Cartoon of the Day: Consensus Quicksand

Cartoon of the Day: Consensus Quicksand - Soft spot of data cartoon 10.16.2015

"Make no mistake," Hedgeye CEO Keith McCullough wrote in an Early Look earlier this week. "This is a #SuperLateCycle slowdown."


Stay out of the way of consensus quicksand. Stick with Hedgeye.

HEDGEYE Exchange Tracker | Seasonal Roll Underway

Takeaway: Trading volume across category started its seasonal roll into 4Q. 1Q volumes have been stronger historically across the board.

Weekly Activity Wrap Up

Volume across category contracted week-over-week starting its seasonal slough off into 4Q. U.S. cash equities' fourth-quarter ADV dropped to 7.2 billion from 7.9 billion the week prior but remains +3% higher year-over-year. Meanwhile, options and futures activity is negative Y/Y and Q/Q. U.S. equity options activity is averaging 16.4 million contracts per day in the new quarter, a -5% contraction versus the fourth quarter of 2014 and a -9% contraction versus 3Q15. Futures activity is averaging 17.6 million contracts per day in the fourth quarter, an -8% year-over-year contraction and -5% quarter-over-quarter decline.


HEDGEYE Exchange Tracker | Seasonal Roll Underway - XMon1


The slack in activity to start the new quarter is in line with seasonal patterns with both derivatives category (futures and options) historically putting in lower growth rates into 4Q. Cash equities tend to maintain a positive activity rate in the last quarter of the year, as the January effect and the tendenacy for stock prices to rise is priced in in December. All categories experience a substantial jump in 1Q activity, with new asset allocations being effected in the start of new calendar years:


HEDGEYE Exchange Tracker | Seasonal Roll Underway - XMon18


U.S. Cash Equity Detail

U.S. cash equity trading came in at 6.4 billion shares traded per day this week. That brings the fourth quarter average to 7.2 billion shares traded per day, a +3% Y/Y expansion but -1% Q/Q contraction. The market share battle for volume is mixed. The New York Stock Exchange/ICE is taking a 25% share of fourth-quarter volume, a +4% year-over-year increase, while NASDAQ is taking an 18% share, a -9% year-over-year decline.


HEDGEYE Exchange Tracker | Seasonal Roll Underway - XMon2


HEDGEYE Exchange Tracker | Seasonal Roll Underway - XMon3


U.S. Options Detail

U.S. options activity came in at a 15.5 million ADV this week, bringing the 4Q15TD average to 16.4 million, a -5% Y/Y and -9% Q/Q contraction. The market share battle amongst venues continues to be one of losses at the NYSE/ICE, which has lost -12% of its share year-over-year settling at just 18% of options trading currently. Additionally, CBOE's market share has been falling recently and has started off the fourth quarter at 26%, -13% lower than 4Q14. NASDAQ, on the other hand, is starting the quarter strongly, increasing its market share by +15% compared to 3Q15, bringing itself back into line to the 24% share it held a year ago. BATS' share has been falling recently but at 8% in 4Q15TD it remains +32% higher than in 4Q14. Finally ISE/Deutsche's 15% share in 4Q15TD remains consistent with 3Q15, which brings it to +9% Y/Y growth.


HEDGEYE Exchange Tracker | Seasonal Roll Underway - XMon4


HEDGEYE Exchange Tracker | Seasonal Roll Underway - XMon5


U.S. Futures Detail

CME Group volume came in this week at 11.7 million contracts per day and is averaging 12.9 million for the fourth quarter, a -13% Y/Y and -10% Q/Q contraction. However, CME open interest, the most important beacon of forward activity, currently tallies 101.8 million CME contracts pending, good for +9% growth over the 93.7 million pending at the end of 4Q14, an expansion from the prior week's +6%.


Activity levels on the futures side at ICE fell to 4.4 million contracts this week. However, at 4.7 million contracts traded per day in 4Q15TD, activity has grown +7% Y/Y and +10% Q/Q. ICE open interest this week tallied 65.8 million contracts, a +11% expansion versus the 59.4 million contracts open at the end of 4Q14, an improvement from the prior week's +9%.


HEDGEYE Exchange Tracker | Seasonal Roll Underway - XMon6


HEDGEYE Exchange Tracker | Seasonal Roll Underway - XMon8 2


HEDGEYE Exchange Tracker | Seasonal Roll Underway - XMon7


HEDGEYE Exchange Tracker | Seasonal Roll Underway - 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 | Seasonal Roll Underway - XMon10


HEDGEYE Exchange Tracker | Seasonal Roll Underway - XMon11


HEDGEYE Exchange Tracker | Seasonal Roll Underway - XMon12


HEDGEYE Exchange Tracker | Seasonal Roll Underway - XMon13


HEDGEYE Exchange Tracker | Seasonal Roll Underway - XMon14

HEDGEYE Exchange Tracker | Seasonal Roll Underway - 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 | Seasonal Roll Underway - XMon19 3



Please let us know of any questions,


Jonathan Casteleyn, CFA, CMT 




 Joshua Steiner, CFA






It’s been our long held belief that the Board of Yum! Brands (YUM) has needed to “de-risk” the company from its large China operations.  It now looks like that change is inevitable.  At least there are few large shareholders that hope so!


Yesterday, after the close YUM announced that Corvex’s Keith Meister has joined YUM’s Board of Directors.  This move alone signals a shift in the company’s thinking, which was inevitable following the plunge in YUM’s stock following the company’s recent earnings announcement.  Also, after the close, the company updated its 4Q15 guidance, which contained more bad news.  Fortunately, the updated guidance will take a back seat to the conclusions emerging from the board’s “year-long strategic review.”   YUM said it will announce its decision about a prospective restructuring “shortly”.


Reading between the tea leaves it now appears most likely that YUM will announce plans of a material restructuring on or before its December 10th Analyst Meeting.   


The two most likely events are:

  1. A decision on the new operating structure of the China Division with a possible spin-off (to trade on the Hong Kong exchange)
  2. A material leverage recapitalization


Other possible events include:

  1. A sale/IPO of Pizza Hut
  2. A split of the company into three companies (KFC, PH and TB)


The most important event will be to limit the company’s exposure to the volatility in the China business and return the company to being a high margin high return asset-light global franchise business model.  Currently, YUM is trading at 11.7x NTM EV/EBITDA versus 15.6x for its global asset light peer group and 12.5x for McDonald’s.


We can still value YUM close to $100, but the multiple assumptions behind that can be called into question give the current macro environment in China.  That being said we can still see this stock getting back to $90.


We look forward to hearing what the YUM Board of Directors has to tell shareholders.


Please call or e-mail with any questions.


Howard Penney

Managing Director


Shayne Laidlaw






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PENN: We Are Removing Penn National Gaming From Investing Ideas

Takeaway: Please note we are removing Penn National Gaming from Investing Ideas

After a very strong run since we added it to Investing Ideas on May 26th, we are removing Penn National Gaming (PENN) from Investing Ideas today. Shares are up approximately +9% since we added it, versus -3.8% for the S&P 500.


Here's an update from Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan:


We are still constructive on PENN's long term prospects. The stock has performed well and the valuation now looks reasonable rather than cheap. Most of the catalysts have come to fruition, near term earnings look in line with estimates, and we await a better entry point or the emergence of additional catalysts to revisit the long idea.


PENN: We Are Removing Penn National Gaming From Investing Ideas - zzzzz x penn

FMHQ (Friday Morning Housing Quant)

Takeaway: The builder complex has started 4Q solidly in the green with most of the names performing in-line with what beta would predict.

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 | Election Cycle: We profiled the stark and recurrent pattern of housing performance alongside the election cycle last month (see:  Election Cycle Analysis --> Will Housing Trump the Market?).  The behavioral underpinning is relatively straightforward – housing is the largest, mostly broadly held asset in the country and populist pandering does not include policy platforms anchored on crushing the primary or singular source of net wealth for a significant percentage of households.  According to the NHBR (Here) early evidence out of New Hampshire suggests housing again sits as a central topic of constituency concern. According to the UNH Survey, “ 90 percent of Granite Staters say housing affordability is a problem in New Hampshire, and three-quarters say presidential candidates should focus on it … only 13 percent say the candidates should put “no focus” on it.”  The drumbeat of housing-as-an-issue newsflow is likely to only get more steady from here. Moreover, recent chatter has HUD Secretary Julian Castro (HERE) being mentioned as a potential VP candidate for Clinton. 

  • Performance Roundup: Housing stock returns are off to a solid start thus far in 4Q15. The absolute returns for ITB and XHB are +4.3% and +4.1% 4QTD vs the S&P 500 +5.4%. Meanwhile, the average builder QTD return is +5.5%, but this is positively skewed almost +200 bps by HOV, which is +23.7% QTD. Our preferred four horsemen among the builders are KBH, BZH, LEN & NVR (+5.1%, +5.7%, +3.4%, +2.3%). 
  • Valuation: The cheapest names in the group currently are BZH (8.9x), TMHC (9.5x) and MTH (9.6x), while the most expensive are NVR (14.6x), LEN (13.2x), and TOL (13.2x).

FMHQ (Friday Morning Housing Quant) - BQ 1


FMHQ (Friday Morning Housing Quant) - BQ 2


FMHQ (Friday Morning Housing Quant) - BQ 3


FMHQ (Friday Morning Housing Quant) - BQ 4 



Joshua Steiner, CFA


Christian B. Drake

LNKD: Tracker Update (Talent Solutions)

Takeaway: Our tracker suggests an improving selling environment into 3Q15, reinforcing our view that mgmt was crying wolf with its organic guide down.


  1. TRACKER SUGGESTS IMPROVING SELLING ENVIRONMENT: Our LNKD JOLTS tracker is accelerating through the first two months of 3Q15, suggesting an improving selling environment.  Our tracker has produced a relatively tight correlation with LNKD's Talent Solutions ARPA dating back to 1Q11 (~0.75).  As a reminder, our LNKD Talent Solutions TAM analysis suggest the bulk of that TAM is in the upsell opportunity (ARPA) vs. new account volume.  See 2nd note below for detail.  
  2. GUIDANCE = WORST-CASE SCENARIO: We suspect LNKD all but removed Display Advertising revenue from its guidance (see 1st note below), so that headwind is more than baked into estimates.  That said, we see Talent Solutions as the swing factor moving forward.  LNKD should handily beat rebased 2H15 consensus TS revenue estimates barring a considerable deceleration in both ARPA and LCS account growth (see scenario analysis below).  LNKD's salesforce ramp into the improving selling environment would suggest the opposite.  


See the notes below for supporting detail/analysis on our LNKD Long thesis, and let us know if you would like to disucss.  As a reminder, we our hosting our quarterly Internet BEST IDEAS Update call next Tuesday.  



Hesham Shaaban, CFA




LNKD: Tracker Update (Talent Solutions) - LNKD   ARPA vs. JOLTS 3Q15 2

LNKD: Tracker Update (Talent Solutions) - LNKD   TS Scen 2015 3Q15 2 

LNKD: Tracker Update (Talent Solutions) - LNKD   2015 Guidance 2Q15


LNKD: Notes from 10-Q & IR
08/26/15 10:35 AM EDT
[click here


LNKD: New Best Idea (Long)
07/14/15 08:00 AM EDT
[click here]

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