Fed Fishing?

“Many men go fishing all of their lives without knowing it’s not the fish they are after.”
-Henry David Thoreau


In case any of you emailed me and got a “Gone Fishing” auto-reply, I checked out on Tuesday night of last week to go on what has become an annual Hedgeye Fishing Trip to my homeland on Lake Nipigon. It was epic.


Fed Fishing? - z dj


Got volume? Often called the “Sixth Great Lake”, Lake Nipigon is massive. It has a surface area of 1,872 square miles and average and max depths of 180 and 541 feet, respectively (Wikipedia).


So now I’ll try to make the literary-transition from a place where there were no other humans to where there was no volume. On Friday, Total US Equity Market Volume was down -22% and -33% vs. its 1-month and 1-year averages. Wow.


Back to the Global Macro Grind


Buying markets on slow-to-no-volume UP days is not what I do. I like to buy/cover on capitulation (low-end of my immediate-term risk range) DOWN days. For many things High Beta #Deflation, that day was Wednesday of last week.


By week’s end, what the growth bulls call “reflation” finally had an up week. Not up huge, but up. And that’s mainly because the US Dollar ended up closing down -1% (US Dollar Index) on the week.


If you look at the week-over-week moves in Global FX vs. the month-over-month, here’s what that added up to:


  1. US Dollar Index -1.0% on the wk = -0.1% month-over-month
  2. Euro (vs. USD) +1.3% on the wk = +0.9% month-over-month
  3. Canadian Dollar +0.3% on the wk = -2.8% month-over-month
  4. Brazilian Real +0.7% on the wk = -9.9% month-over-month
  5. Russian Ruble -1.4% on the wk = -13.1% month-over-month


In other words, the closer a country’s leverage is to what’s been crashing for the last 1-3 months (commodity “reflation” expectations, Oil, etc.), the less of a “bounce” it got on Down Dollar last week.


Here’s how Commodities themselves did last week:


  1. CRB Commodities Index -0.2% on the wk = -9.8% month-over-month
  2. Oil (WTI) down another -4.1% on the wk = -21.3% month-over-month
  3. Gold finally had a real up wk of +1.9% = -3.6% month-over-month
  4. Silver was +2.5% on the wk = -0.8% month-over-month
  5. Copper was +0.6% on the wk = -7.5% month-over-month


Yes, it is rather damning for the USD to have one of its biggest down weeks of the summer and see both the commodities index and oil continue to crash/deflate (for those who remain long of them, that is).


That said, if you pivoted, hard (on Wednesday), and bought/covered anything US Equities that was in the midst of a -7% (Russell 2000) to -15% (Energy Stocks) draw-down, you crushed it last week.


Even though the world couldn’t find it in them to buy Brazilian Stocks (down another -2.1% on the wk, and down -10.7% in the last month), hedge funds that were short US Energy and Utility stocks evidently had to buy/cover, for a trade:


  1. Energy Stocks (XLE) were +3.4% on the wk, but are still down -7.0% in the last month
  2. Utilities (XLU) were +2.7% on the wk, and continue to have a big relative move +6.1% in the last month


You see, the one thing that the Utilities (XLU) long position has going for it that “reflation” bulls don’t is called … drumroll … #Deflation! Yep, as both US growth and global inflation expectations fall, so do sovereign bond yields.


With the US 10yr Treasury Yield down another -3 basis points this morning, it’s almost down as much in the last month as inflation expectations themselves:


  1. US 10yr Treasury Yield -24 basis points in the last month to 2.17%
  2. US 5yr Break-Evens -33 basis points in the last month to 1.28%


And sure, there’s something like “82% of economists polled” at some Old Wall media outlet still looking for a “rate hike” in September. And maybe this un-elected Fed is under enough political pressure to do just that…


And… if they do that, as both growth and inflation expectations continue to map their respective cyclical and secular slow-downs, they run the very obvious risk of being THE catalyst for the next Dollar Up, #Deflation of levered asset prices.


I’m betting many at the Federal Reserve have spent their entire central-planning lives not knowing that they are the catalyst some of us are still looking for.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.12-2.24%

SPX 2071-2106
VIX 12.03-14.32
EUR/USD 1.08-1.11
Oil (WTI) 41.35-44.11


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Fed Fishing? - 08.17.15 chart

The Macro Show Replay | August 17, 2015


Monday Mashup

Monday Mashup - CHART 1




8/10/15 July Restaurant Sales and Employment Trends



8/6/15 WEN | Performing Well for Now



Friday, August 14

BWLD | Completed previously announced acquisition of 41 restaurants (click here for article)

Beef | U.S. net exports of beef continue to decline (click here for article)


Thursday, August 13

YUM | Plans to open 400 new restaurants in Turkey, they currently have 100, of which they own 99 of them (click here for article)

MCD | Increases the size of their quarter pounder by 0.25 ounces to make the burger weigh 4.25 ounces (click here for article)


Wednesday, August 12

SHAK | Announced pricing of secondary offering of 4,000,000 shares at a price of $60.00 per share (click here for article)


Tuesday, August 11

SHAK | Raising minimum wages in Washington, DC to $12/hr (click here for article)

WEN | Entered into the previously announced accelerated repurchase program to buy back 14.36 million shares of common stock (click here for article)

JMBA | Is the latest company to join the mobile ordering craze, their new mobile order app will be enabled at 200 locations to start off (click here for article)

FRGI | Named Willie Romeo its first corporate director of off-premise consumption, as the brand intensifies focus on to-go and catering (click here for article)

DNKN | To open two locations in Baton Rouge, to open in Fall 2016 (click here for article)



Casual dining and quick service stocks, in aggregate, underperformed the XLY last week. The XLY was up 0.1%, top performers from casual dining were KONA and CHUY posting an increase of 3.5% and 3.0%, respectively, while HABT and KKD led the quick service pack up 7.1% and 5.2%, respectively.

Monday Mashup - CHART 2

Monday Mashup - CHART 3



From a quantitative perspective, the XLY looks bearish from a TRADE perspective, but bullish in the TREND duration, with TREND support at 77.34.

Monday Mashup - CHART 4



Monday Mashup - CHART 5

Monday Mashup - CHART 6



Monday Mashup - CHART 7

Monday Mashup - CHART 8

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August 17, 2015

August 17, 2015 - Slide1

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





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