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Friday
STRATEGY: Waterfall decline of -11% over 14 days in Jan points to +13% gains next 6M = new highs coming, but 1H still treacherous
Facebook decline does not negate violent February base case
Equity markets were roiled by the Facebook earnings miss/disappointment and the 26% decline of FB also triggered a far broader risk-off day.
– On the one hand, given FB is a franchise stock, thus, a miss there strikes broad terror
– On the other hand, why would FB justify a 9% decline in Amazon, or 3% drop in Basic Materials?
This strikes me as a massive over-reaction, but perhaps not a surprise given the multiple factors causing market jitters. Investors are very quick to turn cautious recently. In my view, this defies the idea that investors are overly ebullient.
– rather, markets seem to have a “hair trigger” on anything with a whiff of bad news.
In our Strategy section below, we discuss why we still expect a violent February rally. But the sell-off Thursday was a one day setback.
…COVID-19 cases are down 92% in NYC, showing Omicron is literally disappearing
Omicron has spread quickly through communities and just as quickly faded. And this seems to be the case in NYC, where the first dense cases of Omicron were seen:
– since peaking in early Jan
– Omicron cases are down 92% from their peak
– the rise and fall in daily cases is symmetric
This points to a broader picture for the US. Omicron will soon be fading in the USA overall and we expect cases to fall 90% (from peak) by the end of February. And in the absence of a mutation, COVID-19 may be fading from the minds of consumers by Spring. This has positive implications, considering that consumer spending and confidence has fallen with each COVID-19 variant surge. Thus, the absence of a new variant means we could see a stronger return to normalcy.
– and possibly a rise in the participation rate
– which would ease the labor shortages
STRATEGY: Facebook decline does not negate violent February base case
The monthly jobs report is always important for markets, but given the heightened market jitters, will carry extra import.
But we believe the ultimate direction for markets in February is higher. The simple reason, in our view, is that a lot of bad news is priced in.
– retail investors put $53 billion into money market sidelines in past 8 weeks, a “top decile” pace
– retail investor sentiment fell to -29.8 (bulls less bears) last week, the worst reading in 8 years
– markets just sold “everything” Thursday following a weak print by FB
To me, when markets are this fragile and nervous, the probability for positive surprise is higher. We see this as the case yesterday given the still strong fundamentals and given the retreat in COVID-19 cases.
– 80% of companies are beating so far 4Q2021 EPS
– magnitude is 4.9%, impressive
– overall sales YoY +15.5%
– overall EPS YoY +25.0%
= operating leverage still in place
– best results are by Energy cos
– 89% beat with avg beat of 24.9% <– Wow
– Sales YoY +81.8% <– double Wow
After waterfall decline, history says +7%/ +13% next 3M/ 6M
The S&P 500 posted a waterfall decline of 11% peak to trough over 14 days. On a closing basis, it would be a ~9% decline. While many things seem common in this pandemic era, a fall of this velocity is actually rare:
– foremost, it shows the fragility of confidence
– sort of flies in the face of those saying markets are in a bubble and investors are too bullish
In fact, in the past 10 years, this velocity of fall has only happened 5 prior times and these are shown below:
– 5 of 5 times, this was at the end of a sell-off
– not the start
– and markets staged a fierce and violent rally after each of these
Tireless Ken and the data science team compiled forward market returns, following 14D market declines. These are tiered below into deciles:
– the ~9% fall ranks as the “worst decile” since 1938
– the worse the 14D decline, the larger the bounce
– the relationship holds as we move down the deciles
– at the worst decile, forward 1M, 3M and 6M returns are very strong
– forward 3M and 6M returns are 7.1% and 13.0%
– this implies S&P 500 > 4,850 before 1H2022
– hence, this reinforces our view that markets can stage a strong rally from Jan lows into Feb
– but we believe 1H2022 remains treacherous
STRATEGY: 2022 theme –> BEEF –> Bitcoin (B) + Bitcoin equities (E) + Energy (E) + FAANG (F)
Our 2022 themes are shown below. And in not in any order:
– Bitcoin + Bitcoin Equities BITO 1.07% GBTC 1.05% BITW
– Energy
– FAANG FNGS -1.12% QQQ -0.29%
Combined, it can be shorted to BEEF.
– Homebuilders (Oct – Apr aka Golden 6 months) XHB -0.58%
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330 Granny Shot Ideas: We performed our quarterly rebalance on 2/3. Full stock list here –> Click here
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POINT 1: Daily COVID-19 cases 240,399, down -214,632 vs 7D ago…
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Current Trends — COVID-19 cases:
– Daily cases 240,399 vs 455,031 7D ago, down -214,632
– 7D positivity rate 19.9% vs 25.2% 7D ago
– Hospitalized patients 115,993, down -17% vs 7D ago
– Daily deaths 2,514, up 4.1% vs 7D ago
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The latest COVID-19 daily cases came in at 240,399, down -214,632 vs. 7D ago. The COVID-19 is in full retreat across the nation as all states yesterday have reported a lower case figure. The 7D average of new cases has fallen more than 50% from the peak of over 700,000 to 341,800. The chart below shows the steady decline in daily cases over the past few weeks – daily cases almost halve every week compared to prior week. The 7D delta in daily cases have been negative in 14 of past 15 days and the speed of case decline has not shown any sign of slowing. The next major development we are expecting is the rollover in daily deaths – we thought the death trend had rolled over a few days ago, but it started to rise again.
7D delta in daily cases has been negative in 14 of past 15 days…
The 7D delta in daily cases remains in the negative regime and has been very stable around the level of -200,000. This reflected the steady decline in daily cases. Going forward, we might see the 7D delta increase slightly as daily cases have fallen so much. But the 7D delta in daily cases should still be negative.
Only 5 states are still seeing a rise in cases while 45 states + DC are seeing cases falling…
*** We’ve split the “Parabolic Case Tracker” into 2 tables: one where cases are falling (or about to fall), and the other where cases are rising
In these tables, we’ve included the vaccine penetration, case peak information, and the current case trend for 50 US states + DC. The table for states where cases are declining is sorted by case % off of their recent peak, while the table for states where cases are rising is sorted by the current daily cases to pre-surge daily cases multiple.
– The states with higher ranks are the states that have seen a more significant decline / rise in daily cases
– We also calculated the number of days during the recent case surge
– The US as a whole, UK, and Israel are also shown at the top as a reference
Daily deaths are still rising, while positivity rates and hospitalization are falling now…
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 hospitalization started to roll over. And more importantly, the daily mortality did not follow the same pattern as hospitalization, which shows Omicron is less deadly compared to other variants (at least so far).
– Positivity rate finally started to fall after plateauing for two weeks. It also confirms the recent decline in daily cases.
POINT 2: VACCINE: vaccination pace has slowed recently… Still more than half of eligible people have not received their booster shots…
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Current Trends — Vaccinations:
– avg 0.7 million this past week vs 0.9 million last week
– overall, 27.2% received booster doses, 63.7% fully vaccinated, 75.2% 1-dose+ received
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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 90% combined penetration
– Given the 2.5x multiplier, all states besides MS, WA, OR, TX, ID, MI, MO, and GA 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
There were a total of 778,409 doses administered, as reported on Thursday. The improving COVID case trend across the nation may have influenced people’s desire and sense of urgency to get the booster doses. That said, given the benefits that vaccination provides:
– reduce severity –> reduce hospitalization –> prevent healthcare crisis
– reduce the transmission of virus
– we believe the daily number of vaccines administered remains the most important metric to track.
And as we noted previously, there are still half of booster-eligible people (more than 80 million) who have not yet received their booster dose. Hence. to convince these people remains the key.
This is the state by state data below, showing information for individuals with one dose, two doses, and booster dose.
In total, 541 million vaccine doses have been administered across the country. Specifically, 249 million Americans (75% of US population) have received at least 1 dose of the vaccine. 211 million Americans (64% of US population) are fully vaccinated. And 90 million Americans (27% of US population) received their booster shot.
POINT 3: Tracking the seasonality of COVID-19
***We’ve updated the seasonality tracker to show figures from the last 9 months, from this calendar day, in each of the last two years***
As evident by trends in 2020 and 2021, seasonality appears to play an important role in the daily cases, hospitalization, and deaths trends. 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
– Opposite effects hold true in the winter
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.
