The Economic Data calendar for the week of the 7th of September through the 11th of September is full of critical releases and events. Here is a snapshot of some of the headline numbers that we will be focused on.
CLICK IMAGE TO ENLARGE.
Takeaway: Volume in all three categories remained elevated after last week's volatility blow-out
Weekly Activity Wrap Up
With volatility remaining elevated, exchange traded activity continued at an impressive pace this week. U.S. cash equity volume averaged 7.9 billion shares for the week, following last week's volume blow out. Growth in U.S. stock trading for the third quarter is now running at +29% Y/Y and +16% Q/Q. U.S. equity options activity averaged 17.0 million contracts this week. Year-over-year growth in U.S. options is tracking at +18%. U.S. futures activity continues to comp positively. U.S. futures activity hit 19.2 million contracts this week (the combination of CME Group and ICE Futures U.S. activity) and is now averaging 18.7 million for the quarter, a +6% year-over-year and quarter-over-quarter expansion.
U.S. Cash Equity Detail
U.S. cash equity trading finished the week at 7.9 billion shares traded which is blending to a 7.3 billion daily average thus far for the 3rd quarter of 2015. This is +29% year-over-year growth for U.S. stock activity. The market share battle for volume is mixed. The New York Stock Exchange/ICE's share of third-quarter volume remains at 24%. NASDAQ's share also remained unchanged week over week at 19%, 100 bps lower than last year, a -4% decline.
U.S. Options Detail
U.S. options activity remains significantly higher, both quarter-over-quarter and year-over-year. 17.0 million contracts traded this week which is blending 3Q15 activity to 18.7 million contracts per day, up +24% quarter-over-quarter and +18% 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 shed 300 basis points of share, good for a -15% loss from last year as ISE/Deutsche Boerse and BATS mop up volume and share.
U.S. Futures Detail
CME Group volume came in this week at 15.1 million contracts. That blends 3Q15 volume to a 14.5 million average level, a +8% year-over-year expansion. Additionally, CME open interest, the most important beacon of forward activity, continues in strong fashion. 103.8 million CME contracts are pending, good for +23% growth over the 84.1 million pending at the beginning of 2014, consistent with the prior week's +25%.
Activity levels on the futures side at ICE hit 4.2 million contracts this week, with 3Q15 blending to a 4.2 million daily average, a +2% year-over-year expansion. ICE open interest this week tallied 63.8 million contracts, a -8% contraction versus the 69.2 million contracts open at the beginning of 2014.
*Please note that in the last week ICE discontinued reporting of its single stock equity contract activity, stating it is not indicative of revenue. Therefore, the historical numbers we show are now revised to exclude that activity.
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.
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:
We recently presented our investment thesis on the Exchanges. To summarize,
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
Please let us know of any questions,
Jonathan Casteleyn, CFA, CMT
Joshua Steiner, CFA
On August 28th Hedgeye CEO Keith McCullough hit on his biggest concerns for the near term and discussed how the volatility component is critical when analyzing the moves in the market.
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Takeaway: Current Investing Ideas: ZBH, GLD, MCD, RH, XLU, LNKD, ZOES, FNGN, FL, PENN, GIS, EDV & TLT
Below are our analysts’ updates on our thirteen current high conviction long and short investing ideas. Please note that we added the healthcare company Zimmer Biomet (ZBH) to the short side this week. In addition, we removed Virtu Financial (VIRT) from the short side and Hologic (HOLX) from the long side. We also feature CEO Keith McCullough’s updated levels for each below.
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.
We added Zimmer Biomet to Investing Ideas on the short side Friday afternoon. Our Healthcare sector analyst team led by Tom Tobin will send subscribers a full stock report outlining our bear case this coming week, along with updated levels for ZBH. from Keith.
The report below was written by Financials Co-Sector Head Jonathan Casteleyn.
Shares of Financial Engines continue to bounce around in the volatile market on fears that the company’s underlying 401K managed account offering will lose substantial subscribers as investor flee equities. While historically market volatility has dislodged some money from the firm’s asset-under-management, by definition the firm’s portfolio are efficient optimized and will outperform any headline gains or losses in the broader financial markets.
FNGN’s engines are constantly rebalancing along the efficient frontier using modern portfolio theory and hence are diversified amongst equities, fixed income, and cash. While FNGN’s subscribers might panic temporarily on overall lower market returns, they shouldn’t, because their performance will be better than benchmark averages. Our research shows that FNGN portfolio’s pick up lower volatility than many equity markets which give us comfort that long term, there is still a solid value-added service provided by the company to its client base.
FNGN’s optimized portfolio’s have side-stepped the volatility of equity markets and put up better returns than most stocks only behind the returns and volatility of an all bond portfolio. This means FNGN subscribers have well diversified portfolios as a result of their professional managed services from the company:
The update below was written by our Gaming, Lodging & Leisure team.
Following our recent visit to Plainridge and meetings with senior management, we reiterate our positive Penn National Gaming thesis. Stability in regional markets provides good earnings visibility while expected strong contributions from Plainridge and Jamul next year should provide a nice 2 year growth story.
As we highlighted in a separate note this week, ("August Just a Blip"), regional gaming likely cooled off in August following a strong July. While that could provide some consternation as the states begin releasing August gaming revenues later this week, the YoY slowdown is more related to quantitative factors rather than the health of the regional gaming customer. September should quickly provide evidence of that.
Incidentally, Penn National in Pennsylvania just reported slot revs down 4% for August. Confirmation of a weaker August as we forecasted.
Bottom Line: The bull thesis on PENN appears very much intact.
The update below was written by our Consumer Staples team.
General Mills announced on Thursday that they have signed a definitive agreement to sell the Green Giant and Le Sueur vegetable businesses to B&G Foods (BGS) for $765mm in cash. This news is no surprise. It has been widely rumored for the last six months. As we laid out in our GIS Black Book, management still has work to do to reshape the portfolio for future growth. In addition to divesting underperforming non-core businesses, acquiring growth will be crucial to revitalizing the company.
While the news was largely expected by the market, it was good to see this deal finally close. We are expecting GIS to actively shape their portfolio for the foreseeable future. On whether it will be an acquisition or a divestiture, we are hoping for both, as they need to shed non-core assets and acquire high growth ones.
GIS stated that they expect the sale to be dilutive to FY2016 EPS by ~$0.05-0.07 per share, excluding transaction costs and a one-time gain on the sale. General Mills will provide additional details about the impact of the transaction when it reports 1Q16 results on September 22nd. As expected the company plans to use the net proceeds for share repurchases and debt reduction following the Annie’s acquisition last year.
To view our analyst's original note on LinkedIn: CLICK HERE
After speaking with company management and reviewing the 10-Q, we believe the recent sell-off in the stock is overdone. Most of LinkedIn’s wounds have been self-inflicted (soft guidance), not fundamental. We suspect that management realizes that it really messed up by "low-balling" guidance two quarters in row. We don't think it will make the same mistake again on its next print. And, with the worst case scenario already baked into consensus estimates, we suspect the worst is now behind them.
Fundamentally, we continue to see LNKD’s investment into its salesforce as a prudent move given an improving selling environment from macroeconomic trends. It’s quite possible that LNKD could see an acceleration in revenue growth within its core Talent Solutions segment by year end, which we believe would dispel many of the recent concerns in the name.
The update below was written by our Restaurants team.
Zoës Kitchen has officially entered the big leagues as the company and its stock price continue to grow exponentially. Despite the impressive financial performance, delivery, the stock has not been performing well recently due to reasons and market-related forces outside of the company’s control.
To be sure, the company remains on the Hedgeye Restaurants Best Ideas list as a long. In our eyes, ZOES represents the best growth story in the restaurants sector. We believe the present downturn in the stock represents a great buying opportunity for longer term investors.
The "Growth Is Back" bulls didn’t like a trifecta of mediocre labor market data releases this week. The labor market peaks late cycle and the trend in key employment data suggest things are going from great to good (marginal changes matter):
The ADP employment report showed a sequential acceleration, printing +190K vs. +185K in July. But to be clear, this series peaked at over +200K additions in the first couple of months of 2015
Initial jobless claims bottomed about six weeks ago. The trend in that series is moving back to the all-important 300K level. Remember, peak improvement in initial claims occurs around 7 months ahead of the economic cycle peak and coincident with or slightly ahead of the equity market peak. To be sure, Initial Jobless Claims have been the single most consistent, lead labor market indicator for the economic cycle.
While the headline NFP number was a bomb on Friday, printing +173K for Aug. vs. estimates for +215K, the trend is also turning. This series also peaked back in February on a YY rate-of-change basis
Don't forget Wednesday’s ISM-Manufacturing report. It was poor to say the least:
Why do we point to all of this growth-slowing data? Because it’s meaningful.
The market sniffed out a shaky stock market this week and a slew of poor employment data:
On the small loss on the gold position, we had the catalyst out of Europe this week as the ECB pointed to lower forward-looking growth and inflation expectations. Mario Draghi also announced the expansion of the share limit on their QE program. The market took this as Euro bearish. The USD appreciated against the Euro, and Gold moved lower on Thursday.
We received a number of questions this week on why long-term Treasury positions haven’t gone up more with all of the current turmoil in equity markets. Our view is that growth continues to slow and our most important goal in this period of volatility is to advise people on how not to lose money. Our asset allocation remains one of cash, Treasuries, and a small gold position. Sure, it may be boring for now, but it’s better than being ruinous. Take a look at the less-than-stellar hedge fund returns in the month of August.
We're sticking with our game plan.
To view our original note on McDonald's: CLICK HERE
McDonald’s is on the Hedgeye Restaurants Best Ideas list as a long.
The franchisees voted YES on the proposal to launch All Day Breakfast nationwide at all 14,318 U.S. locations. The vote confirmed on Tuesday, September 1st by the franchisee leadership council. This is a very important, monumental move by CEO Steve Easterbrook. It will define his legacy as the CEO that changed McDonald's (and the rest of the industry) for many years to come.
In 2016, if MCD (with all day breakfast and an improved value message) can drive same-store sales up by 5%, the system will generate $1.9bn in incremental system-wide sales. Needless to say, a healthy McDonald’s will make life difficult for a number of others in the QSR space.
As noted in our survey we released on July 27th, it is evident that All Day Breakfast (ADB) will be a game changer for the company. Breakfast is the single most requested item by McDonald’s customers. Listening to the customer is a tried and true way to succeed.
Menu changes are coming as part of this initiative. MCD will have to remove some items from the previous menu to make way for ADB. They have already announced the removal of certain sandwiches and snack wraps and the simplification of the drive thru menu, but expect more to come on a region by region basis. The company has said that they will be offering at minimum the Egg McMuffin, Bacon, Egg & Cheese Biscuit, Sausage Burrito, Hotcakes, Hash Browns and Fruit ‘N Yogurt Parfait.
As part of this move, operators will need to purchase separate grills and toasters. The grills will sit on rolling carts which will carry utensils used just for eggs to ensure the raw eggs do not contact any other food. The required investment will range from $500 to $5,000 per restaurant, depending on what equipment franchisees already have. We would not be surprised to hear that corporate is helping to support the franchisees making this investment.
All Day Breakfast has the potential to be the “silver bullet” MCD will need to drive same-stores sales higher in 2016 and beyond. This will undoubtedly drive incremental traffic, probably even from people that don’t normally go to McDonald’s. The momentum that they gain from this must be harnessed to turnaround customer perception. This is their time to shine and we are confident the system is ready to show off its bountiful improvements to bring back their lost customers and continue to serve their loyal ones. ADB is coming sooner than we had thought, and we look forward to the November 10th analyst day in which we will assuredly be getting an early read on All Day Breakfast performance.
To view our analyst's original note on Restoration Hardware: CLICK HERE
Below is a look at our bullish outlook on Restoration Hardware across the three durations over which we analyze investment ideas and themes.
The Sept 10 print marks one of the few times we’ll expect ‘only’ an in-line print from RH. The timing of new product launches (Modern/Teen) has been well-telegraphed by management for 2H, not 2Q. Nonetheless, we’ll still be looking at 25-30% EPS growth.
The catalyst calendar looks solid for RH. Immediately following the print, we’ll see the launch of RH Modern and RH Teen. Then we’ll see four successive Design Gallery openings in Chicago, Denver, Austin and Tampa. Square footage will subsequently accelerate from a mid-single digit level to over 30%.
We think RH will earn close to $11 per share in 3 years, which compares to the consensus at just over $6. The square footage component is well known, but we think people are missing…
The update below was written by Retail analyst Alec Richards.
To own Foot Locker at this price, you need to believe that the company can:
This went from being an average company driving 20-30% EPS growth with less capital, to one that has to spend more just to maintain a 10% earnings growth rate. We think we’re right in between those two stages now, and the ownership characteristics are probably very different as we move from one to the other.
All in, if we’re wrong in our analysis, we think the upside is $75 (15x $5 in EPS). If we’re right, we think it can revisit $50-$55 (12-13x $4.00), at least 3 to 1 downside to upside.
Takeaway: NVR, one of our top two names for the quarter, continues to lead the group at +15.1% QTD and +10.3% on NTM earnings estimate revisions.
Our FMHQ (Friday Morning Housing Quant) tables present the state of the publicly traded homebuilders in a visually-friendly, quantitative format that takes about 60 seconds to consume.
Quick Quant Takeaways:
Housing Macro | Employment: Employment growth within housing’s key demand demographic of 25-34 year olds was flat sequentially at +2.3% YoY while accelerating payroll growth in the 20-24 YOA bucket drove acceleration in the aggregate 20-34 YOA group. Resi Construction employment was also flat sequentially with year-over-year growth decelerating -60bps to +4.0%. There are a couple takeaways: First, employment growth on both the supply and demand sides of housing continue to outperform the broader averages. Second, tightening resi labor market conditions are finding flow through to price with earnings growth for residential construction workers and single-family GC’s running at a notable premium to the broader average. Hourly earnings grew +4.8% YoY in the latest month for resi construction workers while growing 2.2% YoY in the private sector in aggregate and +2.4% for NonSupervisory & Production workers (who the BLS estimates = ~80 of the labor force).
*Bonus Bullet: Completely unrelatedly, this week’s Friday Morning Housing Quant devolved into the Friday Afternoon Housing Quant due solely to our spontaneous over-reminiscing about the Karate Kid (see this morning’s Early Look).
A quick compilation for your holiday weekend enjoyment:
The Crane Kick >> HERE
Johnny’s Back! >> HERE
Daniel is the Real Bully >> HERE
Joshua Steiner, CFA
Christian B. Drake