In a brief HedgeyeTV political recap, Potomac Research Group’s JT Taylor and Hedgeye’s Daryl Jones discuss the results of GOP and Democratic primaries in Wisconsin and who will be the likely presidential nominees on each side.
Takeaway: Exchange volume is outstripping exchange equity performance, so we still like the group long.
Outside of the noise of BM&F exiting its 4% position in CME Group (CME), we remind investors that year-over-year rate of change in the exchange sector volume is still solid and we are buyers of the sector on weakness. CME specifically has put up a solid 1Q16 result in our view with results to come in at $1.18, +4% above consensus driven by +13% volume growth and a +1% pricing advance. Although CME has given up its year-to-date gains on the short swing BM&F sale, investors won't get this type of earnings growth anywhere else in the Financials sector. Industry leaders BlackRock (BLK) and Goldman Sachs (GS) reflect that with GS stock down -22% over the past 12 months and even the growing passive ETF business at BLK resulting in a -10% loss. Exchange activity is again opening the new 2Q on firm footing with more important open interest tallies still expanding.
Weekly Activity Wrap Up
Cash equity volume is starting 2Q16 strongly with 7.0 billion shares traded per day so far, +10% higher than the average daily volume (ADV) one year ago in 2Q15. Meanwhile, futures traded through CME and ICE, which are putting up a 17.6 million ADV, are flat versus the year-ago quarter. However, CME's open interest currently tallies 109.3 million contracts, +20% higher than the 91.3 million pending at the end of 2015, which ensures robust trends for the foreseeable future. Lastly, options volume is weaker, down -9% Y/Y with a 13.9 million ADV.
U.S. Cash Equity Detail
U.S. cash equities trading is coming in at 7.0 billion shares per day in 2Q16TD. That marks +10% Y/Y growth. The market share battle for volume is mixed. The New York Stock Exchange/ICE is taking a 25% share of second-quarter volume, which is +71 bps higher Y/Y, while NASDAQ is taking a 17% share, -145 bps lower than one year ago.
U.S. Options Detail
U.S. options activity is coming in at a 13.9 million ADV in 2Q16TD, a -9% Y/Y and -19% Q/Q contraction. In the market share battle amongst venues, NYSE/ICE has been trending downward and is taking a 16% share of 2Q16TD volume, -22 bps lower than the year-ago quarter. Additionally, CBOE's 24% market share of 2Q16TD is down -298 bps Y/Y. Meanwhile, NASDAQ is doing well in the first week of 2Q16, taking a 23% share, +75 bps higher than one year ago. BATS has also been taking share from the competing exchanges, up to a 12% share from 10% a year ago. Finally, ISE/Deutsche, which experienced market share growth through 1Q16, has stagnated recently at 15%, which is -84 bps lower than 2Q15.
U.S. Futures Detail
13.4 million futures contracts per day traded through CME Group so far in 2Q16, which is flat Y/Y. However, CME open interest, the most important beacon of forward activity, currently sits at 109.3 million CME contracts pending, good for +20% growth over the 91.3 million pending at the end of 4Q15, an expansion from last week's +16%.
Contracts traded through ICE came in at 4.2 million per day so far in 2Q16, a -1% Y/Y contraction. ICE open interest this week tallied 65.4 million contracts, a +3% expansion versus the 63.7 million contracts open at the end of 4Q15, a contraction from last week's +4%.
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.
Please let us know of any questions,
Jonathan Casteleyn, CFA, CMT
Joshua Steiner, CFA
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Below is a brief excerpt from our Potomac Research Group colleague and Chief Political Strategist JT Taylor's Morning Bullets sent to institutional clients each morning. For more information on how you can access our institutional research please email firstname.lastname@example.org.
Although Donald Trump lost by double digits in WI, his campaign continues to assure supporters that he will hit the magic number. The mother lode of delegates will now be found in the Northeast (where Trump is polling well) and CA where he holds a lead over Ted Cruz - and his appeal to former Gov. Arnold Schwarzenegger's supporters has been well-received. Trump needs to win 62 percent of the remaining delegates - a tough task - but if his northern firewall holds, then again we believe it will all come down to CA.
CRUZ'S BRONX CHEER:
On the heels of his WI victory, Cruz is finding himself unwelcome parts of the Empire State. Polls already have him in third behind John Kasich, and if Trump lands to a sizeable victory here, it would wash away any aura of Cruz gaining ground. Cruz has little wind in his sails following his WI victory, and the positive coverage that would normally follow such a win has been usurped by Trump's huge lead in NY polls and from his "New York values" comments made earlier in the primary. To make matters worse, his scheduled appearance at a Bronx high school was cancelled due to a threatened student walkout and protests. Kids these days.
LEE-DING THE LIST:
Appointing UT Sen. Mike Lee to the SCOTUS is suddenly the hot idea in Washington, and the not-so-subtle promotion of him may coincide with Trump's promised list of possible SCOTUS nominees. Lee is a conservative purist and is idolized by the more ideological wing of the Republican Party - which is currently rallied around Cruz. By invoking Lee's name and placing him on his SCOTUS shortlist, Trump could narrow his rift with conservatives, but we still don't see signs of him emerging as the great Republican unifier.
Wall Street's pie-eyed enthusiasm to "buy stocks now" was made even more palpable yesterday. According to FactSet, the average analyst's bottom-up S&P 500 target price for the year ahead was 2256.59. That implies 10.5% upside from yesterday's close. Meanwhile, analysts have been pulling back their expectations for Q1 S&P 500 earnings and Reuters reports "weak earnings expectations sets [the] stage for stock gains."
First off, just consider the accuracy of that 2256.59 bottom-up S&P 500 target. Here's FactSet:
"The average difference between the bottom-up target price estimate at the end of the month one year ago and the final price for the index at the end of the same month one year later has been +6.8%. In other words, industry analysts on average have overestimated the final price of the index by 6.8% at the end of each month during the previous year."
The reason for the serial over-optimism? Sell side analysts have been perennially bullish. Remember: "Of the 11,584 ratings on S&P 500 companies at the end of the first quarter (March 31), 50.8% were Buy ratings, 43.8% were Hold ratings, and 5.4% were Sell ratings."
This while analysts have, in fact, begun ratcheting back their earnings expectations for Q1 2016. According to FactSet:
"During the first quarter, analysts lowered earnings estimates for companies in the S&P 500 for the quarter. The Q1 bottom-up EPS estimate (which is an aggregation of the estimates for all the companies in the index) dropped by 9.6% (to $26.32 from $29.13) during this period."
That was the largest drop for a quarter since Q1 2009.
And yet the latest bit of permabull storytelling suggests that falling earnings expectations will send stocks higher, as companies beat those dismal expectations.
That argument doesn't hold water. What this bullish interpretation doesn't account for is that all S&P 500 sectors are bumping up against tough comps in Q1 and Q2 of 2016. For our take on this, watch Hedgeye CEO Keith McCullough in the video below:
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