ChatGPT vs Earnings Ranking, can the giants hold up the US stock market?

Hello everyone, below is the key information summary of Dolphin's combination strategy for this week:

There wasn't much macroeconomic data in the US stock market last week, only the April Markit PMI implied that manufacturing has returned to the threshold line, supporting the risk-free rate to continue in the high range of 3.5-3.6%, which is basically consistent with Dolphin's judgment last week.
Although China's March consumption recovery was not stunning, it at least showed marginal improvement and continued to improve. In addition, the GDP data in the first quarter was not bad, driven by the recovery of consumption. Of course, the problems still exist: weak private investment and insufficient speed of consumption recovery.
Overall, after the temporary end of the US banking crisis and the failure of short-term monetary easing expectations, there is evident US dollar fund withdrawal from Hong Kong stocks and growth stocks, which has caused a more significant decline in global growth valuations.
Currently, Dolphin is paying attention to e-commerce and Internet companies, dining and consumption, which have dropped to the near-hit zone state. Dolphin will closely monitor price opportunities in further declines. Based on marginal changes in performance displayed last week, Dolphin adjusted from Hikvision to TSMC.
This week marks the start of the earnings season for giants such as Google, Meta, Microsoft and Amazon, all of which are somewhat related to ChatGPT, so their share prices remained stable even under poor performance last quarter. Given the current resilience of the economy this quarter, the focus is on two advertising stocks simultaneously reducing costs and increasing efficiency, and on the possibility of exceeding profit expectations. Amazon is focusing on the resilience of retail growth and profit release space brought by cost reduction and efficiency improvement. Microsoft may have weaker performance, especially if ChatGPT-related costs are included in their earnings, so the narrative progress of ChatGPT is the main point of attention.

The following is the detailed content:

I. US stocks: A week of stalemate Last week, macroeconomic data in the US stock market entered a rare period of calm. Except for the April Markit manufacturing PMI, which did not shrink, but rather slightly recovered from last month's 49.2 to 50.4, there was very little other basic high-value information.

Corresponding to the macroeconomic performance in the US, it was basically a week of stalemate: the ten-year US bond was basically stable at 3.5%-3.6%, with very little fluctuation; at the same time, the six-month and one-year Treasury bonds were also stable at over 4.78% and 5%, respectively, which means that the market continues to expect a rate hike in May.

The only major change in bonds of different maturities last week was the one-month Treasury bill, with its yield dropping directly from over 4% to 3.4%. From Dolphin's perspective, the significant decline in yield is mainly due to the market's growing concern that there may be pitfalls regarding the US raising the debt limit.

The deadline for raising the debt limit this year should be in mid-2022, corresponding to the current 3-month Treasury bill. As this issue grows closer, everyone tends to buy the 1-month limit instead of the 3-month limit Treasury bills, causing the yield of the one-month Treasury bill to quickly decline, while the yield of the three-month Treasury bill is clearly on the rise.

In addition, the trend of residents' bank deposits moving out has resumed in the week ending April 12th:

The negative liabilities of the entire US banking industry also reappeared in the trend of outflows, with nearly $80 billion in resident deposits leaving in a single week. Corresponding to this, the bank's cash reduced by $52 billion and securities assets (mainly fixed-income bonds, MBS, etc.) shrank by nearly $30 billion.
However, there was no contraction in the credit offered by banks to the real economy in the week of April 12th. In addition to loans to ordinary enterprises and individuals, personal housing loans have also begun to recover, driving the overall growth of mortgage loans. Only the vehicle loans in the personal loans and the commercial real estate loans in the real estate loan field continue to shrink.

Based on observations over the past few weeks, it can be seen that the biggest impact of continued outflow of resident deposits should still be on commercial real estate loans and vehicle loans, as well as bank's account cash. Regarding securities assets, since resident deposits flowed into government bonds after leaving banks, actual financing by the government's financing department may not have been greatly affected. Rather, the financing costs have increased, directly corresponding to the issue of raising the debt limit for government bonds and interest rates.

Currently, the proportion of bank account cash assets to total assets is about 14%, compared to only 6-8% during the 2008 economic crisis and around 10% before the pandemic. If there is no run on the banks and only a slow outflow, it seems that the banks still have a cushion.

Overall, in the two weeks following the banking industry's liquidity crisis, the basic fundamentals of the real economy have basically slowed down as expected, and the expected monetary easing has not been implemented. Corresponding asset market transactions have only been fluctuating.

This Thursday, when two heavy-weight economic data will be released in the United States: the first-quarter GDP and personal consumption expenditure (PCE), the market currently expects a quarter-on-quarter annualized growth of 2%. The annualized growth rate of consumption was relatively high in January and slightly decreased in February, so there is a possibility of exceeding expectations for the first-quarter GDP.

Second, the slow climb of domestic economic recovery

In the first quarter, China's GDP grew 4.5% year-on-year. Of the three drivers, the contribution from exports is not dragging down this year as expected. Economic growth mainly depends on domestic consumption and investment.

However, from the situation in the first quarter and March, private investment in investment remains weak, while the recovery of consumer spending by residents has not yet returned to normal levels. Here, particular attention will be paid to consumer spending. 1. Resident expenditure: From the past trend, it is almost synchronized with residents' disposable income excluding inflation. The growth rate of consumption expenditure in the first quarter has approached the growth rate of disposable income, which further releases consumption.

In terms of sub-items, the compound annual growth rate of nominal consumer expenditure in the first quarter was 5%, which is lower than the growth rate of more than 7% in the previous three years. Behind this is that the growth rates of all categories except food, tobacco and alcohol are declining.

Based on the four-year compound annual growth rate of 5% as the benchmark point, the feature of being optional to lag behind or essential was particularly obvious. Except for transportation and communication, clothing, daily necessities and services, education, culture, and entertainment, which are greatly affected by the epidemic, are significantly worse than the eat, medicine, and housing, especially clothing, whose demand is clearly deflationary.

Combining the latest social and retail data (Is consumption really only weakly recovering?), currently in the epidemic-stricken service consumption versus physical optional, the recovery strength of service consumption (catering, accommodation, offline leisure, and social services, etc.) is significantly greater than that of physical optional (electrical products, clothing, etc.).

Before the epidemic, domestic service consumption was eroding physical consumption at an annual rate of around two percentage points. In 2019, service consumption accounted for about 53-54%, and the proportion of service consumption in the entire 2022 was also around 52.5%. Without the epidemic, the proportion of service consumption in domestic resident consumption was expected to advance towards 60%, which also means that there is still great room for the recovery of service consumption.

Compared with commodity consumption, service consumption will have a higher demand for manpower, and it can be expected that the continued repair of service consumption will also significantly improve residents' employment.

2. Furthermore, for further consumption release, either reduce the proportion of disposable income converted into savings (deposits + investment), which accounted for about 38% in the first quarter, compared with about 34-35% before the epidemic; or increase the growth rate of residents' disposable income. Before the epidemic, the growth rate of residents' disposable income was basically between 6-7%, currently it is 4%. Looking at the source of income, in addition to wage income slowing down, asset income was hit particularly hard in this wave, and operating income has only just begun to recover in the first quarter. 3. If we look at the directional changes of household savings through the monthly increase in household loans and deposits, in March, the amount of new loans taken out by households reached 12,000 yuan, but compared to the increase in deposits for the month, it is still insufficient. For every 1 yuan not borrowed, households saved 2.3 yuan in response.

This data has fluctuated between 0.5-1.5 since 2011-2012, after the two sluggish years in the real estate market, and although it was still on the high side in March, it is now back to normal proportions. This could mean that households or properties are continuing to leverage, or alternatively, raise investment allocation ratios.

Although households leveraging is not yet active enough, the dolphin leans more towards the reaction of three years of public health practice and regulation superimposition. In terms of the overarching trend, looking at the inflection point of the urbanization rate of Japan and Korea in the past, the urbanization rate of both countries slowed down when it reached around 75%.

The rate of urbanization in Korea paralleled that of China before the inflection point of the slope, and during the process of going from 65% to 75%, the rate of urbanization did not slow down significantly, taking about five years in between.

Through this set of high-frequency data, we can see that household income, consumption, and even leveraging are indeed starting to recover. However, the growth rate of household income and consumption has not returned to normal levels, and it is not realistic to expect households to spend the savings accumulated in the last three years of disasters.

But this also means that with the gradual return of service consumption and the stabilization of household employment expectations, the effects of the balance of three years can truly be realized. Currently, employment and enterprise recruitment have only just begun to recover, and have not yet returned to pre-2020 epidemic levels.

In contrast to the US economy, the slow slowdown of the economy means that the short-term monetary easing shift in the market will fall through, which is not conducive to markets such as the Hong Kong stock market that are outside the US dollar, while the recovery of the domestic economy has only just begun, and the overrunning of stock prices in the face of the weak reality of the slow economic recovery can only wait for fluctuations and consolidation. Under this global market background, major stock indices have basically fallen, with the greater the growth, the larger the decline.

In the context of the US economy being hard and the domestic slow recovery, the trend of north-south capital flow in the past two weeks has seen a continuing decline in northward capital inflows and some recovery in southward capital.

However, looking at the data from new consumer and credit in March in the context of the entire year, domestic consumption is still recovering, while the risk of a collapse in the US after the high interest rates has not been eliminated. Many Hong Kong-listed technology companies that Dolphin Jun is focusing on are entering the batting area, including e-commerce and some entertainment stocks. Recently, Dolphin Jun will focus on oversold opportunities.

Three, portfolio reallocation

Based on the performance progression of the companies that Dolphin Jun has focused on last week: Hikvision's performance shows more of a weak recovery in revenue after the stock price's repair, and as a type B state-owned enterprise, the three expenses are rigid, therefore it is temporarily cleared and cashed out. Meanwhile, whether based on the judgment of capacity utilization rate or description by the company itself, TSMC has reached the bottom by mid-year, and Dolphin Jun has made an early low allocation.

Last week, the performance of the new energy vehicle industry, represented by Tesla, implies that in order to maintain sales volume, Tesla can ignore gross profit, and if it follows another round of price cuts, it will still have an impact on its peers. Meanwhile, the firm performance of NINGBOHN has a certain cushion due to its strong family background. Although the valuation is relatively cheap, it still needs to be observed how high the safety cushion is when profit margin visibility drops.

Based on this, Dolphin Jun's portfolio has been reallocated as follows:

Four, Alpha Dolphin portfolio returns

In the week of April 14th, the Alpha Dolphin portfolio fell by 1.4%, which is significantly worse than the S&P 500 (-0.1%), basically consistent with the CSI 300 index (-1.5%), but obviously better than the Hang Seng Tech Index (-4.7%).

From the beginning of testing the portfolio to last weekend, the absolute return of the portfolio was 15.5%, and the excess return compared to the benchmark S&P 500 index was 21%.

Five, the successor of loose monetary policy

The reason why the performance of the Dolphin Jun portfolio was lower than the S&P 500 last week was mainly due to the poor performance of Chinese assets in the holdings: Alibaba, Tencent and other Internet and the Hang Seng Tech Index are all weak, and the semiconductor industry is relatively weak, which has led to the overall weak performance of the portfolio.

The specific companies with the largest increase/decrease in individual stocks, Dolphin has summarized the reasons as follows:

VI. Asset Distribution of Combination

There was no adjustment in the combination this week, with a total of 21 stocks or ETFs, including 4 standard-rated and 17 low-rated, as well as gold, U.S. bonds, and U.S. dollar cash. As of the end of last week, Alpha Dolphin's asset allocation and equity asset holding weights were as follows:

VII. Key events this week:

This week marks the beginning of the giant earnings season. Both advertising giants, Google and Meta, as well as both cloud giants, Microsoft and Amazon, will release their earnings reports. First-quarter U.S. macroeconomic resilience exceeded expectations, so we may focus on the possibility of advertising revenue exceeding expectations for the two advertising giants and profits exceeding expectations under the reduction of cost and increase of efficiency.

During this period, Microsoft benefited from ChatGPT's stock price having clearly deviated from its fundamentals, and we need to pay attention to the slowdown in its cloud business as well as ChatGPT's current erosion of its cost side. Amazon may focus on the implied benefits of the recovery of online consumption in the U.S. and the company's progress in reducing costs and increasing efficiency.