Blame Nasdaq? Blame S.E.C. Too

Takeaway: The SEC is just as much to blame as Nasdaq in yesterday's shutdown.

When Defense is Offense: A Troubled Week for the Exchanges

While we are never one to throw peanuts from the cheap seats, the fact-of-the-matter is that publicly traded U.S. stock exchanges had a rough week from an operations standpoint. To put it lightly. After coming public in a reverse IPO by buying innovative trading system Archipelago in 2006, the formerly private New York Stock Exchange now publicly trades under the symbol NYX. Its New York cross town rival, the NASDAQ Stock Market, also offered shares to the public for the first time last decade in 2002, with investors now able to buy into its fairly stable earnings stream and steady free cash flow business by investing in shares of NDAQ.


Blame Nasdaq? Blame S.E.C. Too - naz2


Yesterday, every major global financial media outlet was alerted to the fact that NASDAQ had shut down its trading systems, and for just over a 3 hour period, mass media was focused on an impending disruption to the trading landscape as we know it. Labeled as the “Flash Freeze,” Thursday’s event was being built up as a major market event for all investors, on par with the May 6th, 2010 “Flash Crash” where the Dow Jones Industrial Average experienced its biggest intraday drop ever of 1,000 points.


We disagree.


This week’s shutdown, while troublesome, was not the watershed event of 2010. In fact, it displays the prudence and early warning signals that now exist in the market structure industry to prevent trading sessions like the Flash Crash. The Flash Crash occurred because of a confluence of events. That trading session on May 6th, 2010 started with troubling news out of Greece with riots and sovereign debt worries which forced the Dow down 300 points to start the day. By 2:45 pm however, the markets were in complete freefall, with an incremental decline of over 600 points to tally nearly a 1,000 point decline at one point reaching a 9.9% loss for the Dow Jones Industrials on the day.

The combustible combination of massive selling pressure in stock futures; algorithmic traders pulling completely out of the market; and trading orders going off at stub quotes, or inactive limit orders way off of market prices, all aggregated together to trigger this unprecedented intraday move. While the Dow essentially recaptured this “glitch” of a 600 point move, to finish down its original indication of 300 points for the day, the damage was already done with investors of all stripes suddenly highly suspicious of a cobbled together exchange trading system that can be prone to malfunction.


While investors and analysts are still waiting for a technical layman’s explanation as to why NASDAQ shuttered its systems for most of the day, we argue that the exchange acted appropriately and stopped trading to avoid any cascading of an initial problem into a more noteworthy event. The fact-of-the-matter is that the current U.S. stock market system is a puzzle of multi-level trading systems with different classes of market data speeds, a bee’s nest of legacy order books, and now the added complication of dark pools or off exchange trading systems. The real blame lies at the regulatory level with the historically liberal policies of the Securities and Exchange Commission having allowed too many trading venues to develop. This has resulted in the patchwork of a operational landscape we call the U.S. stock market.


After the Flash Crash, the SEC conducted a 5 month investigation of the inputs driving that significant event. The agency has already commented that it is looking into the NASDAQ shutdown this week. One of the agency’s most revealing findings however, may in fact be its decade long approval of new exchange products, new multi level trading venues, and its support of off exchange traded systems which has now complicated formerly simple operations.


Both publicly traded stock exchanges are dealing with these operational complications on a day-to-day basis, in addition to having to run for-profit businesses that are fighting four consecutive year of stock volume declines and ongoing market share losses from more aggressive broker dealers and alternative trading venues. NASDAQ stock is currently at a crossroads, with NDAQ now screening well in our internal quantitative model at Hedgeye Risk Management, but from a fundamental research standpoint with now new operational uncertainties as of this week’s event.


Warren Buffett championed the idea that investors should not have a quote machine in their office and that securities should be bought for meaningful periods where one wouldn’t have to see a public price every moment of every day. While we agree with this principle, and are not concerned with a 3 hour preemptive shut down of the exchange to avoid broader systemic issues, as a research department with the ability to recommend NDAQ stock, we encourage a forthright and actionable explanation from both the company’s management and U.S. regulators. The SEC is just as much to blame here as NDAQ and we are not mixing our alphabet soup in this statement.   

WWW: Massively Positive Hire

Takeaway: WWW hires the most eligible bachelor in global footwear. There is no other way to slice this than hugely positive. WWW remains a top pick.

Don’t overlook WWW’s announcement today that it hired Gene McCarthy as President of the Merrell brand. It’s a very material announcement, and one that bolsters our bullish call on WWW.


  1. McCarthy is one of the most successful footwear executives in the world, with a pedigree stretching from Nike, to Reebok, to Timberland, and UnderArmour. WWW is extremely lucky to have nabbed him.
  2. Merrell is about $550mm in revenue, or 20% of WWW’s total sales. Yes, it is WWW’s biggest division, and we think that he will have a meaningful impact given that Merrell has been a drag on WWW’s results. It needs the help. He is the kind of individual that can take this to being a $1bn brand, instead of someone that will be content with 3-5% growth annually.
  3. But we think that WWW brought McCarthy in with much bigger plans in mind -- whether they are saying it or not (watch what they do, not what they say). Keep in mind that he was brought in to fix the Yellow Boot business at Timberland in April 2006. But by December 2007 he was already Co-President of the parent company. The guy ‘gets it’ when it comes to brand building, and it was a waste for TBL to isolate his talent on only a quarter of the company’s business.
  4. But then why did he seemingly fail at UA?  We thought it was a big deal when Kevin Plank hired McCarthy away from Timberland to run UA’s footwear business. But in the end, it did not really work, and we were proved wrong.  We think the problem was two-fold. A) The footwear business at UA needs more capital. It needs more R&D, and more distribution resources both inside and outside of the US. WWW has that already. B) The chemistry between Plank and McCarthy simply did not work. They’re both very ‘type A’, and there was definitely a clash – especially when it came to arguing as to whether the company needed more resources to make the footwear business work


Unless WWW paid an ungodly sum of money to get McCarthy on board them team, which is unlikely, there is no way to slice this announcement other than overwhelmingly positive.

WWW: Massively Positive Hire - 111


[VIDEO] Hedgeye’s Casteleyn on Nasdaq Snafu

Hedgeye Risk Management Financials Research Director Jonathan Casteleyn discusses the Nasdaq “Flash Freeze” with FBN’s Liz Claman.


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Obamacare Chart of the Day

Takeaway: The impact of Temp hiring on Non-Farm Payrolls growth is very small.

Obamacare Chart of the Day - tobin1


Celebrity is weaker but overall, not much change in trends.  We’re still cautious heading into Wave season.


  • Caribbean pricing did not move much.  Getaway is getting a good premium ahead of its inaugural Caribbean voyages in February 2014.
  • Celebrity exhibited pricing weakness across most regions, probably as a tactic in response to the negative publicity stemming from the Celebrity Millennium troubles in Alaska. It remains to be seen whether this is a temporary setback for RCL’s premium brand, which has had a great year. Meanwhile, the RC brand showed strength in its close-in FY 2013 European pricing.
  • Costa's 2014 pricing remains steady

Here are some observations from our proprietary pricing survey of >12,000 itineraries.  We analyze YoY trends, as well as relative trends, which are determined by pricing compared to the last earnings/guidance date for a cruise operator i.e. CCL: 6/25; RCL: 7/25; NCLH: 7/29.





  • FQ4 close-in pricing remained weak, though it is slightly better than a month ago.  FQ1 2014 pricing was moderately lower YoY and FQ2 2014 pricing was flat. Relative trend is stable.


  • Costa’s close-in FQ4 pricing of mid-to-upper teens growth continued through August. Early 2014 Costa pricing trend is slightly positive.
  • Cunard’s FQ1 pricing is down double digits YoY.  Pricing trend remains negative.  
  • The new ship, Royal Princess, had some discounting for its FQ2 2014 itineraries, relative to July 
  • AIDA pricing was mixed with Scandinavia/Red Sea itinerary was doing a little better than Western Europe/Eastern Med


  • Holland America pricing finally turned around in Alaska, up nicely YoY in FQ2 2014 and FQ3 2014

Asia, Mexico, & South America


  • Asia 
    • Costa’s and Holland America’s FQ1 2014 pricing trend was flat. Princess’s pricing for its sparse itineraries was slightly positive.    
  • Mexico    
    • Carnival pricing was down 14% YoY in FQ4, -3% in FQ1 and flat in FQ2
    • Holland America’s pricing trend was flat, while Princess pricing trend was moderately positive
  • South America
    • Costa’s and Holland America’s pricing trend was flat, while Princess’s pricing trend was slightly positive




  • RC brand:  YoY pricing for FQ4 and FQ1 were similar to the last pricing update in early August.  FQ2 pricing was roughly flat.
  • Celebrity:  pricing worsened YoY in FQ4 and FQ1. Trend was slightly negative.
  • Pullmantur:  flat pricing trend


  • RC brand:  FQ4 close-in pricing was very strong but FQ2 2014 pricing was moderately lower YoY
  • Celebrity:  FQ2 2014 pricing is down substantially and trend was negative.  
  • Pullmantur:  close-in pricing trend was slightly positive


  • Celebrity YoY pricing was 12% lower for F2Q 2014.

Asia and South America

  • Asia 
    • RC brand, Celebrity, and Azamara pricing were all slightly positive for FQ1-FQ2 2014.
  • South America
    • Positive RC brand pricing offset by lower Celebrity pricing in 2014




  • Close-in pricing was a little better than that seen in early August.  FQ1/FQ2 pricing was up slightly.
  • Very close-in Breakaway pricing was slightly higher while early FQ 2014 pricing was slightly negative.
  • Getaway pricing had a nice 5% uptick in its pricing since early August.  It is commanding a 50% premium to Epic and a 10% premium to Sun. 


  • Flat pricing trend across all durations.

FDA Closer To Online E-Cig Ban?

Yesterday the WSJ reported that the FDA is considering a ban on online sales of e-cigs as part of broader regulatory restrictions that are expected to be announced in October.


What’s Our Take?

  • It wouldn’t be a huge surprise to see online sales of e-cigs banned.  The FDA is well aware how easy it is for consumers to purchase e-cigs online– one simply has to put in a birth date of at least 18 years of age
  • The FDA is also concerned with the appeal of flavored e-cig offerings (like bubble gum or coffee) that may attract a younger demographic
  • Estimates suggest the online e-cig market to be worth ~$500MM of the total $1-1.5B category
  • We expect any restrictions on online sales to favor Lorillard’s Blu e-cig and NJOY (private), the two companies with the greatest retail market share and nationwide presence. [Blu is estimated to have under 20% of its total sale online]
  • Additionally, as RAI (Vuse) and MO (Mark-Ten) expand distribution (they’ve rolled out brands in the last two months across test markets in one state each), we’d expect an online ban to benefit big tobacco due to their retail leverage over smaller e-cig players
  • We expect future FDA regulatory restrictions to include at least advertising (same or more similar standards to traditional tobacco) and nicotine levels (at most equivalence with traditional tobacco) 


Matthew Hedrick

Senior Analyst

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