Charts of the Week

Extreme Positioning, A Big Bet on VIX, Empire State Implosion, Freightflation and China's Kerfuffle

Back to the Futures

What a crazy week! Natural gas crashed, sugar rallied up over 9% and cocoa hit all-time highs.

A Look at Positioning

In dollar terms, US equity futures positioning has hit an all-time high recently, suggesting that participation is becoming increasingly lopsided to the long side.

We also see CTAs, Risk Parity and Vol Controlled funds with rather stretched positioning levels.

Dealers are the most short VIX calls on record, as hedging demand has been surging. What this chart illustrates is that there is an enormous amount of long VIX positioning in the form of options, which may have the counterintuitive impact of actually suppressing volatility as it’s rather well supplied at this point.

Adding to that long VIX call positioning by participants (and short VIX call positioning by dealers) was an extremely large VIX upside bet targeting 17 in February.

Shifting over to the NASDAQ, long positioning is close to a 5-year high. Are we long enough yet? We’re approaching tech earnings season with Tesla, Netflix, Intel and others reporting this week.

A Look Around the World

Did you know that Microsoft and Apple’s combined market capitalization is greater than that of all of the 225 companies in the Nikkei put together? It’s a rather staggering example of just how powerful the rally in US tech mega caps has been over the last several years.

Meanwhile, the rotational trade out of China and into Japan has been extraordinary, to say the least. While we closed out that trade last year, it continues to perform. China is still rolling over as Japan continues to rally. Further, it’s fair to say that the Japanese government is handling their economic woes with more resolve than China’s government, bolstering investor confidence.

Here’s another extraordinary divergence — the NASDAQ 100 is soaring as the Hang Seng is rolling over. Incredible outperformance within the largest US tech stocks over the last six years. Whether this trend continues is a question for another day.

Flows and Correlations

Hedge funds have been covering some of those aggressively shorted single stocks, providing episodic short squeeze rallies. We’ve also seen similar within the Russell 2000, one of the preferred macro products for hedge funds to short into oblivion. That flattening out of short positions can have a powerful upside impact on price discovery within lower quality parts of the market. It’s important, if not critical, to not confuse such moves with sustainable rallies, however.

Speaking of rates, money market funds continue to attract savers and conservative investors, with the largest inflows to start the year ever.

A Changing Landscape

More and more companies are choosing to stay private rather than IPO. This means that we see more mature companies going public, which is good for investors. It also, however, means that some of the largest life changing gains one may experience may not happen from IPOs as much now as they had in the past. Making this shift a bit of a mixed bag overall.

The Empire State index rolled over meaningfully, with the largest two-week drop since COVID, and the second largest on record. Though expectations actually rose, suggesting that businesses are more pessimistic in the present than what they expect in the future.

Drilling down into the data shows a rather significant decline in New Orders, Shipments and Unfilled Orders. All suggest that business conditions in New York have materially weakened in the goods-producing industry.

CPI data continues to show energy as the leading area of year-over-year weakness, but shelter, transportation and food still remain elevated year-over-year. With housing prices continuing to rise, the idea that the CPI’s OER component will fall from here may be far fetched.

Food inflation has also been a concern in the US, with prices rising over 25% from December 2019 to December 2023. While food is not as large of a budget component in the US as it is in Europe and other parts of the world, this is still putting more pressure on the bottom two quartiles of consumers.

The real eye catcher in CPI data, however, is car insurance prices. Surging over 20% year-over-year.

In fact, car insurance costs nearly doubled over the last decade as vehicle replacement costs increased and with them premiums surged higher.

Car insurance, however, is not the most aggressive area of upward price revisions. Instead, going back over the last 23 years we can see hospital services surged 243.7%, college tuition and fees moved up by 184.7%, and childcare and nursery school services rose by 132.8%.

As a result of stronger than expected retail sales data and some vaguely hawkish Fed chatter last week, Fed Funds Futures discounted the chance of a March rate hike to less than a coin toss. Decreasing the expectation of cuts from 6 to 5 (or 133 bps) for 2024. Though we still feel it’s more likely to come at 2-3 cuts.

One reason we may need to temper our expectations of cuts vs what Fed Funds Futures suggest is that freight rates are surging because of tensions in the Red Sea and the Panama Canal having major bottlenecks due to prevalent drought conditions. This type of cost push inflation takes about 5-6 months to translate to consumers, however, and much of it may be felt more by Europe than the US.

Big Trouble in Brittle China

China lent an enormous amount of money as a part of its Belt and Road initiative, and now over $1 trillion of that debt is coming due, but most of those countries that borrowed are experiencing challenges paying it back.

Chip demand in China is declining as well, falling a record 15% as sanctions and a slowing economy undermine the appetite for semiconductors and capacity to buy them.

Funds aren’t just leaving China to head for greener pastures, like Japan. They are piling into ex-China ETF assets as well. We don’t really consider China an emerging market at this point anyway due to the economy maturing and slowing.

FXI has fallen 46.63% over the last five years and is down 6.71% year-to-date. Suggesting that cheap can continue to get cheaper. Further, it’s hard to qualify Chinese equities as objectively cheap because of the extreme opacity within the country. There is no real accountability or transparency. We’re merely meant to take financial statements at face value. Does anybody remember Sino-Forest or Lucky Coffee?

Local government funding vehicles are increasingly facing insolvency risks, with an increasingly large maturity wall of expirations as we navigate throughout Q1 and Q2.

Zooming out we can see that 2024 brings about the second largest amount of maturities since 2023, meaning that the year ahead is likely to be somewhat tumultous. The government is attempting to strike a very precarious balance between conservative stimulus and not letting this situation become more and more dire.

Then and Now

Remember what it was like to do research way back when? If you are as ancient as I am you do. We’re extremely fortunate to have the compendium of humanity’s knowledge at our fingertips. It makes sharing all of this information with you all so much easier.

I hope that everyone has a wonderful week ahead!

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