Signs point to "more risk on" --> YE rally --> Stay Cyclical into YE, especially Energy + homebuilders "Golden 6 months"

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STRATEGY: Signs point to “more risk on” –> YE rally –> Stay Cyclical into YE, especially Energy + homebuilders “Golden 6 months”

RIP Colin Powell: One of the good guys and one from the era of common good
Colin Powell passed away yesterday, due to complications from COVID-19.  He is a legend, former chairman of the Joint Chiefs of Staff, Secretary of State, and National Security Advisor.  He was 84 and was double-vaccinated, but unfortunately also had a compromised immune system due to his cancer.  I want to pay tribute to Mr Powell, because he is one of the “good guys.”   One from the era where the common good meant Mr. Powell was in service for this nation, and made decisions, personal and business, for the better good.  So it is indeed a sad day.

His leadership skills are well known and on ample display during his tenure in both the military and in public office.  I did not know he had “13 rules to live by” but today, many articles share these.  They are so good, I am posting them here twice. In text form and in image form, just in case you would like to snip these and forward them:

Powell’s 13 rules to live by:
1. It ain’t as bad as you think. It will look better in the morning.
2. Get mad, then get over it.
3. Avoid having your ego so close to your position that when your position falls, your ego goes with it.
4. It can be done.
5. Be careful what you choose. You may get it.
6. Don’t let adverse facts stand in the way of a good decision.
7. You can’t make someone else’s choices. You shouldn’t let someone else make yours.
8. Check small things.
9. Share credit.
10. Remain calm. Be kind.
11. Have a vision. Be demanding.
12. Don’t take counsel of your fears or naysayers.
13. Perpetual optimism is a force multiplier.

This list is pure gold!!!  And the snip from Newsweek.com is below

UK –> surge in cases but no signs of policy response… doesn’t mean needs to happen
Yesterday, we received multiple incoming emails from clients, citing the concerning surge in cases in the UK.  The variant to “blame” for this surge is AY.4.2, the proposed name for this sub-type.  This version has the spike mutation S:Y145H, and this is potentially increasing its transmissibility. And as shown:

– UK cases are rising again
– not reaching December 2020 levels, but surging

…Each new variant is not necessarily cause for new alarm
While Dr Gottlieb initially “tweeted” some alarm about this variant, the public reaction (hysteria) has caused Dr. Gottlieb to walk back some of his comments.  As noted below, he believes policymakers and health experts need to watch this, but is not saying there needs to be immediate concern.  

– COVID-19 will keep evolving
– The label “Delta-plus” has been used since early August 2021 to identify AY.1 and others in 5 countries
– Each new variant is not necessarily a cause for renewed alarm

CURIOUSLY LONDON UNSCATHED: UK cases are surging in 6 of 7 regions, except London.  And UK hospitalizations muted
The best way to get situational awareness of the surge in the UK is to look at regional cases and regional hospitalizations.  On cases:

– 6 of 7 regions are seeing big surges
– London surge is most muted
– It is curious to me why London is so muted

But cases might not always be the best metric.  Severity, measured by hospitalizations, provides equal insights.  And as shown below, hospitalizations are not really surging, to the same extent as cases:

– UK hospitalizations are basically unchanged
– 6 of 7 regions see far more muted hospitalizations

Vermont: 70% full-vax rate and yet all-time high cases, similar to the UK, and policymakers are not intervening 
The UK policymakers are not panicking.  And that seems appropriate for the moment.  In fact, an analogous development is Vermont in the US. 

– Vermont has a vaccination rate of 70.5% (full) and 78.8% (1-dose plus).  
– Daily cases are at all-time highs
– No panic from policymakers

– Hospitalizations are much lower

I was passing through Vermont this weekend.  I ate a meal at a local diner.  There was no extra mitigation.  In fact, there is no mask requirement.  And nobody seemed to use masks.  I did not mind –> when in Rome…

– But the lack of panic shows that cases might not be the best benchmark
– in many instances

And yes, Vermont’s surge is pretty severe.  As shown below:

– VT’s daily cases are 377 per 1 million residents. 
– The USA overall is 134 per 1mm
– VT is 3X the US

This is equivalent to USA having 300,000 cases per day.  It’s a huge number.  

ISRAEL: Poof! What happened to cases?  A sign of what to expect for USA? Maybe
By the way, Israel’s COVID-19 cases have collapsed.  Take a look at the daily cases below:

– POOF!
– Daily cases are 90% off their highs
– Was this the 3rd shot doing the trick?
– Or did Delta-variant burn out?

We will not know.  But this is a good sign.  And so the question is whether the US will follow UK or Israel.  The reality is both UK and Israel will see a peak and a decline in cases.  So the need for investor panic is mitigated. Unless, of course, the variant that emerges is far more severe from a healthcare perspective.

STRATEGY: Signs point to “more risk on” –> YE rally.  Stay Cyclical into YE, especially homebuilders “Golden 6 months”
On Monday am, there was a short market “wobble” in the AM.  We highlighted this in the shaded pink below.  And then by late morning, equities found their footing and continued the surge.

– Market mode now –> Buy the dip
– Not “sell the rallies”
– This is a precursor, in our view, of a YE rally
– This argues investors need to add more “risk-on” exposure

DUCK TEST: If “Mom and Pop” are buying the dips –> this is known as a bull market
Recall the “duck test”?

– if it walks like a duck
– it must be a duck?

There are some that are criticizing the equity markets because “retail is dip buying” — retail dip buying is a BULL MARKET.  I was at Smith Barney in the mid to late 1990s.  Back then, I was an equity research analyst covering Wireless Services — Sprint PCS, Nextel, Western Wireless, ALLTEL, Alamosa Holdings, etc.

Quentin Stevens was head of equity capital markets.  And every week, during our weekly briefings, Quentin would give us trading color.  On the days when equities were down hard, we would hear this from Quentin:

– “our retail desk saw big orders come in”
– “hedge funds were position squaring but retail saved the day”

Retail investors are the savers in the USA.  They control $100 trillion of household net worth.  If they are buying stocks, this is a good thing.  It is a sign of a bull market.

– But someday it could become a bubble
– Yikes
– We are not there, in my opinion

BOTTOM LINE:  Adding more “risk-on” into YE makes sense
Wasn’t 3Q earnings season supposed to be bad news for stocks?  Margin pressures? etc.?  As shown below, so far, 85% of companies are beating 3Q2021 EPS results.  Wow.

– beating on EPS
– margins are still expanding
– supply chain is a mess
– but it is getting better

Basically, demand is strong and that means top-line is strong.  This is further supportive of risk-on into YE.  What does this mean?

Overweight:
–  FAANG –> good stocks 
   FB AAPL -0.82%  AMZN -1.05%  NFLX -0.26%   GOOG -0.87%

–  Epicenter –> risk-on 
   SPHB  XLF 0.52%  XLI 0.07%  XLB 0.12%  RCD

–  Homebuilders –> more risk-on (see Golden 6 months) 
   XHB ITB 0.18%

–  Energy equities –> more risk-on-er  (see many prior comments)   
    XLE -0.55%  OIH -1.19%  XOP

So, if one wanted to be the most risk-on, Energy is probably the most “risk-on” position.


…Discretionary breaks out vs Staples = Risk-on sign
Our Head of Technical Strategy, Mark Newton, also points out that Consumer Discretionary broke out relative to Consumer Staples.  This is another strong risk-on signal.  

– again, further proof to go risk-on

26 Granny Shot Ideas: We performed our quarterly rebalance on 07/30. Full stock list here –> Click here

POINT 1: Daily COVID-19 cases 127,658, up +15,268 vs 7D ago…

Current Trends — COVID-19 cases:

• Daily cases 127,658 vs 112,390 7D ago, up +15,268
• Daily cases ex-FL&NE 125,797 vs 110,172 7D ago, up +15,625
• 7D positivity rate 5.0% vs 5.8% 7D ago
• Hospitalized patients 52,645, down -10.6% vs 7D ago
• Daily deaths 1,294, down -17.4% vs 7D ago

*** Florida and Nebraska stopped publishing daily COVID stats updates on 6/4 and 6/30, respectively. We switched to use CDC surveillance data as the substitute. However, since CDC surveillance data is subject to a one-to-two day lag, we added a “US ex-FL&NE” in our daily cases and 7D delta sections in order to demonstrate a more comparable COVID development.

The latest COVID daily cases came in at 127,658, up +15,268 vs 7D ago. Monday’s 7D delta is positive due to the underreporting last Monday on Columbus Day. We expect the distortion to clear out quickly. As seen below and emphasized by the consistently negative 7D deltas, cases are currently rolling over. 

Rolling 7D delta in daily cases distorted due to Columbus Day…
The uptick in the rolling 7D delta is a result of the underreporting last Monday on Columbus Day. We expect for the distortion to clear out quickly, and for the rolling 7D delta to resume its downtrend.

Low vaccinated states seem to have a larger increase in daily cases compared to their recent low…
The “Parabolic Case Surge Tracker” monitors the possible parabolic surge in daily case figures. In the table, we included both the vaccine penetration and the recent case trend for 50 US states + DC. The table is sorted by the multiple of their recent peak daily cases divided by the daily cases when their case surges started.

– The states with higher ranks are the states that have seen a more significant rise in daily cases
– We also calculated the number of days during the recent case surge; a state with a high multiple but low number of days since its low means the state is facing a relatively rapid surge in daily cases
– The US as a whole, UK, and Israel are also shown at the top as a reference

Hospitalizations, deaths, and positivity rates are rolling over amidst case rollover…
Below we show the aggregate number of patients hospitalized due to COVID, daily mortality associated with COVID, and the daily positivity rate for COVID.

– Net hospitalizations peaked below the Wave 3 peak and are currently rolling over 
– Daily death peaked slightly above the Wave 2 peak and are currently rolling over
– As per the decline in daily cases, the positivity rate is currently rolling over 

POINT 2: VACCINE: vaccination pace trending up once again…

Current Trends — Vaccinations: 

• avg 0.8 million this past week vs 1.0 million last week
• overall, 56.6% fully vaccinated, 65.3% 1-dose+ received

Vaccination frontier update –> all states now near or above 80% combined penetration (vaccines + infections)
*** We’ve updated the total detected infections multiplier from 4.0x to 2.5x. The CDC changed the estimate multiplier because testing has become much better and more prevalent. 

Below we sorted the states by the combined penetration (vaccinations + infections). The assumption is that a state with higher combined penetration is likely to be closer to herd immunity, and therefore, less likely to see a parabolic surge in daily cases and deaths. Please note that this “combined penetration” metric can be over 100%, as infected people could also be vaccinated (actually recommended by CDC). 

– Currently, all states are near or above 80% combined penetration
– Given the new multiplier. only RI, FL, MA, CT, NM, NY, NJ, IL, CA, PA, DE, and SD are now above 100% combined penetration (vaccines + infections). Again, this metric can be over 100%, as infected people could also be vaccinated. But 100% combined penetration does not mean that the entire population within each state is either infected or vaccinated

Below is a diffusion chart that shows the % of US states (based on state population) that have reached the combined penetration >60%/70%/80%/90%/100%. As you can see, all states have reached combined infection & vaccination >100% (Reminder: this metric can be over 100%, as infected people could also be vaccinated. But 100% combined penetration does not mean that the entire population within the state is either infected or vaccinated)

There were a total of 523,032 doses administered reported on Monday, up 8% vs. 7D ago. While we are seeing the vaccination pace slow down, we believe it may soon pick back up as booster shots are becoming more widely available. Also, the same catalysts remain in place:

– Proof of vaccination required by many US cities and venues
– Booster shots
– Full FDA approval of Pfizer COVID vaccines (hopefully it could help overcome vaccine hesitancy)
– Biden’s vaccination plan

The daily number of vaccines administered remains the most important metric to track this progress and we will be closely watching the relevant data.

73.9% of the US has seen 1-dose penetration >60%… 
To better illustrate the actual footprint of the US vaccination effort, we have a time series showing the percent of the US with at least 45%/45%/50% of its residents fully vaccinated, displayed as the orange lines on the chart. Currently, 100% of US states have seen 40% of their residents fully vaccinated.  However, when looking at the percentage of the US with at least 45% of its residents fully vaccinated, this figure is 96.3%. And only 81.6% of US (by state population) have seen 50% of its residents fully vaccinated.

We have done similarly for residents with at least 1-dose of the vaccination, denoted by the purple lines on the chart. While 98.7% of US states have seen 1 dose penetration >50%, 90.6% of them have seen 1 dose penetration >55% and 73.9% of them have seen 1 dose penetration > 60%.

This is the state by state data below, showing information for individuals with one dose and two doses.

The ratio of vaccinations/ daily confirmed cases has been falling significantly (red line is 7D moving avg). Both the surge in daily cases and decrease in daily vaccines administered contributed to this.

– the 7D moving average is about ~7 for the past few days
– this means 5 vaccines dosed for every 1 confirmed case

In total, 405 million vaccine doses have been administered across the country. Specifically, 217 million Americans (66% of US population) have received at least 1 dose of the vaccine. And 188 million Americans (57% of US population) are fully vaccinated.

POINT 3: Tracking the seasonality of COVID-19

In July, we noted that many states experienced similar case surges in 2021 to the ones they experienced in 2020. As such, along with the introduction of the more transmissible Delta variant, seasonality also appears to play an important role in the recent surge in daily cases, hospitalization, and deaths. Therefore, we think there might be a strong argument that COVID-19 is poised to become a seasonal virus.
The possible explanations for the seasonality we observed are:

– Outdoor Temperature: increasing indoor activities in the South vs increasing outdoor activities in the northeast during the Summer
– “Air Conditioning” Season: similar to “outdoor temperature”, more “AC” usage might facilitate the spread of the virus indoors

If this holds true, seasonal analysis suggests that the Delta spike could roll over by following a similar pattern to 2020.

We created this section within our COVID update which tracks and compare the case, hospitalization, and death trends in both 2020 and 2021 at the state level. We grouped states geographically as they tend to trend similarly.


CASES
It seems as if the main factor contributing to current case trends right now is outdoor temperature. During the Summer, outdoor activities are generally increased in the northern states as the weather becomes nicer. In southern states, on the other hand, it becomes too hot and indoor activities are increased. As such, northern state cases didn’t spike much during Summer 2020 while southern state cases did. Currently, northern state cases are showing a slight spike, especially when compared to Summer 2020. This could be attributed to the introduction of the more transmissible Delta variant and the lifting of restrictions combined with pent up demand for indoor activities. 

HOSPITALIZATION
Current hospitalizations appear to be similar or less than Summer 2020 rates in most states. This is likely due to increased vaccination rates and the vaccine’s ability to reduce the severity of the virus.

DEATHS
Current death rates appear to be scattered compared to 2020 rates. This is likely due to varying vaccination rates in each state. States with higher vaccination rates seem to have lower death rates given the vaccine’s ability to reduce the severity of the virus; states with lower vaccination rates seem to have higher death rates.