CME -- bull and bear case

Today I bought some more CME -- just a small increase -- left some powder dry for later. The stock was hurt today because of the Sentinel fund issue -- people are concerned about CME's clearing house operations where they serve as the counterparty for each side in a trade. So rather than 2 investors trading with eachother, they trade with CME in the middle because that way neither investor has to worry about whether the other is going to meet its obligations in the trade (deliver cash, etc.)

CME then needs to get the money from the investors or they suffer the loss. They claimed today there are no issues with people maintaining the appropriate margin or performance bonds (money set aside to cover the margin required to trade futures). So this is one issue -- that CME could face lots of losses from hedge funds or other parties backing out of trades and forcing CME to cover for them. I don't have an edge here but I go with history -- not been a problem before despite volatile markets with lots of losses. They mark to market customers twice a day too so they can wipe someone out pretty quick if necessary.

Second bear issue is that much of the problems in the credit markets are driven by losses on derivatives like those traded at CME's exchanges. So there could be either regulatory or investor concern about using these instruments in the future since they turned out to be too dangerous. But the OTC market for interest rate swaps and foreign currency trades is much much larger than what gets traded at CME's exchange. The problem then is not the standardized stuff that is traded in the open on the CME. The problem is the esoteric stuff that is traded behind the scenes in the over the counter market (OTC).

One answer could be to convince investors to convert their risky behind the scenes trades into more standardized stuff that trades in the open on CME's exchange. That is one way to continue to see big upsides in volume growth. July was up 40% but August is up closer to 100% at least in terms of certain contracts -- keep in mind that August of 2006 was probably a slow month given all the people out on vacation.

I think the estimates are too low given the volume and I am confident the higher volume is sustainable and they will not suffer counterparty issues. The stock could very well be $650 or more in a few months.

good luck.