larrycheung

August 10th Daily Market Note: U.S. Headline CPI appears to find a bottoming process in the 3% region - a pivotal macro turning point

Added 2023-08-10 17:47:46 +0000 UTC

Hi Folks - here is the 8/10 Daily Market Note, with PDF attached if you want to view it that way.

Daily Strat Note: August 10th 2023

U.S. Headline CPI appears to find a bottoming process in the 3% region

Forward-looking Conclusions of this note:

Macro: U.S Headline CPI appears to find an equilibrium in the ~3% region, with housing leading the driving force in the headline figure reaccelerating. This increase is due to low supply of housing inventory in the market, and not strong demand from buyers in my view.
U.S. Stock-Specific: U.S. travel themes as discussed continue to show relative strength. Apple holds steady. I am now looking at more Selling Put candidates – some opportunities have come back to us.
Bonds: The 10Y is remaining at the 4% level and TLT is starting to balance. View on Bonds is similar to before.
China: Holding China continues to pay off for patient folks as discussed. Reiterate Hold. Still upside on China names I’ve discussed even after BABA’s earnings outcome.

Daily Market Note & Context

My interpretation of the current U.S. macro data is that it is causing a very intense tug of war among market participants, and that the higher-probability trade is to lengthen out timeframe in positions and avoid trading the choppiness.

Let’s recall that Markets bottomed in October 2022 when Headline CPI peaked at 9%+. In the first time in many months, Headline CPI is actually re-accelerating again. This time, it is led by Housing, and Housing’s ongoing inventory shortage is going to keep prices elevated for the time being. Energy prices are also on the rise again, and I expect higher Oil prices to add further upward pressure on CPI in the coming months. At the same time, there is still quite a lot of bearish positioning along with cash on the sidelines to balance out the wall of worry from macroeconomic data.

On China names, we saw Alibaba (which I use as the proxy for China Internet) post growth re-acceleration for the first time in 2 years. This is a very positive development in the context of a company where sales growth has lingered near the flat-line over the past 8 quarters. Alibaba is still priced at 10.2X EV/EBITDA which I rate as fair, and believe if growth continues surprise to the upside, BABA is forming a longer-term base that can eventually revisit 110 or better (with great choppiness along the way) in the upcoming months.

There is much concern that Deflation is a theme that will hurt the investment thesis for China names. Historically speaking, Deflation is one of the worst environments for stocks (even worse than inflation) as falling prices will directly impact many companies’ average selling prices, lower their operating margins, and reduce their stock’s DCF value since EBITDA margins are a highly sensitive input into the valuation model. In my view, China is in quite a challenged position where if they unleash monetary stimulus because lowering rates further may cause the Yuan to lose further ground against the Dollar. President Xi has also conveyed that full-blown fiscal stimulus is unlikely because of the desire to contain their domestic debt balances.

If we see stimulus from China, I expect China ADR stocks to broadly rise. If they don’t stimulate, then the best way to play a deflationary China environment is to look for companies that can continue to produce growth in sales, margins, and profits. This is a prime reason I upgraded TCOM in a recent letter because I see signs that China’s millennial and Gen Z cohort is allocating their discretionary spending in the same way U.S. millennial and Gen Z folks are – through travel, experiences, and entertainment. Even if China deflation persists, companies that continue to produce growth will be fine and will be sought out by fund managers.

Below is a list of setups that I’m currently watching for selling options premium.

Positioning Guidance that I’ve recently started based on my previous letters

Options Positions Focus:

All existing positions still in play (See previous Letters)
Entering Short Puts (Sell Puts) on AMD with Strike 97 (Sept 22nd Expiration)
Entering Short Puts (Sell Puts) on DIS with Strike 80 (Sept 22nd Expiration)
Entering Short Puts (Sell Puts) on MSFT with Strike 285 & 295 (Sept 22nd Expiration)
Entering Short Puts (Sell Puts) on ORCL with Strike 102 (Sept 22nd Expiration)
Entering Short Puts (Sell Puts) on TXN with Strike 155 (Sept 22nd Expiration)
Entering Short Puts (Sell Puts) on PDD with Strike 71 (Sept 22nd Expiration)

Another way to view these Strike levels is that I’m happy to buy the shares outright at that price.

Long Stock Positions (Same sentiment as yesterday – No change in views)

Same as previous letters.
No opinion at the U.S. Index level – these levels don’t appeal to me. They are coming back down, but we are in a corrective phase, so it’s too early to buy in.

Short Stock Positions