The most obvious way to do something complex, such as govern 100 million people or walk on two skinny legs, is to come up with a list of all the tasks that need to be done, in the order they are to be done, and then direct their completion from a central command, or brain. The former Soviet Union’s economy was wired in this logical but immensely impractical way. Its inherent instability of organization was evident long before it collapsed. ~ Kevin Kelly “Out of Control”
In this week’s Dirty Dozen [CHART PACK], we look at inflows, turning market internals and weakening breadth, discuss falling deposit rates and what it means for inflation, before diving into the best performing global equity market to date, along with some ways to trade it…
Q3 2022 hedge fund letters, conferences and more
- The latest BofA Flow Show summary with highlights from me.
- Back in October, I pointed out the positive divergence between Cyc v. Def and the SPX (link here), suggesting we should be open to a bear market rally beginning soon. That has been born out, but now this lead is rolling over. So this is something we need to track.
If it keeps trading down, then it raises the odds this bounce is running out of gas. Another troubling sign is the lack of confirmation from Discretionary/Staples. To turn decidedly bullish, we would need to see this lead turn up.
- The SPX is nearing its downward-sloping 200-day moving average. A level that acted as resistance during the summer rally. I’d expect that this level, combined with the market’s short-term overbought conditions (near 2stdev above 20 and 50-day moving averages), drives some reversion lower at the start of this week.
- Lastly, indicators of short-term breadth are weakening. This isn’t enough to call a top on this bear market rally. But it’s something to keep an eye on. And reason to move up stops.
- BBG reported over the weekend that “Bank deposits at US commercial banks are starting to decline. This is an early warning sign of a weakening US economy… The chart below shows that the main driver of the fall is a decline in household savings deposits. Some of this drop may be reflected in the rise in household’s checkable deposits, as people shift money out of their savings account into their current account, but overall the fall in savings deposits is larger than the rise in checkable ones.”
- This matters for inflation over the next 12 months because, as BBG points out, “This is a sign of a weakening economy, not one that is about to face an imminent and renewed inflationary impulse. In fact, falling deposit growth is empirically a sign of declining inflation. This is counter-intuitive at first glance, but banks create deposits when they create loans, so at the margin, deposit growth is driven by loan growth.”
- Did you know the best-performing country equity index this year is Mexico? It’s one of the few markets that’s positive on the year (bold red line below / chart from Koyfin).
- Mexico’s long-term chart is constructive as well. Following a brutal 7-year bear market, the index looks close to completing a 7-year inverted H&S bottom (chart below is a monthly).
- There are a number of reasons for this outperformance. The primary one is that Mexico is set to gain the most from the intensifying Cold War 2 and the fracturing/regionalization of the global economy. Here’s the following from BofA.
In the last decade… international trade has leveled off, and our new findings suggest that what had seemed a relentless march toward globalization may now be reversing. Of course, that doesn’t mean that international trade will end. But when you consider that the companies in the 12 global industries we cover represent $22 trillion in combined market value, even incremental shifts toward “de-globalization” could have major implications for economies, jobs and consumers… In some cases, reshoring will mean moving supply chains to nearby developing countries. So Mexico is likely to benefit from reshoring of U.S. companies, for example.
- BofAML found that more than 80% of companies across 12 industries, from semiconductors to capital goods, were rethinking parts of their supply chains. According to the American Chamber of Commerce, as shared in a recent report from Societe Generale, 40% of companies surveyed “said they were considering relocating or had relocated manufacturing facilities outside China.”
- Relative EPS trends are moving strongly in favor of Mexico. These improving fundamentals are driving the index higher.
- There are a number of ways to play what is likely to be a long-term trend. One is through the currency, by going long the peso. MXNUSD completed a major H&S bottom recently. It’s now coiling in a Bull Quiet regime with a measured move target a good deal above current prices.
There’s also a low-risk highly asymmetric way to play this bullish Mexico trade, and that’s using DOTM options on a certain asset, which we’ll be executing in the Collective this week.
