US equities may present volatility opportunities; Eastern stocks fall out of a reversal pattern.

Focus on sectoral opportunities in US equities and prepare for a volatile market. Last summer, we noted that valuation models for the four major US homebuilders—PulteGroup, Lennar, NVR, and D.R. Horton (including metrics such as home sales volume and selling prices)—indicated that valuations in the US homebuilding sector were excessively high at the time: the ratio of actual valuation to model-predicted valuation exceeded the historical mean by 3.25 standard deviations. Subsequently, the sector corrected by 15%. However, in Q4 2023, dovish Federal Reserve policy drove down US Treasury yields, prompting investors to turn optimistic about US housing sales—and the entire sector rebounded alongside the bond market. Figure: Revenue forecast model and composite price performance of the top five homebuilders Yet amid soaring market capitalizations, the underlying fundamentals of US homebuilders may not be as robust as the market assumes. This week, D.R. Horton reported disappointing earnings, and during its earnings call, the company specifically highlighted recent forced reductions in new-home pricing. According to the aforementioned revenue forecast model, the valuation-to-forecast ratio for the entire US homebuilder sector remains over four standard deviations above the historical mean—a notable red flag. The model also forecasts a deterioration in US new-home prices beginning in Q3 this year. Therefore, unless a sharp rebound in housing sales volume offsets the impact of price cuts, US homebuilders’ revenues may face mounting pressure going forward. Figure: Year-on-year growth rate of US median new-home prices vs. model forecast If US homebuilders indeed experience quarterly revenue declines, this could—on a macro level—serve either as evidence refuting the current 'soft landing' narrative or as an early signal of rising recession risk. That said, this scenario remains relatively low-probability for now; nonetheless, the US residential real estate sector warrants close monitoring as a leading indicator. Figure: ETF tracking US homebuilding stocks From a seasonal perspective, US equity indices may enter a brief consolidation phase after mid-February. Historical data shows that February tends to be seasonally weak overall for US equities. Moreover, the two weeks following February 15 consistently exhibit relatively weak daily returns. Figure: Average two-week S&P 500 returns since 1928 Figure: Average daily S&P 500 returns since 1985 Notably, with US equity volatility remaining low, markets have coalesced around a broadly bullish consensus—driving the cost of S&P 500 put options to historically cheap levels. Low US equity volatility stems primarily from widespread bullish sentiment and correspondingly low demand for portfolio 'insurance'. Figure: Current term structure of S&P 500 implied volatility For instance, the price of a three-month, 5% out-of-the-money S&P 500 put option has hit its lowest point in the past 15 years (see chart below). A put option expiring at the end of March with a strike price of 4770 currently costs only about $30. Figure: S&P 500 implied volatility term structure Figure: CME S&P 500 put options This implies both that US equity price action may soon become more volatile—and that purchasing modest option protection for one’s portfolio represents a low-cost, asymmetrically attractive, and essentially risk-free hedge.

The Great Coffee War in China: The 'Little Red Cup' Edition

Moreover, what deserves even greater attention is consumer-end resilience. Many believe the central challenge facing China’s coffee market today is simply insufficient consumer demand. In fact, numerous relatively successful chain coffee brands have been steadily ‘milk-tea-ifying’ their product offerings—introducing milk-tea-like beverages—to sustain growth in cup volumes. Yet Lu Yongchen, CEO of Tims China, argues: “The coffee industry is supply-driven: the more supply there is, the larger the consumer base grows, and the more deeply consumption habits take root. Coffee itself is a healthy, mildly addictive beverage—consumers tend to drink more over time. The key issue is habit formation; thus, increased capital inflows, expanded supply, and proliferation of brands all accelerate market education.” He further contends: “The coffee industry is inherently scale-driven: only when scale reaches a certain threshold can brand influence emerge—and procurement, logistics, rent, and other cost advantages materialize.” On this point, he appears to share strikingly similar views with Zhang Yong, CEO of Haidilao, who voiced comparable insights in late 2020. Per Tims China’s financial reports, same-store sales growth for company-operated stores stood at 7.4% in 2020, 15.7% in 2021, 0.7% for the six months ended June 30, 2022, and 7.5% for the three months ended September 30, 2022. Thus, regarding future store-opening quality, more time is needed for observation. That said, confronted with revenue growth without corresponding profit growth, achieving profitability as soon as possible remains an urgent, concrete challenge for management. Finally, it bears mentioning that aggressive store expansion—demonstrating rapid growth—is often a necessary condition for chain food-and-beverage companies to secure—or maintain—high valuations. Hence, in short: Charge ahead! III. Is the greatest strategic pitfall trying to have it all? In its IPO filing documents and numerous PR materials, Tims China consistently emphasizes its ‘coffee + warm food’ positioning as a key differentiator versus competitors. Indeed, Tim Hortons was originally named 'Tim Horton Donuts' and does possess a historical food heritage. Yet in practice, Tims China’s product and operational execution reveals multiple contradictions and tensions. On one hand, offering warm food requires appropriate kitchen infrastructure, strict requirements on store size and staff training—essential to ensure consistent, freshly prepared taste and food safety. But Tims China’s ‘Tims Go’ and ‘Tims Express’ store formats—modeled after competitors—clearly fall short of these requirements. Moreover, these compact outlets cater exclusively to delivery and pickup orders, making it impossible to deliver on the brand’s stated mission of providing customers with a ‘warm, inviting space experience.’ On the other hand—setting aside polarized consumer reviews on social media regarding Tims China’s warm food offerings—the coffee sector is already saturated with players entering the ‘light meal’ segment. Indeed, in Shanghai’s coffee scene, ‘coffee + light meals’ has long been a mainstream trend. For example, Starbucks and Luckin Coffee significantly ramped up their bakery and pastry offerings in 2022, launching items like ‘ham croissants’ and ‘bagels.’

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