The Economic Data calendar for the week of the 21st of December through the 25th of December is full of critical releases and events. Here is a snapshot of some of the headline numbers that we will be focused on.
Takeaway: Current Investing Ideas: TIF, JNK, NUS, W, WAB, ZBH, FII, MCD, RH, ZOES, GIS & TLT
Below are our analysts’ updates on our twelve current high conviction long and short ideas. As a reminder, if nothing material has changed in the past week which would affect a particular idea, our analyst has noted this. We will send CEO Keith McCullough’s updated levels for each ticker in a separate email.
To view our analyst's original report on Junk Bonds click here.
Our bullish TLT, short JNK investment recommendation is well-documented and the Fed's rate hike has played out as expected during the second half of last week. But the dour outlook on the state of credit markets got worse as even investment grade corporate credit is beginning to crack:
Upon aggregating the bank debt of these three massive commodity producers, $120Bn is the notional credit value that might be tiptoeing the “Junk” line by mid-next year. We continue to expect our deflationary outlook to weigh on high yield credit markets into 2016.
As Hedgeye CEO Keith McCullough remarked on The Macro Show on Friday:
"In baseball-speak, we’re in the top of the third inning of this credit market move. And in six months, we might be in the seventh inning stretch. The real problem that is accelerating this slow moving nosedive is that everyone in the business of being long Junk is stuck right now and can’t get out.
And that’s why I’m not covering this short junk bond position. No way."
Now that the Fed finally hiked federal funds by 25bps into a late-cycle slowdown, the fact that TLT was up 1.8% (Wed-Fri.) on “lift-off” should be concerning to the growth accelerating bulls. After the dovish hike, the U.S. Treasury 10-Year Yield (THE GROWTH EXPECTATION PROXY) was down 10 bps (2.3% to 2.2%). And yes, the most telegraphed rate hike ever was dovish.
Just look at the Fed’s projections and the language in the FOMC's statement. Yellen, essentially, acknowledged what we have said for ~ a year and a half now:
... And on the Fed’s forward-looking economic projections:
On this week's data, economic gravity failed to be arrested by the Fed:
For anyone who wants to ignore the industrial side of the economy, Friday’s Services PMI number was also a total bomb:
Markit Services PMI decelerated to 53.7 in December vs. 56.1 in November, and is now decelerating on a sequential, trending, and quarterly average basis
Put Manufacturing and Services weakness together for a composite PMI reading that is also decelerating on a sequential, trending and quarterly average basis.
To view our analyst's original report on Nu Skin click here.
On Nu Skin (NUS), Hedgeye Consumer Staples analyst Howard Penney has no new update this week. The stock is still a strong short both fundamentally and due to the risks associated with investigations and legal matters.
Here's a brief excerpt on NUS from a note Penney sent to institutional clients last Sunday:
"... In terms of open questions, between the end of 3Q15 and the company's investor day (which was 37 days) was there an event that forced management to highlight an additional risk and uncertainty in its SEC filings?
In the recent 8-K, Nu Skin added an additional risk and uncertainty that was not previously there. It reads, “risk that litigation, investigations or other legal matters could result in settlements, assessments or damages that significantly affect financial results.”
Conveniently tucked away about three-quarters of the way into the paragraph this language signals to us that the SEC investigation is very real and could pose a threat to them.
Although it would be pure speculation to think what the meaning of this is, we believe that the SEC investigation is coming to a head, and could have grown larger than its original scope, which was just looking into charitable contributions made in China."
To view our analyst's original report on Federated Investors click here.
Federated Investors (FII) profitability got a boost this week as the Fed boosted short term rates for the first time in 7 years. Even the slight 25 basis point hike improves profitability in the firm’s leading money fund business by +30% into the New Year.
In essence, the firm rolls 30-day paper throughout the short term fixed income curves and the new higher yields forthcoming into 2016 will allow the company to claw back some of the waived fees it has extended to its client base in money funds. Year-to-date the company has waived over $300 million in fees. With that firmly in the rearview, it becomes an opportunity set as FII gets higher yield from cash products next year.
In the financial sector, FII is the most asset sensitive name we cover, meaning it benefits most from even marginal interest rate hikes.
To view our analyst's original note on Wabtec click here.
When you boil our Wabtec (W) short thesis down to its essence, it's really quite simple:
Q: Where will railroad equipment investment go in the next five years?
A: We believe freight rail equipment spending is just starting to enter a multi-year downturn. It’s a cyclical market, and WAB shares remain priced for growth.
To view our analyst's original report on Tiffany click here.
Shares of Tiffany (TIF) are down 2.5% since the company reported earnings in late November and off 11% from the post earnings rally. When we look at this name over a slightly longer duration this is where we stand: We have no doubts in the quality of the management team but the reality is that there are no obvious margin levers to offset the declining growth profile in the business, especially amidst increased late cycle risks.
The price has come off, but so have earnings. It is trading near a peak multiple on our numbers (18x) on peak margins (21%), and peak earnings that are not likely to grow for 2-3 years.
To view our analyst's original report on Wayfair click here.
Pier 1 Imports (PIR) reported earnings on Wednesday, and the company reported disappointing top-line numbers and echoed similar commentary we’ve heard across the industry about the highly promotional environment during the Holiday season this year.
Wayfair (W) reported Five-Day Holiday sales growth of 130% Y-o-Y. Management all but telegraphed a sequential increase from the 3Q results when it said it would up the ante during this holiday season in areas like seasonal décor, housewares, etc.
The company realized last year that could play the Black Friday game in areas less tied to furniture and more directly competitive with retailers like Bed Bath, Target, Walmart, Kohl’s, etc. Also, let’s not forget two things:
We think that W is one of the culprits driving the highly promotional environment, which won’t be good for either product margins or ad expense as it pays to drive traffic to its site in 4Q.
The longer-term call is that W is building the infrastructure for a TAM that we think is far overstated. By our math the online market for W categories today is $27bil with upside to $45bil by 2020. That’s a big delta from the $60-$90bil being presented to the Street.
To view our analyst's original report on Restoration Hardware click here.
We have to give Restoration Hardware Chairman and CEO Gary Friedman props for his approximately nine minute segment on Cramer earlier this week. Let's face it, him going on what's arguably the most volatile and biased financial media platform, unscripted, is not what we wanted to see.
The risk of fireworks was high.
But he capped off a successful day RH (CFO and IR) had on the investor conference circuit by focusing on the real value drivers at Restoration Hardware (RH) -- growth in product concepts, and RH's real estate transformation. The appearance was planned well before the earnings release, by the way, coinciding with a business-focused trip to NYC.
All-in, it was a positive event for the stock.
To view our original note on McDonald's click here.
McDonald's (MCD) remains one of our top Long ideas in the restaurants space. Since we initiated our Long call on August 11th at a price of $99, the stock has gone up 17.4%, versus the S&P 500 which is down -4.7%.
All indications are that All Day Breakfast is working to drive incremental traffic to the restaurants with people matching breakfast items with lunch/dinner items driving tickets. We are currently running a survey to get a read on the effectiveness of All Day Breakfast and look forward to updating you in next week's edition.
We continue to love McDonald’s heading into the new year and maintain our price target of $150.
To view our analyst's original report on Zimmer Biomet click here.
Zimmer Biomet's (ZBH) has been under pressure in recent weeks alongside the XLV and the S&P 500. The fears of a Fed liftoff in the midst of an economic slowdown, high yield distruption, funds shutting down, and slowing growth have all conspired to keep ZBH well below its 2015 peak of $121 and hovering around $100.
The BLS reported Non-Farm Payrolls and Job Openings (JOLTS) which are both important markers of underlying healthcare demand generally and orthopedics specifically. For Healthcare employment, growth was stable sequentially in November versus October and remained near multi-year highs of just over +3.0%. For Job Openings in Helthcare, levels recovered sequentially for October, but growth remained flat sequentially after beginning a long 18 month march higher off the 1Q14 lows. Our view is employment trends reflect the underlying patient demand, so the peaking in growth reflects a peak in demand.
While the broad market is worried about the Fed liftoff and slowing economic growth, the market seems even more concerned about ZBH’s growth. In the charts we can see expectations for ZBH to growth inline with their recent rate of ~10%. While we believe that is an aggressive growth rate, we may not be alone in a more sanguine view. While 10% growth is in the area code of where consensus expects the XLV to grow going forward, the multiple disparity suggests the market might be more suspicious.
The NTM P/E for ZBH has opened up a huge multiple discount to their HC peers in recent months. That can mean the market is presenting a great buying opportunity, or the market is skeptical of consensus earnings and growth assumptions. We’re obviously on the skeptical side and would like to believe the discount in the P/E multiple is saying the same thing.
Going forward we’ll continue to speak to surgeons about case volume, device pricing, the CCJR, and the ACA. Most importantly, we’ll keep monitoring monthly JOLTS, HC Employment, and our #ACATaper charts. So far, the wave has clearly crested, so grab your board, 2016 is going to be an epic ride.
General Mills (GIS) is a great stock for volatile times in the market, boasting style factors that we love; large cap, low beta and liquidity.
The fundamental business on the other hand has been struggling. GIS is anchored in the slowing center aisles, and it has struggled in large part to meet analyst expectations. We believe this is due, in part, to management’s overly bullish outlook on their own business during the 1Q16 earnings conference call, which they toned down a bit during the 2Q16 call.
This quarter was the perfect storm of internally and externally driven pressures that lead to downside in the business. Some of the pressures in the quarter included:
The second half of 2016 is chock full of innovation, merchandising and strong advertising that should help lead General Mills back to the leadership position in their categories. We are staying long General Mills and view the near term weakness as a strong buying opportunity for a long-term position.
Zoës Kitchen (ZOES) is down ~15% this week on the heels of a downgrade from Credit Suisse. We view this as overblown. If you are not in the name already, it is highly advisable to take this year-end sale and get in.
The Credit Suisse report cited valuation, growth and general industry softness as concerns going forward. The analyst may have a small case on the valuation front, but this company is a differentiated concept that has plenty of room to expand and grow into the valuation.
We reaffirm our long-term bullish thesis on ZOES.
Please join us on Tuesday, December 22, 2015 at 11AM for a review of the bear case on Newmont Mining.
NEM is typically perceived as a ‘premium’ gold miner, but, for one, we aren’t sure there really is such a thing. Long-term, NEM has been a secular underperformer; we expect that underperformance to continue. NEM may struggle with comparatively high costs in a declining gold price environment. We are not convinced that NEM’s 2015 cost reductions reflect the underlying production economics and expect the shares to be further derated by the market in 2016.
Dial-in Information will be distributed in the reminder email for this call.
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Takeaway: Exchange activity spiked substantial higher across the board as the Fed adjusted rates for the first time in 7 years.
Weekly and Activity and Quarter-End Wrap Up
All three categories had their most active week of the quarter given trading around the Fed's rate hike and oil hitting new lows. Cash equity volume came in at 8.4 billion shares traded per day, bringing the 4Q15TD ADV up to 7.2 billion, which is +3% higher than 4Q14. Throughout 4Q15, equities' ADV growth over 4Q14 has, for the most part, stayed within a range of flat to +3%.
Futures activity (both on CME and ICE) came in at 24.5 million contracts per day in the most recent 5 days, blending the 4Q15TD ADV to 19.2 million, now +3% higher than the previous quarter and in line with the year-ago quarter. Y/Y comps were difficult for futures this quarter given extraordinary activity levels in 4Q14 stimulated by the threat of a Grexit from the Eurozone. Futures' ADV growth over 4Q14 started the quarter out negative and hit a low of -12% in the period ending October 22. However, volume steadily rose over the course of 4Q15 to the point where it is now in line with 4Q14.
Options put up an average of 20.4 million contracts per day this week, blending the quarter-to-date daily average to 16.6 million, -4% lower Y/Y and -8% lower Q/Q. Options ADV growth over 4Q14 was consistently negative throughout 4Q15, usually maintaining a range between -2% and -6%.
U.S. Cash Equity Detail
U.S. cash equities trading came in at 8.4 billion shares per day this week. That brings the fourth quarter average to 7.2 billion shares traded per day, a +3% Y/Y growth and -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 +1% year-over-year increase, while NASDAQ is taking an 18% share, a -10% year-over-year decline.
U.S. Options Detail
U.S. options activity came in at a 20.4 million ADV this week, bringing the 4Q15TD average to 16.6 million, a -4% Y/Y and -8% Q/Q contraction. The market share battle amongst venues continues to be one of losses at the NYSE/ICE, which has lost -8% of its share year-over-year settling at 19% of options trading currently. Additionally, CBOE's market share sits at 25%, -16% lower than 4Q14. NASDAQ's share of 4Q15 volume has been falling slightly in the past few weeks, bringing it -2% lower than 4Q14. However, at 23%, the exchange's market share is still +13% higher than the previous quarter. Additionally, BATS' 9% share of 4Q15TD volume is +39% higher than in 4Q14. Finally ISE/Deutsche's 15% share in 4Q15TD remains consistent with 3Q15, which brings it to +8% Y/Y growth.
U.S. Futures Detail
CME Group activity came in at 18.0 million contracts traded per day, bringing the 4Q15TD average to 14.1 million, a -5% Y/Y and -2% Q/Q contraction. Y/Y comps were difficult this quarter with ADV growth over 4Q14 hitting a low of -17% in the period ending October 22. However, volume grew steadily thereafter to the point where CME's 4Q15TD ADV is now only -5% below that difficult 4Q14 comp. CME open interest fell to 95.7 million CME contracts pending this week as investors redeemed their December exposures to roll them into January.
ICE activity came in at 6.4 million contracts traded per day this week, bringing 4Q15TD ADV to 5.1 million, +17% Y/Y and +20% Q/Q growth. Over 4Q15, Similarly to CME, ICE's QTD ADV dipped down to a low in the week ending October 22. However, Y/Y growth at that point was still significantly positive at +7%. Since then, the QTD ADV has risen to it's current +17% Y/Y growth. Also similarly to CME, ICE open interest this week fell to 66.6 million contracts pending as investors rolled their exposures into January.
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
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