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The "Funeral Celebration" of US Stocks: Recession is a Good Thing, and the Most Aggressive Rate Hike means the End of Negative News

Hey guys, I'm Dolphin Analyst!

Last week, there was a lot of buzz in the macro market regarding rate hikes, downturns, and great power competition. Before updating my portfolio, let's take a look at the macro situation last week.

First, let's discuss the main market ups and downs last week: in the context of rate hikes and downturns, US stocks shone brightly, rising 3-5% for the week and staged an impressive rebound. On the other hand, after two months of lifting lockdown restrictions, A-shares and Chinese concept stocks were struggling.

The significant rise in US stocks goes beyond the earnings season itself. Here, I would like to highlight the two major macro events in the US to see how the market managed to "turn bad news into good news."

1. The most aggressive rate hike? It's no more negative news.

The US stocks raised its benchmark interest rate by 75 basis points as scheduled last week, putting the Federal Reserve's benchmark interest rate at a neutral rate of 2.25% - 2.5%, pushing interest rates to the peak of the last rate-hiking cycle. The speed and momentum can be considered "thunderous" (for a more detailed analysis, please click “Fed Hikes Rates - The End of the Aggressive Policy Era?”).

The rate has increased by 75 basis points for two consecutive months. This speed will inevitably slow down as the actual impact on the real economy takes time to transmit. Nonetheless, as estimated by Dolphin Analyst, the market has interpreted this as positive news because the peak of rate hikes has passed, and the negative news has ended. The market turned into a frenzy, and the next round of rate hikes will only occur two months later.

2. Economic downturn? That's good news.

Last week, the US GDP was released, and since GDP does not factor in price increases, the actual GDP growth rate in the US has declined for two consecutive quarters (quarter-on-quarter year-over-year dimension).

Furthermore, as observed by Dolphin Analyst (refer to “When Americans Are Short on Cash, How Far Away is the US from Recession?”), the US economy, as a severely demand-driven economy, currently faces two problems. Firstly, wage growth is not keeping up with inflation. Secondly, the money saved during the pandemic has almost dissipated.

Looking at the average savings data for Americans updated last week: Americans don’t seem to have much savings habits, with an average of only a few thousand dollars in savings per person. The latest average savings per person in June declined further to 2800 dollars, and the year-on-year decline of savings per person is 45%, which is comparable to the decline in house sales in China.

A very practical problem is: at this rate of decline, the purchasing power of wages is still declining. If labor-intensive enterprises follow Amazon's lead and continue to experience a decline in profits, they may lay off hundreds of thousands of workers each quarter. Coupled with the rising cost of borrowing for consumption, regardless of whether US officials admit it, the US recession is much closer than we think. And behind this is the Fed's guidance to raise interest rates by 50 basis points next year, while the core divergence of market expectations from gradually entering an interest rate-cutting cycle starting next year.

Three, critical moment, giants hold up

Last week, of the five giants - Google, Microsoft, Meta, Apple, and Amazon - only Meta continued to collapse, while Amazon, which has long-term logic stability but relative mismatch of input and output, ushered in a performance reversal, and Microsoft seemed flat but exceeded its contract orders, locking in high certainty for next quarter. Google was not as fragile as expected, and Apple barely passed this quarter. Overall, almost all of them "crossed the line."

Driven by the above three points, the US stocks had a strictly joyous week in a company's overall plain performance atmosphere, with all sectors rising.

Overall, if the Dolphin Analyst looks ahead, at least in the short term, as the Dolphin Analyst mentioned before, the period of interest rate hikes has passed, and the factor of suppressing the US stocks with the interest rate "killing valuation" has temporarily stopped. There will be a breathing period of at least two months. When looking for "rigid" performance stocks that were wrongly killed in the market's all-round "killing valuation," we should also pay attention to the US stock macro data such as employment and inflation when the interest rate hike day approaches at the end of September.

Four, A-share's alternative trend

As the stock markets in major developed markets have fully recovered, A-shares were quite different last week. At the macro level, last week's high-level meetings in China mainly included the State Council meeting and the deployment of the economic arrangements for the second half of the year, in addition to the telephone conversation between the leaders of China and the United States, which will not be elaborated here.

Overall, except for a slight recovery in real estate and the rise of the automotive sector due to the promotion of car consumption, the extension of new energy vehicle purchase tax exemption, and traditional industries such as oil and petrochemicals, other sectors were mainly in decline, especially the sectors related to consumption such as healthcare, food and beverage, and social services, with large declines due to poor performance and epidemic prevention and control.

The amount of northbound and southbound capital transactions continues to shrink, although they are all in a net inflow status, the magnitude is very small.

Five, Alpha Dolphin Portfolio Returns:

Overall, due to the continued large pullback of Chinese assets and the heavy Dolphin Analyst's Chinese asset position, last week (7/25-7/29), the Dolphin Research Alpha Dolphin Portfolio returned dropped by 2.2, significantly underperforming the S&P 500 Index (up 4.3%, with crude oil prices stable as the benchmark, and the S&P repaired for a whole month), and slightly lower than the decline of the Shanghai and Shenzhen 300 (-1.6%).

From the beginning of self-assembly testing to last weekend, the portfolio's absolute return was 14%, with a relative return of 20% compared to the S&P 500.

VI. Pure US stocks support, Chinese stocks sluggish, consumption dismal

Last week in the Dolphin's portfolio, major Chinese assets with a holding weight of over 25% suffered a large decline in addition to many warning statements, while many stocks in the consumer industry suffered from poor performance. The prospect of future repairs on these stocks was low, which is why the majority of the portfolio's returns were mainly from US stocks.

The following is a breakdown of the reasons for the significant ups and downs of the key stocks tracked by the Dolphin.

Last week, Dolphin paid attention to the inflow and outflow of funds for the following stocks: Northbound funds continued to buy Fenzhong, while consumer electronics companies such as Sunyu and Goertek saw net buying as Apple revealed their financial report. The new energy sectors, such as Longi Green and Enjie, also saw inflows. An important point to mention is Tencent, where Southbound funds have started to increase their buying in Tencent at around 300 RMB.

However, last week Southbound funds continued to sell Semiconductor International, Sunwah and Meituan while Northern Sunshine Power saw a rebound in stock prices but was still sold by the Northbound funds, and Geely Automobile was still being bought last week. Now that Southbound funds have changed hands, it is being sold in earnest.

VII. Portfolio asset distribution

If we look at the internal testing start point on March 1, the entire gain of the Longbridge Alpha Dolphin portfolio as of Friday is 17%, including dividend income, and the single stock return is 19%.

Last week, the Dolphin did not adjust its portfolio and has a total of 33 stocks in its possession, including 10 standard stocks, but only 23 lower-priced stocks.

As of last weekend, the allocation of Alpha Dolphin's assets and the weight of its equity holdings are as follows:

But in the new week, based on the marginal changes in the performance of companies during the financial reporting season and Dolphin Analyst's in-depth research on newly added covered company BOE Technology. As Amazon's latest quarterly report suggests that the company's performance inflection point is approaching, Dolphin Analyst has adjusted Amazon to a standard configuration based on last Friday's closing price and added a position in BOE Technology, configured as a low-end model.

VIII. Key Points of the Week

As the financial reporting season of US stock market giants comes to an end, there are still some medium-sized and small but beautiful companies left in the US stock market, such as Airbnb and Square, etc. This week, led by Alibaba and Kweichow Moutai, China's asset financial reporting season is launching.

As for Chinese assets, the second quarter financial report is almost predictable, it is only a matter of how much, and more importantly, it is like Alibaba's performance outlook for the third quarter and beyond.

Dolphin Analyst has summarized the specific points that need to be noted as follows:

Please refer to the following articles on Longbridge's weekly reports on Dolphin's portfolio:

“Business Results Thunderstorm” Opening as Interest Rate Enters the Second Half

“The epidemic is about to rebound, the US is about to decline, and funds are about to change their minds.”

The current Chinese assets: "No news is good news" in the US stock market

Has the Carnival of Growth Already Peaked? But is the US really in decline?

Is the US in Recession or Stagflation in 2023?

US oil inflation, China's new energy vehicles to grow stronger? 《Fed hikes interest rates, but Chinese asset opportunities still arise》

《US stock market inflation soars again,how far can the rebound go?》

《Grounded and practical: Dolphin portfolio takes off》

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