Equity markets surged to start the week, and at first glance, one could say the weekend developments were better than expected, and thus, on the margin, risk on for markets. This is becoming a pattern, where the absence of “bad” or even catastrophic news is resulting in a general upwards drift in markets. And the incoming economic data remains better than expected — a huge beat on June ISM Services at 57.1 vs 50.2 expected. Both PMIs (manufacturing and services) are solidly back >50 and affirming the US economy has bottomed.
Taking a step back, when economy has bottomed, and stocks behave with an “underlying bid,” we see this an overall constructive environment and one that allows stocks to surprise to the upside. I still find it curious that many market skeptics cite the “high P/E” as a reason for caution. At the bottom of a market cycle (which we are in) and when earnings are depressed, P/E is naturally going to be stratospherically high–that was the case in 2009 as well.
And there remain a few “binary” events that could cause the market to abruptly re-position:
– Healthcare cure or vaccine developed
– FL, CA, AZ, TX, or F-CAT, could see cases rollover and mark the apex of current wave in US pandemic.
>80% chance Texas is past the peak…
In our view, TX is already past the peak. We discuss this in detail below (see commentary) but the high points are:
– Houston is the leading indicator, followed by Austin, San Antonio and Dallas
– Houston cases peaked 14D ago and are down 70% since (Austin ~80% decline)
– Positivity rate in Houston is now 11% vs 22% two weeks ago, even as tests 2X
– Houston case profile is tracking NYC shocking closely –> NYC took 18 days -75% and 32 days -90%
Thus, if Houston is past the peak and it was the center of the parabolic surge initially, then it is acting as the beacon akin to NYC in late March.
Source: Fundstrat and TX health dept.
Daily cases are up on Monday (see below) but it is mainly a “true-up” from CA. And perhaps more importantly, daily deaths from COVID-19 remain in a downtrend. Recall, US cases have been surging for several weeks now and yet, we have not seen a similar surge in hospitalizations (nationwide) nor in deaths.
Source: COVID-19 Tracking Project
As a side note, Florida is now explicitly stating they are “double-counting” COVID-19 cases. That is, if a person has multiple tests over a period of time, each time that person is positive, this is counted as a case. Thus, someone COVID-19 positive and tested multiple times is going to be showing up multiple times. Florida is not the only state to do this and it is due to states wanting to get cleaner “positivity” readings. And this methodology accomplishes that.
Source: FL Department of Health
STRATEGY: The market surge on Monday was led by “bond proxies” –> FANG, Tech
What I did find curious yesterday is the fact that yesterday’s equity market surge was led by FANG and Tech. Now, these are leaders, so we should naturally expect leaders to keep leading. And this is the start of 3Q2020, so we should also expect inflows in the quarter to lead to a general inflow into whatever is leading (momentum strategy). But the reason this is curious, is that economic data continues to surprise to the upside (even TSA data was good). And if the market’s perception of the healthcare side remains better (fewer deaths = no need to close), we should expect Cyclicals to rally.
Thus, if we see equities surge and FANG leads, this could be:
– Asset allocation at start of quarter
– or reluctant cash coming off sidelines and into “bond proxies”
But if equities continue to surge this week and economic data is upbeat, and “closing” odds fall:
– we see a rotation into cyclicals/epicenter.
So we think yesterday’s market reaction is more the former, rather than the latter. I know I sound a bit rambly, but as this daily chart shows, the epicenter/cyclical trade really struggled Wed and Thu last week (7/1 and 7/2) but yesterday, despite FANG/AMZN being the leader, cyclicals kept pace. So this is what we are watching this week.
POINT #1: Daily rise modestly 46,338 (+3,463 vs 1D ago) despite massive CA “true-up”
Total cases in the US rose to 46,338, +3,463 vs 1D ago. The most positive aspect of this is the fact that even the rise is below the record 57,800 seen on Saturday.
– overall testing fell to 523k vs 650k, so there is a drop in tests explaining this
– CA reported +6,110 increase in cases at 11,529 vs 5,410 1D ago, but this is due to Los Angeles lab delays.
Source: COVID-19 tracking project
The rise in cases for Los Angeles is really a “catch-up” to reflect the paucity of cases in the prior two days. The 3D average is 2,633, so Los Angeles cases are still rising.
One of our clients on the West Coast, JL (did not get his permission), shared the CA press release, and this abstract below explains it all.
So, CA still has rising cases, but the absolute explosion reported on Monday is due to “catch-up” from the weekend effect.
6 states reported a large 1D increase
California 11,529 vs 5,410 (1D) +6,119
Texas 5,318 vs 3,449 +1,869
North Carolina 1,546 vs 1,329 +217
Missouri 420 vs 221 +199
Puerto Rico 225 vs 29 +196
Washington 651 vs 469 +182
Total 6 states +8,782
6 states reported large 1D declines
Florida 6,336 vs 10,059 (1D) -3,723
Louisiana 1,101 vs 1,937 -836
Georgia 1,548 vs 2,197 -649
Tennessee 724 vs 1,291 -567
Nevada 491 vs 843 -352
Virginia 354 vs 639 -285
Total 6 states -6,412
Source: COVID-19 tracking project
Source: COVID-19 tracking project
POINT #2: F-CAT Update: >80% chance TX peaked. >60% for Phoenix and >50% Miami
Of F-CAT, Florida and California are still seeing “uncontained” growth in cases…
Recall, we believe the key “nucleus” county in each state of F-CAT will act as the leading indicator, and once that county has peaked, the state has likely past the apex. This, of course, is barring a new strain of the virus or a new series of super spreader events. The nucleus cities are:
– FL -> Miami
– CA -> Los Angeles
– AZ -> Phoenix
– TX -> Houston
Each of these 4 states has taken multiple course corrections, limiting further openings (Texas), restricting bars (TX, CA, AZ and now FL). So, there are now additional containment measures underway that should further help limit the spread. In fact, Miami Mayor Carlos Gimenez also took the additional step to close dine-in restaurants. So Miami is rolling back some of the easing.
Source: Miami Mayor’s Office
Houston 14 days past peak, Phoenix 5 days…
We think Texas has the highest probability of a peak, as Houston is 14 days since it established its local peak. The days since “local peak:”
– Houston 14 days, -70% from peak
– Phoenix 5 days, -14% from peak
– Miami none
– Los Angeles none
The daily confirmed cases for these 4 counties is shown below and as these charts show, Houston, Phoenix and Miami (potentially) are past peak cases. Los Angeles did not report full data for Saturday and Sunday, so there was a major “true-up” on Monday (see blurb below).
Source: Johns Hopkins
80% chance Texas has peaked…
Why do we think there is a >80% chance Texas has peaked? Here is our rationale:
– Houston daily cases peaked 14 days ago and daily cases -70% since.
(NYC, post-peak, saw daily cases -75% after 18 days, +4 from now if Houston follows)
– Houston positivity rate >22% 14 days ago and now 11%, cut in half
– Austin daily cases peaked 7 days ago and -83% since
– San Antonio cases peaked (possibly) 4 days ago and -80% since then
So basically, Houston leads Austin which leads San Antonio which leads Dallas. And Houston looks like it peaked.
Once cases peaked, it took NYC 18 days for cases to fall -75% and 32 days for cases to fall -90%
NYC is our template for thinking about the path of cases, if Houston indeed peaked. The NYC daily confirmed cases chart is below:
– NYC cases peak on 4/9/2020
– NYC cases -75% by 4/27/2020, or 18 days
– NYC cases -90% by 5/11/2020, or 32 days
Source: NYC Dept of Health
Houston data so far:
– Daily cases peaked 6/22/2020
– Currently 14 days since pea, daily cases -70%
So Houston is tracking NYC pretty closely.
Source: NYC and Houston health departments.
Even Houston’s positivity rate has crashed from 22% to 11% in the past two weeks…
Another sign Houston is past its peak is the drop in positivity rate. The positivity rate, when test levels remain high, captures detection rate and if it is high (while testing is high), it is a sign of rapid spread.
– Past 14D, total daily tests in Houston rose from ~7,000 to ~14,000
– Past 14D, positivity rate fell from 22% to 11%
Source: TMC
Texas: The 4 major cities already peaking: Houston -> then, Austin -> then, San Antonio -> Dallas (waiting)
Moreover, look at the 4 major cities of Texas. It looks like each of these is seeing their own local peaks:
– Houston 14D ago
– Austin 7D ago
– San Antonio 4D ago
– Dallas, still surging
Source: Johns Hopkins
The primary reason we believe Miami and Phoenix likely peaked is their “daily confirmed cases/1mm” matched NYC at its peak…
We think the two charts below bear watching — it is the daily cases per 1mm residents (to standardize prevalence) comparing Miami and Phoenix compared to NYC.
– On 6/30, Phoenix daily cases matched NYC peak seen on 4/9
– On 7/4, Miami daily cases matched NYC peak seen on 4/9
The NYC daily case peak of ~900/1mm residents proved to be a high water mark for the city and was not really exceeded by other major counties. Hence, this level of case prevalence could also be where the virus reaches its natural break point.
Source: Johns Hopkins
Positivity rates for Phoenix surged on Monday…
The positivity rates for Los Angeles, Miami and Phoenix are shown below.
– Los Angeles positivity rate is surprisingly low at 10%
– Miami rate is still an unacceptably high 20%, so as long as this figure is high, one could argue case detection is not sufficient.
– Phoenix positivity rate is reported at 40%, but something does not seem right there given the surge.
In a way, we wonder if Los Angeles surge in cases, while troubling, is certainly not at the uncontained rate seen for Phoenix and Miami.
POINT #3: “Experts” market expects 168-530 million COVID-19 cases by March 2021…
One of my good friends, Thomas Hu, shared with me some survey results from a group called goodjudgment.io. This entity employs “superforcasters” and these experts make judgments on the future path of macro issues. Below is their forecast for worldwide COVID-19 cases by March 2021.
– Based on experts views, the collective is a 61% probability of between 168-530 million by March 2021
– I think this is based on 61% of the respondents choosing this path
Source: goodjudgment.io
In the next 268 days, daily cases need to reach 1.6 million per day, or >11X current levels to reach that 61% probability…
There are about 12 million cases today. So we made a table below to show the increase in cases and the implied daily cases to reach the various forecast break points:
– to reach the central case (61%), daily cases need to rise 1.6mm per day
– current cases are running ~150k per day
Source: Fundstrat
Is this plausible? Might need Africa and massive second wave in Asia
The US has already seen a massive outbreak. By the way, the central case implies 5% of the total population in the world gets COVID-19.
– the US is probably there already
As this quilt below shows, this means that we should see an explosion in cases where there are few today. This is primarily Asia and Africa, and a continued case proliferation in Latin America.
Source: Fundstrat and Johns Hopkins
