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Investing Ideas - Levels

Please see below Hedgeye CEO Keith McCullough's refreshed levels for our high-conviction investing ideas.


Investing Ideas - Levels - 8 16 2015 10 43 30 AM


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

Anything longer than 3 years is unpredictable.

HEDGEYE Exchange Tracker | Futures Jump, Cash Equities Continue Acceleration

Takeaway: Futures activity jumped this week; 3rd quarter ADV increased but is still down -3% y/y. Cash equity volume growth accelerated to +20% y/y.

Weekly Activity Wrap Up

U.S. cash equity volume continues to widen its lead with the largest year-over-year growth among the major product categories, now running higher by +20% thus far in the new 3rd quarter. U.S. equity options activity is also putting up higher activity levels at +10% Y/Y growth. U.S. futures trading has been in a summer lull for the third quarter. However, this week's average volume picked up to 19.7 million, bringing the quarter to 17.4 million contracts daily, down -3% year-over-year but a sequential improvement versus last week's -6%. The important open interest tally continues to favor our Best Idea's long view on CME Group (CME), with the big Chicago exchange's trading backlog up now +24% since the beginning of 2014. (It was up +22% last week.)


HEDGEYE Exchange Tracker | Futures Jump, Cash Equities Continue Acceleration - XMon1 2


U.S. Cash Equity Detail

U.S. cash equity trading finished the week at 7.0 billion shares traded which is blending to a 6.8 billion daily average thus far for the 3rd quarter of 2015. This is +20% 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 but with NASDAQ's still sporting market share 200 bps lower than last year, a -6% decline.


HEDGEYE Exchange Tracker | Futures Jump, Cash Equities Continue Acceleration - XMon2


HEDGEYE Exchange Tracker | Futures Jump, Cash Equities Continue Acceleration - XMon3


U.S. Options Detail

U.S. options activity remains significantly higher, both quarter-over-quarter and year-over-year. 18.4 million contracts traded this week which is blending 3Q15 activity to 17.4 million contracts per day, up +15% quarter-over-quarter and +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 also has shed 400 basis points of share, good for a -14% loss from last year as ISE/Deutsche Boerse and BATS mop up volume and share.


HEDGEYE Exchange Tracker | Futures Jump, Cash Equities Continue Acceleration - XMon4


HEDGEYE Exchange Tracker | Futures Jump, Cash Equities Continue Acceleration - XMon5


U.S. Futures Detail

CME Group volume picked up this week to 15.0 million contracts. That blends 3Q15 volume to a 13.1 million average level, a -3% year-over-year decline. CME open interest, the most important beacon of forward activity, continues in strong fashion with 104.8 million contracts pending, good for +24% growth over the 84.1 million pending at the beginning of 2014. That marks further improvement from the prior week's +22%.


Activity levels on the futures side at ICE hit 4.8 million contracts this week, with 3Q15 blending to a 4.3 million daily average. That is also a -5% year-over-year decline. ICE open interest this week tallied 73.3 million contracts, a -3% contraction versus the 75.2 million contracts open at the beginning of 2014. That marks an improvement versus the prior week's -4% level.


HEDGEYE Exchange Tracker | Futures Jump, Cash Equities Continue Acceleration - XMon6


HEDGEYE Exchange Tracker | Futures Jump, Cash Equities Continue Acceleration - XMon8 2


HEDGEYE Exchange Tracker | Futures Jump, Cash Equities Continue Acceleration - XMon7


HEDGEYE Exchange Tracker | Futures Jump, Cash Equities Continue Acceleration - XMon9 2


Monthly Historical View

Monthly activity levels give a broader perspective of exchange based trends. As volatility levels, measured by the VIX, MOVE, and FX Vol should rise to normal levels after the drastic compression this cycle, we expect all marketplaces to experience higher activity levels.


HEDGEYE Exchange Tracker | Futures Jump, Cash Equities Continue Acceleration - XMon10


HEDGEYE Exchange Tracker | Futures Jump, Cash Equities Continue Acceleration - XMon11


HEDGEYE Exchange Tracker | Futures Jump, Cash Equities Continue Acceleration - XMon12


HEDGEYE Exchange Tracker | Futures Jump, Cash Equities Continue Acceleration - XMon13


HEDGEYE Exchange Tracker | Futures Jump, Cash Equities Continue Acceleration - XMon14


HEDGEYE Exchange Tracker | Futures Jump, Cash Equities Continue Acceleration - XMon15


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 | Futures Jump, Cash Equities Continue Acceleration - XMon19 3




 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 | Futures Jump, Cash Equities Continue Acceleration - XMon20


 Please let us know of any questions,


Jonathan Casteleyn, CFA, CMT 




 Joshua Steiner, CFA





Investing Ideas Newsletter

Takeaway: Current Investing Ideas: MCD, RH, XLU, LNKD, UUP, ZOES, FNGN, DXJ, HOLX, FL, VIRT, PENN, GIS, VNQ, EDV & TLT

Investing Ideas Newsletter       - China cartoon 08.11.2015


Below are Hedgeye analysts’ latest updates on our sixteen current high-conviction long and short investing ideas. We will send CEO Keith McCullough’s updated levels for each ticker in a separate email. Please note we added McDonald's (MCD) this past week. 



Shares of Hologic have risen over 9% since we added the name to Investing Ideas one month ago on July 16th. Healthcare Sector Head Tom Tobin has no new update this week.


"We are very bullish on McDonald’s," says Restaurants Sector Head Howard Penney. "We like where this company is going. We like the new CEO and the changes they’re making."


Penney notes that there are a lot of things going on inside the company which we can’t see that are extremely meaningful to where this company will be in 12-18 months.


"I’ve said this a dozen times recently, but 2015 will be the last year McDonald’s trades at an average price below $100," he says. 


Retail Sector Head Brian McGough maintains that Restoration Hardware is to Home Furnishings what Ralph Lauren is to Apparel and what Nike is to Athletic Shoes. That’s a meaningful statement given that RH has only 3% share of a $140 billion relevant market. 


While the company's recent announcement about the launch of RH Teen is not groundbreaking by any means, it is a positive one nonetheless. And it is absolutely consistent with the path that RH needs to take in order to double its revenue by 2018 and reach $11 in earnings – a number that is $5, or ~80% above the consensus. If we’re right on our numbers – which we think we are – then that suggests a long-term CAGR in earnings and cash flow better than 40%. If that’s the case, then the current 28x forward multiple looks flat-out cheap given the growth profile.  


Bottom line remains that RH is the preeminent brand in the space, and sets/leads consumer style trends/wants/needs but with very little fashion risk. Importantly, we think that RH is in second inning of a game that ultimately may prove to be a double header.


We believe the company will add $3 billion in sales over 3-years and climb to $11 in EPS. The earnings growth and cash flow characteristics to get to that kind of number would support a 30+ multiple. In the end, we’re getting to a stock in excess of $300.


Virtu Financial and other algorithmic market makers missed a big opportunity this week when the People’s Bank of China devalued the Yuan peg to the U.S. dollar. These large, unexpected macro events historically have caused big trading opportunities across asset classes which tend to drive daily revenue generation for the high frequency trading community.


Virtu has largely pushed back its timeline for entering the Chinese market saying last week that a Chinese trading operation shouldn’t be expected until the end of the year (or beginning of 2016).


In addition, the Sino regulatory authorities continue to maintain a suspension of 28 algo and high frequency trading firms until an investigation on the cause of the precipitous decline in Chinese equities is completed. The regulatory positioning of Virtu is weak in our view as the high frequency trading community globally is always fodder for both political and legislative ire.


Over time, we expect a more restrictive regulatory regime coming out of Europe by 2016 for the HFT community in new MiFID (Markets in Financial Instruments Directive) rule sets and there is always the risk that long running U.S. scrutiny intensifies again.


We see fair value -30-40% lower on VIRT shares.


Hedgeye Internet & Media Sector Head Hesham Shaaban reiterates his bullishness on LinkedIn.


He notes that this is a company that has carved out its own identity within the social media space.  LNKD’s value comes from its database of member profiles, which has a virtual moat around it since we don’t believe another player could replicate that database at comparable scale. Its product portfolio is primarily paywalls: varying degrees of access to these profiles, for which LNKD charges premium pricing. LNKD’s average annual revenue per customer in its largest Talent Solution segment is roughly $45K.


The opportunity for LNKD currently is that it is investing in its salesforce into an improving selling environment.  This investment created a near-term hiccup in the 1Q15 results, but the company is already showing improving trends in 2Q15, which we expect to continue into 2H15.  Meanwhile, LNKD has bought themselves some breathing room on its overly conservative guidance on its last two earnings releases, which has come at the expense of its stock price; hence a good entry point.


Hedgeye's veteran Restaurants analyst Howard Penney views Zoe's Kitchen as one of the best small-cap growth names in the Restaurant category.


The company is set-up for long-term success for the following reasons:

  1. Superior brand positioning
  2. Management philosophy and execution
  3. Unit opening geographic profile
  4. Early-stage average unit volumes and returns


Our Financials analyst Jonathan Cateleyn will be meeting with the new CEO of Financial Engines in New York City in 10 days. Casteleyn notes that the meeting comes at a good time as FNGN shares are at an important pivot point.


The new Chief Executive took over at the end of last year from the legacy executive that originally took the company public, so it will be valuable to understand how his stewardship differs from the prior strategy that made this a solid small cap grower.


We will have a detailed update after our meeting with the firm’s management.   


Foot Locker is a healthier company today than it has ever been in the history of the company. Management deserves credit for that. But unfortunately, the low hanging fruit has been picked, and then the ‘tough to reach’ fruit was picked, and now we need to reach for those last few apples on the top of the tree. 


So, while this might be a healthier company, there’s almost no room for error. At this valuation it is a far less defendable stock.


Remember that this company’s RNOA went from 5% to 28% over six years as it pulled capital out of the model (closing stores/repositioning banners) while boosting productivity and margins to all-time highs. At the same time, it’s percent of sales from Nike (traffic driver) went up by 2,500bps to 72% of COGS – and near 80% of sales.  That’s not going any higher.


FL’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 17.5x forward earnings – an all-time high. The ‘going private’ angle here is moot given its high Nike exposure.


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


We remain long of Japanese equities and re-iterate our expectation for QQE expansion by the end of the year or the beginning of 2016 which will be YEN BEARISH and BULLISH for Japanese equities.


As mentioned in last week’s report, the “manufacturing/production/export side of the economy is humming along,” while inflation expectations continue to trend lower. A decent manufacturing sector, with deflationary pressures and QQE knocking on the door is something we want to be long.

  • Industrial production accelerated sequentially on a Y/Y rate of change basis for June (+2.3% vs. +2.0% prior)
  • Machine Orders decelerated sequentially on a Y/Y basis but that reading is still tracking up double digits (+16.6% for June vs. +19.3% prior)
  • PPI readings came in worse than expected and declined sequentially Y/Y (-3.0% vs. -2.9% est. and -2.4% prior)


"As we predicted, regional gaming revenues surged in July which gives us confidence in our Q3 EPS estimate of $0.23, which is $0.04 above the Street," writes Hedgeye Gaming, Lodging & Leisure Sector Head Todd Jordan.


"We continue to like Penn National Gaming here due to stable regional gaming trends, better than expected quarterly and annual earnings, and the Plainridge and Jamul contribution to PENN’s two-year growth story."


General Mills remains one of our favorite names in the Consumer Staples space.


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 not a comprehensive list but 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. 


With the relative central planning policies abroad perpetuating a de facto tightening, the USD pulled back this week on the FX devaluation from Beijing. Market participants pulled back the expectation for a rate hike and the USD got tagged on Wednesday (-1.1% on the day and finished down ~1.1% on the week). It may be a slight pullback, but the next currency catalyst will be in Jackson Hole on August 27-28th where the ECB's Mario Draghi will have his turn. We expect the event to be Euro bearish, dollar bullish on the margin.


The U.S. remains one of the less bad spots to put your money. We reiterate our #EuropeSlowing call as one of our big 3 macro themes for Q3. Take the confluence of awful July data out of China and Friday’s GDP reports out of Europe as a sign that Beijing and the ECB will ring the monetary cowbell louder when it’s all said and done (hopefully they don’t ring as the Fed tightens) --> Dollar BULLISH even if the Fed pushes on a rate hike and kicks the can.


Eurozone Q2 GDP Report:

  • Eurozone: missed expectations (+0.30% Q/Q vs +0.40%) 
  • Germany: improvement from the prior quarter but missed expectations (+0.40% Q/Q vs +0.50%)
  • France: Big Miss --> 0.0% (exp. +0.20%) vs last quarter of +0.60%

Carnage in China: July Data

  • Industrial production missed estimates, printing +6.0% Y/Y in Jul. vs. +6.6% est. (+6.8% prior)
  • Fixed asset investment hit a 15-year low
  • Property investment growth slowed to +4.3% Y/Y which was the lowest reading since March 2009
  • Factory output slowed Y/Y sequentially
  • Exports declined -8.6% Y/Y vs. -1.5% est. (+2.8% in June) --> Chinese crude steel output -4.6% Y/Y (-1.8% Y/Y through first 7-months of 2015)


The rotation to growth-slowing asset classes continued this week. One of our top long sector ideas in utilities (XLU), which was added last week to Investing Ideas, leads S&P sectors month-to-date (+3.7%).


The set-up for the September FOMC meeting is as follows:


  1. The Fed runs the risk of tightening into a late-cycle slowdown which could ultimately flatten the yield curve (BULLISH for TLT, EDV, VNQ).
  2. Slower growth and deflationary headwinds are acknowledged and the can is kicked on a rate hike which should also be good for bonds. Until growth inflects positively, you’ll see TLT in our investment conclusions as the yield curve is the best proxy for forward looking growth expectations.

The largest discrepancy in our Growth, Inflation, Policy model vs. consensus and central bank estimates is our full-year inflation forecast which is much lower (+0.2% vs. +1.4%). It’s not that central bank forecasts are credible; it’s the fact that they will eventually have to acknowledge growth slowing and deflationary headwinds which will put pressure on long-duration rates.


The possibility of reaching 2% inflation has been a pipe dream in the recent past and we’re nowhere near pre-crisis levels. Deflation is real, and central banks will continue trying to do something about it.


PPI data released Friday slowed sequentially on a Y/Y basis:

  • PPI Final Demand -0.8% y/y for July vs. -0.7% in June
  • PPI Ex. Food and Energy +0.6% y/y  July vs. +0.8% in June

Investing Ideas Newsletter       - z run 08.14.15 PPI Percentile


PPI data released Friday slowed sequentially on a Y/Y basis:

  • PPI Final Demand -0.8% y/y for July vs. -0.7% in June
  • PPI Ex. Food and Energy +0.6% y/y  July vs. +0.8% in June



investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

The Week Ahead

The Economic Data calendar for the week of the 17th of August through the 21st of August is full of critical releases and events.  Here is a snapshot of some of the headline numbers that we will be focused on.




The Week Ahead  - Z WEEK AHEAD 08.14.15 Week Ahead

Are You A Democrat Or A Socialist?

By Moshe Silver


Election time kicks off with something for everyone – from Donald Trump ( all Circus, no Bread) to Bernie Sanders (Bread on every table and free Circus tickets for everyone.) 


Are You A Democrat Or A Socialist? - z 44


If you thought the average voter is not politically sophisticated, we offer Representative Debbie Wasserman Schultz, the chairwoman of the Democratic National Committee, who in a television interview was unable to articulate the difference between a Democrat and a Socialist.


America’s political multiple personality disorder goes back to the debate over the Constitution; the Federalists wanted to keep the loose confederation of states under the Articles of Confederation, and were opposed by James Madison’s Virginia faction who arrived in Philadelphia in 1787 determined to create a strong central government. If the Federalists were lilies in a pond — all drawing nourishment from the same pool, yet all free to float independent of the rest — the constitutional faction envisioned a wheel with the central government at its hub and the states as spokes; each distinct, yet joined in a single structure.


In the debate the term “federal” underwent a metamorphosis until the original Federalists (supporters of the Articles) were transformed into Anti-Federalists (opponents of the Constitution).  Within days of the draft constitution being submitted to the Continental Congress, critical pamphlets appeared under Roman pseudonyms, emphasizing the republican values of their authors (the first were signed “Cato” and “Brutus.”)


Into the fray leapt Alexander Hamilton.  Wielding one of the most brilliant and prolific pens in history, Hamilton oversaw the creation of the cornerstone of American political thought, The Federalist Papers. The (new) Federalists were much better organized, and had a more robust program than their antagonists. The Anti-Federalists were, after all, arguing for the status quo and against change; the Federalists were arguing for a document that would forge a nation.


The core of Hamilton’s vision was a national bank and a strong central government that would assume the debts of the states, collect tariffs, field a standing military, and allocate the nation’s resources among the states as required, and not in proportion to their population or ability to raise funds. Hamilton insisted that only the full faith and credibility emanating from a strong central bank would make America a full member of the club of nations.


Jefferson and his Republicans opposed Hamilton’s Federalists, rejecting the notion of a central government, a central bank, and a standing military. The end of the Napoleonic wars in Europe also reduced tension in America, and a growing sense of national unity reduced domestic partisanship. The Federalists withered, while the remaining Republicans rallied around Andrew Jackson, and in the early 1830s were renamed the Democratic Party, which it remains.


Jackson was hostile to the notion of a central bank and a paper currency. Thus it is something of a hoot that Jackson will remain on the $20 bill while Hamilton  is bounced for a player to be named later, a victim to the very system he created.


Today’s Democratic Party website says they


“… believe that we’re greater together than we are on our own — that this country succeeds when everyone gets a fair shot, everyone does their fair share, and everyone plays by the same rules. Our party, led by President Obama, is focused on building an economy that lifts up all Americans, not just those at the top.”


Historians trace the origins of socialism to the French Revolution and the labor abuses of the Industrial Revolution. The Socialist Party USA homepage wants


“… to establish a radical democracy that places people’s lives under their own control… non-racist, classless, feminist socialist society… where working people own and control the means of production and distribution through democratically-controlled public agencies, cooperatives, or other collective groups… where the production of society is used for the benefit of all humanity, not for the private profit of a few…”


So are you a Democrat or a socialist?


Today’s Democratic party occupies Hamilton’s hub and spokes position, seeking to strengthen the hub against the excesses of moneyed interests. (Positioning yourself as the party of the common person is difficult when your front-runner — nay, only-runner —complains that she has it tough, in a year where she and her husband took in some $25 million in speaking fees.  At the same time, a focus group of Trump supporters, all white, and mostly working-class, declared with passion “he’s one of us!” Did we sleep through something?)


Democrats place their faith in centralized of control over resources, restraint on excessive local interests, with guarantees of local autonomy where consistent with the national interest. The imperfection of elected leaders is balanced by the separation of powers, and the guarantee of regular elections which gives us an opportunity to throw the bums out.


If you think legitimate private and local interests need to be held in check and administered by a strong central government for the benefit of all, you could be a Democrat.


If, on the other hand, you believe in Philosopher Kings capable of magnanimously administering resources so that everyone is guaranteed to be a productive and valued member of society, then you may be a socialist.


If you are still not sure whether you are a Democrat, Republican or Socialist — or even too confused to call yourself “undecided” — don’t worry. The candidates are in the same boat as you.  But unlike you, one of them will be our next president.


 — Publius Puer


Moshe Silver is a Managing Director at Hedgeye and author of Fixing a Broken Wall Street.

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