On today’s Macro Overlay, Hedgeye CEO Keith McCullough ranks the names currently on our Investing Ideas list based on their style factors. He also discusses potential upcoming catalysts that investors should be paying close attention to.
Takeaway: UA buying LULU would be one of the most painful mergers in retail history. The big winner would be Nike. That's why it won't happen.
Just because UA’s 43x EBITDA multiple suggests it CAN buy Lululemon at 15x, does not mean it SHOULD. If it does, we think it will make UA a tremendous short. But we won’t ever make that call, because the likelihood of UA buying LULU is about as high as Nike buying Uber.
- UA wants to beat LULU organically. Not just beat it, but kick it once it’s down, and dance over its grave.
- UA would have to pay $7-8bn for the ‘privilege’ of owning one of the worst-managed brands in retail. That might be ok if UA had experience fixing things. But it doesn’t. Plus, why acquire a company it can beat organically with less than 1/10th the capital allocation.
- The last, and most important factor is Culture. You simply cannot find two more polar opposite cultures (let us know if you can think of any). LULU is a company based on a tree-hugger yogi mentality with little concern for planning, analysis, and close to no sense of urgency. UnderArmour is filled with amazingly energetic, Type-A high-performance athletes camouflaged in business casual clothes. Imagine JJ Watt (DE Houston Texans) in full gear doing ‘warrior pose’ in a peaceful yoga studio…with Nancy Pelosi. That’s about how awkward the cultural matchup here would be.
This would be the modern-day equivalent of when Adidas bought Reebok back in 2006. That handed Nike 10 points of share in Footwear. Rest assured that Nike execs are praying that UA buys LULU. That’s why it won’t happen.
Editor’s Note: This is a brief, abridged excerpt from a more detailed research note sent to subscribers by Retail analyst Brian McGough. To read the entire note and learn more about subscribing to our Retail sector research, ping firstname.lastname@example.org.
Takeaway: Housing stocks bounced notably in the latest week, but continue to modestly lag the market more broadly.
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.
- Performance Roundup: Housing resumed its normal 4Q seasonal momentum in the latest week with the average builder up 3.0% on the week vs the S&P 500 rising 1.7%. This brings the QTD performance back into solidly green territory. QTD absolute returns for ITB and XHB stand at +7.2% and +5.0% vs the S&P 500 +8.4%. Meanwhile, the average builder from our tables below is now +2.1% QTD. Our preferred four horsemen of 4Q among builders are NVR, LEN, BZH & KBH, which are +8.4%, +5.1%, +6.2%, Unch'd QTD, respectively. The three best performing builders thus far this quarter are DHI (+9.2%), NVR (+8.4%) and TOL (+8.1%), while the three worst performing builders are TMHC (-10.5%), HOV (-5.1%), and MTH (-3.1%).
- Insider Buying: Other than the Director at Hovnanian (HOV) who purchased 20k shares (~$45k) in late October, there's been no recent insider buying in the sector.
- Beta: The highest beta names (1YR) remain HOV (1.52), KBH and BZH which are at 1.33 and 1.36, respectively. At the other end of the spectrum, the lowest beta plays are NVR (0.61), MDC (0.93) and TOL (1.00).
- 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.
- Valuation: The cheapest names in the group currently are BZH (7.5x), MTH (9.6x) and TMHC (9.2x), while the most expensive are NVR (15.2x), LEN (13.3x), and TOL (13.6x). Incidentally, NVR, at 5.3x TBV, is currently at 99% of its peak 5-year valuation.
Joshua Steiner, CFA
Christian B. Drake
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Takeaway: The 4Q15TD options ADV rose to 16.9 million from 16.5 million in the previous week, making for a +200 bps improvement in the Y/Y rate.
Weekly Activity Wrap Up
The 4Q15TD average daily volume for cash equities and options rose this week with options having their strongest week of the 4th quarter to date. Cash equities averaged 7.21 billion shares per day, bringing the quarter's average to 7.16 billion marking +2% Y/Y growth from 4Q14. Options activity rocketed during the week putting up an average of 19.5 million contracts per day, blending the quarter-to-date average to a 16.9 million ADV, now only -2% lower Y/Y versus the -4% comp last week. Futures activity (both CME and ICE) continues to burn off the tough 4Q14 comp which included the Grexit, with the 17.8 million contracts per day this week blending to 18.0 million for 4Q15 to date. This Y/Y activity change remains at -6%. Most importantly Y/Y open interest is up +14% at CME and +17% at ICE which will drag trading volume through to higher levels into 2016.
U.S. Cash Equity Detail
U.S. cash equity trading came in at 7.2 billion shares traded per day this week. That brings the fourth quarter average to 7.2 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 -10% year-over-year decline.
U.S. Options Detail
U.S. options had their best week of the quarter so far. Activity came in at a 19.5 million ADV this week, bringing the 4Q15TD average to 16.9 million, a -2% Y/Y and -7% Q/Q contraction. The market share battle amongst venues continues to be one of losses at the NYSE/ICE, which has lost -6% 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 +6% Y/Y growth.
U.S. Futures Detail
CME Group activity came in at 13.2 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 106.5 million CME contracts pending, good for +14% growth over the 93.7 million pending at the end of 4Q14, consistent with the prior week.
ICE saw volume of 4.6 million contracts traded per day this week, bringing 4Q15TD ADV to 4.9 million, +11% Y/Y and +14% Q/Q growth. ICE open interest this week tallied 69.4 million contracts, a +17% expansion versus the 59.4 million contracts open at the end of 4Q14, an improvement from last week's +15%.
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:
Please let us know of any questions,
Jonathan Casteleyn, CFA, CMT
Joshua Steiner, CFA
Takeaway: Draghi is 'not relaxed' about deflation. With good reason.
WORRIED ABOUT #DEFLATION? YOU SHOULD BE.
Earlier this morning, ECB President Mario "Whatever It Takes" Draghi warned as much in a speech delivered in Frankfurt. To be precise, Draghi said "We will do what we must to raise inflation as quickly as possible." He then added that "Low core inflation is not something we can be relaxed about."
What may not be appreciated, however, is that Draghi is actually perpetuating deflation, in currencies and commodities.
Here's Hedgeye CEO Keith McCullough's dissection of Draghi's comments, and the resulting effects on USD and oil, in a note to subscribers following the news:
"Draghi saying the ECB “cannot be relaxed” about fighting #Deflation – so, he’s devaluing the Euro again this morning, -0.5% to $1.06 vs. USD, reversing what was a Dollar Down day yesterday (in other words, he’s perpetuating commodity #deflation)
Oil, meanwhile, is looking to snap $40 WTI again as the Dollar ramps on “whatever it takes” to try to bend/smooth economic gravity - you can expect that most OCT “reflation” data is going to mean revert to bearish TREND here in NOV as commodities crash."
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