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Call Invite | Q4 2015 Macro Themes Conference Call (10/8/15 at 1:00PM ET)

Call Invite | Q4 2015 Macro Themes Conference Call (10/8/15 at 1:00PM ET) - HE MT 4Q15 cartoon

 

We will be hosting our highly-anticipated Quarterly Macro Themes conference call on Thursday, October 8th at 1:00PM ET. Led by CEO Keith McCullough, the presentation will detail the THREE MOST IMPORTANT MACRO TRENDS we have identified for the quarter and the associated investment implications.

 

Q4 2015 MACRO THEMES OVERVIEW:

  • #SuperLateCycle (USA): Slowing growth typifies the twilight of an economic expansion and negative 2nd derivative trends are creeping in across much of the domestic fundamental data. From labor and manufacturing markets to consumer and business confidence, leading indicators are beginning to roll as the late-cycle moves past peak. We'll detail why Slower-And-Lower-For-Longer remains the call. 
  • #GlobalSlowing: With the Street, IMF, World Bank and OECD all still forecasting global growth of around 3% for 2015, we find it appropriate to reiterate our call for global growth to come in at or below half that rate. Moreover, while China's August CNY devaluation effectively made our #EmergingOutflows theme a consensus bearish cog in the global economic outlook, we do not think investors are appropriately positioned for a likely trend of negative revisions to the respective growth outlooks in the U.S., Eurozone and Japan throughout the balance of the year.
  • #Crashing: Definitive crashes have occurred across many global macro markets in recent months. Those market participants on the wrong side of growth slowing and deflation are feeling the most pain. Crashing inflation expectations are perpetuating the pain across all asset classes and sectors levered to unrealistic growth expectations (energy, industrials, materials), as well as across the high-yield bond market, commodity markets, commodity currencies. Is the U.S. equity market next in line?

 

CALL DETAILS

  • Toll Free:
  • Toll:
  • Confirmation Number: 13621323
  • Materials: CLICK HERE

 

As always, our prepared remarks will be followed by a live, anonymous Q&A session. Please submit your questions to . Also, for those of you who cannot join us live, we will be distributing a replay video of the call shortly after it concludes.

 

Kind regards,

The Hedgeye Macro Team

 


HEDGEYE Exchange Tracker | Storm Stocks - Volume Keeping Pace Into Quarter End

Takeaway: While Hurricane Joaquin appears to be safely avoiding making East Coast landfall, named storms have spurred volumes historically.

While Hurricane Joaquin is thankfully forecasted to miss making landfall on the Eastern seaboard, with one month left in Hurricane season, we outline the historical impact on the exchange sector. Overall, the energy complexes of CME and ICE can experience substantial hedging and speculative volume as activity gravitates to both the crude oil and natural gas products of both venues. While Katrina and the storm systems of 2005 were most impactful, historically trading volume and open interest swell in the aftermath of serious systems. This has made the exchange stocks relative winners against the S&P 500 over a 1, 3, and 6 month duration.  

 

HEDGEYE Exchange Tracker | Storm Stocks - Volume Keeping Pace Into Quarter End - opening chart

HEDGEYE Exchange Tracker | Storm Stocks - Volume Keeping Pace Into Quarter End - opening table final

 

Weekly Activity Wrap Up

All three exchange categories finished out the third quarter showing good growth. U.S. cash equity volume averaged 7.9 billion shares this week, bringing the third quarter to a 7.3 billion ADV, an expansion of +29% year over year and +15% quarter over quarter. U.S. equity options activity averaged 17.1 million contracts this week, bringing the third quarter average to 18.1 million, a +15% year-over-year and +20% quarter-over-quarter expansion. Futures activity averaged 18.6 million contracts per day this week. That brings the third quarter to an 18.6 million ADV, a +6% year-over-year and +6% quarter-over-quarter expansion.

 

HEDGEYE Exchange Tracker | Storm Stocks - Volume Keeping Pace Into Quarter End - XMon1

 

U.S. Cash Equity Detail

U.S. cash equity trading finished the week at 7.9 billion shares traded which brought the 3rd quarter of 2015 to a 7.3 billion daily average. 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 took a 24% share of third-quarter volume. NASDAQ finished the quarter with a 19% share, 100 bps lower than last year, a -4% decline.

 

HEDGEYE Exchange Tracker | Storm Stocks - Volume Keeping Pace Into Quarter End - XMon2

 

HEDGEYE Exchange Tracker | Storm Stocks - Volume Keeping Pace Into Quarter End - XMon3

 

U.S. Options Detail

U.S. options activity came in at a 17.1 million ADV this week which brought 3Q15 activity to 18.1 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 | Storm Stocks - Volume Keeping Pace Into Quarter End - XMon4

 

HEDGEYE Exchange Tracker | Storm Stocks - Volume Keeping Pace Into Quarter End - XMon5

 

U.S. Futures Detail

CME Group volume came in this week at 13.9 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 97.1 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 4.3 million daily average, a +5% year-over-year expansion. ICE open interest this week tallied 63.5 million contracts, a -8% contraction versus the 69.2 million contracts open at the beginning of 2014, consistent with the prior week's -8%.

 

HEDGEYE Exchange Tracker | Storm Stocks - Volume Keeping Pace Into Quarter End - XMon6

 

HEDGEYE Exchange Tracker | Storm Stocks - Volume Keeping Pace Into Quarter End - XMon8

 

HEDGEYE Exchange Tracker | Storm Stocks - Volume Keeping Pace Into Quarter End - XMon7

 

HEDGEYE Exchange Tracker | Storm Stocks - Volume Keeping Pace Into Quarter End - 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 | Storm Stocks - Volume Keeping Pace Into Quarter End - XMon10

 

HEDGEYE Exchange Tracker | Storm Stocks - Volume Keeping Pace Into Quarter End - XMon11

 

HEDGEYE Exchange Tracker | Storm Stocks - Volume Keeping Pace Into Quarter End - XMon12

 

HEDGEYE Exchange Tracker | Storm Stocks - Volume Keeping Pace Into Quarter End - XMon13

 

HEDGEYE Exchange Tracker | Storm Stocks - Volume Keeping Pace Into Quarter End - XMon14

 HEDGEYE Exchange Tracker | Storm Stocks - Volume Keeping Pace Into Quarter End - 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 | Storm Stocks - Volume Keeping Pace Into Quarter End - 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 | Storm Stocks - Volume Keeping Pace Into Quarter End - XMon20

 

 Please let us know of any questions,

 

Jonathan Casteleyn, CFA, CMT 

  

  

 

 Joshua Steiner, CFA

 

 

 

 


W: Adding Wayfair to Investing Ideas (Short Side)

Takeaway: We are adding Wayfair to the short side.

Please note that we are adding Wayfair (W) to the SHORT SIDE today.

 

Our Retail team led by veteran Sector Head Brian McGough will send subscribers a full research note next week explaining our bearish thesis on the stock.

 

W: Adding Wayfair to Investing Ideas (Short Side) - zz ww


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Investing Ideas Macro Overlay: Positioning Your Portfolio After Today's Jobs Report

 

On today's Macro Overlay, Keith ranks all of the names currently on the Investing Ideas list in the face of Friday's (expectedly) disappointing jobs report.


FL: We Are Removing Foot Locker From Investing Ideas

Takeaway: We are removing Foot Locker from Investing Ideas today.

Please note that we are removing Foot Locker (FL) from Investing Ideas today.

 

As Keith McCullough (our CEO and Risk-Manager-In-Chief) notes, the stock is oversold and at the low end of the range. Our Retail team's long-term bearish thesis on the company remains intact.

 

FL: We Are Removing Foot Locker From Investing Ideas - z 4444


P: It's All About the Benchmarks (Web IV)

Takeaway: Wishful thinking does not trump precedent set by the prior CRJs.

INTRODUCTION

P and SX are worlds apart in their proposals, but the big difference is that SX is looking for a steady increase off the Web III rates, while P is asking for a massive reset.   We can all exchange jabs on who has the better benchmark, but unless P is the clear winner, it will likely be the loser since its proposal is the one that deviates most from prior rates set by the CRB (see the below quote for context).  In short, P was playing from behind before the game even started.

 

“the rates in these negotiated agreements serve as a caution to us not to depart radically from past rates where we cannot be confident, based on the quality of the benchmark evidence in the record, that the magnitude of such a departure is fully supported in the target market.” 

- Web III Copyright Royalty Judges

 

As we mentioned during our call last week (P: Webcaster IV = Powder Keg), the benchmarks matter most, and this is where P has the weakest argument of all the players involved.  Below we discuss each of the major benchmarks, with supporting slides from our deck.  

 

BENCHMARKS

  1. IHRT (Warner Deal): The deal includes a series of benefits not covered by the statutory license, particularly a revenue share opportunity for terrestrial radio, which IHRT doesn’t have any legal obligation to pay WMG for since terrestrial is considered promotional.  For context, terrestrial represents the overwhelming majority of radio consumption in the US (vs. internet).  Further, IHRT's effective rate for the WMG deal was supposedly recalculated at $0.0017/spin at final arguments vs. the $0.005 it previously submitted (we're still trying to verify).  What we do know is that SX calculated the effective rate for the IHRT-WMG deal at $0.00309/spin (for the 10/2013-5/2014 period) after attempting to adjust for perceived calculation errors and extra-statutory factors.  IHRT doesn't appear to make any attempts to adjust its own benchmark for these extra-statutory features in its Proposed Findings, so it would seem that if $0.0017/spin is indeed the effective rate, that would be the lower bound of the zone of reasonableness, not the upper bound, especially considering the terrestrial radio revenue share in the deal.  
  2. SX (Interactive Deals): SX's benchmark is derived from 80+ interactive agreements.  Note that outside the ability to choose specific songs, interactive and non-interactive are largely the same service, buyers, and sellers.  Further, the Copyright Royalty Judges (CRJs) in both the Web II and III proceedings used the interactive benchmarks as a baseline for setting rates.  The question is what is the appropriate interactivity adjustment, with SX calling for 2x based on the ratio of retail subscription prices in the interactive vs. non-interactive market, and P calling for 4X based on the ratio of total webcaster revenues in the interactive vs. non-interactive market.  The former was the same analysis used by SX in Web III, which the CRJs adopted with downward adjustments.  The latter essentially calls for a greater interactivity discount given the lower relative monetization levels of a non-interactive webcaster (primarily ad-supported) vs. an interactive webcaster (primarily subscriptions).  Since P is the largest non-interactive player in the market, P is essentially asking the judges tailor the rate to suit its model.  Note that all of the CRJs in every Webcasting proceeding before Web IV suggests that they copyright licensee’s business model (e.g. P's ad-supported model) is secondary concern at best for determining rates under the willing buyer/seller standard (see slides below and email us for direct quotes).  
  3. P (Merlin): We’re not sure why one 18-month deal between P and an entity that represents 5%-10% of P’s total spins could receive the greatest weighting as a benchmark for what a willing buyer/seller would agree to over the next 5 years; regardless of statutory influence.  But that’s the major issue.  All the CRJs agree that their role is to establish rates that would have been negotiated in the market assuming no statutory license existed.  P really hasn’t done anything to prove that Merlin wasn’t directly tethered to the Pureplay Agreement, which is both the prevailing statutory rate, and inadmissible as a benchmark for setting rates (see below).  Further, the Register has never "blessed" the Merlin agreement; it has never even seen the agreement.  The Register's role in this process was a matter of law, not fact.  The Register allowed it because it was a direct license agreement, which legally can't be thrown out.  However, the Register is also allowing SX to submit the Pureplay Agreement as evidence to assess its statutory influence over the deal (see actual excerpt from decision below).  All indications are that Merlin was very careful in structuring the deal so that it couldn't be separated from the Pureplay agreement, which means P has likely already lost; especially since the onus was on P to prove why the CRJs should depart radically from past rates.

 

Below are the slides from our call last week specifically discussing the Web IV benchmarks.  Let us know if you would us to send over the the full deck and replay.

 

Hesham Shaaban, CFA


@HedgeyeInternet  

 

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P: It's All About the Benchmarks (Web IV) - P   Register s Merlin determination

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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.

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