September 11th Daily Market Note: A pause in the Dollar Index Advance and Yields Climbing continues to boost Tech recovery
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Note: Our Sector Rotation ideas for community members from last week are quickly moving in our favor. This post will have a generous preview. Portfolio positioning will be beneath the paywall.
Daily Market Note: September 11th 2023 by Larry Cheung, CFA
A pause in the Dollar Index Advance and Yields Climbing continues to give Tech further recovery
Forward-looking Conclusions of this note:
Macro: Investors reposition into less China-sensitive names within technology to drive the S&P 500 higher, namely MSFT and META (two relative value and outperformance ideas previously provided to Members)
Stock-Specific: Previous Sell Put positions from 9/7 Daily Market Note begin to perform.
Bonds: Treasuries via TLT continuing to soften is a situation I’m watching as that is a longer-term risk to the recovery.
China: One of our mentioned top ideas in China continue to perform (see here).
Daily Market Note & Context
In my previous Daily Market Note from 9/7, I focused very heavily on providing setups that I believed would work in the foreseeable future. Those are working in the background, so in this note, I will discuss more of the macro landscape that we are in based on my observations.
Let’s start off with the U.S. There is a growing chorus that we will achieve a soft landing and that the probability of a recession happening at all has been greatly reduced. Investment Banking leader Goldman Sachs recently cited that the probability of a recession is now around the 15% level.
Sharing this view, many large banks are also moving away from their previously bullish forecasts on Treasuries as they believe a soft landing and a strong economy will continue to sideline the TLT ETF. The way I am looking at this is by observing excess savings for U.S. Households, which I think is a reasonable macro data point to understand consumer health. Back in 2021, U.S. Households held about $2.1 trillion in excess savings. Fast forward to recent data, that figure is now $190 billion as of July. The Fed recently observed that excess savings is falling by about $100 billion per month, so simple math suggests that sometime in the 4th quarter of 2023, excess savings will be nearly erased.
When we couple this trajectory with the low U.S. personal savings rate of 3% and student loans set to resume, it is difficult to make the case that consumer confidence is on an upward trajectory in the coming months ahead. Mathematically, for consumer spending to keep up with its current pace, it would mean that the aggregate balance in savings would continue to fall while the aggregate balance with credit debt continues to rise (benefitting Visa and Mastercard). This phenenomon will impact consumer discretionary companies the most and impact large technology companies that have B2B contracts and consumer staples that have attracted all customer demographics like Costco and Walmart the least. The equity prices of this dynamic either has already or will reflect this ongoing situation.
In China, there is much discussion over why the government no longer reports the Youth Unemployment rate, which provides signals to consumer health and spending for Gen Z. Most recent reported figures was around the 21% mark. Without this metric, I believe the best way to understand consumer spending is by looking at earnings transcripts of consumer-facing companies such as Trip.com, Alibaba, Meituan, New Oriental, etc to evaluate how management sees the landscape.
Based on the most available information from this perspective, consumer spending is improving from a trough level that was reached last year. Spending has not been robust, but does not support the narrative that the Youth Unemployment rate is near 50% as some media outlets have speculated. Sectors such as real estate and big-ticket items such as EVs remain highly contested among consumers, but spending on travel and education continues to be quite healthy (all things considered). Among my China coverage, I continue to like the names previously mentioned. Alibaba’s share price weakness is not fully representative of the opportunity set in China ADRs.
Ahead of being out of office from September 14th-30th, I will slowly start to scale out of previously mentioned Sell Put positions before 9/14. I remain constructive on all companies mentioned, but from my own personal standpoint, prefer to close trading positions while I’m out of office. I rate Investment Positions to be a Hold in this environment.
Below is an update on the positions discussed from 9/7 Daily Market Note. Good start to the week for our Community.
-Larry
Portfolio Positioning Notes and Further Investor Education Details: