Power Demand/ US Government Issuance/ Equity Allocation levels

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Power Demand

Heading into year-end, we obviously start to think about the set up to close the year, and more specifically, the setup to open the next year. One chart that is hard not to pay attention to is this one concerning power demand.

GS has a basket that tries to encapsulate this demand:

The chart is stunning:

YTD Best and Worst performers:

Considering the MS chart above, is the GS basket’s recent “pullback” (yes we are being liberal with that definition here) worth taking another look at?

Only time will tell, but the MS thesis behind that demand out to 2028 is pretty “powerful.”

US Government Issuance vs Risk Assets

We did see an interesting article on Bloomberg this week that is highly technical in nature, but there is a standout metric in there that caught our eye.
The article focuses on Government issuance and its relationship to risk assets.  The article states:

US Government Issuance vs Risk Assets

We did see an interesting article on Bloomberg this week that is highly technical in nature, but there is a standout metric in there that caught our eye.
The article focuses on Government issuance and its relationship to risk assets.  The article states:

“Therefore we would expect to note a stronger relationship between government issuance and risk assets. We see just that. The ups and downs of the growth in shorter-term Treasury issuance has led the highs and lows of US equity-market growth by about 6-9 months, especially since the mid-2010s. The sharp drop off in the growth of issuance we have seen recently could become a problem for stocks next year.”

It continues: 

“Whenever the percentage of the deficit funded by bonds has exceeded 100%, stocks have underperformed or sold off. The previous times this has happened are a checklist of rough years for the stock market spanning the past two decades: 2008, 2010, 2015, 2018 and 2022.”

With the deficit at its present level, and an incoming presidential administration, if that blue line trends higher, it would mean another couple red circles to add to the Bloomberg checklist.

Equity Allocation levels

Many have seen these charts, but after a week where the VIX moved almost 100% in a day, we figure it’s worth pointing out that there may be a few too many investors thinking the same thing.

The charts:

Self-explanatory.  

Have a great weekend!

Best,

Meraki Trading Team

About Meraki Global Advisors

Meraki Global Advisors is a leading outsourced trading firm that eliminates investment managers’ implicit and explicit deadweight loss resulting from inefficient trading desk architectures. With locations in Park City, UT and Hong Kong, Meraki’s best-in-class traders provide conflict-free 24×6 global trading in every asset class, region, and country to hedge funds and asset managers of all sizes. Meraki Global Advisors LLC is a FINRA member and SEC Registered and Meraki Global Advisors (HK) Ltd is licensed and regulated by the Securities & Futures Commission of Hong Kong.

For more information, visit the Meraki Global Advisors website and LinkedIn page
Contact:
Mary McAvey
VP of Business Development

TSY Curve/ Shelter/ Unemployment levels/ Momentum Unwind

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TSY Curve

Is it different this time?

Since 1992, each time the 3m/10yr TSY spread has gone negative the US has entered a recession.
The question this time is the time delay: The 3 previous occurrences have generated a recession within a year. What is noticeable is that each time the recession itself did not begin until the spread moved back into positive territory, which of course we just did.

Shelter

Is the impact on inflation from Shelter yet to emerge?

CPI was released Wednesday, December 12th, and the Headline YoY came in at +2.7%. Rent of Shelter comprises 34.8% of that number.

Since the depths of the pandemic, when Shelter bottomed out in early 2021 at .50 and then rallied to 2.68% in q1 2023, it has retraced by just about 50% from that high recently to 1.7%. To the technicians out there, that is very close to the 50% retracement of the original move suggesting the Index has reverted back to trend. It could also be argued that the long-term trend is possibly within the 2 white lines of 1.46% to 1.07% below.

Why is this worth highlighting?

It might have to do with how the BLS, Bureau of Labor Statistics, calculates the Rent of Shelter metric.

“The CPI aims to capture the change in the prices of goods and services consumed by households over time. For housing, the BLS wants to capture the change in the consumption value of a home—the price of the shelter it provides—not the change in the value of the home outright.”

But there is a lag between how the BLS calculates and how a few well-known indices calculate, such as Zillow or Corelogic.

“The measure of the rents in the CPI tends to lag well-known indices of market rents like the Zillow Observed Rent Index and the CoreLogic Single Family Rent Index. CPI rent inflation rose only moderately in 2022, while market rents were soaring (see figure). More recently, CPI rent inflation has been much higher than Zillow and CoreLogic rent inflation.“

The charts tell the story.

Over time, changes in house prices do predict changes in rents—although the relationship is far from one-to-one and occurs with long lags. Xiaoqing Zhou and Jim Dolmas of the Dallas Fed find that the correlation between house price growth and OER inflation peaks at about 0.75 after 16 months.

So, if we consider that 16-month lag mentioned above, that will take us back to July of 2023.

Considering the lag effect from the Zillow and Corelogic chart above, if the relationship follows historical norms that ECANUJ4R Index, Shelter, will continue to move lower. How much nobody can know exactly, but if we do a little back of the envelope math, the most recent Shelter number of 1.7% contributed 63% of the total 2.7% headline CPI. In an overly simplistic view, if that Shelter number were to drop to 1.4%, arguably the high-end range of the long-term trend, and that same 63% relationship held true, that would generate a 2.22% Headline CPI YoY. Lower inflation numbers could provide unexpected aircover for the Fed to continue cutting sometime late Q1 25 or Q2 25. That thought seems very different from chatter of the cutting cycle concluding after the December FED move.

Unemployment levels

Harder to find a Job lately?

According to Indeed, new postings have taken a turn lower.

We thought comparing this to a few other Unemployment metrics could offer some perspective.

Below are the Indeed metric from above, the Unemployment rate, and finally the JOLT Index. Panels 1 and 3 have the obvious downward trend, while the unemployment rate in panel 2 is has been moving higher on 7 of the last 8 prints.

Momentum Unwind

We saw a fair amount of commentary earlier in the week on the momentum unwind that has wreaked some havoc with Hedge Fund positioning. GS provided a forward-looking matrix to help put the move in perspective.

Hope it offers some relief to those concerned.

Have a great weekend!

Best,

Meraki Trading Team

About Meraki Global Advisors

Meraki Global Advisors is a leading outsourced trading firm that eliminates investment managers’ implicit and explicit deadweight loss resulting from inefficient trading desk architectures. With locations in Park City, UT and Hong Kong, Meraki’s best-in-class traders provide conflict-free 24×6 global trading in every asset class, region, and country to hedge funds and asset managers of all sizes. Meraki Global Advisors LLC is a FINRA member and SEC Registered and Meraki Global Advisors (HK) Ltd is licensed and regulated by the Securities & Futures Commission of Hong Kong.

For more information, visit the Meraki Global Advisors website and LinkedIn page
Contact:
Mary McAvey
VP of Business Development

South Korea / Spreads / China / Insider Selling / Peter Lynch

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South Korea

Well, it’s not every week a country in the G20 declares martial law, but this week it did briefly. There was a pretty sharp reaction to it, but by the end of the week its impact had been negligible.

Looking at the KOSPI Index as a proxy, we can see that on a net basis the damage was just over a 1% move. The ETF version of this Index, EWY, traded in the US during different hours, responded a bit aggressively, initially down 7% but then closing the week down a bit over 3%.

Got us wondering, at what trailing P/E level or Fwd. P/E do investors historically like to step into the KOSPI?
It appears we are getting pretty close to both.

Trailing P/E

Looks like 10X is the level, last being 11.51.

On a Forward basis it appears 8X is the ultimate level, but once again not too far away.

Spreads

For the those looking for signs of the apocalypse, they will not be found in Corporate spreads.

At or near lows while the Fed Multiple on the SPX hovers near highs….

China

China in 3 charts:

Yield of the 10yr TSY, GDP, and CPI

Residential Property Prices:

Mortgage Rates

We are no experts, but the direction of the 3 charts above does not suggest a change in fortune for the Chinese economy.

Insider Selling

We have shown this chart before, we continue to see it popping up, its just simply hard to ignore.

US executives are selling stock at extreme levels: The ratio of insider sellers to buyers hit nearly 6x, the most in at least two decades. This is DOUBLE the average seen over the last 3 years. This also exceeds the previous record of 5x seen in 2021 before the bear market began. After the historic market run, corporate insiders are taking profits on their own stocks.

Peter Lynch

Many reading this note may have no clue who Peter Lynch is, he was a pretty renown PM at Fidelity a few decades ago who ran the Fidelity Magellan Fund.

We saw this posted, and thought it was worth highlighting. Apologies for the formatting, but the value is in the content.

Have a great weekend!

Best,

Meraki Trading Team

About Meraki Global Advisors

Meraki Global Advisors is a leading outsourced trading firm that eliminates investment managers’ implicit and explicit deadweight loss resulting from inefficient trading desk architectures. With locations in Park City, UT and Hong Kong, Meraki’s best-in-class traders provide conflict-free 24×6 global trading in every asset class, region, and country to hedge funds and asset managers of all sizes. Meraki Global Advisors LLC is a FINRA member and SEC Registered and Meraki Global Advisors (HK) Ltd is licensed and regulated by the Securities & Futures Commission of Hong Kong.

For more information, visit the Meraki Global Advisors website and LinkedIn page
Contact:
Mary McAvey
VP of Business Development

US Treasuries/Chinese Fishing Boat/India Fund Flows/Bitcoin

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Treasuries

Has the US Treasury market withstood the onslaught of Foreign selling pressure?

Japan and China are dumping US Treasuries: In Q3 2024, Japan sold a net $61.9 billion of Treasuries, the most on record. This was the second consecutive quarter of selling after $40.5 billion in Q2. At the same time, China dumped $51.3 billion, the second largest amount ever recorded. China has now sold Treasuries in 6 out of the last 7 quarters and its total holdings fell below $800 billion for the first time in 16 years. 2 of the world’s biggest foreign holders of US government debt are selling like never before.

If we take a look at Foreign holdings of Treasuries as %, we can see they are down from 55% in 2008 to just under 31% presently. Might it be safe to assume the bulk of selling is over?

Top Panel is % of Foreign Ownership, middle panel is net purchases of China mainland, and bottom panel is net purchases of Japan.

If that selling pressure has abated, might that be one less pressure point on rates?

Chinese Fishing Boat and the Kattegatt Sea

A post that caught our eye this week, mostly because we have not seen any other exposure on this event.

https://www.linkedin.com/posts/matthewsnkibble_update-the-yi-peng-is-trapped-the-cargo-activity-7267508974030147584-Y6Iy?utm_source=share&utm_medium=member_desktop

India and Fund Flows

We mention because it appears around this P/E level, is where the NIFTY index has bounced 4 previous times since then.

Bitcoin

No call here on price, but simply pointing out that Open Interest on Bitcoin futures contracts is, not surprisingly, at an all-time high. More institutional focus expressed through the futures market ?

What caught our attention regarding the open interest chart ?

The chart from this post. https://x.com/crossbordercap/status/1861814218971812298

“Here we track our GLI metric (NOT M2!) advanced by 3 months vs the 6w change in Bitcoin back to 2015. May be another buying opportunity ahead?”

Have a great weekend!

Best,

Meraki Trading Team

About Meraki Global Advisors

Meraki Global Advisors is a leading outsourced trading firm that eliminates investment managers’ implicit and explicit deadweight loss resulting from inefficient trading desk architectures. With locations in Park City, UT and Hong Kong, Meraki’s best-in-class traders provide conflict-free 24×6 global trading in every asset class, region, and country to hedge funds and asset managers of all sizes. Meraki Global Advisors LLC is a FINRA member and SEC Registered and Meraki Global Advisors (HK) Ltd is licensed and regulated by the Securities & Futures Commission of Hong Kong.

For more information, visit the Meraki Global Advisors website and LinkedIn page
Contact:
Mary McAvey
VP of Business Development

XRT/ Nat Gas/ New Home Sales/ Chart Updates

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The XRT, S&P Retail ETF, is hitting a new 52-week high today, Friday November 22, so the Consumer must be a in great shape! We have addressed employment and the credit stress on the Consumer previously, but according to the action in the ETF, the outlook must be rosy.

So, we decided to look under the hood.

Top 25 Weightings:

Now, if we look at the best performers over the past 52 weeks, driving the performance, we see 3 of the top 5 names. A used car dealer, a supermarket, and a used clothing retailer.

We are by no means retail analysts, but thinking the health of the consumer is strong based on those 3 names might not be a safe assumption.

As a reminder, the University of Michigan Current Conditions survey was released today, this chart does not exactly jive with the XRT.

Why might the Current Conditions survey be hovering near rather depressing levels?

We came across a few charts that could help explain.

Professionals not feeling confident about their prospects according to below.

So, they are feeling stuck and unsatisfied, but they don’t seem to have other options or else the below chart would say otherwise.

Nat Gas

Could Nat Gas be headed for some rough sailing?

Technically approaching RSI, middle panel, and Stochastic levels, bottom panel, that historically suggest exhaustion.

Although the above may well be a subjective interpretation, the historical performance math is not. Nat gas is head for the worst 3-month performance period over the previous 10 years, beginning in December.

If we want to consider some familiar names in the space, with the exception of EQT at the bottom, all look to be exhausted as well. Just a thought.

New Home Sales

New Homes sales were released Tuesday November 19th. Considering the level of the national 30yr Fixed mortgage, and historical perspective, it’s surprising that the new unit levels are not lower.

If those Unit levels go lower, then estimates may follow, the EPS estimate for the underlying Index of XHB, Homebuilder ETF, is $806 which is now below initial estimates at the beginning of the year. And with the Index trading at close to 15X on a Fwd. P/E basis, an argument could be made that both estimates could head lower as well as the multiple compressing, unless we were to see a drastic change in mortgage rates.

Chart Updates

Didn’t see this one coming?

https://www.linkedin.com/posts/james-bianco-117619152_why-are-democrats-better-stock-pickers-activity-7264316935293542400-RBuM?utm_source=share&utm_medium=member_desktop

Insider Selling not exactly making investors feel warm and fuzzy.

Follow the smart guys works after all.

The most popular hedge fund long positions have outperformed in most sectors YTD as of November 15, 2024.

Have a great weekend!

Best,

Meraki Trading Team

About Meraki Global Advisors

Meraki Global Advisors is a leading outsourced trading firm that eliminates investment managers’ implicit and explicit deadweight loss resulting from inefficient trading desk architectures. With locations in Park City, UT and Hong Kong, Meraki’s best-in-class traders provide conflict-free 24×6 global trading in every asset class, region, and country to hedge funds and asset managers of all sizes. Meraki Global Advisors LLC is a FINRA member and SEC Registered and Meraki Global Advisors (HK) Ltd is licensed and regulated by the Securities & Futures Commission of Hong Kong.

For more information, visit the Meraki Global Advisors website and LinkedIn page
Contact:
Mary McAvey
VP of Business Development

Stagflation, Should We Be Concerned?

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Definition of Stagflation:

Recent economic metrics show some concern we could be nearing a period similar to that of the 1970s. Both the CPI and PPI, Finished Goods less Food & Energy, ran up into 1974. The Unemployment rate, and EHUPUS Index followed and the QoQ GDP went negative for 3 quarters in a row, meeting the above definition.

There was a period of recovery, when CPI and PPI were both reduced by at least 50%, while unemployment pulled back from a rate of 8.87% to 5.7%, and there were 20 straight quarters of positive QoQ GDP.

Then Inflation reared its ugly head again and both CPI and PPI doubled, Unemployment almost doubled rising from 5.75 to 10.67%, and there were 2 instances of QoQ GDP being negative for 2 consecutive quarters.

Now, the unanswerable question is this: was the pandemic a one-off event or are we setting up for a similar pattern to be repeated?

When looking at the more recent CPI and PPI readings, its evident that there is subtle, but undeniable, upward trend.

CPI

PPI

Unemployment

Is there any evidence that unemployment is on the verge of turning higher, other than the thesis we are headed into a period of stagflation?

According to the St. Louis Fed, FRED, Temporary Help Services has peaked and begun to head lower.

Other employment metrics:

ISM Manufacturing Report on Business Employment

Job Openings

This last employment chart is exceptionally relevant considering the recent intentions of Elon and Vivek under the new administration.

As for “stagnant economic growth”, the Atlanta Fed has a different view: 2.5% is healthy and a long way from negative.

So, what should we be monitoring to help anticipate the possibility of Stagflation?

We thought taking a deeper look at those Inflation metrics, and what is really driving them. Is it different than the 1970s episode?

Of the 2.6% present CPI #, 2.86 of that Is Core Services, and of that #, Shelter is 1.74 and Transportation Services is .51.

As seen above, both have been moving steadily lower, but just recently had small upticks.

In the case of PPI, Services represent .179 of the .197 total number, or 91% . Finished Services less Trade Transportation and Warehousing represent more than 50% of the Gross number at .122.

Why get into the weeds here? Both inflation metrics have been on the glide path the Fed has been attempting to navigate since they began raising rates. Why can’t the market just shake the recent small upticks off as “noisy” numbers?

This is why:

Since the Fed began reducing rates in September, by 75bps, the yield on the 10yr TSY has increased 85bps. This is not exactly what the intended outcome was. So, Investors are asking questions, which brings us back to the weeds of what exactly is driving the very subtle uptick in the 2-inflation metrics.

With respect to the PPI for services less trade, transportation, and warehousing, the following are included: telecommunication services, medical care, insurance, and lodging.

When we see charts like the one below, its not hard to understand why the PPI is doing what it’s doing. The medical care inflation chart was simply too depressing to include as most of know all-too-well, already.

So, we narrowly focus on Shelter and Services contributions to the CPI and PPI to see if the subtle uptick turns into something more. But let’s not forget about the other side of the equation, unemployment. The November jobs number will be even more highly anticipated than usual. October was the weakest number since December of 2020.

December 6th the NFP will be released and should provide clarity on whether the recent 12k number was a fluke or the beginning of something few market participants would like to see: potential stagflation.

Have a great weekend!

Best

Meraki Trading Team

About Meraki Global Advisors

Meraki Global Advisors is a leading outsourced trading firm that eliminates investment managers’ implicit and explicit deadweight loss resulting from inefficient trading desk architectures. With locations in Park City, UT and Hong Kong, Meraki’s best-in-class traders provide conflict-free 24×6 global trading in every asset class, region, and country to hedge funds and asset managers of all sizes. Meraki Global Advisors LLC is a FINRA member and SEC Registered and Meraki Global Advisors (HK) Ltd is licensed and regulated by the Securities & Futures Commission of Hong Kong.

For more information, visit the Meraki Global Advisors website and LinkedIn page
Contact:
Mary McAvey
VP of Business Development