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HEDGEYE Exchange Tracker | Financial Shock Absorbers

Takeaway: The exchanges are just in-line performers when vol is low but act as shock absorbers in high volatility environments.

The exchange stocks historically have acted as shock absorbers in high volatility environments kicking off relative outperformance against the broader financial sector. The calm of 2012 through mid-2014, put the exchanges at just inline performers versus the XLF as both baskets of financial stocks rose in lock-step. However the high VIX environment of 2009-2011 displayed the worth of these techology driven, agency mechanisms, as the Dow Jones Exchange Index (DJGEX) consistently outperformed the Financials sector SPDR. With the VIX (magenta line, left scale) again breaking out of its base with higher highs and higher lows entering 2016, we expect the start of a divergence between the DJGEX and the XLF to continue. Only at very high levels of VIX (north of 40) do exchange equities also get shaken out to lower levels historically.


HEDGEYE Exchange Tracker | Financial Shock Absorbers - Exchanges Weekly



Weekly Activity Wrap Up

With volatility easing, exchange traded volume slacked off this week, although the week's average daily volumes (ADVs) in cash equities and futures still exceeded their year-over-year comps. Cash equity volume came in at 8.6 billion shares traded per day this week, bringing the 1Q16TD ADV to 9.3 billion, up +34% Y/Y. Futures activity at CME and ICE came in at 21.5 million contracts traded per day this week, bringing the 1Q16TD ADV to 24.0 million, up +20% Y/Y. CME in particular is setting an all-time trading volume high with 18.1 million contracts per day on average this month, taking out the former high of 17.5 million in ADV in October 2014 on the potential for a Greek exit from the European Union. Options did not have as strong a week, coming in with 15.3 million contracts traded per day, but that still brings the 1Q16TD ADV to 19.1 million, up +23% Y/Y.



HEDGEYE Exchange Tracker | Financial Shock Absorbers - XMon1


U.S. Cash Equity Detail

U.S. cash equities trading came in at 8.6 billion shares per day this week, bringing the 1Q16 average so far to 9.3 billion shares per day. That marks +34% Y/Y and +31% Q/Q growth. The market share battle for volume is mixed. The New York Stock Exchange/ICE is taking a 24% share of first-quarter volume, which is consistent with the prior quarter and year-ago quarter, while NASDAQ is taking a 19% share, +62 bps higher Q/Q but -86 bps lower than one year ago.


HEDGEYE Exchange Tracker | Financial Shock Absorbers - XMon2


HEDGEYE Exchange Tracker | Financial Shock Absorbers - XMon3


U.S. Options Detail

U.S. options activity came in at a 15.3 million ADV this week, bringing the 1Q16TD average to 19.1 million, a +23% Y/Y and +20% Q/Q expansion. In the market share battle amongst venues, NYSE/ICE has been trending downward at a moderate pace, but at an 18% share it is +135 bps higher than the year-ago quarter. Meanwhile, NASDAQ's recent declines bring it -445 bps lower than 1Q15. CBOE's market share is down -131 bps Y/Y but has improved recently; its 27% share of 1Q16TD volume is up +147 bps from 4Q15. BATS and ISE/Deutsche have been taking share from the competing exchanges, with BATS up to a 10% share from 9% a year ago and ISE/Deutsche taking 16%, up from 13% a year ago.


HEDGEYE Exchange Tracker | Financial Shock Absorbers - XMon4


HEDGEYE Exchange Tracker | Financial Shock Absorbers - XMon5


U.S. Futures Detail

15.5 million futures contracts traded through CME Group this week, bringing the 1Q16TD average to 18.1 million, a +21% Y/Y and +37% Q/Q expansion. CME open interest, the most important beacon of forward activity, currently tallies 107.2 million CME contracts pending, good for +17% growth over the 91.3 million pending at the end of 4Q15, an improvement from last week's +14%.


Contracts traded through ICE came in at 6.0 million per day this week, bringing the 1Q16TD ADV to 5.8 million, +17% Y/Y and +22% Q/Q growth. ICE open interest this week tallied 66.7 million contracts, a +5% expansion versus the 63.7 million contracts open at the end of 4Q15, consistent with last week.


HEDGEYE Exchange Tracker | Financial Shock Absorbers - XMon6


HEDGEYE Exchange Tracker | Financial Shock Absorbers - XMon8


HEDGEYE Exchange Tracker | Financial Shock Absorbers - XMon7


HEDGEYE Exchange Tracker | Financial Shock Absorbers - 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 | Financial Shock Absorbers - XMon10


HEDGEYE Exchange Tracker | Financial Shock Absorbers - XMon11


HEDGEYE Exchange Tracker | Financial Shock Absorbers - XMon12


HEDGEYE Exchange Tracker | Financial Shock Absorbers - XMon13


HEDGEYE Exchange Tracker | Financial Shock Absorbers - XMon14

HEDGEYE Exchange Tracker | Financial Shock Absorbers - 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 | Financial Shock Absorbers - XMon19 3



Please let us know of any questions,


Jonathan Casteleyn, CFA, CMT 




 Joshua Steiner, CFA





Central Planners Gone Wild! Delusions, Hallucinations & Pipe Dreams

Takeaway: Central planners at the Fed, BOJ & ECB have consistently underestimated the challenges they face and overestimated tools in their arsenal.

Central Planners Gone Wild! Delusions, Hallucinations & Pipe Dreams - central banker house of cards


Do central planners worldwide have any credibility anymore?


This past Wednesday's Fed's FOMC announcement amounted to little more than a shoulder shrug. Apparently, the members will be...


"... monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook."


Thanks for coming out.


To be clear, today's U.S. GDP report was unequivocally awful. We're holding our breath in anticipation wondering what Yellen & Co. will have to say about it. Unfortunately, we'll likely have to wait until at least February 10th when Yellen testifies on Capitol Hill.


Meanwhile... outside these fifty states, central planners abroad are doing their best to screw things up too. Here's analysis from our Macro team on Japan in a note sent to subscribers this morning on the BOJ's decision to pursue a negative interest rate policy.


Central Planners Gone Wild! Delusions, Hallucinations & Pipe Dreams - kuroda


"News of the morning = Japan goes NIRP – and the Yen goes >120, 10Y JGB’s trade down to 0.09% (as in “nine” basis points) and along with the balance of global yields, U.S. 10Y treasury yields followed suite and are trading down -6bps to 1.91% as the yield curve (10’s-2’s) compresses to another new low.


Together with yesterday’s durable goods disaster, this morning’s slowing GDP report and more rumors of stimulus out of China the global #GrowthSlowing data remains conspicuous. Resurgent central bank interventionism is not a function of improving macro fundamentals. "



Central Planners Gone Wild! Delusions, Hallucinations & Pipe Dreams - Draghi cartoon 01.08.2015


Heading over to Europe...


"The ECB’s Jens Weidmann (also President of the Bundesbank) warned fellow policy makers that the ECB should not go too far with the QE program, but will President Mario Draghi listen?  We doubt it!  Weidmann rightly points out that the ECB needs to lower its inflation forecast for 2016. A 2% target is after all a pipedream!"


Watch Hedgeye CEO Keith McCullough discuss central banking in the video below.


... So back to our original question, "Do central planners have any credibility?"


The answer ... a resounding NO.

McCullough: ‘Aggressively Sell Any Market Rally’


In this excerpt from The Macro Show, Hedgeye Gaming Lodging & Leisure analyst Todd Jordan explains why you don’t want to be long his sector heading into a recession. Meanwhile, Hedgeye CEO Keith McCullough explains how investors should play our dour economic outlook.

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

0-Handle | 4Q15 GDP

We’ll leave it to others to review & opine in the internal minutiae of this morning’s GDP report.  We’d highlight a few tangible takeaways:    


  • GDP | #GrowthSlowing, 3 Qtrs & Counting ….   On a year-over-year basis,  growth slowed -30bps sequentially in 4Q15 to 1.80% YoY, marking a 3rd consecutive quarter of deceleration and the slowest rate of growth in 7-quarters.  Sequential deceleration was largely ubiquitous across all expenditure types and sub-aggregates (see summary table below).  It’s not incidental that employment growth, income growth & consumption growth all peaked in 4Q14/1Q15 and have since decelerated alongside headline growth.  We are late cycle in the current expansion and negative 2nd derivative changes across labor, consumption, investment, and credit growth shouldn’t be particularly surprisingly – it’s how the temporal procession of the cycle manifests and 2nd derivative trends naturally precede first derivative changes. 
  • Comps | It Gets Tougher:   Comps only get tougher in 1Q16 and given the base effects in combination with the prevailing trajectory of current domestic and global macro data we expect the trend toward deceleration to extend another quarter or two, at least. 
  • Slow and UnSexy:  Slowing growth puts us in Quad #3 (slowing growth and Inflation) or Quad #4 (stagflation) in our GIP model over the coming quarters.  $USD’s, Bonds and Utilities work under either scenario.  It's not sexy and it's as boring as its been profitable over the last ~6-months but we continue to like those slow growth exposures.  See this mornings Early Look for a further discussion. 
  • NIRP  Action out of the BOJ this morning and the resultant downward shifting of the global yield curve serves to edify our bullish view on bonds.  Divergent central bank policy and an active OUS currency war race-to-the-bottom is supportive of $USD allocations and a perpetuation of the Strong Dollar deflationary trends that have characterized much of the past year.  Resurgent central bank interventionism is not a function of improving macro fundamentals. 


 0-Handle | 4Q15 GDP - GDP


0-Handle | 4Q15 GDP - Income   Consumption Past Peak


0-Handle | 4Q15 GDP - PCE LT


0-Handle | 4Q15 GDP - Cred


0-Handle | 4Q15 GDP - Eco Summary




Christian B. Drake



BREAKING: Hedgeye Macro Team Nails U.S. GDP (Again). Consensus? Not So Much

Takeaway: Old Wall economists completely missed economic reality once again.

BREAKING: Hedgeye Macro Team Nails U.S. GDP (Again). Consensus? Not So Much - GDP cartoon 05.29.2015


BREAKING: US GDP hit the 0.7% Hedgeye forecast. We maintained our forecast of between 0.5% to 1.7% Q-o-Q for fourth quarter 2015 GDP all year, even while Old Wall consensus consistently ratcheted it back from 3% in July. 


Here's the inglorious breakdown: 

BREAKING: Hedgeye Macro Team Nails U.S. GDP (Again). Consensus? Not So Much - wall street 4q15 


In other words, our non-consensus macro team nailed the last five GDP reports while economic reality still confounds Wall Street's pundits. We'll say it again #GrowthSlowing





Here's the breakdown of today's GDP release via Hedgeye U.S. Macro analyst Christian Drake. Note all the red in the right-hand column. (That's bad.)



It's funny. Supposed "blue chip" economists can hold up personal consumption expenditure (PCE) as an economic "bright spot" all they want. But staring at the absolute number of any data release tells you nothing about where we're headed.


At Hedgeye, our analysis is more dynamic and based on the year-over-year rate of change. By this measure, PCE is slowing. (That's also bad.)



The preponderance of economic data – from employment to incomes to PCE growth – is rolling over on a rate-of-change basis. We'll throw in one more metric for good measure: Credit growth.


See the chart below. (Again, bad.)


Interesting. All of these economic indicators peaked in 1Q 2015. 


Coincidence? We think not.



For investors (particularly long-only investors), the current macro environment presents an especially tough setup. Our Macro team has been highlighting the increasing likelihood of a U.S. #Recession in the 2Q or 3Q of this year.


Moreover, as Hedgeye CEO Keith McCullough continues to reiterate, regardless of whether our #Recession call is right or not, the U.S. stock market is headed for a 20% correction. No ifs, ands, or buts about it.


How do you play it?


Here are our top Macro ideas: Long bonds (TLT) Utilities (XLU)



In the meantime, stay (far) away from consensus forecasts.


AMZN | Timing

Takeaway: This would’ve been a great qtr a wk ago. We’re bifurcated by duration on AMZN. While we like it 1 yr out, need to get past next 2 Qs first.

It goes without saying that this is one of the more polarizing quarters for Amazon in quite a while. But let’s put aside the stock move for a minute and look at what’s changed fundamentally – after all, with the sell-off the stock is trading about in line with where it was just two days ago.


  1. The irony with all of this is that the quarter itself was very good. Sales grew by 25%, in its core business – what we’ll call US Retail – 60% of sales (it’s actually North America EGM + Media). This is a BIG plus for those out there that think that AMZN can one day capture 10% of total US Retail Sales.  That’s a $500bn number. You may balk at it. We might too. But people believe it, and as long as they do, they’ll hold this stock forever.
  2. AWS also looked relatively solid. Yes, it decelerated to 69% (from 78% last quarter) but is well above a rate we need to make this model work.
  3. International is a clear hole we can poke in the quarter, as we saw growth of only 12%. Keep in mind that AMZN has about 33% share of US Online Spending, but only about 8% in its more developed non-US regions.  While there’s a big opportunity for AMZN to grow outside our borders – potentially fueling one of the next multi-year legs of growth – it’s not acceptable for a company like this to see Int’l sales go from 45% to 33% over the past economic cycle.
  4. That brings us to the only thing we’re really concerned about, which is AMZN’s profitability to the extent we are, in fact, headed into a recession.  Roughly 65% of its total sales are in the US. At the same time, we just saw gross margin improvement decelerate materially, suggesting tougher GM compares 2-3 quarters out. If we have down gross margins, sales erode on the margin due to the economy, then the only thing that could sustain AMZN’s EBIT line is cuts to SG&A growth. If there’s anything we know (and respect) about AMZN, it’s that the company will spend money how, where, when and on what it so chooses. In fairness, this is a $100+bn revenue company that is producing over 50% returns on incremental cash. From where we sit, Bezos has earned a hall pass to do pretty much whatever he wants (that hall pass can be revoked if returns go the other way).


Hedgeye has a very bearish view on the US economy, so we’re concerned about the guide in another 13 weeks.  The SIGMA chart below supports this, as it’s the first time AMZN has been in a negative Sales/Inventory position in seven quarters. Unless estimates come down materially when they hit by the end of the weekend, we’re more on the bearish side from a near-term perspective. Though from a TAIL duration 3-years or less, we still like the story a lot.


AMZN  |  Timing - 1 29 2016 amzn chart1


AMZN  |  Timing - 1 29 2016 amzn chart2


Charts include consensus estimates:

AMZN  |  Timing - 1 29 2016 amzn chart3


Gross Margin expectations remain high.

AMZN  |  Timing - 1 29 2016 amzn chart4