The economy will be soft and soft, investment opportunities may emerge?

At the end of April, the SPX index of the U.S. stock market returned positive 1.5% to a level of 4,169 points, the Nasdaq was virtually unchanged and the Dow Jones Industrial Average was positive 2.5%. For the first four months of 2023, the broader index of S&P 500 companies is up more than 8%, but remains in bear market territory, below about 4,200 points.

In the short term, the market's uptrend has come under pressure since April 25, according to Investor's Business Daily.

SPX Monthly Chart

In the first four months of the year, the S&P500 climbed more than 8%. At this rate, annual returns could exceed 24% in 2023. And that possibility only exists if interest rates stop climbing later this year or start falling later. It's hard to imagine the stock market returning more than 20% when interest rates keep climbing to 6%, 7%, or higher.

When the economy returns to normal and the epidemic is over, do you remember the old adage - "sell your stocks in May and you'll have nothing to worry about for the summer"? Well, our model did indicate an overbought situation near the end of April, so we bought insurance in April. So far, those insurances have not worked in April. Whether and when the market enters a summer correction is not clear to us, and in any case, this summer will give the answer.

Fundamentals: Last month we mentioned, "The fundamental question for equity fundamentals is whether the economy will have a soft landing or a hard landing in 2023. And the key determinant of a soft landing or hard landing is inflation, that is, is inflation growing faster than nominal economic growth, or not? " Well, the U.S. Department of Commerce just released an annualized 1.1% growth in real GDP for the first quarter of 2023 on April 27. This means that inflation was lower than nominal GDP growth in the first quarter, which is good news when it comes to answering the basic question above.

Of course one can still say now that GDP growth is slowing. If the slowdown continues, real GDP could be negative in the second quarter. This is possible, but in our view this is unlikely. It would take more than two negative GDP growth periods this year to qualify as a recession.

Moreover, based on our observations during our first quarter travels around the U.S. and abroad subjectively assessing the economic situation, we conclude that economic activity is currently sound from a consumer perspective.

According to a report published by Yardeni Research on May 1, S&P 500 corporate earnings for 2022 are now set at $218.09 per share consolidated earnings. The earnings outlook for 2023 is $220 to $225 per share, still a slight but positive increase to this year's forecast.

As of April 28, 53% of companies in the S&P 500 have reported actual results for the first quarter of 2023 to date. Of these companies, 79% have reported actual earnings per share above expectations, which is higher than the 5-year average of 77% and higher than the 10-year average of 73%. Overall, companies reported earnings that were 6.9% above estimates, which is below the 5-year average of 8.4%, but above the 10-year average of 6.4%.

The blended (combining actual results for companies that have reported and estimated results for companies that have not yet reported) earnings decline for the first quarter is -3.7% today, while at the end of the first quarter (March 31) the earnings decline was -6.7%.

If -3.7% is the actual decline for the quarter, this would be the second consecutive quarter that the index has reported a decline in earnings. Five of the 11 sectors reported year-over-year earnings growth, led by the consumer and industrial sectors. On the other hand, six industries reported year-over-year earnings declines, led by Materials and Health Care.

Technical: As we said, the SPX broke above its 250-day moving average and started a new uptrend from Wednesday, March 29th. The 250-day moving average is a long-term support, like a floor for bulls and a ceiling for bears. Let's now update it based on the price action in April:

In the three weeks following the breakout, the uptrend encountered a bit of a challenge and a short-term correction seemed to form. However, it bounced back when the corrected price touched the 50-day moving average. This moving average is a short-term support like a floor, and the price bounced like a tennis ball hitting the floor. The higher the bounce, the greater the momentum.

We can use an analogy here to illustrate this action. A moving average is like calculating the average score of all the students in a class. The good students score higher than the average, while the not-so-good students score lower than the average. We saw a price change in April where the good students' scores dropped toward the class average before they were motivated to try to get their scores up again. So they become good students again, and they pull away from the average score again.

Promoting factors

1) The economy is growing. After real GDP grew at an annual rate of 2.6% in the fourth quarter, it grew another 1.1% in the first quarter of 2023 (source: Bea.gov). Fed Chairman Jerome Powell said in early May that he is not forecasting a downturn this year, but rather moderate growth.

2) Rate hikes are expected to stop in the second half of this year. As of the fourth quarter of 2022, the price index increased by only 3.6% over the previous year. In the first quarter of 2023 it increased by 3.8%. (Source: Bea.gov)

3) Earnings of S&P500 companies show growth. Earnings per share for SP500 companies are finalized at around $218 in 2022, an increase of 6% over the previous year. Lower but positive growth is forecast for 2023, reaching at least $220 per share.

Deterrents

1) The market is overbought as of the end of April! The market price faced strong resistance around 4200 at the end of April when our model showed signs of overbought.

2) Pessimists are hoping that a summer correction is coming. When summer arrives, trading volume is usually lower than at other times of the year. We speculate that more of Wall Street may be on vacation.

3) Money/credit is expensive and availability is low. With prime rates above 5%, the cost of borrowing for mortgages or corporate programs could exceed 7% or more for the foreseeable future. When the supply of money is low, where does the money to invest in stocks come from?

02

Uncle Manipulation (with US and A-share replay)

April Review

Our portfolio spent most of April sitting on the sidelines, expecting a stock market correction, so we missed the market rally in April. That said, the market-neutral options strategy gave us income to offset the decline in certain long stocks.

What was done well:

1. JPMorgan Chase (JPM) stock was sold off by a short call

a. Stocks held on hand were forced to sell due to covered call in the money.

b. Stocks realized a 13.7% profit in 12 months. The most recent 4/21 240 covered call realized a 1% profit in 1 month.

2. JPMorgan Chase (JPM) event-driven

a. Bet on Q1 2023 quarterly report to beat expectations, sold 120 put due April 21.

b. Quarterly report did exceed expectations, 120 put achieved 0.3% earnings in 1.5 weeks.

c. JPMorgan Chase reported record first quarter revenue, beating analysts' expectations as net interest income soared nearly 50% from a year ago amid rising interest rates. Regulators took over troubled First Republic Bank on Monday, May 1, making it the second-largest failed bank in U.S. history, and promptly sold all of its deposits and most of its assets to JPMorgan Chase. CEO Dimon said on a conference call that he believes "this part of the [banking] crisis is over."

3. Tesla (TSLA) options trading

a. Short sale of 153 put/235 call strangle expiring April 14, and 145 put/230 call strangle expiring April 28.

b. 1% profit for 2.5 weeks on the 4/14 strangle; 0.7% profit for 2 weeks on the 4/28 strangle.

c. Tesla Q1 2023 net income down over 20% from last year. Underutilization of new factories, combined with increased raw material, commodity, logistics and warranty costs, and lower environmental credit revenue, all contributed to the profit decline.

What did not do well:

1. Microsoft (MSFT) stock was sold off by short selling calls

a. Stocks held on hand were forced to sell due to covered call in the money.

b. Stock missed the upside from 279 (call strike) to 307 (share price at end of April).

c. MSFT's revenue for the first quarter of 2023 was up 7% from last year to $52.9 billion. Net income rose to $18.3 billion or $2.45 per share from $16.7 billion or $2.22 per share in the same period in 2022. MSFT AI models combined with a common user interface (natural language) usher in a new era of computing. Two factors, quarterly report beat and AI model, led to the rise in the stock price.

2. Losses from hedging instruments

a. Going long the VIX (Market Panic Index) for the 5/17 25 call resulted in a 59.9% loss on the April book.

b. After we purchased the hedge call, the market continued to rise. The long SPY portion made money, while the VIX hedge portion made a loss. 3.
3. Long Moderna (MRNA) with 13.5% loss in April.

US Stock Outlook

- Fed Chairman Jerome Powell said in early May that the U.S. economy will likely grow modestly rather than see a recession in 2023. Who knows better than him? Therefore, the chances of a soft economic landing are high.

- In the near term, we do think stocks are overbought, and there is evidence of more recent flows into stocks and equity funds. (Source: Goldman Sachs Group).

- If a correction occurs, this would be a good buying opportunity and we could shift a portion of our portfolio from market neutral to long.

Uncle fixed investment in A-shares (as of April)

Views on A-shares

The SSE Composite Index was almost unchanged, returning 1.5% to 3,323 in April. It stayed above its 250-day moving average in most cases. As of the end of April, we see a cumulative market return of 7.6%. Our portfolio remains on hold for the year for now.

03

Uncle's View of Crude Oil, Gold and Silver, Exchange Rates and U.S. Bonds

Crude Oil - Crude oil prices found support at $63.50 per barrel in March and rallied 1.2% in April.

- WTI crude oil futures (CL) found support in March after a continuous downtrend that started in June last year. It rose 1.2% in April to close at $76.60 per barrel, still sitting at its 50-month average.

Gold and Silver - Gold's uptrend since last November continued. Silver's uptrend since last September continues.

- Gold futures (GC) maintained its uptrend and retested the key $2,000 per ounce level in April.

- Silver futures (SL) also resumed their uptrend and reached the $25.3 per ounce level in April, down from the previous high of $30.

USD/CNY Exchange Rate - RMB Depreciates Slightly in April

- The RMB/USD exchange rate once again approached the $7 milestone. By the end of April, the yuan depreciated to 6.93 yuan to $1.00.

U.S. debt - An indicator of a recession, but we are already in a bear market in the stock market. By the end of April, the 10-year Treasury yield of 3.45% was still below the 2-year yield of 4.06%, and both were little changed from March.

- People use a comparison of long-term risk-free debt yields and short-term yields to predict economic downturns or recessions. We may not see a recession in 2023, but rather the correction we are currently seeing.