Definition of levitate: "to rise or cause to rise and hover in the air, especially by means of supernatural or magical power."
Takeaway: Not only has financial trader count growth of +22% outpaced commodity trader growth of +14%, it has effected OI exponentially.
Over the past 2 years, growth in financial traders has outpaced growth in commodities traders according to the weekly CFTC Committment of Traders Report. The number of commodities traders has grown +14% while financial traders have grown over 1.5x that rate, by +22%. Even more dramatic is the impact on all important open interest. While commodities trader growth of +14% has had a one-to-one effect on OI expanding an equivalent +14%, financial trader growth of +22% has effected open interest expontentially with a +51% expansion. This reinforces our long view on financials heavy CME Group (CME), the open interest for which now sits at 110.5 million, up +21% YTD versus only +3% OI growth at Intercontinental Exchange (ICE). CME Group stock finally punched through $100 a share this week, up over +12% year-to-date (before a +5% fully loaded dividend) versus just +2% return for ICE.
Weekly Activity Wrap Up
Volume for futures and options came in higher week over week. Futures activity came in at 20.3 million contracts per day, bringing the 3Q16TD average daily volume (ADV) to 19.8 million, +6% Y/Y growth. Options activity came in at 17.4 million contracts per day. However, the 3Q16TD ADV remains -10% lower than the year-ago quarter at 16.3 million. Cash equities came in lower week over week at 6.8 billion shares per day, bringing the quarter's ADV to 6.9 billion, -6% lower than 3Q15.
U.S. Cash Equity Detail
U.S. cash equities trading came in at 6.8 billion shares per day this week, bringing the 3Q16TD ADV to 6.9 billion, -6% lower than the year-ago quarter. The market share battle for volume is mixed. The New York Stock Exchange/ICE is taking a 24% share of third-quarter volume, which is just about in line with the year-ago quarter, while NASDAQ is taking a 17% share, -222 bps lower than one year ago.
U.S. Options Detail
U.S. options activity came in at a 17.4 million ADV this week, bringing the 3Q16TD ADV to 16.3 million, -10% lower than the year-ago quarter. In the market share battle amongst venues, NYSE/ICE's 14% share of 3Q16 volume is -315 bps lower than one year ago. Additionally, while BATS' share grew in the first half of 2016, growth has stalled somewhat in recent weeks, and the exchange's 11% share is -27 bps lower than the year-ago quarter. Meanwhile, NASDAQ's 22% share is +85 bps higher than in 3Q15, and CBOE's 30% market share of 3Q16 is up +276 bps Y/Y. Finally, ISE/Deutsche's 13% share is -139 bps lower than 3Q15.
U.S. Futures Detail
15.8 million futures contracts per day traded through CME Group this week. That puts the 3Q16TD ADV at 15.3 million, +7% higher Y/Y. Additionally, CME open interest, the most important beacon of forward activity, currently sits at 110.5 million CME contracts pending, good for +21% growth over the 91.3 million pending at the end of 4Q15, an expansion from the previous week's +18%.
Contracts traded through ICE came in at 4.5 million per day this week, pushing the 3Q16TD ADV to 4.4 million, a +4% Y/Y expansion. ICE open interest this week tallied 65.6 million contracts, +3% higher than the 63.7 million contracts open at the end of 4Q15 and an expansion from the previous week's 1%.
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
Patrick Staudt, CFA
Takeaway: Companies in the S&P 500 spent $166.3 billion on share buybacks during the first quarter. That marked a new postrecession high.
The above is the latest permabull headline from the Wall Street Journal arguing that the buyback boom will live on and continue to stoke stocks.
Hang on a second...
That's worth parsing. The article suggests valuations are cheap and highlights academic studies which show shares of companies that buy back stock outperform the broader market by 12% over the next four years.
Good question. According to FactSet:
"Companies in the S&P 500 spent $166.3 billion on share buybacks during the first quarter, which marked a new postrecession high. Since 2005, only Q3 2007 produced a larger amount of buybacks ($178.5 billion). Dollar-value buybacks in Q1 represented a 15.1% increase in spending from the year-ago quarter, and a 15.6% jump from Q4. This breakout in the first quarter of the year comes amid somewhat of a stabilization period for buybacks since the middle of 2014. With that said, buyback spending still remained at very high levels for the index during this period."
Consider peak buybacks in the context of net income and free cash flow...
"At the end of the first quarter, 146 companies in the S&P 500 spent more on buybacks in the trailing twelve months than they generated in earnings. This marked the seventh highest total going back to 2005... At the end of the first quarter, trailing twelve month buybacks made up 59.6% of free cash flow, which was a 6% increase year-overyear."
In other words, companies are increasingly buying back stock at the expense of long-term investment in their business. As Hedgeye U.S. Macro analyst Christian Drake points out on The Macro Show yesterday:
"If you have record repo activity at all-time highs in equities, pushing on 8 years into an economic expansion maybe you get paid in the short term. But what do you think of that in terms of long-term value creation?"
It's a good question to ponder as permabulls shout "buy, buy, buy" the all-time high.
Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.
Takeaway: "Krugman calls for 'a big burst of government spending and maybe also cash donations.' Godspeed to free-market capitalists."
Paul Krugman joined Ben Bernanke in calling for helicopter money yesterday. Here's the word via Bloomberg:
"Japan should raise its inflation target to 4 percent and embark on a large but temporary fiscal stimulus to boost prices in the economy, Nobel laureate Paul Krugman said.
Speaking at a conference on Thursday in Singapore, Krugman called for 'a big burst of government spending and maybe also cash donations,' though authorities don’t necessarily need to adopt a strategy that involves 'helicopter' money, he said.
'Japan needs to get that inflation rate convincingly high,' Krugman said, adding that worrying about the 'longer-term budget outlook needs to be put on hold.' The Bank of Japan’s current target is 2 percent and consumer prices excluding fresh food, a key benchmark for the BOJ, have fallen for three straight months."
As Hedgeye CEO Keith McCullough wrote earlier today, "Krugman calls for 'a big burst of government spending and maybe also cash donations.' Godspeed to free-market capitalists." In other words, Japan has been pulling out all the stops for some time now to no effect.
Investors are voting with their feet. Take a look at the chart of Japanese equities over the past year:
Hedgeye Potomac, in conjunction with the international law firm of Squire Patton Boggs, will be hosting a series of calls on Brexit and will first examine the legal and procedural implications.
With Prime Minister Theresa May now formally installed at 10 Downing Street, we will discuss with Squire’s Brexit Task Force the events following the UK’s exit vote from the EU and what the outcome of the vote spells for the UK and the rest of the world.
The call will take place on July 22nd at 11:00AM EST with prepared remarks followed by Q&A.
KEY TOPICS ON THE CALL WILL INCLUDE
ABOUT SQUIRE PATTON BOGGS
Squire Patton Boggs is a full service global law firm that provides insight at the point where law, business and government meet. Squire Patton Boggs consists of over 1,500 lawyers in 45 offices across 21 countries.
Squire Patton Boggs’ Brexit Task Force is a multi-disciplinary team of lawyers and policy advisers who are uniquely placed to support clients from across the globe on the effects Brexit will have on business.
The Public Policy teams, particularly in Brussels and Washington, D.C., consist of top tier lawyers with considerable public policy experience - which helps them provide seamless and coordinated discussions with the relevant authorities.
Confirmation Number: 13641782
Takeaway: Shares of Agrium have remained comparatively resilient in 2016, a trend which we expect to reverse in 2H16.
Hedgeye analysts Jay Van Sciver and Ben Ryan hosted an institutional call on Agrium (AGU) earlier this week. Here's the key takeaway:
Shares of Agrium have remained comparatively resilient in 2016, a trend which we expect to reverse in 2H16. As Agrium enters the back half of the year, wholesale margins are likely to see pressure amid lower fertilizer prices and higher input costs. While 1H16 retail margins benefited from early spring 2016 season planting and delayed fall 2015 nutrient application, such support should fade in 2H.
To access our institutional research email firstname.lastname@example.org.