Trading Philosophy
My goal for the 11-days trading is to capture short-term market gains at maximum and outperform the overall market returns, accompanied by tight management of portfolios’ exposure towards systematic and unsystematic risks. To fulfill my targets, the stock picks undergoes fundamental to obtain optimal choices. Top-down approach is my main portfolio’s vision, starting with the throughout examination of the US current macroeconomics and equity market conditions. Next, from the macro-perspective, I will pinpoint industries of which growths are assessed as the most solid and sustainable. Corporations, whose financial conditions and growth potential are foreseeable, are my priority within the chosen industries. To identify the powerful companies, a financial analysis of the firm 1-year past performance is conducted (Q3/2021-Q2/2022). Firms’ financial performance is investigated through the D/E, ROE and Net Margin. Besides, to set my expected returns, the P/E and EV/EBITDA valuation multiples are observed to identify whether the considered stock’s market prices reflect the intrinsic value of corporations.
My trading strategy follow the mixture of value and growth investment. However, given the current turbulent macroeconomics environment, value stocks can better secure my portfolio position given their powerful intrinsic basis (Olsen 2003). Thereby, major portfolio stakes are value stocks of sufficient profitability, yet, being traded at discount market prices comparing to sector’s peers. The selected growth stocks have valuation strength, abundant growth prospect or currently appealing to investors. Besides, unsystematic risks of the passive portfolio is managed by diversifying stock’s industries, of which are resilient under current economic headwinds. Next, the active portfolio focuses on current market’s interest and trends and adjustment made accordingly. To offset the current volatile market, my portfolio is hedged with future and options contracts.
Macro-Economics
The US have undergone soaring inflationary pressure since Q3/2021 (figure 1) hitting several historic peak at 8.3% (Mar-2022), 8.6% (May-2022) and 9.1% (Jun-2022). The underlying cause dated back to the FED’s giant trillions-dollars QE stimulus packages during 2020-2021and the
CB’s prolonging near-zero bound interest rate policy (Morrow 2022). Then, in Q1-2022, inflation skyrocketed further due to rising oil prices from the Russia-Ukraine geopolitical tension, supply chain disruption from China Zero-Covid policy and the changing demand of US consumers (Stewart 2022). Ever since, the real median income growth has merely managed to keep up with the CPI uncontrollable rise (SeekingAlpha 2022a), which generates widespread stagflation fears. Thereby, during Q1-Q2/2022, the FED have authorized three aggressive rate hikes to alleviate inflation (Foster 2022) – placing the EFFR at 1.58% by ending-Jun 2022 within the target regime of 1.50-1.75 (figure 3).
Altogether, the soaring inflation and FED’s responsive action through several rate hikes within 6 months of 2022 - have 1.contracted the US economic growth (Q1 by -1.6% & Q2 by -0.9%) (Duguid 2022) and 2.deteriorated the national financial conditions including equities market turbulences and higher borrowing costs. Besides, the negative growth of real M2 supply (figure
5) have fueled further liquidity challenges for the financial sector (Jones 2022). Evidently, during Q3/2021-Q2/2022, the ANFCI1 index have risen from -0.68 to 0.1 reflecting the US contracting financial conditions. Next, the S&P 500 plunged by 18% from Dec-2021 to May-2022 (figure 6)
– reflecting equity volatility exceeding its long-run average (Brusuelas 2022). The RMS US reported equity downgrading performance from negative Z-score of over -2.0 – of which only appears in recessionary period (figure 7).
Downwards pressure on the US PMI4 since Q3/2021 majorly contributes to falling BCI. By the ending-Q2/2022, the PMI of both manufacturing and services sectors have fallen to 50 implying contracting activities of both (figure 10). Especially among manufactures, private inventories investment declines (in merchandise and motor vehicles sales) is the most critical component hampering the US GDP Growth in Q2/2022 (BEA 2022). Therefore, firms with excellent financial performances during difficult business environment are my main interest.
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