The US unemployment rate has risen, and Chinese concept stocks have hope.

Hello everyone, here is the Dolphin Research's summary of the core information on this week's portfolio strategy:

**1) The liquidity of the US dollar may put pressure on US stocks in the second half of the year. Dolphin Research has started to focus on the following key points: The TGA account has been replenished by nearly a hundred billion dollars in a single week, but the source of funds has returned to the old path of repurchase agreements. At the same time, the Federal Reserve has paused its long-term Treasury bond reduction and shifted to MBS.

The intentions behind the marginal changes of these two major departments last week are very clear. The Federal Reserve and the Treasury Department are working together to support market liquidity and financial markets. Overall, the liquidity preference remained favorable last week.

2) The US economy is still in the perfect crossover period of "inflation has subsided, but the economy is still going strong" in July: PCE prices have once again confirmed the decline in inflation, while personal consumption, supported by a significant reduction in the savings rate, continues to thrive. The manufacturing PMI, which has been hovering below 50, also saw a slight recovery in August.

3) The rapid easing of the US labor market is a good thing, but there are hidden concerns: The job additions in August were very impressive, close to 190,000, which is the ideal state desired by the Federal Reserve. However, after the increase in labor force participation, the unemployment rate has risen, which is worth paying attention to.

Especially since the labor force participation rate has remained stagnant for months, and even showed a slight downward trend, the sudden increase in August brought more than 500,000 new job seekers to the labor market. But is this a short-term phenomenon or because these people have depleted their excess savings and need to re-enter the labor market? This question will affect the assessment of future consumption power, especially in the context of a savings rate dropping to 3.5%. It is worth continuous attention.

Furthermore, in combination with the continuous net layoffs of flexible workers and the rapid slowdown in hourly wages, there are signs of economic weakening hidden here.

4) However, data like this from the United States actually favors the valuation recovery of Chinese assets. On the one hand, the US economy is signaling a slowdown, but it is not reaching the level of recession. It is still expected to have a soft landing. The economic cooling brings relief to expectations of interest rate hikes, which is beneficial for the valuation recovery of growth stocks. Meanwhile, the valuation of Chinese assets is at a low point. With the relief of interest rate hikes, the repair of relations between major countries, the relaxation of domestic real estate policies that are practical rather than just rhetoric, there is greater elasticity for stock price recovery.

Of course, the basic premise here is that the issuance of long-term bonds by the US Treasury does not significantly absorb market liquidity.

Here are the detailed contents:

I. US deficit financing returns to the old path of short-term emergency

In the recent strategy weekly report, "Is the US Treasury Splurging? The Backlash Has Arrived," Dolphin Research mentioned the need to closely monitor the issue of market liquidity during the reconstruction process of the TGA account in the second half of the year.

If long-term bonds are used for deficit financing and TGA account reconstruction, the liquidity of the real economy corresponding to it will be continuously drained, thereby dragging down the performance of equity assets. The reconstruction of the TGA account from June to mid-August mainly relied on repurchase agreements for financing, which had a smaller impact on market liquidity. Let's take a look at the progress of TGA account reconstruction from last week, as well as the corresponding sources of funds:

Treasury Department - The target balance of TGA until the end of September is $650 billion. In the last week of August, the balance of the TGA account increased by nearly $85 billion, reaching $500 billion.

Due to the continuous sale of US Treasury bonds and MBS by the Fed on the asset side, the reduction in assets should correspond to a simultaneous reduction in liabilities. However, the TGA account balance on the liability side has increased significantly, so other key liability items must increase substantially.

Since the issuance of Treasury bonds by the Treasury Department has increased in the past two weeks, the pace of asset sales by the Fed has shifted from long-term bonds to MBS, especially last week. However, the difference on the liability side last week is that the issuance of long-term bonds should have absorbed bank deposit reserve balances, thereby putting pressure on equity liquidity.

At least that was the case the week before last, but last week's situation returned to the old path after June and before August. The essence of the TGA account reconstruction is essentially financed by reverse repurchase agreements, which have little impact on equity capital liquidity.

From the above changes, it can be seen that the double act of the Fed and the Treasury Department in supporting market liquidity and the financial market is very obvious, and the overall liquidity preference is still favored last week.

The US economy is still in a "perfect period"

a) Surging personal consumption in July

Last week's economic data was not bad in terms of fundamentals, but the recent large changes in revised data in the US economy have affected the authority of the initial values. Let's start with the most important July consumption data - simply put, it was almost as strong as retail sales, and the surge in consumption was driven by a significant decrease in the savings rate.

The strong consumption is the result of squeezing funds originally intended for savings, rather than an excessive increase in income. As for the direction of expenditure (excluding inflation), there is a clear return of durable goods consumption, which has been on a continuous monthly growth rate of 1%+ since June.

The trend of the PCE price index, which is calculated based on consumer spending weights, does not differ significantly from the CPI in July. Both are basically in a downward trend of inflation.

These two numbers combined once again confirm the current "perfect" economic period in the United States - inflation is declining while economic growth continues.

Under the backdrop of consecutive months of accelerated MoM growth in the durable goods manufacturing industry, it seems to be supporting confidence in manufacturing orders: key indicators of the August ISM Manufacturing PMI show signs of recovery.

After the rebound in prices, once manufacturers have depleted their inventories to a certain extent, coupled with the rise in prices, the manufacturing industry is no longer reducing output. However, in terms of new orders, the recovery of demand in the midstream is not yet evident, but overall destocking has shown signs of bottoming out.

b) Has the labor market cooled down or have Americans started looking for work again because they don't have money to spend?

As the most critical macroeconomic data for August, the latest monthly non-farm payroll in the United States reached 187,000, which is relatively reasonable. Why is it considered relatively ideal?

Currently, the total potential labor force of the United States, including both labor force and non-labor force, is over 200,000 people. In August, it was 210,000 people. If the labor force participation rate of new entrants is higher than that of the existing population, and if the labor market was initially balanced, then the monthly increase of 150,000 to 210,000 people in the labor force pool can correspond to approximately 150,000 to 200,000 non-farm jobs.

Since the post-pandemic period, the current situation in the US labor market has been characterized by insufficient labor supply and a stagnant labor force participation rate. However, there has been a significant change in this situation in August: although the number of new jobs is very good, the main issue lies in the sudden increase in the labor force participation rate from 62.6% to 62.8%.

This number may seem small, but it corresponds to a labor supply of nearly 530,000 people, which is an additional contribution resulting from the previous two months of declining labor force participation and a decreasing labor force.

But the net non-farm employment in that month was only 180,000, which means that many newcomers to the labor market did not find jobs. The unemployment rate increased from 3.5% to 3.8%.

In the end, the number of unemployed people in August was 6.38 million, while the job gap at the end of July was 8.8 million (1.38 jobs for every person looking for work, approaching the pre-pandemic level of 1.2-1.25). If there is a net job cut in August, the tight labor market in the United States will quickly recover.

In addition, looking at the net increase in jobs in different industries, the contribution still comes from essential industries such as healthcare and social assistance. The leisure and catering industry also has a relatively high employment rate. However, it is worth noting that although overall employment is still good, there are continuous issues in certain forward-looking industries. The employment of temporary workers in the hiring services sector continues to decline, which, in Dolphin Research's view, is a sustained signal of weakening demand.

So, here comes the key question. Has the labor force participation rate increased because residents have almost exhausted their excess savings, especially with the continuous high credit card consumption (over 11% YoY) and the continuous decline in the savings rate? Dolphin Research believes that this is worth continuous attention.

Once this consumer mentality changes, many people will re-enter the labor market and find that the job vacancies are quickly filled, except for positions in the catering and other social service industries. Professional positions such as healthcare may not be suitable, which may lead to an increase in safety savings. As a resilient factor in the current strong US economy, it is worth paying attention to changes in residents' consumption behavior.

Also, due to the re-entry of many people into the labor market, the supply has rapidly increased, and the hourly wage growth rate in August has slowed down significantly. Compared to the previous months, which hovered around 0.4% MoM growth rate, the non-farm hourly wage growth rate in August was only 0.24%. However, this growth rate is still at the level desired by the Federal Reserve under the inflation target of around 2%.

The gradual recovery of the job market is actually very favorable for the decline in interest rate hike expectations. However, the problem is that if the decline is too fast, the market may once again worry about an economic recession. However, Dolphin Research believes that the probability of this recession is not high when considering the inventory levels of the main industries and the marginal changes in PMI. A soft landing is still the most likely scenario.

III. Market Trends

With the dual coordination of the Federal Reserve and the Treasury Department's liquidity, as well as the support from macroeconomic data depicting "inflation has leaked but the economy is still intact," global assets rebounded last week.

As for Chinese concept stocks, which have relatively high elasticity, the easing of Sino-US relations, weakened expectations of interest rate hikes, and the relaxation of property purchase restrictions in China (beneficial to the recovery of consumer stocks) have created a more favorable environment for the valuation recovery of Chinese concept assets, which are undervalued in themselves.

IV. Portfolio Adjustment

As Dolphin Research has mentioned in recent strategy reports, under the extremely low valuation of Chinese concept stocks, attention will be focused on the margin of safety brought by high-quality stocks with undervalued prices.

Last week, Dolphin Research made slight adjustments and added some individual stocks to the portfolio. Among the three companies mentioned below, Pinduoduo was previously misjudged, but based on its financial performance, it is believed that there is still an opportunity for further increase in its stock price, so it has been reintroduced into the portfolio. As for Beike, it is included due to its good company quality, and Ctrip is included because of the industry's good recovery. Dolphin Research believes that both companies have the potential to deliver better-than-expected performance.

V. Portfolio Returns

In the week of August 28th, the Alpha Dolphin virtual portfolio had a 2.4% increase in returns, which is almost the same as the S&P 500 index (+2.5%) and the CSI 300 index (+2.2%), but lower than the MSCI China index (+3.0%) and the Hang Seng Tech index (+3%).

Since the start of the portfolio testing until the end of last week, the absolute return of the portfolio was 26.4%, and the excess return compared to the MSCI China index was 44%. From the perspective of asset net value, Dolphin Research initially had a virtual asset of $100 million, which has now grown to $129 million.

Sixth, Individual Stock Profit and Loss Contribution

Last week, global assets rose across the board. In addition to technology and small-cap stocks that are sensitive to interest rate cuts, Pinduoduo, which has strong fundamental performance, also saw significant gains. On the other hand, consumer stocks generally performed weakly, but the relaxation of real estate policies may help restore the valuation of consumer stocks in the short term.

Here is a breakdown of the specific reasons for the top gainers and losers, as compiled by Dolphin Research:

Seventh, Asset Allocation

After portfolio rebalancing this week, there are 21 stocks in the portfolio, including 3 stocks rated as standard allocation and 19 stocks rated as low allocation. The remaining assets are allocated to gold, US bonds, and US dollars.

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

Eighth, Key Events This Week:

This week marks the end of the Chinese company earnings season, with only Ctrip releasing its earnings report. It is worth paying attention to Ctrip's outlook for the third and fourth quarters.