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HEDGEYE Exchange Tracker | Cash Equities and Options Rocketing Higher

Takeaway: U.S. cash equity volume is vaulting higher by +16% Y/Y with U.S. equity option volume not far behind at +10 Y/Y.

We recently presented our investment thesis on the Exchanges. To summarize,

  • Long CME:  Financially oriented CME Group (CME) is enjoying a long awaited boom in activity, as trader counts and open interest in Treasuries, Eurodollars, and FX products are swelling. The decade long concentration on trading energy and commodities is over and with steeply shaped forward curves and more profitable opportunities, financial products are seeing rapid adoption. 
  • Short ICE: We see collateral damage from the ongoing rapid price decline in energy and commodity markets. As a result, these important products at ICE will be less active than the Street expects, as commercial hedging and speculative energy trading dries up.

We think CME has $5 per share in earnings power in the out year and the stock will revisit near $140. As outlined in our presentation deck and replay below, a CME long position can also be paired with a short ICE position, with favorable fundamental exposures on each side of the trade.


Separately, recent IPO Virtu (VIRT) is being valued incorrectly by the market. Our main qualm is that the company takes intraday prop risk, but has no tangible equity capital to cover any potential trading losses. Shares of VIRT are currently on our Best Ideas list as a short with a fair value in the mid-teens (30-40% downside).


Hedgeye Exchange Black Book Replay HERE

Hedgeye Exchanges Black Book Materials HERE


HEDGEYE Exchange Tracker | Cash Equities and Options Rocketing Higher - XMon20


Weekly Activity Wrap Up:  U.S. equity options are putting up the best quarter-over-quarter growth so far. The running quarter-to-date average for options is currently 17.3 million contracts, up +10% year-over-year and better by 15% sequentially from 2Q15. Futures activity hit 14.2 million contracts this week, lower than the running 3Q15 average of 17.2 million contracts quarter-to-date, which is down -5% year-over-year. U.S. cash equity trading is showing the largest year-over-year growth, running higher by +16% Y/Y thus far in the new 3rd quarter.


HEDGEYE Exchange Tracker | Cash Equities and Options Rocketing Higher - 2XMon1


U.S. Cash Equity Detail: U.S. cash equity trading finished the week at 6.6 billion shares traded which is also blending to a 6.6 billion daily average thus far for the 3rd quarter of 2015. This is +16% year-over-year growth for U.S. stock activity. The market share battle for volume is mixed, with the New York Stock Exchange/ICE standing pat at 24% market share and NASDAQ continuing to cede share to competitors. NASDAQ thus far this quarter has taken just 18% share of all U.S. stock trading, down 200 basis points year-over-year or a -6% decline.


HEDGEYE Exchange Tracker | Cash Equities and Options Rocketing Higher - 2XMon2


HEDGEYE Exchange Tracker | Cash Equities and Options Rocketing Higher - 2XMon3 2


U.S. Options Detail: U.S. options activity continues to churn higher with 18.0 million contracts traded this week which is blending 3Q15 activity to 17.3 million contracts per day, up +10% year-over-year. The market share battle amongst venues continues to be one of losses at both the NYSE/ICE and NASDAQ. NYSE has lost 400 basis points of share year-over-year settling at just 18% of options trading currently. NASDAQ has also shed 400 basis points of share, good for a -16% loss from last year as ISE/Deutsche Boerse and BATS mop up volume and share.


HEDGEYE Exchange Tracker | Cash Equities and Options Rocketing Higher - 2XMon4


HEDGEYE Exchange Tracker | Cash Equities and Options Rocketing Higher - 2XMon5


U.S. Futures Detail: CME Group volume has been relatively low the last couple weeks. In the most recent 5-day period ending July 23rd, activity levels were 10.5 million contracts at the big futures exchange. 3Q15 volumes are blending to a 12.9 million average level which is a -4% year-over-year decline. CME open interest continues in strong fashion with the latest count this week showing 100.1 million contracts pending, good for +17% year-over-year growth. Activity levels on the futures side at ICE hit 3.7 million contracts this week, with 3Q15 blending to a 4.3 million daily average. That amounts to a -6% year-over-year decline. ICE open interest this week tallied 72.6 million contracts, continuing a -4% year-over-year contraction.


HEDGEYE Exchange Tracker | Cash Equities and Options Rocketing Higher - 2XMon6 2


HEDGEYE Exchange Tracker | Cash Equities and Options Rocketing Higher - 2XMon7 2


HEDGEYE Exchange Tracker | Cash Equities and Options Rocketing Higher - 2XMon8


HEDGEYE Exchange Tracker | Cash Equities and Options Rocketing Higher - 2XMon9


Monthly Historical View:  Monthly activity levels give a broader perspective of exchange based trends. Largely, volatility levels are just starting to rise after drastic compression this cycle. Thus as the VIX, MOVE, and FX Vol starts to normalize, we expect all marketplaces to experience higher activity levels.


HEDGEYE Exchange Tracker | Cash Equities and Options Rocketing Higher - 2XMon10


HEDGEYE Exchange Tracker | Cash Equities and Options Rocketing Higher - 2XMon11


HEDGEYE Exchange Tracker | Cash Equities and Options Rocketing Higher - 2XMon12


HEDGEYE Exchange Tracker | Cash Equities and Options Rocketing Higher - 2XMon13


HEDGEYE Exchange Tracker | Cash Equities and Options Rocketing Higher - 2XMon14


HEDGEYE Exchange Tracker | Cash Equities and Options Rocketing Higher - 2XMon15


Sector Revenue Exposure: The exchange sector has broadly diversified its revenue exposure over 10 years as public entities with varying top line sensitivity to the enclosed trading volume data. The table below highlights how trading volumes will flow through the various operating models at NASDAQ, CME Group, ICE, and Virtu:


HEDGEYE Exchange Tracker | Cash Equities and Options Rocketing Higher - XMon19 3



Please let us know of any questions,


Jonathan Casteleyn, CFA, CMT 




 Joshua Steiner, CFA




Investing Ideas Newsletter

Takeaway: Current Investing Ideas: DXJ, HOLX, FL, VIRT, PENN, GIS, VNQ, EDV & TLT

Investing Ideas Newsletter       - Bull   dove cartoon 06.26.2015


Below are Hedgeye analysts’ latest updates on our nine current high-conviction long and short investing ideas as well as CEO Keith McCullough’s updated levels for each.  


Please note we added DXJ (Japanese Stocks) this past week. We also added Foot Locker and removed Deere (both bear side).


Investing Ideas Newsletter       - z 7 24 2015 4 54 20 PM

Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less



We shared the following slide during our presentation in our call for institutional clients earlier this week.


Investing Ideas Newsletter       - z HOLX not baked in


Based on our data driven model, and the simple arithmetic of s-curve growth, it looks like the consensus outlook is calling for a steady increase in 3D mammography penetration.


If the market behaves like it did when HOLX helped transition facilities from film mammography to digital, the adoption curve will look exactly as we have it modeled.


If the market adopts 3D even just a little faster (which is likely in our view) the impact to HOLX revenue, EPS, and the share price will be dramatic, as you can see in the table above.


We currently expect the fast part of the adoption curve will take 6.4 years based on our data through June 2015.  If the next few months come in better, the pace will begin to fall to 6.25 years (3rd rowin the table) and below.  Shortening the adoption time by 3 months at each line in the table drive more revenue, at a high incremental gross profit, and high incremental EPS.


Hologic reports July 29th and we’ll update our positive outlook after the call.


Foot Locker’s RNOA (return on net operating assets) went from 5% to 28% over six years as it pulled capital out of the model (closing stores/re-positioning banners) while boosting productivity and margins to all-time highs. At the same time, its percent of sales from Nike (traffic driver) went up by 2,500 basis points to 72% of COGS (cost of goods sold) – and near 80% of sales. 


That’s not going any higher.


Foot Locker’s answer is to become a unit growth story once again and sustain a mid-single digit comp while maintaining the leanest cost structure out of any retailer around. And for all that, the stock is trading at 16.5x forward earnings – an all-time high. The ‘going private’ angle here is moot given its high Nike exposure.


Lastly, the stock is having increasingly muted reactions to good news.


CEO Keith McCullough added Japanese Stocks to Investing Ideas on Friday afternoon. Click here to read the note. Our senior macro analyst Darius Dale will provide a detailed update next week.


A major broker/dealer firm broke ranks this week and initiated research coverage of Virtu Financial with a Sell recommendation. While the rationale for the new rating didn’t highlight our main hangup with the company’s financials, it is a fairly telling sign that a major dealer that interacts with VIRT on a daily basis is also bearish on the fundamental prospects for the company.


Again, our core contention with the firm’s positioning is that with no tangible equity capital that VIRT will have to cover any trading losses in its operations with overnight credit lines which don’t leave an appropriate margin of safety for investors. The company runs its trading book with $245 million of overnight capital and $499 million in equity. However with $715 million in Goodwill, this leaves no liquidity for any mishaps.


VIRT doesn’t report 2Q earnings until August 5th however we will get the latest trading record during the past quarter then which will give investors an indication if the firm’s near flawless daily trading track record is continuing.  


Investing Ideas Newsletter       - z cast 


Penn National Gaming reported Q2 profit of $16.9 million on Thursday. The company's profit of 19 cents per share beat analysts' expectations.  PENN posted revenue of $701 million in the period, which also beat forecasts. 


Shares have climbed 40% since the beginning of the year and 58% over the last 12 months, obviously much higher than the S&P 500.


Gaming, Lodging and Leisure Sector Head Todd Jordan was at Penn National Gaming's investor day yesterday. He will provide a detailed update next week.


General Mills (GIS) remains on the Hedgeye Consumer Staples Best Ideas list as a LONG.


Key segments across the company are turning the corner and improving performance. Specifically GIS has figured out the yogurt category, after 3 years of struggling with Greek and losing on the core business, management has turned the Yogurt division into a growth segment.


Investing Ideas Newsletter       - zane1


Cereal has obviously been a struggle for all companies participating. Although still down, the trend is looking better, in FY16 we hope to see the switch to Gluten Free Cheerios and other improvement, turn performance around.


Investing Ideas Newsletter       - zane2


FY16 Hedgeye Guidance ―

Looking into FY16 we are excited about the possibilities. Management is working hard on their “Consumer First” initiative and making great changes to current product while also introducing new products.  Below is a list of some of the biggest things that we are looking forward to this year:

  1. Yoplait in China
  2. Gluten-Free Cheerios
  3. No artificial colors or flavors in the cereal
  4. Granola innovation / Muesli
  5. Greek Plenti / Whips
  6. Original yogurt sugar reduction
  7. Renovation on Grain Snacks
  8. Strong push on Natural & Organic products
  9. Delivering Value to consumer on brands like Totino’s and Hamburger Helper
  10. Bringing U.S. innovation International


Bottom line is they are still struggling; we don’t want to shy away from that. But the core of the portfolio is growing and management seems to be working tirelessly on implementing changes to grow the rest of the portfolio, especially cereal.  We also still believe that to have continued growth into the future a sizeable acquisition or divestiture would be beneficial to the business.  



Those long of #LowerforLonger enjoyed another solid week of 2%+ gains for TLT and EDV. VNQ followed up last week’s gains with a pullback of equal size, but we received a positive sloth of data this week that confirms our long housing theme, which we’ll  focus on below. A positive housing outlook within a bearish rate environment should be positive for VNQ.


With the exception of another positive jobless claims report (lowest level since 1973!) which is empirically late cycle in nature, housing dominated an otherwise light week of economic data in the U.S.


Existing home sales for June reached a new post-housing crisis high:

  • Existing home sales totaled 5.49MM units in June (seasonally adjusted annual rate)
  • The print marked a 9.6% Y/Y increase (+3.2% sequentially from May)
  • As an indicator to what demographic is driving the strength, existing home sales to 1st time buyers rose +17.4% Y/Y
  • An excess of housing sales over available inventory fell -2.2% -2.2% in June. A tighter supply should continue to drive the increase in housing price trends

New Home Sales for June came in weaker than expected, but the intermediate to longer term picture has been one of immense improvement:

  • New home sales came in at 482K vs. expectations of 548K (546K prior)
  • New Home Sales declined -6.8% for June but the intermediate to long term trend remains intact which is why we evaluate marginal changes on a YY comp basis. New Home Sales numbers are still trending up double digits from 2014

 Investing Ideas Newsletter       - zben1


Investing Ideas Newsletter       - zben 2


Investing Ideas Newsletter       - zben3



Steiner: Why Capital One Is Down -12% Today

In this excerpt from today’s edition of The Macro Show, Financials Sector Head Josh Steiner explains three reasons why Capital One shares are plunging today, while CEO Keith McCullough explains why you can’t afford to ignore macro factors. 


Subscribe to The Macro Show today for access to this and all other episodes. 


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Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

HAIN | Cosmetic Deception

Today Hain Celestial (HAIN) announced that they have agreed to acquire the Mona Group, a branded plant-based drink manufacturer in Europe for an undisclosed amount. Mona has two brands that they operate, Joya, which makes up a majority of the sales and Happy which is relatively unknown. In calendar year 2014 the collective Mona Group had $50 million in net sales.


HAIN | Cosmetic Deception - HAIN CHART 1


The plant-based segment is a very competitive market, and as private label is getting more prominent it is imperative to have the top brand in your respective categories.  Joya and Happy are not top brands and they face an uphill battle in the plant-based beverage business. Alpro, a top brand for WhiteWave (WWAV) is a clear leader in European plant-based beverages with #1 brand position and $510 million in net sales in FY2014. Furthermore, Alpro has a 43% market share in plant-based beverages across Europe and the nearest competitor has only 7% (HAIN or Joya are not even in the top 5).


This brings us to our next point, below is a quote from Irwin Simon, CEO of HAIN from the press release that is blatantly incorrect:

"We are excited by the acquisition of Mona, which expands our presence in plant-based products in Europe, solidifying our leadership position in the category with the addition of Joya® and Happy® to our Dream™, Lima® and Natumi® brands.  This acquisition increases the scale of our plant-based operations to over $100 million net sales in Europe in a growing category of branded and private label products, while providing us with additional manufacturing capacity,"


HAIN is not even in a leadership position to solidify. Irwin is living in la la land, potentially doesn’t even know the competitive market or he is just deceiving investors, in our outreach to the company we didn’t hear anything back on this point.



There is no fundamental organic growth in Europe to support their projections so management turns to M&A. The UK revenues are deteriorating on a sequential basis, so HAIN is forced to acquire businesses to meet expectation. The sooner people realize this point the better, HAIN specializes in buying companies and just putting them on the shelf to rot.


HAIN is on our Hedgeye Consumer Staples Best Ideas list as a Short, this transaction further convinces us that management is using the same old tricks to meet expectations.


DXJ: Adding Japanese Stocks to Investing Ideas (Long Side)

Please note we are adding DXJ to Investing Ideas today. CEO Keith McCullough explains why below.

*   *   *   *   *

DXJ: Adding Japanese Stocks to Investing Ideas (Long Side) - z tok

Long Japan remains the back-door way to be long lower-volatility-lower-valuation-liquid-equities. Unlike in Europe, USA, and China, Japanese growth data is actually accelerating too (PMI accelerated in July to 51.4 from 50.1 in June). 


Pardon? Buy Japan as both the absolute (rate of change) and relative momentum of its growth factor is beating China and Europe? Yep. That’s the really cool kids’ portfolio – long AMZN, SBUX, and Nikkei!


Oh, did I mention that Japan’s rate of change in growth will be accelerating in the 2nd half of 2015 as the beloved navel gazer market (USA) slows? What the un-cool kids own are basically US cyclicals (I think they’re now called “value” stocks):


  1. Industrials (XLI) down another -0.9% yesterday (down -4.4% in the last month)
  2. Dow Transports down another -2.1% yesterday (down -4.1% in the last month)
  3. Russell 2000 down another -1.1% yesterday (down -3.0% in the last month)


So much for the “global growth is back, buy reflation” idea…




Takeaway: New Home Sales for June were a disappointment and usher in the seasonally-soft third quarter performance period for Housing equities.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.


NHS | #THUD - Compendium 072415 


Today's Focus: June New Home Sales 

It’s generally difficult to characterize +18% YoY growth as disappointing but with sales retreating -6.6% sequentially (vs +0.3% estimates) along with negative revisions to both April and May, New Home Sales in June could be aptly characterized as a dud. 


On the supply side, the inventory of new homes rose +5.4% month-over-month to 215K on a unit basis while accelerating +230 bps sequentially to +9.1% YoY.  Geographically, sales declined sequentially across all regions except the Northeast while year-over-year sales growth was positive across all geographies with growth of +23% and +24% in the Northeast and South, respectively, leading the gains. As a percentage of the total market, New Home share dropped to just 8.1% in June (LT average =  ~11.4%) as existing sales made another post-crisis high in the latest month. 


As it relates to New Construction activity, we highlighted the distortion in the May/June Starts data last week but it’s worth a quick re-iteration.  The +295% YoY growth in MF permits in the Northeast ahead of the impending NYC tax exemption expiry helped augment the Total Starts figures for a second month in June and drove MF share of total up to a 42-year high.  A reversal of that pull forward sets the stage for a potential retreat/disappointment in the reported July data.      


IS GOOD, GOOD ENOUGH? | CONCEPTUAL REDUX:  We titled our 3Q15 Housing Themes Presentation IS GOOD, GOOD ENOUGH?.  The deck is over 120 slides of data intensive analysis but the overarching theme can be sufficiently captured conceptually:  The Housing data in 3Q will be “good” but the large-scale positive reversal we’ve seen over the last ~9-months is now rearview, the comps get tougher after the reported June data and we don’t have any discrete catalysts in the nearer-term.   Further, performance seasonality in the stocks is recurrent and pervasive and 3Q represents the soft-patch period.   


From a longer-term perspective, the mean reversion upside to average & peak levels of activity (recall: housing cycles are long and autocorrelated) remains both conspicuous and compelling, but the asymmetry in the setup and the leverage to our expectation for a positive inflection in both fundamentals and investor attitudes when we reversed to bullish back in November of last-year has, in large part, played out.  


Again, we think the data will remain “good”  -  with Purchase Application demand flat sequentially in 3Q (but holding near 2Y highs) and NHS declining in the latest month (but still above the TTM ave) “good” is proving an apt adjective -  but, tactically, the prospect for aggregate builder outperformance in the near-term carries a diminished probability.  Here, the Title Insurers and Mortgage Insurers offer some tactical cover while moving upstream towards larger cap/lower beta/liquidity/quality style factors make sense in terms of direct builder exposure.  



NHS | #THUD - NHS   SF Starts




NHS | #THUD - NHS Comps


NHS | #THUD - EHS to NHS Ratio


NHS | #THUD - NHS Inventory






NHS | #THUD - NHS Mean   Median Price




About New Home Sales:

Each month the Census Department releases the New Home Sales report, which measures the number of newly constructed homes that have been sold in the month. The difference between the New Home Sales report and the Starts and Permits report is that New Home Sales only includes single family spec homes built and sold by builders, and does not include condos, apartments, or owner-built units. This is why New Home Sales typically run at roughly half the rate of Starts.



Joshua Steiner, CFA


Christian B. Drake


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