Daily BriefsMulti Strategy

Brief Multi-Strategy: SPX 3,100 Where Risk to Reward Diminishes and more

In this briefing:

  1. SPX 3,100 Where Risk to Reward Diminishes
  2. Asia Short Interest Weekly – HK Financials and Property, Japan Real Estate, Korea Tech, Taiwan Semis
  3. NPC/Covid19/Hong Kong/China-USA/China-India
  4. Back to Basics: Why the S&P 500 Is Overvalued

1. SPX 3,100 Where Risk to Reward Diminishes

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S&P 500 (SPX INDEX) is moving into a frothy stage primarily on the back of the tech rally exhausting as we see rotation into value. It is this rotation that sets up a mature stage of the rise with credit event risk rising over the summer. US Demonstrations are a trigger from pend up consumer frustration that will be more visible in June/July.

Market sensitivity to US demonstrations/troop deployment on watch – A weak open/impulse lower would increase odds of breaking trendline support sooner. The opening gap lower and slide below 3,030 weakens the immediate posture but a recovery attempt back above 3,030 will ensue today and will act as a pivotal level to hold/break.

2. Asia Short Interest Weekly – HK Financials and Property, Japan Real Estate, Korea Tech, Taiwan Semis

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The Asia Short Interest weekly looks at moves in market wide short interest and highlights movements in stock specific short interest across Hong Kong, Japan, Korea and Taiwan using the last available data published by the relevant authorities.

Hong Kong saw shorts rise on Tencent Holdings (700 HK), Sun Hung Kai Properties (16 HK) and China Construction Bank H (939 HK) while there was big short covering on Alibaba Group (9988 HK), Semiconductor Manufacturing (981 HK) and Xiaomi Corp (1810 HK). Shorts jumped on Financials, Communication Services and Real Estate and covered position in Information Technology, Consumer Discretionary and Consumer Staples.

Japan saw an increase in shorts on Shiseido Company (4911 JP), Kubota Corp (6326 JP), Japan Real Estate Investment (8952 JP) and a reduction is shorts on Softbank Corp (9434 JP) and Showa Denko K.K. (4004 JP). Sectorally, shorts increased in Real Estate, Industrials and Consumer Staples and shorts were covered in Communication Services.

Shorts in Korea increased led by Technology Hardware and Consumer Durables.

Shorts rose in Taiwan led by Semiconductors, Technology Hardware, and Materials while shorts covered small size in Capital Goods and Banks.

3. NPC/Covid19/Hong Kong/China-USA/China-India

China News That Matters

  • Beijing to the rescue, with cost cuts
  • Racing for a vaccine, not international flights 
  • Countdown starts for Hong Kong crackdown  
  • US plans sanctions on China
  • Skirmishes in the Himalayas 

In my weekly digest China News That Matters, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and highlight why I think the news is significant. These posts are meant to neither be bullish nor bearish, but help you separate the signal from the noise.

4. Back to Basics: Why the S&P 500 Is Overvalued

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There has been a recent continuing controversy about the usefulness of forward P/E as a valuation tool in the current recessionary environment. On one hand, past bear markets have typically bottomed out at a forward P/E ratio of 10, with a low of 7 (1982) and a high of 14 (2002). FactSet’s reported market rating of 21.5 forward earnings is very stretched by historical standards.

We go back to the basics of equity valuation by considering the following questions:

  • How will this crisis affect the company in the near term (2020)?
  • How will this crisis affect the business the company is operating in, and its standing, in the long term?
  • How will the crisis affect the price of risk, including the likelihood of default, equity risk premium and default spreads?

The current operating environment is dismal, and there is little hope of relief over the next few years. Credit conditions are deteriorating. Unless some miracle medical advance appears in the immediate future, we are likely to see widespread business failures over the next 12 months that will cripple the economy and, in Jerome Powell’s words, “make the recovery slower and weaker”. The Fed is doing what it can to put a cap on risk premiums. It can print liquidity, but it cannot print sales, nor can it print equity for failing firms.

One (Fed support) out of three isn’t good enough. Current valuation is discounting a V-shaped recovery and strong Fed support. It has not even begun to discount the aftershocks of the COVID-19 crisis. Equity risk and reward is tilted to the downside.

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