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NEW MONEY IS HITTING THE MARKET
M2 Money Supply Analysis, Offside Capital
Everyone keeps mentioning the M2 Money Supply print on Twitter…
The one thing they don’t seem to care about (but matters the most) is this:
Overall M2 Supply hardly matters to markets, as it is relative in nature
What matters is the monthly rate of change
Why do I care about the rate of change?
Because it directly tells you how policymakers - the Fed specifically - are thinking about liquidity and stimulus requirements for markets and the economy.
This latest reading represented a 1.09% increase compared to last month.
Which is a second standard deviation increment compared to historical behavior.
And that brings up a far more important question:
Why is the Fed suddenly boosting liquidity so aggressively?
Especially when we have new IPOs like SpaceX, Anthropic, and OpenAI hitting the markets with additional liquidity.
I mean, Kevin Warsh is of the thinking that he can keep interest rates low while shrinking the Fed’s balance sheet.
This sort of move directly contradicts his gameplan.
If you’ve been watching our Morning Digests, then you know:
Markets keep swinging back and forth from breadth to concentration
These rotations don’t mechanically work unless the engine has enough oil (liquidity)
Without ample liquidity, the machine breaks.
A break in the machine can show up as VIX shocks and other plumbing issues in these trillion-dollar rotations happening as the market makes up its mind as to which area of the economy wins during the AI race.
But, that’s not even the bigger issue.
Go read our deep dive on why South Korea’s KOSPI is now predicting the NASDAQ’s next move.
That entire $1.5 trillion rug waiting to get pulled might be why the Fed is anticipating sudden liquidity needs.
Maybe.
Now let’s get into yesterday’s Manufacturing PMI, and which industries in the United States might be ready to deliver big upswing moves coming soon.
CHART OF THE DAY
You may be looking at Micron’s small dip and thinking this is your chance to go all in before new all-time highs are reached.
If that’s you (or someone you know)
You should refer to the latest positioning update from Goldman Sachs’ trading desk.
They have just shown you that Micron is one of the most sold/shorted names in US information technology.
ARE YOU COVERED? —>
I ran my analysis on Micron earnings a couple of weeks ago, and told you it wasn’t as healthy as everyone thought.
The entire report relied on rising memory prices rather than sales volume.
And that’s not even the worst part…
THE ECONOMY’S LATEST
US Manufacturing PMI, Offside Capital
Manufacturing is only ~15-20% of US GDP.
But,
It represents a large share of jobs, cyclical behavior, and consumer trends.
Most stop at the headline number, but I can tell you over 80% of my trading ideas come from the PMIs.
So yes, it matters a lot.
53.3% was the headline, down 0.7% from the previous month.
Still expanding but expanding slower.
Now let’s dig deeper into actual signals coming from the PMI segments:
Inverted Customer Inventories vs PMI, Offside Capital
Customer inventories are a powerful leading indicator as to where the PMI itself may be headed.
Right now, inventory readings are on a downtrend, which is a good thing as tightening supply essentially means increasing demand and consumer spending.
However,
There has been a recent break to these lower lows, and that’s a potential headwind to future PMI readings.
I believe that, when you strip out AI’s influence on the economy, the PMI should have been much weaker than reported.
Trade Balance, Offside Capital
In fact, this is what economic activity looks like when you zoom out.
Reported manufacturing imports minus exports (essentially trade) have plummeted over the past quarter.
Iran did have somewhat of an impact on this, but the reality is the trend was already headed lower.
And that’s a clear reflection of the sort of economic activity taking place in the US (besides all the AI capex noise.)
However, not all industries are included in this anemic economic activity:
PMI Industry New Order Readings, Offside Capital
When I dug into new order readings, four industries became clear outliers:
Primary Metals
Apparel
Computer & Electronic Products
Machinery
Of course, this is the one area of the economy that currently has all the momentum and growth.
And yes, it is all tied to the AI boom.
PMI Industry Production Readings, Offside Capital
Moving on to production (the next step after orders come in)
You can see activity is booming for these same industries, which means they are getting ready for more demand ahead.
The slower production compared to last month is a concern, though these are still within the top five in production readings.
So I think the trend could continue to stay up.
PMI Industry Inventory Readings, Offside Capital
Here’s the tie-breaker, inventories.
You can see that demand had outpaced supply for these industries up until now, where all but apparel have managed to increase their inventories in June.
This increase could be taken as another symptom of slowing.
But,
Nothing will be accepted as an actual slowdown until inventories begin to expand within the top 5 of industries, and we continue to see slower production alongside rising inventories.
So far,
I think this is more of a green light to start digging into these four industries for potential swing trade ideas.
All of which will be posted, hedged, and executed inside Offside Premium.
When executives were asked about the state of their industry,
Here’s what they had to say about computer & electronic products:
PMI Respondent Section
Reading past all the corporate lingo, here’s the real signal:
Prices are becoming an issue
Interest rates act as a potential headwind to future orders and consumption
My guess is that the price issues are mostly centered around memory prices.
Which is why Apple and Microsoft have begun raising hardware prices, even Best Buy hinted at coming troubles from price hikes in consumer electronics.
This is extremely important to keep in mind when hunting for the right companies and narratives within the industry.
Now here’s what was said about machinery:
PMI Respondent Section
This is a very strong tell.
Executives are clearly telling you orders for machinery related to semiconductors and defense continue to carry the industry forward.
So now we can combine this information along with the above warnings in memory prices and interest rates to drill down into our ideas.
Three industries could be very well set up for an EPS (and price) upswing in the following quarter.
This will be a harder space to look for opportunities given lots of names have already spiked.
But,
We’re forgetting about one area here…
Apparel.
This is only one month of supporting data, so it’s not yet an official trend.
Still, I would deem it worthy to look into ideas in that space, as expectations are probably too pessimistic and carrying attractive risk/reward setups if apparel names end up reporting growth in revenues and earnings.
WHAT’S THE TRADE?
Some traders are now preparing for the potential turnaround in the apparel industry:
Massive volume and open interest is happening for On Holding (ONON) calls right now.
This is one piece of data alone, and it is NOT an indication that I will select a trade in ONON from here.
But,
It does show that maybe I should start digging further into the space for other such evidence.
The same will be done for the other three industries showing healthy signs of expansion.
The results will be given to Premium Members first.
Click here to be part of what’s next.
And as always, keep an eye on our Morning Digests.
I suspect Lululemon (LULU) will make it into the Offside Portfolio as its price action begins to look constructive, backed by this recent data out of the apparel industry.
A Final Note
COMING UP NEXT
As the services PMI index comes out next week, I will give you a deep dive on that as well and connect the dots on what’s happening in the other corner of the economy.
Trade ideas will be outlined such as today, and finish connecting all of the information necessary.
We are two weeks away from earnings season, so make sure you sign up for Offside Premium to receive my earnings coverage materials.
In the meantime, here’s a video from Goldman Sachs interviewing Honeywell’s CEO on what he thinks about the future of AI in the industrial sector and its applications.
Good to see what the insiders are thinking, and whether these views are realistic or not:
Until next time,
OFFSIDE RESEARCH
Against the Tape, Ahead of the Curve.