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HEDGEYE Exchange Tracker | Grinding to Positive Year-over-Year Growth

Takeaway: Although comps are tough this quarter, rising volume is making for improving Y/Y growth rates.

Weekly Activity Wrap Up

Options and futures volumes continued to come in above their 4Q15TD averages this week in a bid to leg out positive Y/Y comps by the end of the quarter. Options volume averaged 16.7 million contracts per day, raising the 4Q15TD ADV to 16.5 million. Y/Y change remains negative at -4%, but that marks an improvement from last week's -5% comp. Futures volume averaged 19.3 million contracts per day this week, raising the 4Q15TD ADV to 18.1 million, still a -6% Y/Y contraction but an improvement from last week's -7% comparison. Cash equities came in at 7.1 billion shares per day, bringing the 4Q15TD ADV to 7.1 billion, good enough for +2% Y/Y growth. In October of last year, the potential Greek exit from the European Union drove outsized activity, making for difficult comps this quarter in '15. However, with recently rising volumes, Y/Y growth rates are grinding into more positive territory.

 

HEDGEYE Exchange Tracker | Grinding to Positive Year-over-Year Growth - XMon1 2

 

Additionally, with a Fed rate hike on the table again near term, the following chart shows that historical Fed adjustments have been positive for CME volumes (mainly in Eurodollar futures and options). In the last rate hiking campaign, which lasted from June 2004 through June 2006, CME Eurodollar ADV experienced a clearly positive upward trend with baseline activity accelerating throughout the program. If the Fed raises rates (even marginally), we expect a similar positive impact on CME fixed income activity.

 

HEDGEYE Exchange Tracker | Grinding to Positive Year-over-Year Growth - XMon16

 

U.S. Cash Equity Detail

U.S. cash equity trading came in at 7.1 billion shares traded per day this week. That brings the fourth quarter average to 7.1 billion shares traded per day, a +2% Y/Y expansion but -2% Q/Q contraction. The market share battle for volume is mixed. The New York Stock Exchange/ICE is taking a 24% share of fourth-quarter volume, a +2% year-over-year increase, while NASDAQ is taking an 18% share, a -9% year-over-year decline.

 

HEDGEYE Exchange Tracker | Grinding to Positive Year-over-Year Growth - XMon2

 

HEDGEYE Exchange Tracker | Grinding to Positive Year-over-Year Growth - XMon3

 

U.S. Options Detail

U.S. options activity came in at a 16.7 million ADV this week, bringing the 4Q15TD average to 16.5 million, a -4% 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 -7% of its share year-over-year settling at just 19% of options trading currently. Additionally, CBOE's market share sits at 26%, -16% lower than 4Q14. NASDAQ, on the other hand, has increased its market share by +15% compared to 3Q15, bringing itself only -1% lower than the 24% share it held a year ago. Additionally, BATS' 8% share of 4Q15TD volume is +29% higher than in 4Q14. Finally ISE/Deutsche's 15% share in 4Q15TD remains consistent with 3Q15, which brings it to +8% Y/Y growth.

 

HEDGEYE Exchange Tracker | Grinding to Positive Year-over-Year Growth - XMon4

 

HEDGEYE Exchange Tracker | Grinding to Positive Year-over-Year Growth - XMon5

 

U.S. Futures Detail

CME Group had its best week all quarter with 14.2 million contracts traded per day, bringing the 4Q15TD average to 13.2 million, a -11% Y/Y and -8% Q/Q contraction. CME open interest, the most important beacon of forward activity, currently tallies 106.6 million CME contracts pending, good for +14% growth over the 93.7 million pending at the end of 4Q14, an expansion from the prior week's +12%.

 

ICE saw volume of 5.2 million contracts traded per day this week, bringing 4Q15TD ADV to 4.9 million, +12% Y/Y and +15% Q/Q growth. ICE open interest this week tallied 68.2 million contracts, a +15% expansion versus the 59.4 million contracts open at the end of 4Q14, consistent with last week's +15%.

 

HEDGEYE Exchange Tracker | Grinding to Positive Year-over-Year Growth - XMon6 2

 

HEDGEYE Exchange Tracker | Grinding to Positive Year-over-Year Growth - XMon8

 

HEDGEYE Exchange Tracker | Grinding to Positive Year-over-Year Growth - XMon7

 

HEDGEYE Exchange Tracker | Grinding to Positive Year-over-Year Growth - 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 | Grinding to Positive Year-over-Year Growth - XMon10

 

HEDGEYE Exchange Tracker | Grinding to Positive Year-over-Year Growth - XMon11

 

HEDGEYE Exchange Tracker | Grinding to Positive Year-over-Year Growth - XMon12

 

HEDGEYE Exchange Tracker | Grinding to Positive Year-over-Year Growth - XMon13

 

HEDGEYE Exchange Tracker | Grinding to Positive Year-over-Year Growth - XMon14

HEDGEYE Exchange Tracker | Grinding to Positive Year-over-Year Growth - 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 | Grinding to Positive Year-over-Year Growth - XMon19 3

 

 

Please let us know of any questions,

 

Jonathan Casteleyn, CFA, CMT 

  

  

 

 Joshua Steiner, CFA

 

 

 

 


Dear Fed, If You're Truly 'Data Dependent', This Should Give You Serious Pause

Takeaway: Today's disappointing data confirms a number of our non-consensus calls and risk of first Fed Hike (into a slowdown) since the early 80s.

Dear Fed, If You're Truly 'Data Dependent', This Should Give You Serious Pause - consumer slowing

 

STILL DON'T BELIEVE GROWTH IS SLOWING? WE DON'T KNOW WHAT TO SAY. 

 

While the latest round of lackluster economic data continues to confound Old Wall expectations, we're not surprised. Our Macro team continues to reiterate its #GrowthSlowing and #SuperLateCycle calls even while many on Wall Street cherry-pick last month's "Where's Waldo" jobs report number as the latest "evidence" to remain ebullient. 

 

Oh well. The data continues to be on our side.

 

Dear Fed, If You're Truly 'Data Dependent', This Should Give You Serious Pause - retail sales

 

Look no further than today's retail sales and producer price numbers. Hedgeye CEO Keith McCullough had this to say: 

 

"Both US Retail Sales and PPI slowed (again) this month. If you missed the Macy’s and Nordstrom blowups this week, just wait until US Retailers comp the toughest comp in 5 yrs (in November). Oh, and the Fed is going to hike into this slowdown. That should be fantastic for the [producer prices] which is crashing to new lows like Copper did this week. USD #Deflation Risk = On."

 

Today's PPI reading confirmed our concerns about #Deflation (one of our calls for over a year now). Here's a five year look at PPI including the latest number. To be sure, the slope of the line is unambiguously negative:

 

Dear Fed, If You're Truly 'Data Dependent', This Should Give You Serious Pause - PPI

 

We nailed retail sales too. This past July, Hedgeye Macro analyst Darius Dale warned subscribers about #ConsumerSlowing...  

 

Dear Fed, If You're Truly 'Data Dependent', This Should Give You Serious Pause - darius macro consumer

 

Again, here are the latest numbers and the increasingly tough comps for retail sales in November.

 

Dear Fed, If You're Truly 'Data Dependent', This Should Give You Serious Pause - retail sales  keith

 

And this beauty...

 

Dear Fed, If You're Truly 'Data Dependent', This Should Give You Serious Pause - z km retail report

 

Need more proof? Anecdotal evidence of the consumer spending crash is sprinkled all over equity markets. 

 

Here's Macy's (M) CEO Terry Lundgren earlier this week:

 

"We believe that the retail industry is going through a tough period that we seem to experience something like this every five to seven years or so, and this one feels familiar in that regard."  

 

... And a look at Macy's stock chart:

 

Dear Fed, If You're Truly 'Data Dependent', This Should Give You Serious Pause - Macys down

 

Then there's Nordstrom (JWN) CFO Mike Koppel:

 

“It appears that there has been a slowdown in the overall demand for the customer that is purchasing what we sell.”

 

... And the resulting stock plunge:

 

Dear Fed, If You're Truly 'Data Dependent', This Should Give You Serious Pause - Nordstrom

 

Not to alarm you further... but even after Kohl's (KSS) posted seemingly positive earnings, its shares are getting shellacked too on #ConsumerSlowing woes. (Note: our Retail analyst Brian McGough reiterated his short call yesterday.)

 

Dear Fed, If You're Truly 'Data Dependent', This Should Give You Serious Pause - KSS

 

Dear Fed, If You're Truly 'Data Dependent', This Should Give You Serious Pause - KSS brian

 

Bottom Line: None of this is reassuring. Economic Pollyannas be advised.

 

Dear Fed, If You're Truly 'Data Dependent', This Should Give You Serious Pause - z xx


Dept Stores | Gonna Happen Again in 4Q

Takeaway: Expectations suggest sequential pickup in sales w/o margin pressure. That's extremely aggressive given the circumstances.

Here's a look at key financial metrics for the four department stores that reported earnings this week. There are some really interesting takeaways. We all know sales are weak and inventories are high. By our math those two metrics are about 500bp out of whack. Our sense is that if retail CEOs could pick any two-week period of the entire year where the industry does not have excess inventories, they'd universally pick the two leading up to Thanksgiving/Black Friday. Unfortunately, the ball is not in their court.

 

Expectations for 4Q, as outlined below, still look too high. For the most part, expectations are for better-trending comps, without a meaningful hit to margins. There's very little chance that this comes to fruition. Base case is that we see a slowdown in sales OR in margins (negative earnings event). Worst case is erosion in comps AND margins.

 

The point is that there's a better chance than not that we see another round of downward earnings revisions.  Either way it's reason for the group to test lower multiples.

 

COMP SALES

  • The first thing that jumped out at us is that implied fourth quarter guidance is for a sequential acceleration in the two-year comp for every retailer.
  • Expectations are highest in 4Q for the mid-tier players -- JCP and KSS -- and are lowest for the upper end (M and JWN).
  • KSS 4Q expectations look like the biggest stretch to us.

 Dept Stores | Gonna Happen Again in 4Q - 11 13 15 chart1 

 

MARGINS

  • Macy's is looking for a 4Q gross margin decline, while the others are implied to be improve sequentially.
  • JWN is banking on the biggest 4Q improvement, which we think is partially fair given that it's probably cleaner than the others due to the excessive levels of clearance in 3Q vs last year.
  • JCP Margin guidance (Gross and EBIT) seems reasonable to us, but when heading into the holidays with competitors carrying so much inventory, we don't think it’s a slam dunk by any means.

  Dept Stores | Gonna Happen Again in 4Q - 11 13 15 chart2 

  Dept Stores | Gonna Happen Again in 4Q - 11 13 15 chart3 

 

SIGMA

This chart is not pretty -- showing that inventories are growing faster than sales by about 5% for the group headed into holiday. We need to see a huge surge in underlying demand to have margins positive for the group. Our sense is that the department stores end up in Quadrant3 -- right where they started.

Dept Stores | Gonna Happen Again in 4Q - 11 13 15 chart4


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Gold Update: Key Takeaways Following Our Materials Sector Launch


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NUS | SHOW ME THE MONEY!

Nu Skin (NUS) was recently added to our Hedgeye Consumer Staples Best Ideas list as a SHORT.

 

NUS released (click HERE for the release) detailed information surrounding VitaMeal sales and profitability. The new information they provided conflicted with the information they gave shareholders on the 3Q15 earnings call. 

 

Clearly, by putting out this new information, management is trying to calm the skeptics about the issues surrounding VitaMeal.  Unfortunately, the new information sheet provided by the company only raised more questions about VitaMeal than it answered. 

 

Now one of the biggest concerns we see coming out of this new information is where did all the money go?  Which is arguably a bigger issue than we saw rising out of the VitaMeal controversy originally. Now, the original concerns are still there, they are just further compounded by this additional question.

   

In the new document it clearly says that VitaMeal is “1.5% of sales and less than 1.5% of operating profits.” Which contradicts what they said on the 3Q15 earnings call, Truman Hunt, CEO, said “Yeah, it's a product just like priced and sort of positioned just like any other product we would sell.”

 

Breaking down what they said in the new document, some things just don’t add up.

 

WHERE DID ALL THAT MONEY GO?

Looking at what the company recently disclosed the numbers just don’t add up.

In 3Q15, the company disclosed that there were 15.34 million meals donated or 510 thousands bags sold.  Based on 1.6% (management 3Q15 guidance) of company sales ($571.3 million), VitaMeal sales in 3Q15 VitaMeal were $9.1 million.  That implies that the ASP for VitaMeal was $17.87 per bag, significantly below the retail price of $25.50.  

 

On the 3Q15 call CEO Hunt said “distributors purchase it for $20 to $25 depending on the market.” While the newly disclosed document specifically states that VitaMeal is sold for $25.50 per bag in the United States.

NUS | SHOW ME THE MONEY! - CHART 1 11.13.15

 

What accounts for the difference in the ASP?  In 3Q15, where did the $7.59 per bag or $3.89 million dollars go? For the nine months of 2015 (according to the company’s numbers) the average VitaMeal bag sold for $14.45, implying that there is $19.1 million dollars unaccounted for.

 

Given these discrepancies in their own reporting what happened to the $19.1 million that is unaccounted for over just the last nine months?

 

MARGIN STORY ON VITAMEAL DOES NOT SEEM RIGHT

The company also said that VitaMeal contributes just under 1.5% of operating margins. It's incomprehensible in our eyes that VitaMeal has similar input costs to high end creams and nutritional supplements. Additionally, there are no distribution costs for Nu Skin given the charities take care of delivery. We strongly believe that VitaMeal holds a much larger percentage of operating profit than it does of sales.

NUS | SHOW ME THE MONEY! - CHART 2 11.1.3.15

 

INCONSISTENCIES CONTINUE

Managements inconsistencies continue, below is an excerpt from the recently disclosed document stating that the margins on VitaMeal are “lower than its typical margin.” Directly contradicting what CFO Ritch Wood said during the 3Q15 earnings call when asked about VitaMeal margins, “it’s a product just liked priced and sort of positioned just like any other product we would sell.”

NUS | SHOW ME THE MONEY! - CHART 3 11.13.15

 

In 3Q15 we have VitaMeal sales representing 2.28% of total revenue via their Smile reports, which is 68bps above managements commentary of 1.6%. Accounting for distributor commission of 19% and COGS of 4% that would equate to roughly 39.7% of GAAP EPS or roughly 14.5%% of adjusted EPS.

 

One thing we would also like to point out, SAFI or Napoleon Dzombe are not mentioned once in this document. A troubling fact given only just two years ago SAFI was the largest recipient of funds from Force for Good, instead they mention Feed the Children.

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


FMHQ (Friday Morning Housing Quant)

Takeaway: The builders, under pressure for the last 3-4 weeks, are now roughly flat QTD, while the housing ETFs remain up 3-4% QTD.

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. 

 

Takeaways: 

  • Housing Macro | Rates:  Alongside the labor supply consternation coming out of 3Q builder earnings and some incremental softening in the demand data over the last month, the primary macro factor impacting the space has been the rise in rates.  Rates on the 10Y TSY are up +34bps over the last 20 trading days as the market priced in a rising probability of movement in the policy rate out of the Fed in December.  The shift in 30Y Mortgage Rates has been notably more muted, rising just +11bps over the same period.  Outside of (what have become) recurrent bouts of rate volatility, our late-cycle macro expectation on rates remains lower-for-longer – a view finding some further confirmation this morning with domestic retail sales disappointing and wholesale price inflation missing expectations and accelerating further into the negative at -1.6% YoY. 
  • Performance Roundup: It's safe to say that the housing stock complex has been weak of late. Interestingly, in spite of a spate of weak earnings prints and subdued outlooks, the average builder stock remains roughly flat QTD. QTD absolute returns for ITB and XHB stand at +3.9% and +3.1% vs the S&P 500 +6.6%. Meanwhile, the average builder from our tables below is -0.9% QTD. Our preferred four horsemen of 4Q among builders are NVR, LEN, BZH & KBH, which are +6.9%, +1.2%, +5.3%, -3.5% QTD. The three best performing builders thus far this quarter are NVR, DHI (+5.6%) and BZH. The three worst performing builders are TMHC (-13.6%), PHM (-5.0%) and MTH (-4.2%).

  • Insider Buying: A Director at Hovnanian (HOV) purchased 20k shares (~$45k) in late October. Outside of that, there's been no recent insider buying in the sector.
  • Beta: The highest beta names (1YR) remain HOV (1.51), KBH and BZH which are at 1.34 and 1.36, respectively. At the other end of the spectrum, the lowest beta plays are NVR (0.60), MDC (0.92) and TOL (0.99).
  • Short Interest: CAA, KBH and DHI have seen SI creep higher, rising as a % of SO by 5.0%, 4.2% and 1.5%, respectively in the latest month. TMHC, HOV & MTH have seen SI fall by 2.3%, 2.0% and 1.8%, respectively.
  • Sell Side Sentiment: MTH has seen the largest drop in sell side support (-10.1% 1M change), while BZH has seen the largest bump in support (+9.1% 1M change).
  • Valuation: The cheapest names in the group currently are BZH (7.4x), TPH (9.3x) and TMHC (8.7x), while the most expensive are NVR (15.0x), LEN (12.5x), and TOL (13.1x).

 

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


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