Are squandering government and low good prices providing a doubled sense of financial security?

If the May economic data released in June still shows a "twisting" trend of hot and slow areas, indicating a soft landing, the key data from May consumption, June employment, PMI, to the latest CPI and PPI released from the second half of June until now, all point to the economy cooling down comprehensively.

Supported by these data, before the release of CPI and PPI last week, the market continuously concentrated funds on the seven tech sisters, driving these companies, and even Tesla with weaker fundamentals, to make significant recoveries, while the other six tech giants reached new highs.

However, after the price data was released, funds started to turn around. So, how are the details of this price data? Let's take a look with Dolphin Jun along with the recent June federal government spending:

I. Seemingly reduced deficit? Still very high

As of June, the fiscal deficit for the first nine months of the 2024 fiscal year is close to $1.3 trillion, a slight decrease of $22 billion compared to the same period last year. It seems that the deficit is slightly lower than the historical record of the same period last year.

In June itself, the deficit appears to be $73 billion, much lower than the monthly deficits of over a trillion dollars or the $228 billion deficit of the same period last year. However, the actual deficit, excluding timing differences in revenue and expenditure, is $166 billion, $25 billion higher than the same period last year, indicating an expanding deficit.

At the same time, with 7-9 months left in the 2024 fiscal year, the U.S. Congressional Budget Office further explained the fiscal budget for the 2024 fiscal year: after adjusting for timing differences in revenue and expenditure, the fiscal deficit of the U.S. federal government for the 2024 fiscal year is expected to reach $2 trillion, surpassing the peak of $1.7 trillion last year.

The reason for significantly increasing the deficit for the next three months is due to a student loan forgiveness policy introduced in April, as well as aid funds provided to Israel, Ukraine, and others, which were not included in the previous nine months.

Regarding this $2 trillion deficit, since the deficit for the first 9 months is already determined, if there is another round of heavy spending in the third quarter, the U.S. fiscal deficit in the third quarter (relative to real GDP) may rise to between 8-9%, and the narrow deficit excluding interest payments will also increase to 4.5%.

This also indicates that even if consumer spending weakens in the third quarter, with crazy government spending to provide support, the security of economic growth remains high. In this scenario, the real variable lies in the inflation level. If there is high growth and high inflation, it will be a repeat of the past period. However, if growth is guaranteed while inflation can moderately decline, the comfort of a soft landing will sharply increaseIn this case, last week's perfect CPI inflation data timely intervened to provide the market with enough reassurance.

II. June Prices: Perfect to Perfection

We know that the structure of US CPI data has always been: core goods continue to leak deflation; in core services, housing is known to follow market rental prices in the case of renewing leases for old houses, and inflation leakage will come sooner or later, with the real concern being inflation in other core services apart from housing.

From this perspective, last week's inflation was almost perfect (due to the seasonally adjusted monthly growth fluctuating around 0.2%, corresponding to an annual price increase of less than 2.5% after a year, Dolphin defines the 0.2% monthly growth as a perfect growth number):

① In highly volatile energy and food prices: while energy costs have been falling for two consecutive months, food inflation has been in the "safe zone" of 0-0.2% monthly growth for 5 consecutive months, indicating that the risk of food inflation is a thing of the past.

② In housing cost inflation, which has been waiting for a turning point, housing inflation has finally seen a rare slowdown, with a mere 0.2% increase month-on-month. Why is this 0.2% so important? Because once the trend enters the range of 0.2% monthly growth, the year-on-year growth after a year will be less than 2.5%, which is precisely the comfortable inflation range that the Federal Reserve can almost accept.

③ Key sub-items of core goods: Under continued high interest rate pressure, both used cars and new cars experienced negative growth month-on-month, especially with a significant drop in used car prices this week, driving an overall 0.1% contraction in core goods prices.

④ Key items in core services excluding housing: Due to the continuous decline in airfare prices, transportation service prices have seen negative growth for two consecutive months, while medical services, which have always been in short supply, have also fallen to a perfect "0.2%" month-on-month growth.

Among the subcategories with still relatively large increases, only motor vehicle insurance prices in transportation and personal services such as haircuts and personal care items remain at a high 0.9% month-on-month growth. In particular, as blue-collar employment cools down, the price increases of some service items with strong labor cost elements are also entering the comfortable zone of 0.2% monthly growthIf the results of scenarios one and two are combined, it is easy to imagine a scenario: with fiscal expenditure in the third quarter providing support, the economy will not be weak. However, with inflation slowing down employment and a broad-based price decline, it is likely to present a perfect macroeconomic combination of ongoing economic growth but past inflation. With the Federal Reserve slowing down the pace of quantitative tightening to guard against liquidity risks, equity assets continue to perform well.

Interestingly, with the overly optimistic CPI data coming out, the market's investment style has shifted dramatically - from the seven tech sisters to the Dow Jones and small-cap stocks, which has exceeded Dolphin's original expectations. One possible explanation is that these assets are more sensitive to interest rate expectations, and with the anticipation of rate cuts, the pressure on these assets has eased.

However, Dolphin notes that historically, in the 1-2 months before a rate cut, due to the downward discount factor of equity assets, there is usually a high probability of a rise in US stock assets. But once the actual rate cut cycle begins, by the end of the rate cut, US stock equity assets have generally declined in the past few rate cut cycles, which is the main trend.

The key point here is that when entering a real rate cut cycle that requires sustained rate cuts, it generally means that the fundamentals are also entering a trend of weakening. As the US stock market is dominated by EPS in leading the rise and fall, when EPS marginally deteriorates, stock prices tend to fall.

Furthermore, this week marks the start of the US stock earnings season once again. The two leading stocks in the semiconductor industry chain - ASML and TSMC - will both release their earnings. The market has already fully anticipated TSMC's price increase, and even after the price hike, it will likely increase capital expenditure again, benefiting upstream semiconductor equipment stocks like ASML. How much of this logic will actually be deduced into the performance and guidance of these companies remains to be seen as we enter this critical juncture this week.

In addition, among internet companies, Netflix will also release its earnings this week. As the logic of cracking down on shared accounts nears its end and enters a phase of driving valuation through price increases, how much upside potential does Netflix have left, and whether the guidance on new users can meet market expectations are all hidden concerns that need attention.

Dolphin will provide rapid and in-depth performance reviews as soon as possible. Longbridge users can receive rapid and in-depth performance reviews on the Longbridge APP, so stay tuned.

III. Portfolio Rebalancing and Returns

Dolphin did not rebalance the portfolio last week. At the end of last week, the portfolio's returns increased by 1.1%, outperforming the S&P 500 (0.9%), but underperforming the CSI 300 (1.2%), MSCI China (2.8%), and Hang Seng Tech Index (5.2%).

Since the start of the portfolio testing until the end of last week, the absolute return of the portfolio is 39%, with an excess return compared to MSCI China of 57%. From the perspective of asset net value, Dolphin's initial virtual assets of $100 million have now risen to $140 million.

IV. Individual Stock Profit and Loss Contribution

Due to the fact that the Alpha Dolphin portfolio tends to select high-quality assets with stable stock prices in equity assets, the portfolio easily outperforms when funds flow back into high-quality assets. Last week, it was confirmed that funds flowed into traditional industries, small-cap stocks, and Chinese concept stocks.

Even within Chinese concept stocks, the companies selected by the Alpha Dolphin portfolio are relatively stable in terms of fundamentals. Therefore, last week, with the frenzy driven by new energy vehicles and the mobile phone industry chain, it was difficult for this portfolio to benefit. Additionally, the significant decline in the stock prices of US stock giants within the portfolio also affected the upside potential of returns.

V. Portfolio Asset Allocation

The Alpha Dolphin virtual portfolio holds a total of 20 individual stocks and equity-type ETFs, with 5 core holdings and the rest being underweighted equity assets, along with holdings in gold, US bonds, and US dollar cash.

As of the end of last week, the asset allocation and equity asset holding weights of the Alpha Dolphin portfolio are as follows: