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HEDGEYE Exchange Tracker | Futures Lead the Week

Takeaway: Futures ramped W/W while cash equities and options contracted. 1Q16TD ADVs remain well above their year-ago levels in all three categories.

Weekly Activity Wrap Up

Futures put up healthy activity this week, rising week over week and coming in just below the already elevated 1Q16TD average daily volume (ADV). Meanwhile, cash equity and options volumes eased week over week, decreasing 1Q16TD ADVs. 1Q16TD ADVs remain well above their year-ago levels in all three categories. Cash equity volume for the week came in at 7.5 billion shares traded per day, bringing the 1Q16TD ADV to 9.1 billion, up +31% Y/Y. Futures activity at CME and ICE came in at 24.0 million contracts traded per day this week, bringing the 1Q16TD ADV to 24.4 million, up +22% Y/Y. Additionally, CME's open interest currently tallies 110.9 million contracts, 21% higher than the 91.3 million pending at the end of 2015, which will drag trading volume higher going forward. Options came in at 15.0 million contracts traded per day this week, bringing the 1Q16TD ADV to 18.0 million, up +16% Y/Y. 

 

HEDGEYE Exchange Tracker | Futures Lead the Week - XMon1

  

U.S. Cash Equity Detail

U.S. cash equities trading came in at 7.5 billion shares per day this week, bringing the 1Q16TD average to 9.1 billion shares per day. That marks +31% Y/Y and +29% 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 an 18% share, +27 bps higher Q/Q but -122 bps lower than one year ago.

 

HEDGEYE Exchange Tracker | Futures Lead the Week - XMon2

 

HEDGEYE Exchange Tracker | Futures Lead the Week - XMon3

 

U.S. Options Detail

U.S. options activity came in at a 15.0 million ADV this week, bringing the 1Q16TD average to 18.0 million, a +16% Y/Y and +13% 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 +56 bps higher than the year-ago quarter. Meanwhile, NASDAQ's recent declines bring it -392 bps lower than 1Q15. CBOE's market share is down -135 bps Y/Y but has improved recently; its 27% share of 1Q16TD volume is up +143 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 | Futures Lead the Week - XMon4

 

HEDGEYE Exchange Tracker | Futures Lead the Week - XMon5

 

U.S. Futures Detail

18.4 million futures contracts traded through CME Group this week, bringing the 1Q16TD average to 18.5 million, a +24% Y/Y and +41% Q/Q expansion. Additionally, CME open interest, the most important beacon of forward activity, currently sits at 110.9 million CME contracts pending, good for +21% growth over the 91.3 million pending at the end of 4Q15, although that is lower than last week's +25%.

 

Contracts traded through ICE came in at 5.7 million per day this week, bringing the 1Q16TD ADV to 5.9 million, +17% Y/Y and +23% Q/Q growth. ICE open interest this week tallied 69.3 million contracts, a +9% expansion versus the 63.7 million contracts open at the end of 4Q15, consistent with last week.

 

HEDGEYE Exchange Tracker | Futures Lead the Week - XMon6

 

HEDGEYE Exchange Tracker | Futures Lead the Week - XMon8

 

HEDGEYE Exchange Tracker | Futures Lead the Week - XMon7

 

HEDGEYE Exchange Tracker | Futures Lead the Week - 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 | Futures Lead the Week - XMon10

 

HEDGEYE Exchange Tracker | Futures Lead the Week - XMon11

 

HEDGEYE Exchange Tracker | Futures Lead the Week - XMon12

 

HEDGEYE Exchange Tracker | Futures Lead the Week - XMon13

 

HEDGEYE Exchange Tracker | Futures Lead the Week - XMon14

HEDGEYE Exchange Tracker | Futures Lead the Week - XMon15

 

 

Please let us know of any questions,

 

Jonathan Casteleyn, CFA, CMT 

  

  

 

 Joshua Steiner, CFA

 

 

 

 


Cartoon of the Day: Bear Facts

Cartoon of the Day: Bear Facts - bear chart 02.26.2016

 

Hedgeye CEO Keith McCullough is arguably the most bearish guy on Wall Street.


We’re Wrong On U.S. Growth (Well, Kind Of)

Key Takeaway: We don’t want to be trite by offering a token golf clap to the U.S. economy bulls in response to the strong JAN PCE data and positive revision to Q4 GDP. It’s more appropriate to offer a standing ovation instead. But what happens after standing ovations? Hint: the audience sits back down... All told, our views on the likely progression of the domestic economic and financial market cycles remain unchanged (see section #3 below for more details).

 

Section I: January Personal Income & Spending Recap

Both income and spending accelerated to start 2016 as the combination of accelerating aggregate wage income and a small decline in the savings rate, off of multi-year highs, combined to drive sequential improvement in household spending. The January NFP data signaled as much (see: yesterday’s Early Look: Number 2 for details) so we got largely what we were expecting with the official release this morning. 

 

An annotated visual tour of the underlying data is below but here are a few key points:

 

  • The January data was solid but the Trend remains one of deceleration.  Income growth, employment growth, consumption growth, consumer confidence and corporate profits all peaked in 4Q14/1Q15 and have been slowing since. Income growth drives the capacity for consumption growth and with weekly hours flat and employment growth slowing, we’ll need to see an ongoing acceleration in wage inflation to maintain the pace of aggregate income growth near current levels. Unless one believes wages will accelerate towards +3.5% in fairly short order, the Trend slope of aggregate income growth (and consumption growth by extension) should remain negative. 
  • Core PCE marked its 45th month below target in January but accelerated for a 3rd consecutive month to +1.67% YoY.  From a policy perspective, the gain bolsters the argument for continued interest rate normalization.  It also, however, bolsters the risk that further policy divergence out of the Fed serves to perpetuate the deflationary and growth slowing trends that have characterized most of the last eight months.  The probability that positive seasonality and easy comps optically boost reported fundamentals in 1Q (see: Early Look: Optical Mischief) also raises the risk of a potential policy blunder. 
  • The dynamics underlying the rise in inflation are also not inconsequential. The benefit of lower energy prices for consumers is being absorbed by higher savings and services consumption (which is why it hasn’t really shown up in the Retail Sales data). Inside of services consumption, much if it is going towards housing (rent/housing inflation is running at a wide premium to income growth & broader price trends) and healthcare consumption.  The rise in healthcare consumption is largely attributable to Obamacare and the influx of newly-insured seeking care. Rising housing costs, while supportive of the Fed’s inflation target, largely represent excess growth in a key consumer cost center and a drag on other discretionary and housing related consumption. Rising inflation driven by disproportionate growth in major consumer cost lines is different than demand-pull inflation driven by (persistent) wage inflation and rising discretionary consumption.

 

We’re Wrong On U.S. Growth (Well, Kind Of) - Income   Consumption Growth

 

We’re Wrong On U.S. Growth (Well, Kind Of) - Core PCE YoY

 

We’re Wrong On U.S. Growth (Well, Kind Of) - CPI Shelter vs Ex Shelter

 

We’re Wrong On U.S. Growth (Well, Kind Of) - Income Spending Summary Table

 

-Christian Drake, Senior U.S. Macro Analyst

 

Section II: Q4 GDP Revision Recap

The headline number beat on flimsy-at-best internals:

 

  • Consumption was revised down by a small amount.
  • Net Exports were revised up as the negative revision to Imports outpaced the negative revision to Exports. That setup is good from a GDP accounting perspective but lower Import and Export activity calls attention to waning aggregate demand trends – both domestically and externally.
  • Almost all of the +30bps revision to the headline growth figure was due to the positive revision to Inventories, which was revised higher by 31bps.

 

We’re Wrong On U.S. Growth (Well, Kind Of) - U.S. GDP Summary Table

 

-Christian Drake, Senior U.S. Macro Analyst

 

Section III: Revising Our Outlook for U.S. Economic Growth

With the advent of this 1-2 punch of generally positive economic data, we are revising up our outlook for domestic economic growth:

 

  • Our GIP Model has U.S. Real GDP growth tracking at +2.0% YoY in 1Q16. This figure represents a +20bps revision to our previous forecast. This moves us ever-so-slightly into #Quad2, which is what had been and still is being implied by the comparative base effect for Q1. Our initial #Quad3 forecast was a function of extrapolating the trending deterioration in growth momentum into the first quarter, but that looks to be less appropriate with the advent of some JAN data including this morning’s Real PCE print.  
  • The aforementioned +2.0% YoY growth rate translates to +1.0% on a QoQ SAAR basis. This figure represents a +40bps revision to our previous forecast. For comparison’s sake, the Atlanta Fed’s forecast for Q1 was just revised down to +2.1%. We expect their model to continue heading towards our [much-lower] estimate as the quarter progresses. Refer to the 2nd half of our 2/17 note titled, “What’s More Important: the Short Squeeze in the Market or the Data?” for details on why.
  • On a full-year basis, we now see U.S. Real GDP coming in at +1.4%, which is up small from a previous estimate of +1.3%. This would still mark the slowest annual growth rate since 2009. Our 2016 GDP estimate implies Nominal GDP growth of +2.8%, which would also represent the slowest rate of annual change since 2009. Please note this as a meaningful headwind to the current Bloomberg consensus forecast of 119.58 for S&P 500 NTM EPS.

 

We’re Wrong On U.S. Growth (Well, Kind Of) - UNITED STATES

 

We’re Wrong On U.S. Growth (Well, Kind Of) - GDP COMPS

 

We’re Wrong On U.S. Growth (Well, Kind Of) - Atlanta Fed vs. Hedgeye Macro GDP Estimate Tracker

 

Moving along, the conspiracy theorist in me doesn’t want to believe the strength in this morning’s JAN Real PCE data. Having consumed enough @Zerohedge tweets about seasonal-adjustment shenanigans over the past two weeks, I came away somewhat surprised to learn of no holes in today’s print. This was a good number and represents a healthier U.S. consumer than we anticipated when we published, “50 Charts On Why Consensus Macro Is Dead Wrong On the U.S. Consumer” back on January 19th.

 

In fact, further analysis would seem to suggest that U.S. economy bears such as ourselves were perhaps reading too much into the SA vs. NSA debate that’s emerged in recent weeks with the advent of the Retail Sales, Durable Goods and Capital Goods releases for the month of January. Specifically, the Z-Scores for the basis point spread between the SA and NSA YoY growth rates for each reading were 1.6, 0.7 and 1.0, respectively; each is on the high side of historical readings, but not high enough to suggest a not-yet-reported material leg down in the underlying health of the U.S. economy.

 

We’re Wrong On U.S. Growth (Well, Kind Of) - RS SA

 

We’re Wrong On U.S. Growth (Well, Kind Of) - DG SA

 

We’re Wrong On U.S. Growth (Well, Kind Of) - CG SA

 

So what does this all mean for markets? We believe the three most important takeaways are as follows:

 

  1. Growth is still slowing on a trending basis across a variety of key high-frequency indicators. And outside of personal consumption data, the preponderance of indicators that are showing sequential and/or trending accelerations in recorded growth rates are still contracting from a YoY perspective and remain sensitive to incremental commodity price deflation from here.
  2. On an inline-or-better FEB Jobs Report next Friday, the Federal Reserve may read into the positive JAN PCE report – specifically the Core PCE Deflator within – and/or Q4 GDP as justification for another rate hike at its 3/16 meeting. At +4bps and +7bps DoD, respectively, both 1Y OIS spreads and 2Y Treasury note yields support this conclusion, on the margin. The implied probability of a rate hike at the FOMC’s 3/16 and 4/27 meetings are up +200bps (to 12%) and +540bps (to 20.8%), respectively, on the day. It goes without saying that incremental tightening of domestic (and global) financial conditions from here remains a key risk to asset markets.
  3. As highlighted in our 2/24 Early Look titled, “Relatively Insignificant”, the probability of a U.S. recession over the next 2-3 quarters continues to rise on a trending basis. Additionally, both the credit and corporate profit cycles continue to have extremely dour implications for asset markets on a forward-looking basis from here. As such, investors would do well not to read too much into January’s solid Real PCE print.

 

We’re Wrong On U.S. Growth (Well, Kind Of) - U.S. Economic Summary Table

 

We’re Wrong On U.S. Growth (Well, Kind Of) - U.S. Economic Summary

 

We’re Wrong On U.S. Growth (Well, Kind Of) - U.S. Household Wealth as a   of Disposable Personal Income vs. Shadow FFR

 

We’re Wrong On U.S. Growth (Well, Kind Of) - U.S.  CreditCycle Bubble Chart

 

We’re Wrong On U.S. Growth (Well, Kind Of) - CORPORATE PROFITS VS. SPX

 

All told, we were wrong on the pace of economic degradation thus far in 2016 and hope you appreciate our objectivity and intellectual honesty here. We aren’t perma-bears insomuch as we aren’t perma-bulls. We have no horse in this race other than preserving our analytical reputations.

 

We simply want to be continue being right on forecasting the data and financial market returns from a trending perspective and our intermediate-term TREND calls on both remain unchanged.

 

-Darius Dale, Senior Global Macro Analyst


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Under 60 Seconds: Foot Locker's Earnings Report | $FL

Hedgeye Retail analyst Brian McGough highlights three key points from Foot Locker's latest earnings report. If you like this excerpt, you’ll love our research.


NEM, ABX, GG: Charts that Matter

Of the major North American miners, Goldcorp finished off Q4 Earnings season last night with an awful print which included a net loss of -$4.3Bn when you include impairment charges of -$3.9Bn (-$128MM without charge).

 

In addition to the impairment charges, Goldcorp wrote-down the carrying value of heap leach inventory and stockpiles at two mines to the total of $104MM. The impairment and write-down charges assumed a long-term gold price of $1,100/Oz. While by no means apples-to-apples, the carrying value of Newmont’s stockpile and ore on leach pads is multiples of Goldcorp, and both companies previously assumed $1,300/oz.

 

These charges are a reality of a cyclical downturn, one that Newmont may be trying to push out as long as possible (or avoid). ABX and GG have taken impairment charges and downwardly revised for lower gold price expectations and Newmont has not. Rather, they’ve kept aggressive gold ($1,300/oz.) and copper ($3.00/lb.) price assumptions for capitalizing their much larger inventories and stockpiles.

 

We believe Newmont’s higher cost profile and aggressive capitalizations will matter in a lower gold price environment. However, we’ll be the first to say that these names are trading vehicles with leverage to gold prices, and being long of gold with leverage which has worked YTD.

 

With the release our monthly sector sentiment deck on Tuesday morning, we’ll outline some of the behavioral factors behind the move YTD as well as to outline what is becoming more of a consensus trade in gold ahead of policy catalysts in the coming weeks.

 

Behavioral factors along with Newmont’s failure to address aggressive accounting practices pushed us to add NEM to our Best Ideas on the short-side last week (link to the 02/18 note).   

 

Below we use 4 charts to highlight what we view as two of Newmont’s biggest long-term headwinds:

  1. High Cost of Production (Adjusted AISC has trended higher since Q3 2014)
  2. Stockpiles and Inventories:
    • Large quantity of stockpiles and inventories (relative to other producers)
    • Aggressive long-term price assumptions for the capitalization of these inventories (meaning they have not yet realized the impairment and write-down charges normally taken by producers in a lower gold and copper price environment) 

 

NEM, ABX, GG: Charts that Matter - Stockp iles   Gold Sales

 

NEM, ABX, GG: Charts that Matter - AISC Adj. For stockpiles

 

NEM, ABX, GG: Charts that Matter - NEM Write downs vs. stockpiles

 

NEM, ABX, GG: Charts that Matter - AISC Table adjusted for stockpiles and sustaining capital

 

 

 

 

 


McCullough: How To Think About Volume

 

In this brief excerpt from RTA Live, Hedgeye CEO Keith McCullough responds to a subscriber’s question about how we analyze financial markets (using price, volume, volatility) and how best to interpret what market volume is telling you. If you like this excerpt you’ll love Real-Time Alerts. Click here to learn more.


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