Cartoon of the Day: LOST

Cartoon of the Day: LOST - Fed cartoon 06.10.2016


What can we expect from the FOMC next week?


"Remember that projecting an air of confidence and maintaining maximum policy optionality requires carefully treading the hawkishly dovish messaging line … or maybe it’s the dovishly hawkish line," Hedgeye U.S. Macro analyst Christian Drake wrote in today's Early Look.


In other words, if you're hoping for clarity, don't hold your breath. There's more nonsensical Fed-speak to come.

HEDGEYE Exchange Tracker | Mind Your Exposures

Takeaway: Coupled with rising volume in a choppy environment, the exchange group is self funding and thus has the lowest cost of capital in Financials

Coupled with a rare expansion in revenues and earnings in this environment, the exchanges strike industry leading margins on higher top line and thus tend to be self funding companies. This creates the lowest cost of capital in financial services, an important attribute as the economy sits late cycle/recession. For all other subgroups dependent on the capital markets for debt and equity capital, recessionary periods mark substantial increases in capital costs which are consternation for both management teams and investors. This group side steps that issue with higher incremental operating margins, low leverage, and thus lower funding costs.


HEDGEYE Exchange Tracker | Mind Your Exposures - chart1


HEDGEYE Exchange Tracker | Mind Your Exposures - chart2



Weekly Activity Wrap Up

Futures put up healthy volume this week, coming in at 20.5 million contracts traded per day through CME and ISE, raising the 2Q16TD average daily volume (ADV) to 18.9 million, +7% higher than the year-ago quarter. Additionally, CME's open interest currently tallies 116.4 million contracts, +27% higher than the 91.3 million pending at the end of 2015. This compares to ICE's OI growth of just +7% YTD. Meanwhile, cash equity and options volume came in below their 2Q16TD quarterly averages, although the former still maintains good year-over-year volume growth. Cash equities came in at 6.5 billion shares per day, bringing the 2Q16TD ADV to 7.0 billion, +10% higher year-over-year. Options volume of 14.3 million dragged down the 2Q16TD ADV  to 15.1 million, -1% lower than the 2Q15 ADV. 


HEDGEYE Exchange Tracker | Mind Your Exposures - ExMon16 1


U.S. Cash Equity Detail

U.S. cash equities trading came in at 6.5 billion shares per day this week, bringing the 2Q16TD ADV to 7.0 billion. 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 +93 bps higher Y/Y, while NASDAQ is taking a 17% share, -137 bps lower than one year ago.


HEDGEYE Exchange Tracker | Mind Your Exposures - ExMon2


HEDGEYE Exchange Tracker | Mind Your Exposures - ExMon3


U.S. Options Detail

U.S. options activity came in at a 14.3 million ADV this week, bringing the 2Q16TD average to 15.1 million, a -1% Y/Y contraction. In the market share battle amongst venues, NYSE/ICE's 17% share of 2Q16TD volume is +31 bps higher than one year ago. Additionally, NASDAQ's 22% share is +25 bps higher year over year. BATS has also been taking share from the competing exchanges, up to an 11% share from 10% a year ago. Meanwhile, CBOE's 26% market share of 2Q16TD is down -107 bps Y/Y. Finally, ISE/Deutsche's 14% share is -152 bps lower than 2Q15.


HEDGEYE Exchange Tracker | Mind Your Exposures - ExMon4


HEDGEYE Exchange Tracker | Mind Your Exposures - ExMon5


U.S. Futures Detail

15.4 million futures contracts per day traded through CME Group this week, bringing the 2Q16TD ADV to 14.4 million, +8% higher Y/Y. Additionally, CME open interest, the most important beacon of forward activity, currently sits at 116.4 million CME contracts pending, good for +27% growth over the 91.3 million pending at the end of 4Q15, an expansion from the previous week's +25%.


Contracts traded through ICE came in at 5.1 million per day this week, the highest weekly volume all quarter, bringing the 2Q16TD ADV to 4.5 million, a +5% Y/Y expansion. ICE open interest this week tallied 68.2 million contracts, a +7% expansion versus the 63.7 million contracts open at the end of 4Q15, an expansion from with the previous week's +5%.


HEDGEYE Exchange Tracker | Mind Your Exposures - ExMon6


HEDGEYE Exchange Tracker | Mind Your Exposures - ExMon8


HEDGEYE Exchange Tracker | Mind Your Exposures - ExMon7


HEDGEYE Exchange Tracker | Mind Your Exposures - ExMon9 


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 | Mind Your Exposures - ExMon10


HEDGEYE Exchange Tracker | Mind Your Exposures - ExMon11


HEDGEYE Exchange Tracker | Mind Your Exposures - ExMon12


HEDGEYE Exchange Tracker | Mind Your Exposures - ExMon13


HEDGEYE Exchange Tracker | Mind Your Exposures - ExMon14

HEDGEYE Exchange Tracker | Mind Your Exposures - ExMon15



Please let us know of any questions,


Jonathan Casteleyn, CFA, CMT 




 Joshua Steiner, CFA





Capital Brief: No Money, Mo' Problems For Trump?

Editor's Note: Below is a brief excerpt from Hedgeye Potomac Chief Political Strategist JT Taylor's Capital Brief sent to institutional clients each morning. For more information on how you can access our institutional research please email


Capital Brief: No Money, Mo' Problems For Trump? - capital brief


Donald Trump’s finance team held its first official meeting amid concerns over the campaign’s lack of a finance team, infrastructure and coordination with the RNC with less than five months left to prepare for the general election. In most election cycles, fundraising for presidential campaigns starts 18 to 24 months out - and Trump will be at a disadvantage out of the gate given his continued controversies and general lack of enthusiasm among the Republican donor class leading many to question whether Trump can achieve his previously stated goal of raising $1 billion.


Donors are disturbed with the threadbare nature of his campaign which continues to struggle in carrying out even the most basic of functions. He lacks pollsters, data and field expertise, a policy-writing shop, and a communications apparatus - and will soon find that the general election is a different animal than the primary.


On the other hand, when it comes to fundraising, Hillary Clinton and the Democrats are running like a well-oiled machine. She’s spent well over $200 million, has a large campaign staff with seasoned veterans, and continues to pad her war chest every day. Additionally - with Clinton, well, being a Clinton - she enjoys a deep bench of supporters ready to fundraise, cut ads, hit the campaign trail, and utilize social media. When Bernie Sanders finally exits the race, she’ll look to tap into a deep reservoir of new (and smaller) donors padding her fundraising lead.


In what may be an audition for the prototypical running mate, Elizabeth Warren launched another blistering attack on Donald Trump, the Republican party, and calls for Wall Street reform. Warren has been suggested as  Clinton’s veep choice by none other than Minority Leader Harry Reid, despite his warning on choosing a senator from a state with a Republican governor. The case for Warren is clear - she’s an outspoken populist-progressive leader who would rally the supporters of Bernie Sanders to Clinton’s cause.

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Stock Report: Hologic (HOLX)

Takeaway: We added HOLX to Investing Ideas on the short side on 5/27.

Stock Report: Hologic (HOLX) - hologic image chart


We have a long history with Hologic (HOLX). Our first major call on the stock was being long and “looking for a double” in April 2014 when the stock was in the low-$20s.  At that time, our proprietary dataset that tracks the number of U.S. Facilities with a Hologic 3D Tomography machine and S-Curve adoption forecast model suggested a large acceleration in growth through 2015.


While there are other elements of Hologic’s business, historical regression analysis shows that forward multiple is most dependent on the growth rate in the Breast Health (42% of sales) business or 3D Tomography sales. Simply put, get Breast Health growth right and get the stock right.


Fortunately, our initial long calls was correct, but now we are on the other side and the same forecast methodology suggests growth has peaked, and new facility placements will likely turn negative into 2H17.


We will continue to provide updates to our proprietary #TOMOTRACKER that will inform us where we are on the adoption curve and act as a benchmark to test our thesis against.


Stock Report: Hologic (HOLX) - 20160608 HOLX 3D SCurve




Over the intermediate term, we see little that can drive further upside to the stock, outside of an acquisition (which is a risk to our thesis). While we expect growth to continue to come under pressure, our call for -30% downside is likely to play out over the next 12-18 months. 


There are two key drivers that we expect will drive shares of Hologic (HOLX) back into the low-$20s.


1. Slowing 3D Tomo Adoption – Hologic stopped disclosing penetration for 3D mammography, providing the last unit counts and market share in September 2015. For the September 2015 period, the company disclosed 28% penetration into their installed base. Our s-curve for 3D indicates share was 32.4% as of 9/27/2015, which agrees with HOLX management statements.


However, based on our Tomo Tracker data, we believe HOLX has added to their 3D installed base and now sits at 40%. While the rapid pace of 3D conversion led to upside relative to consensus estimates and company guidance for much of 2014 and 2015, we expect facility conversion to turn negative now that we have passed 40%. The arithmetic of s-curves is straight forward and has precedent in the 2D adoption curve. 


It is also worth noting that the gross margin on the 3D system is materially higher (65-70%) than the 2D system (50%) and the corporate average, which prior to the 3D ramp averaged around 52%. Accelerated adoption of 3D systems has driven corporate gross margin up an impressive 1,000 bps to 60% in 2Q16. As 3D growth slows, and eventually goes negative, we expect to see the opposite effect take hold.


Stock Report: Hologic (HOLX) - 20160608  TOMOCLIFF


2. #ACATaper While more difficult to quantify, we believe the Affordable Care Act was a tailwind to HOLX’s diagnostic business.  After years of being uninsured, new enrollees were top consumers of diagnostic tests that Hologic offers, such as HPV and PAP. This segment had been in decline prior to 2014, as a result of lengthening of the recommended interval for PAP testing, but reverted back to mid-single digit growth just as the newly insured under ACA hit the market.  We are looking to several data series to track the utilization impact of the ACA, including Healthcare Employment Job Openings (JOLTS), which we will update on a monthly basis.


Stock Report: Hologic (HOLX) - 20160608 ACAPAP




We expect most of our downside to be realized over a 12-18 month time period, as the gap between our Breast Health estimates and consensus widens over the course of 2017. Specifically, consensus is calling for mid-single digit Breast Health growth in 2H17 compared to our estimate for mid-to-high single digit declines.  Based on the correlation with Breast Health Product Sales growth and our forecast, we can comfortably model a return back to 6-8x EV/EBITDA multiple and a stock in the low-$20s (~12x EV/EBITDA Currently).


Stock Report: Hologic (HOLX) - 20160608 HOLX BreastHealthSalesYoY


Stock Report: Hologic (HOLX) - 20160608 MultipleLeadsGrowth


Stock Report: Hologic (HOLX) - 20160608 EVEBITDA


Stock Report: Hologic (HOLX) - hologic image

Remember The Fed's December Rate Hike? What Happened Again?

Takeaway: Following the Fed's December rate hike, Long Bonds (our favorite macro call) rallied to up 12% year-to-date versus 2.6% for the S&P 500.

Remember The Fed's December Rate Hike? What Happened Again? - Hawk dove cartoon 06.06.2016


As the Fed flounders from rate hike rhetoric to cautious soothsaying, Treasuries have rallied. Take a look at the flattening of the yield curve since the Fed decided to "raise interest rates" in December 2015. The yellow line is the yield curve on 12/15/15 and today's is the green line.


Rate hike ... What rate hike?


Click image to enlarge.

Remember The Fed's December Rate Hike? What Happened Again? - rate hike yield spread


To be clear, long the Long Bond (TLT) has been our most vocal Macro call. 


Heading into this year, it was a massively contrarian and in direct opposition to Wall Street consensus, which remained convinced the 10yr Treasury yield would hit 2.5% to 3% on Fed rate hikes. 


Guess what? Our Long Bond call...




The flattening of the yield curve has paid off massively for investors in TLT. Below are the year-to-date returns on Long Bonds versus the S&P 500.


Remember The Fed's December Rate Hike? What Happened Again? - long bonds vs s p

This Is One of the Top-3 Stock Market Bubbles in History


In this excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough and Demographics Sector Head Neil Howe discuss why “the stock market is one gigantic emotional rollercoaster” perched perilously at its peak.


Subscribe to The Macro Show today for access to this and all other episodes. 


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