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PostsFitch is just a "paper tiger," Chinese concept stocks still have hope.
Hello everyone, here is the summary of this week's core information on the combination strategy by Dolphin:
1) The key turning point for the US in adding jobs below 200,000 has finally brought hope to the cooling labor market. However, the low unemployment rate (3.5%) and the ongoing job mismatch (1 job seeker for every 1.59 job openings) combined with stagnant wage growth indicate that Americans still have a relatively strong sense of security. The situation where income growth slows down, security decreases, and savings rate increases, leading to a decline in consumption, as mentioned by Dolphin, is still not in sight.
2) The background of the stock market correction last week was the increasing deficit level in the US fiscal policy after years of macro leverage under the federal government's resistance to easing. By the end of the second quarter, the deficit level reached nearly 9% in a favorable economic situation (compared to just over 3% in China in 2020, a special year). This indirectly indicates the current combination of policies in the US: monetary tightening, fiscal easing, and industry incentives.
However, the loose fiscal policy has led to continuous issuance of US bonds and an increase in bond yields. However, upon closer inspection, the downgrade of sovereign debt credit ratings does not affect the asset allocation pattern of bond buyers. Moreover, the current multiple subscription ratio of US bond issuance is still increasing as yields rise. The significant issuance of US bonds does not have an actual punishment mechanism. Dolphin believes that the reaction of US bond yields is excessive, and there is a greater chance of a yield correction with the release of the July CPI.
3) Based on this judgment, Dolphin still relatively favors the opportunity for a risk-free rate correction and the valuation recovery of Chinese assets, which are still relatively low. The latest earnings reports of US technology stocks have fully demonstrated that the high stock prices imply overly optimistic performance expectations. The release of earnings has become more of a "confirmation of positive news" for profit-taking transactions. If there is no correction, the opportunity is not significant.
Here are the details:
I. US Employment Cools Down, but the Economy Remains Warm
This week officially enters the period of macro data release in July, with two important data points: the leading economic indicator PMI and the employment data that sets the tone for all macro data in July. Let's focus on the most important employment data:
- In July, non-farm payrolls added 187,000 jobs, officially falling below the key threshold of 200,000. Why is 200,000 an important threshold? Because historical data shows that the overall labor pool in the US (including employed, unemployed, and non-labor force) typically adds around 150,000 to 200,000 jobs per month.
Since the current labor force participation rate remains relatively stable, the addition of 200,000 workers per month can be understood as fresh blood entering the labor market. This number is related to immigration policies and the natural arrival of the working-age population and can be considered as a relatively inelastic supply in the short term.
When the increase in employment (187,000 this month) begins to decline to the level consistent with the increase in supply, the underlying meaning is that as long as enterprises do not release job demands that far exceed the increase in employment for the month, the actual supply and demand will remain relatively balanced, and further decrease in the unemployment rate will be very limited. The unemployment rate for this month, 3.5%, is already the lowest value before the epidemic.
However, the current situation is that although the increase in employment and the new labor supply have finally reached a relatively balanced state, due to previous supply shortages, a large number of potential job seekers have been consumed, and the current vacancy in job positions is still much larger than the number of job seekers (one job seeker corresponds to 1.6 job positions waiting to be filled by enterprises).
Therefore, whether the unemployment rate will further decrease and whether there is still room for further employment expansion actually depends on the rigidity of job demands at the current stage. Let's take a closer look at the employment distribution in the latest month:
a. Rigidity of demand due to early retirement of the baby boom generation: Of the 187,000 non-agricultural employed population added this month, the education and healthcare sectors contributed 100,000 people (including 87,000 in healthcare), and by the end of June, there were still 2 million job positions waiting to be filled in the education and healthcare industries.
b. Construction industry: Except for residential construction, all other sectors are expanding their recruitment. Even if we consider residential construction, the industry as a whole is still expanding. After a slight adjustment at the beginning of the year, the demand for labor continues to rise.
c. Manufacturing industry: Durable goods manufacturing has stabilized after several months of adjustment, but non-durable goods manufacturing, especially food and chemical manufacturing, has started to clearly reduce employment.
d. Employment-intensive industries in the service sector: In addition to the education and healthcare industries mentioned earlier, the main sectors that still have relatively rigid demand are the catering industry in the leisure and entertainment sector, as well as personal service industries such as maintenance and laundry. Other major industries, including transportation, business services, information technology, finance, and wholesale and retail trade, have experienced or are currently experiencing layoffs, indicating a rotating cooling-off period.
From these structural changes, we can see that a significant part of the reason why a large portion of demand remains rigid may be related to the age structure in the United States. The concentrated early retirement of the baby boom generation has not only permanently reduced labor force participation on the supply side but also brought additional rigid demand for labor-intensive industries such as healthcare and family care on the demand side. The resolution of employment contradictions in this cycle is more like a slow and meticulous process.
Overall, the main support behind the strong US economy has reached a halftime state in the labor market: New employment and new supply are tending to balance, but due to the current shortage of positions in industries with strong demand (mainly healthcare and personal care), the vacancies need to be gradually filled. The unemployment rate may not have much room to further decline, but it is relatively difficult to quickly increase, especially without the triggering of external macro events.
At the same time, although the growth of new employment has slowed down, wage growth remains rigid: the monthly wage growth rate in July was still 0.42%, corresponding to a year-on-year growth rate of over 5%. When all these pieces of information are combined, it means low unemployment rate (3.5%) + ongoing employment contradictions (1 job seeker corresponds to 1.59 job vacancies) + continuous rigid wage growth.
This also means that the sense of security among US residents is still relatively sufficient. Even after the economic downturn mentioned by Dolphin, the situation of slowing income growth, declining sense of security, and increasing savings rate that suppresses consumption is not yet in sight.
Secondly, what's the deal with this round of pullback?
The slowdown in employment is not a problem, and the economic fundamentals are fine, but the stock market continues to decline. Where is the problem? In Dolphin's view, it is still the aftermath of the major reshuffling of the balance sheets of the Federal Reserve and the Treasury Department.
As early as before, Dolphin said: In this wave of the epidemic, the leverage of the private sector, including local governments, has been transferred to the federal government. In the first quarter of this year, compared with before the epidemic, the overall macro leverage ratio of the US economy increased by 11 percentage points, and one department of the federal government reached 15 percentage points, while the leverage ratios of local governments and households actually decreased.
So what does this problem correspond to? First, it is the issue of the national debt ceiling, and after the national debt ceiling is resolved, it is the problem of excessive issuance of US bonds and downgrading of sovereign debt ratings.
Take a look at the current deficit rate of the US federal government: it has reached nearly 9% by the end of the second quarter. It should be noted that in 2020, during a special year for China, the macro deficit rate only slightly exceeded 3%, and although the United States was also high before the epidemic, it was basically kept within 4%.
However, with the current situation of monetary easing in the United States this year, a fiscal deficit rate of 9% means that the US government is actually implementing loose fiscal policies, which to some extent explains the reason why the US economy continues to be strong - monetary tightening, fiscal easing, and industry stimulation.
Moreover, according to the latest plan of the US Treasury Department, the net issuance of the national debt ceiling will be further increased to one trillion US dollars, which is nearly 300 billion US dollars higher than the plan in May. At the same time, the TGA account will be replenished to 650 billion US dollars, originally planned at 600 billion US dollars. Currently, the actual balance of the TGA account has just exceeded 450 billion US dollars.
In other words, the scale of future bond issuance will continue to expand, which has led to a comprehensive increase in yields of bonds of various maturities. Last Friday's employment data also suppressed the yield of two-year bonds, which is sensitive to interest rate cuts. Currently, yields of bonds of various maturities are mostly at high levels, with the ten-year bond still above 4%.
However, in terms of the actual supply and demand in the bond market, although the issuance continues to increase during the process of rising policy interest rates in the United States, the bid-to-cover ratio of US bonds is still rising, and there has not been a situation where "no one wants" the US bonds.
In other words, whether it is the increase in the US debt ceiling or the unexpected issuance of US bonds, there is no clear "market punishment" transmission chain from the buyer's perspective.
In addition, with the cooling of the actual labor market, Dolphin tends to believe that the current reaction of various yield curves is excessive, and the probability of a subsequent decline in US bond yields is greater with the release of CPI data this week.
3. How about market trading?
From the perspective of equity investment, after a season of earnings reports, it is clear that unless there are major unexpected results, the current trading of US technology stocks tends to be "profit locking" after positive confirmation.
As for Chinese assets, except for a few automakers whose valuations are considered "reasonable," the overall valuation is still low. Moreover, this week is the week of performance verification. After expectations are lowered enough, various internet companies are still reducing costs and increasing efficiency. Dolphin tends to believe that the probability of unexpected results is higher. Four, Portfolio Rebalancing
Based on this, in the trading week when global equity assets were suppressed by the downgrade of US sovereign debt ratings and the rise in government bond yields, Dolphin did not make significant adjustments to its Chinese asset holdings. Instead, based on fundamentals, Dolphin reduced its holdings of Xpeng, which had experienced a significant increase, to lock in profits, and also reduced its holdings of Qualcomm, which had continued to show weak fundamentals. The specific adjustments are as follows:
Five, Portfolio Returns
On August 6th, Alpha Dolphin's virtual portfolio returns declined by 1.2%, outperforming the S&P 500 Index (-2.3%), and were similar to the MSCI China Index (-1.1%), but underperformed the CSI 300 Index (+0.7%) and the Hang Seng Tech Index (+0.7%).
Since the start of the portfolio testing until the end of last week, the absolute return of the portfolio was 29.5%, with an excess return compared to the MSCI China of 47%. From the perspective of asset net value, Dolphin's initial virtual assets were $100 million, and currently it is $131 million.
Six, Individual Stock Profit and Loss Contribution
Last week, the stocks in Dolphin's coverage pool that experienced significant gains were mainly related to the fundamental performance during the earnings season, such as Amazon, NIO, and Haidilao, while the stocks that declined were mostly those that had experienced significant gains in the previous one or two weeks and were suspected of being overvalued, such as Xpeng, as well as the semiconductor sector as a whole, which experienced a pullback due to the inability of AI incremental demand to support the existing cycle, combined with the rise in risk-free returns.
The specific reasons for the top gainers and losers, as summarized by Dolphin, are as follows:
Seven, Portfolio Asset Allocation
After portfolio rebalancing this week, the portfolio is allocated to 26 stocks or ETFs, including 6 stocks with standard ratings, 20 stocks with lower ratings, and the rest in gold, US bonds, and US dollars.
As of last weekend, the asset allocation and equity asset holding weights of Alpha Dolphin are as follows:
VIII. Key Events this Week:
This week, Chinese companies' earnings reports will be released one after another, with a large number of Chinese assets entering the reporting period. Leading the way are Li Auto and Alibaba. The specific focus points, summarized by Dolphin, are as follows. Stay tuned for Dolphin's first-hand interpretation of the earnings reports.
Risk Disclosure and Statement for this Article: Dolphin Research's Disclaimer and General Disclosure
Please refer to the recent weekly reports from Dolphin Research for more articles:
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