June 22, 2010 – Buy Those Who Sell Shovels, Not Miners

Featured Trades: (WFC), (UNP), (ISE), (ICE)


3) Buy Those Who Sell Shovels, Not Miners. A careful study of the history of California's 1849 gold rush shows that while almost all the miners went broke, those who provided the picks, shovels, transportation, and banking services made the real money. Those fortunes became so vast, they live on today in names like Wells Fargo (WFC), Levi Strauss, Stanford University, and Union Pacific Railroad (UNP). This is the logic that draws me to last week's IPO for the Chicago Board of Options Exchange (CBOE), the world's largest on both a volume and value basis. Those 75 cent exchange fees and 49 cents clearing fees at the bottom of every trade confirm that you never pay attention to will add up to a hefty $475 million in revenues for the CBOE this year. Timing for the long awaiting issue was no doubt influenced by a 35% jump in average daily volume in April-May, compared to Q1. The CBOE accounts for an impressive 31.4% of listed options volume. The competing Intercontinental Exchange (ISE) has a 21.5% share, while the NASDAQ owned Philadelphia Stock Exchange has a 20% share. CBOE is a great indirect play on volatility, as volume inevitably pops when markets fall, and volatility seems certain to plague all our live in coming years. The listed exchanges are expected to benefit greatly from the passage of the financial reform bill, which promises to drive to them existing OTC derivatives business. Since every newly listed exchange in recent years has been bought out, CBOE offers great potential as a takeover target. Of course, all the hype attendant to the listing brought shares to the aftermarket at a very rich 29 times, compared to 18-22 for the CME and the ICE, so I wouldn't touch it here. Better to keep it on your buy on big dips list.

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