HEDGEYE Exchange Tracker | Steady As She Goes - Volume Tracking Nicely

Takeaway: Cash equity and options activity grew while futures shrank last week. 3Q15 Q/Q and Y/Y growth remains positive for all categories.

Weekly Activity Wrap Up

This week, U.S. cash equity and U.S. options volumes rose week-over-week while futures activity fell. All three categories continue to show Q/Q and Y/Y growth. U.S. cash equity volume averaged 7.8 billion shares this week, bringing the third quarter to a 7.3 billion ADV, an expansion of +28% Y/Y and +15% 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 +15%. Futures activity came in at an average 17.4 million contracts per day. That brings the third quarter to an 18.7 million ADV, a +6% year-over-year and +6% quarter-over-quarter expansion.


HEDGEYE Exchange Tracker | Steady As She Goes - Volume Tracking Nicely - XMon1


Our Best Idea in the sector continues to be the CME Group (CME). Volatility tends to be seasonally high as we move into the "back to work" months of September and October and CME Group exchange volumes have already begun to benefit from this trend. See our recent note on the company which highlights the back-end-loaded nature of the stock's returns given historical Fall volatility and its year-end variable dividend.


HEDGEYE Exchange Tracker | Steady As She Goes - Volume Tracking Nicely - XMon18


U.S. Cash Equity Detail

U.S. cash equity trading finished the week at 7.8 billion shares traded which is blending to a 7.3 billion daily average thus far for the 3rd quarter of 2015. This is +28% 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.


HEDGEYE Exchange Tracker | Steady As She Goes - Volume Tracking Nicely - XMon2


HEDGEYE Exchange Tracker | Steady As She Goes - Volume Tracking Nicely - XMon3


U.S. Options Detail

U.S. options activity came in at a 17.0 million ADV this week which is blending 3Q15 activity to 18.2 million contracts per day, up +20% quarter-over-quarter and +15% 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 -14% loss from last year as ISE/Deutsche Boerse and BATS mop up volume and share.


HEDGEYE Exchange Tracker | Steady As She Goes - Volume Tracking Nicely - XMon4


HEDGEYE Exchange Tracker | Steady As She Goes - Volume Tracking Nicely - XMon5


U.S. Futures Detail

CME Group volume came in this week at 12.8 million contracts. That blends 3Q15 volume to a 14.4 million average level, a +7% year-over-year expansion. CME open interest, the most important beacon of forward activity, currently tallies 96.7 million CME contracts pending, good for +15% growth over the 84.1 million pending at the beginning of 2014, consistent with the prior week's +15%.


Activity levels on the futures side at ICE hit 4.6 million contracts this week, with 3Q15 blending to a 4.2 million daily average, a +5% year-over-year expansion. ICE open interest this week tallied 63.7 million contracts, a -8% contraction versus the 69.2 million contracts open at the beginning of 2014, an improvement from the prior week's -9%.


HEDGEYE Exchange Tracker | Steady As She Goes - Volume Tracking Nicely - XMon6


HEDGEYE Exchange Tracker | Steady As She Goes - Volume Tracking Nicely - XMon8


HEDGEYE Exchange Tracker | Steady As She Goes - Volume Tracking Nicely - XMon7


HEDGEYE Exchange Tracker | Steady As She Goes - Volume Tracking Nicely - XMon9


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 | Steady As She Goes - Volume Tracking Nicely - XMon10


HEDGEYE Exchange Tracker | Steady As She Goes - Volume Tracking Nicely - XMon11


HEDGEYE Exchange Tracker | Steady As She Goes - Volume Tracking Nicely - XMon12


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 HEDGEYE Exchange Tracker | Steady As She Goes - Volume Tracking Nicely - 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 | Steady As She Goes - Volume Tracking Nicely - 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 | Steady As She Goes - Volume Tracking Nicely - XMon20


 Please let us know of any questions,


Jonathan Casteleyn, CFA, CMT 




 Joshua Steiner, CFA





THE MACRO SHOW [UNLOCKED] | Should Investors Still Consider Housing?


During the September 16th edition of The Macro Show, our contrarian, ahead-of-the-curve Housing analysts Josh Steiner and Christian Drake made a special guest appearance to bring our subscribers up to speed on their successful, bullish housing call (despite a slowdown in the broader economy).


*This is a granular, data-packed and detail-oriented show you can’t afford to miss!


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


Subscribe to Hedgeye on YouTube for access to our free video content.




The Week Ahead

The Economic Data calendar for the week of the 28th of September through the 2nd of October 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  - zz week ahead 09.25.15 Week Ahead

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.

Investing Ideas Newsletter

Takeaway: Current Investing Ideas: WAB, ZBH, GLD, MCD, RH, LNKD, ZOES, FNGN, FL, PENN, GIS, EDV & TLT

Investing Ideas Newsletter      - Slower for longer cartoon 09.25.2015


Below are our analysts’ updates on our thirteen current high conviction long and short investing ideas. Please note that if nothing material has changed in the past week which would afffect a particular idea, our analyst has made a note of this. Hedgeye CEO Keith McCullough’s updated levels for each ticker are below. 


Investing Ideas Newsletter      - zz levels 99

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 les



The yield on the benchmark 10-year U.S. Treasury note touched a one-week low Thursday before Janet Yellen delivered her speech in Amherst, MA later that evening where she reaffirmed that a majority of the monetary policy committee was in favor of raising rates in 2015.


That was good for a +4 basis point move. Pretty weak.   


Question: Do you believe her?


Did you believe her when she planned to raise rates in June?


Is the U.S. economy still showing signs of a cyclical slowdown? Yes.  If you, like us, remain skeptical on the said policy path from our omnipotent central planners, and you believe growth continues to slow, then we respectfully submit that you sit on your GLD and TLT allocations.


Relax. Breathe.


On a related economic note, this week's telling durable goods orders reading, which typically shows strength early cycle and weakness late cycle (leading indicator), slowed for the seventh consecutive month in August.


Investing Ideas Newsletter      - zz benny 09.25.15 Durable Goods Order


Durable goods, business investment, net exports and goods inflation remain in discrete deceleration while the labor market (jobless claims), continue to show late-cycle strength.


Leading Indicators (Bad) + Lagging Indicators (Good) = #LATECYCLE

As we’ve highlighted, Initial Jobless Claims have been the most consistent, lead labor market indicator for the economic cycle with peak improvement occurring approximately seven months ahead of the economic cycle peak and coincident with or slightly ahead of the equity market peak. 


On Friday, GDP, CORE Inflation, and personal consumption were all upwardly revised in their Q2 third revisions:

  • The Q/Q SAAR GDP print was revised to 3.9% for Q2 vs. +3.7% prior
  • Personal consumption was also revised up to +3.6% from +3.2% prior
  • Core PCE revised up to +1.9% from +1.8% prior

Remember that because consensus navel-gazes on the Q/Q SAAR GDP number, the Q3 GDP has to comp on top of +3.9%. Tough. Our GDP expectations for Q3 remain in a range of +0.1%-+1.5% on diffucult Q3 comps (YY of course). That's a far cry from current consensus expectations.


Whichever way you want to slice it, Q3 GDP comps are difficult. And, once the data comes out, we think expectations will be downwardly revised again.


In other words, wait for yet another Fed punt on a 2015 hike.


To view our analyst Tom Tobin's original report on Zimmer Biomet CLICK HERE


Investing Ideas Newsletter      - zz ZBH ACA KNEE TAILWIND large


We've noted previously a study demonstrating a 6-fold increase in knee replacement surgery for the newly insured compared to a matched continuously insured population. We assumed the Society of Actuaries assessment of Knee Replacement case volume was correct, applied their reported case rate per 1000 member months to the ACA's newly insured, and derived number for knee replacement surgeries among the newly insured.  


The growth contribution appears to be significant.  The impact increased over the course of 2014 as enrollment ramped, peaked in 1Q15, and appears likely to slow if utilization rates of the newly insured (0.22 cases per 1000 member months) revert to baseline (0.03 cases per 1000 member months).



Constant-currency comparable net sales increased by 2% in 1Q16, while comparable volume was up 1%. General Mills reported total company net sales in 1Q16 of $4.21B coming in slightly under consensus estimates of $4.25B. Embedded within the overall company top line miss is a top line beat within the U.S. Retail segment, which reported sales of $2.53B versus consensus estimates of $2.51B.


While we dig into some key details below, performance in the U.S. has consistently been a source of concern for investors and management. The fact that the U.S. segment has outperformed expectations is a big deal. Adjusted gross margin increased 290 basis points due to net price realization and cost cutting initiatives. Due to Project Catalyst, their corporate cost cutting program, SG&A declined 6%. Cost cutting initiatives have been serving GIS well, reporting EPS of $0.79 ex-items beating consensus estimates of $0.69 by $0.10.


U.S. RETAIL― 1Q16 net sales for the U.S. Retail segment (USRO) rose 4% to $2.53B, Annie’s contributed 3 points of the net sales growth. The most encouraging performance in this segment is the growth of cereal, facing an easy comparison of -9%, cereal was up 6% in this quarter. Facing easy comparisons for the next two quarters, coupled with improvements to the segment, we are expecting the positive numbers to continue. The segment experienced a segment operating profit increase of 38% due to lower promotional spending versus a year-ago and a decrease in SG&A expenses and supply chain costs related to Project Catalyst and Century.




We have been the cereal market bulls since our Black Book presentation on GIS.


Our view has always been that cereal is not in a secular decline, it is merely at a point of maturity. Manufacturers had previously been complacent with the cereal market for too long, innovation deteriorated and sales followed suit. Since this realization, the three big players in the market (GIS, K, & POST) have been investing in the category both on advertising and product improvements. General Mills is starting to see an uptick in their performance. We predict they will be the biggest beneficiary of a stronger category. 


Our team also notes that the YOY monthly change in Breakfast Cereal Employment, compared to GIS cereal reported net sales YOY quarterly growth and cereal category retail sales all bode well for the future of cereal, as employment in this sector has been picking up steadily.


Please note the table below which shows data collected by Packaged Facts. It shows usage rates of breakfast cereal as well as the importance of breakfast. Strong employment numbers coupled with innovation such as gluten-free Cheerios, removal of artificial colors and flavors and sugar reduction; lead us to continue to believe the cereal category can return to growth.


Investing Ideas Newsletter      - zz GIS Investing Ideas 9.25.15


To view our analyst's original report on Restoration Hardware: CLICK HERE


Restoration Hardware opened its fourth Baby & Child store Friday in Greenwich, CT. This is proof that the 22,000 square foot Greenwich (opened in May of 2014) store is too small. And it also marks the first time we've seen RH swap out a Legacy Store for a Design Gallery in a market and then supplement the new footprint with an additional concept -- in this case it's Baby & Child.


Investing Ideas Newsletter      - zz rh baby child greenwich

Image source: Greenwich Time


Our analysis suggests that the Greenwich market could support a 65,000 square foot store. In other words, the current store, while in a great location, and at a significant ROI, could and should be much bigger versus how it exists today in order to capture the market opportunity and properly display the company's expanding category portfolio.


Instead of swapping out the door (the current Greenwich Design Gallery has extremely favorable rent economics -- especially given the prime location) for a bigger store, like we saw in West Hollywood and will see in Houston, RH is adding square footage across the street. The new door at 4,800 sq. ft. is taking over space vacated by Gap Kids (the RH Legacy Store the company closed last year was 5,500 sq. ft.).


More than anything, we think this is a very bullish statement on the success of the Greenwich market. The company would not be opening a Baby & Child concept unless the Design Gallery was crushing it in year one.


Between Baby & Child, RH Modern and RH Teen (which could both merit their own doors), and the addition of Kitchens still TBD, we think we'll see a lot more of this. As in, Legacy Store closures as new Design Galleries open up will be lower than most expect.


Zoës Kitchen fared much better this week.


In case you missed it, shares were up approximately 9%.


We continue to be very bullish on ZOES long-term prospects due to the company's strong fundamentals, superior brand positioning, great growth prospects and strong early-stage average unit volumes and return.


Outside of the company’s strong performance, it's worthwhile to mention that Mediterranean dieting and the trend of healthy eating overall are growing increasingly more popular by the day. ZOES having sole ownership over this category, provides it a great long-term advantage to reap the benefits of this growing trend.


To view our analyst's original note on Wabtec: CLICK HERE


Fresh off his successful, longstanding bearish call this week on Caterpillar (it has underperformed the market by over 60% since his first short presentation on the name) our Industrials Sector Head Jay Van Sciver reiterates his short call on Wabtec.


Below is a key excerpt from a note he sent out earlier this week outlining his concerns for the company:


Faster Rail Networks Require Less Equipment


As rail congestion picked up in 2014, the slower speeds tended to pull equipment on to the track.   Now that speeds are picking back up, we expect that equipment to be pushed back out.  One can think of it as turning existing assets more quickly, or as analogous to the velocity of money vs. inflation.  This is an important negative for WAB, as they sold parts and equipment to US Freight rails as equipment was sucked onto the network, while parts and equipment sales will likely fall below trend as that equipment comes back off.


Investing Ideas Newsletter      - z 34


Hedgeye Internet & Media analyst Hesham Shaaban has no material update this week. To view his original report on LinkedIn: CLICK HERE


Shaaban reitereates that we remain long LinkedIn heading into the company's next earnings release in late October. We are still expecting a clean beat and raise, which we expect will be a positive catalyst for the stock, especially given the current dearth of good Internet longs. 


Penn National Gaming continues to be our favorite Regional Gaming stock. 


As Sector Head Todd Jordan notes, "PENN should benefit from the release of state gaming figures over the next few weeks. Recall that August was weaker than many thought. While we predicted this particular slowdown, our model is showing a sharp September rebound.


September revenues should rebound and serve as a catalyst for the stock going into Q3 earnings. On the research side we have not altered our views of PENN’s long term growth story. We continue to see more upside from current price levels.


Investing Ideas Newsletter      - zz jenks


To view our original note on McDonald's: CLICK HERE


McDonald’s clearly continues to be well-liked by our Restaurants research team and is a near perfect fit into our macro team’s current "style factor" preferences. This stock is high cap with a low-beta, coupled with a company turnaround story that is currently well underway. We believe this stock will do well through this tumultuous time in the market.


As previously mentioned, the company has all day breakfast starting on October 6. We anticipate this development as not only driving increased visits from existing customers, but also new customers that maybe don’t wake up early enough to get breakfast by 10:30am (or simply just people that enjoy eating breakfast items outside of the morning!)


New McDonald's CEO Steve Easterbrook has taken an internal activist approach to reorganizing this company. We believe we will see strong, positive signs of it all working during the 3Q15 call on October 22nd


This past Thursday, Nike reported the best and most impressive quarter in its 35 years as a public company. Whenever any company’s performance is so mind numbing – both on an absolute basis and relative to expectations – one has to wonder if there’s room to go. Is this the time to peel some off, or sell outright?


The stock closed Thursday at a $99.2bn market cap. It flirted with $100bn only twice before. But Friday it will hit the triple digits, and the question is whether it will fall below $100bn ever again.


Interestingly enough, the only negative in the quarter was a high level of inventories in the U.S. This will be nothing more than a hiccup for Nike, but it should absolutely slow growth, or impact margins for Retailers like Foot Locker, Hibbett, and Finish Line. We saw that manifested today in FINL where the sales to inventory spread at -8% was the worst spread we’ve seen in almost two years. That’s never a positive gross margin event. 



Earlier this week, Financial Engines announced that it is making its investment advisors available by phone to all 401(k) participants, whether those participants use the company’s advisory services or not. This is essentially a leverageable marketing tool for FNGN; the change will provide the company with direct access to customers who have the potential to convert from only having their assets on the FNGN platform to having FNGN manage their portfolios.


Advisors now have the opportunity to directly convey their value to customers and to make the case for FNGN fully managing the participants’ portfolios. We expect this to cause an increase in the conversion rate, which, as shown in the chart below, has already been rising.


Investing Ideas Newsletter      - zz fngn


Cartoon of the Day: Don't Be a Dunce!

Cartoon of the Day: Don't Be a Dunce! - Slower for longer cartoon 09.25.2015


With a global economic slowdown (which we called well before our competition) and frightened financial markets staring them in the eyes, our "omnipotent" central-planners blinked and held its key federal funds rate unchanged last week. 


What you may not have known ... our subscribers were prepared. We've been on record for many months now in our suite of products predicting precisely what the Fed said:




Got it?



The Biggest Risk? The Fed’s Forecast…

In this brief excerpt from The Macro Show this morning Hedgeye CEO Keith McCullough weighs in on one of the key risks facing investors right now (hint: Janet Yellen).


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