrier claims that competitive conditions in the dedicated enterprise private line market justify continued deregulation.  The FCC also plans to issue an order modifying volume and term conditions in special access contracts that are deemed unreasonable under traditional common carrier standards. 

The FCC estimates that special access is a $40 billion market that will grow substantially as high capacity connections become increasingly critical to furnish backhaul to expanding wireless facilities in metro markets.  Thus, lower backhaul costs should benefit wireless carriers like Sprint and T-Mobile.  For top tier wireless players like AT&T and Verizon Wireless, lower backhaul costs could be beneficial in geographic territories outside their wireline footprint.

We previously noted the upcoming FCC action, a proceeding raising concerns for incumbents like Verizon and AT&T, and even raising concerns for cable operators (like Comcast (CMCSA), Charter (CHTR) and Time Warner Cable (TWC)) seeking to expand their enterprise service offerings (Potomac Research, FCC Tees Up Special Access, April 5, 2016).  The upcoming action is positive for competitive local exchange carriers (CLECs) like Level 3, XO Communications, Windstream (which acquired PAETEC) and others.

Tariff Investigation:  The FCC tariff modification would close an ongoing investigation of the special access contracts of Verizon (VZ), AT&T (T), CenturyLink (CTL) and Frontier (FTR).  Competitive carriers, including Level 3 (LVLT, which acquired tw telecom), have complained the incumbents impose volume and term commitments, enforced by significant penalties, that effectively shut out alternative sources of private line supply and discourage CLEC investment in private line extensions into enterprise buildings.  The FCC is expected to mandate modifications that will benefit CLECs.  Such competitors lease access to special access connections to provide service for off-net locations (buildings not served by CLEC proprietary lines).

Potential Rule Changes:  Apart from action on the tariff investigation, the FCC will commence a rulemaking to consider substantial changes to the special access regulatory regime.  Verizon and an industry association representing competitive carriers (INCOMPAS) have jointly proposed a new regulatory approach that would end tariffing and deregulate special access in markets deemed competitive.  In markets not considered competitive, rate restrictions would be imposed but would apply on a technology-neutral basis to all providers of enterprise private lines.

Defining when markets are competitive and non-competitive, and the size or granularity of markets under consideration, would be issues explored in the upcoming rulemaking proceeding.  The FCC would need to establish criteria for setting reasonable rates and develop an effective system of enforcement.

Cable operators oppose the Verizon/INCOMPAS regulatory principles, rejecting the notion that they should be subject to any type of pricing regulation as an emerging provider making new facilities-based investment in the enterprise services market.  Competitors agree that cable private line options have been expanding to serve enterprise buildings and provide backhaul from cell towers, but they contend a functional duopoly still results in supra-competitive rates, justifying regulation of both incumbent telco providers and cable operators.

The FCC is interested in the Verizon-INCOMPAS approach as it represents the potential foundation of a consensus industry solution.  But without support from AT&T, CenturyLink and cable operators, the fight over final rules will be intense.  The Commission hopes to wrap this up late in the year, recognizing that potential changes in FCC personnel next year could derail possible rule changes for the special access market.

Cable Operators at Risk:  The proceeding poses two major enterprise market risks to cable providers.  First, any regulatory mandate that drives down incumbent telco special access rates would affect the retail pricing flexibility of cable operators.  They have generated double-digit growth in enterprise services and have plans to grow more substantially in this market, particularly in the provision of backhaul for wireless services.

Second, the FCC is now considering, consistent with the Verizon proposal, the imposition of rate regulations on all special access providers, renaming the offering "business data services."  This would extend pricing rules to cable operators and other providers of enterprise private lines.  Cable operators have not been subject to federal special access regulation and direct pricing regulation would become a new and potentially substantial burden.

Although the FCC would apply Title II common carrier telecom regulation to all special access services -- even if labeled as "business data services" -- the risk to cable operators appears to be complex rate regulation, not the more ominous regime involving mandatory network unbundling.  Under existing statutes, only incumbent phone carriers (essentially the former Baby Bells) are subject to loop unbundling.  The obligation does not extend to cable operators or CLECs.

Moreover, the FCC, backed by senior telecom policy officials in the Administration, generally does not favor network unbundling mandates to promote competition.  They have an expressed preference for facilities-based competition, avoiding the regulatory and litigation burdens associated with estimating wholesale pricing and other requirements for an unbundling regime.  After years of experience with the 1996 Telecom Act local phone competition rules, the Commission seems to acknowledge that genuine competition only comes from facilities-based alternatives.

Absent such alternatives, however, the FCC appears willing to intervene in a market deemed non-competitive, ensuring prevailing special access rates are reasonable.  The upcoming proceeding will be complicated and highly adversarial, but the regulatory trend looks favorable for competitors like Level 3 and introduces new enterprise regulatory uncertainty for cable operators.

Cartoon of the Day: A Closer Look At NIRP

Cartoon of the Day: A Closer Look At NIRP - negative interest rate cartoon 04.21.2016


BOJ governor Haruhiko Kuroda has been defending the central bank's negative interest rate policy recently, even stressing his readiness to expand monetary policy still further. "Good luck with that," Hedgeye CEO Keith McCullough wrote recently. "These guys just don't get it. The #BeliefSystem is breaking down."

Important Thoughts On Market Structure and Sentiment

We’ve been getting a lot of the same questions from a number of clients spanning the gamut in terms of investment strategy and AUM, so we figured we might as well address them in a public forum given the broadly applicable nature of our responses.



Q: “What gets the SPX to go down from here?”


A: The data.


Since the late-September lows, the S&P 500 has held a reasonably tight positive 0.75 correlation with the Citi U.S. Economic Surprise Index, which itself has rallied hard off its early-February lows as U.S. economic data stabilized in rate-of-change terms and perpetuated a waning of recession fears.


Important Thoughts On Market Structure and Sentiment - 4 21 2016 8 46 00 AM

Source: Bloomberg L.P.


Now, a topping process in the latter index appears to have gotten underway over the past two weeks, as most recently highlighted by big misses in this morning's Philly Fed and Chicago NAI surveys. While our process generally underweights survey data – particularly one-off regional surveys – in lieu of doing the actual rate-of-change calculus on relevant “C” + “I” + “G” + “NX” metrics, we reiterate our view that economic deterioration from here is itself the catalyst for the stock market to reverse course a meaningful manner.


Simply put, because macro consensus doesn’t have our economic outlook, we believe domestic economic data will start to miss by wide margin again as it did in the early part of this year. It’s also worth noting that economist consensus always has a natural upward-sloping bias to their growth estimates, which creates additional downside surprise risk to the extent we're right on where the data is headed over the next couple of quarters. 


Important Thoughts On Market Structure and Sentiment - 12


Q: “The market is clearly pricing in a high likelihood of monetary accommodation out of the Federal Reserve. Doesn’t the imminent threat of a rate cut and/or QE4 prevent a market sell-off in almost circular reference fashion?”


A: Not at all.


For starters, it’s important that market participants do not disrespect just how bullish the confluence of economic stabilization in the U.S. and China + a remarkably dovish pivot by the Federal Reserve has been for reflation assets.


As the following table highlights, a healthy amount of key domestic high-frequency growth indicators stabilized on a sequential basis in the FEB/MAR time frame. While the trend of broad-based deceleration remains firmly intact per the “Trending Data” column, there is plenty enough green in the “Sequential Data” column for market participants to have broadly perpetuated a general reduction in near-term recession fears.


Important Thoughts On Market Structure and Sentiment - U.S. Economic Summary Table


And while we disagree with the conclusion (i.e. the risk of a 2016 recession has subsided), we acknowledge that delaying the commencement of said downturn is decidedly bullish for risk assets in the context of the early-February highs in pervasively bearish sentiment.


Secondly, the aforementioned stabilization in the face of Janet Yellen going full-frontal dovish proved to be a powerful elixir for risk appetite – particularly among reflation assets.  Specifically, factor exposure leadership across every major asset class is pricing in some version of QE4 per our Tactical Asset Class Rotation Model:


Important Thoughts On Market Structure and Sentiment - TACRM Summary Table


Important Thoughts On Market Structure and Sentiment - TACRM Global Macro 10 10


Important Thoughts On Market Structure and Sentiment - TACRM U.S. Equities 10 10


Important Thoughts On Market Structure and Sentiment - TACRM Int l Equities 10 10


Important Thoughts On Market Structure and Sentiment - TACRM EM Equities 10 10


Important Thoughts On Market Structure and Sentiment - TACRM DFICEI 5 5


Important Thoughts On Market Structure and Sentiment - TACRM FX 5 5


Important Thoughts On Market Structure and Sentiment - TACRM Commodities 5 5


Important Thoughts On Market Structure and Sentiment - TACRM IFICEI 5 5


***CLICK HERE to learn more about TACRM and its proprietary methodology for quantifying VWAP price momentum across multiple durations and amalgamating those signals into a composite Adjusted VAMDMI score.***


But as we penned in yesterday’s Early Look titled, “Back To Basics”, the Fed has little scope left to manipulate asset markets absent an explicit commitment to monetary easing – which we don’t think will occur in proactive fashion. Specifically, spreads across Fed Funds futures contracts have compressed dramatically in the YTD; the next rate hike is not fully priced into the market until Q3/Q4 of 2017, as opposed to October of 2016 when we started the year.


Important Thoughts On Market Structure and Sentiment - Implied Yields on Select Fed Funds Futures Contracts


That’s an important distinction to make given the fear among bulls and bears alike about this squeeze being perpetuated higher by increasing talk of QE4.


In summary, the dovish shift by the Fed has largely run its course and that they can’t do much in rhetorical terms to convince market participants of their dovishness even more so than they already have. They need to bring out the bazooka and we don’t think they can or will absent material degradation in the economic data (which we are forecasting) and a commensurate decline in risk asset prices as implied by the first chart in this note.


Q: “What do you make of the recent selloff in Treasury bonds and Utilities?”


A: It’s one of two things and neither is good for the forward outlook for risk assets.


Specifically, we think the back up in Treasury bond yields and commensurate sell-off in Treasury bonds and Utilities is a function of investors broadly capitulating on the bear case and that capitulation is obviously in the process of reaching its inevitable crescendo today. In positioning terms, investors broadly giving up on playing defense implies they are either tacitly or explicitly increasing their exposure to risk. We are taking the other side of that decision at the current juncture and keen to do quite the opposite by adding to defensive factor exposure longs today.


Another reason for the aforementioned selloff could be a marginally hawkish shift by the Federal Reserve in next Wednesday’s FOMC statement. If, like us, you believe the FOMC is a collection of bureaucrats that stress the crossing of T’s and dotting of I’s,  then there’s nothing like a couple of months of backward-looking stabilization of economic data and 2100 on the SPX to resuscitate the “policy normalization” debate.


Specifically, there is risk that Janet Yellen pivots fairly hawkishly and sets the stage for another rate hike in mid-June. If that’s the case, the next six weeks could resemble the first six weeks of the year – which, coincidentally, was the worst start to the year ever in equity market performance terms.


Remember, this is the same policymaking entity that opted for “liftoff” amid the worst swoon for stocks since 2011 and into peak U.S recession fears. Don’t disrespect their willingness to take another ill-timed “victory lap”.


We hope you find these discussions helpful. Feel free to email us with any follow up questions and we’ll be happy to assist further.




Darius Dale


Will Bernie Bow Out? ... Trump's Got "The Best Toys"

Below is a brief excerpt from our Potomac Research Group colleague and Chief Political Strategist JT Taylor's Morning Bullets sent to institutional clients each morning. For more information on how you can access our institutional research please email



Will Bernie Bow Out? ... Trump's Got "The Best Toys" - bernie sanders


Bernie Sanders' NY loss was crushing - not just for losing in the state where he was born, raised, and claimed he would pull an upset, but because it dashed any reasonable chance for him to eclipse Hillary Clinton in pledged delegates. Now he must choose whether to up the ante with attacks on Clinton, or pull a 180 and return to his core, issues-based movement. His campaign is sending mixed signals on whether he will remain in the race after the conclusion of next week's Northeast primaries - where Clinton has healthy leads. This could be a make or break week for his continued candidacy, and going negative again might be his only shot - yet can he justify doing so just as there are signs that 83% of Sanders-leaning Democrats would coalesce around Clinton? Party unity is on the line.



Will Bernie Bow Out? ... Trump's Got "The Best Toys" - ted cruz up


As it stands now, Donald Trump is 392 delegates shy of the 1237 needed to secure the nomination the old fashioned way, but he is poised for another huge set of wins in CT, MD, DE, PA, and RI next week. Whether or not Trump goes to Cleveland with a delegate majority, some pols and pundits are suggesting that he could still clinch the nomination on the first ballot even if he is 100-150 delegates short.


This is due to the unbound "free agent" delegates that will be available, and are sure to be wined-and-dined by Trump and Ted Cruz for their support - though Trump's lead and his claim of having "the best toys" means he may have more to offer.   


There may be five more Northeastern states voting before May 3rd's IN contest, but the focus of the Trump and Cruz campaigns has shifted back to the Midwest. IN is being compared to WI - where Cruz pulled off a strong victory - and if he has any hope of blocking Trump from winning 1237 delegates, he needs to sweep the Hoosier State. But this is far from certain - IN's demographics are more favorable to Trump than WI's were, and the anti-Trump forces have yet to organize there. As important as winning IN is to Cruz's new strategy, it may be more vital to Trump and his ability to win a delegate majority without it.

get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.