Click HERE to access the FSInsight COVID-19 Daily Chartbook.
There has been little media coverage, in my opinion, on the sharp downturn in USA COVID-19 cases. The reason we see this as a big deal is that this was achieved without shutting down the economy. Certainly, policymakers needed to course correct, which is good. The reason we see this as a big deal, is this shows the US can handle surges and outbreaks in COVID-19. And as we highlighted, the 4 epicenter states, FL, CA, AZ, TX, or F-CAT, are seeing a collapse in cases that mirrors the decline seen in NY tristate.
Even Tuesday’s COVID-19 case data is promising. Total cases came in at 40,140 and this is down -15,000 from 7D ago and reflects a sizable backlog from Texas (see below) and probably zero further backlog from CA.
Variant scenario — COVID-19 in organic retreat and no second wave in the Fall (no flu season)… rising odds
So today, we started to think about a variant scenario for COVID-19 over the next few months. We think it is possible that COVID-19 could be receding organically and fall towards a sub-5,000 level per day in the US. And on top of that, there would be no second wave this Fall. Why no second wave? We discuss this below, but there has essentially been no flu season in the Southern Hemisphere and we are 4 months into a 5-month flu season (April to Sept). This is true for countries with either high or low prevalence. So, this could play out in the US.
COVID-19 is in organic retreat and daily cases are falling sharply vs 7D ago. In fact, at this pace, we could see sub-2,000 daily cases within a few weeks — that might seem outlandish but consider that just a few weeks ago, daily cases were 60,000-70,000 per day and now sub-40,000.
Source: COVID-19 Tracking Project
And of course, someone skeptical might suggest that this is only temporary because we have a second wave coming this Fall, from “back to school” and “flu season.” But as we noted above, there has not been a flu season in the Southern hemisphere.
So this variant scenario, COVID-19 in full blown retreat and does not resurface, is a possibly seeing growing odds. But this is a low probability scenario, and here are the other potential outcomes:
33% – Daily cases surge to new highs as “back to school” and “flu season” erupt
33% – Daily cases stay 20,000 to 30,000 through Jan 2021
30% – Vaccine/ Cure approved by Jan 2021
3% – Daily cases organically retreat and zero second wave
But with each passing data point, this 4th scenario has growing probabilities.
SalivaDirect test approved which is a good thing…
Regarding testing, this development is positive (**thanks to our client in Westport, CT for sharing the first article on this). A new COVID-19 test was given emergency authorization by the FDA. The test, SalivaDirect, collects saliva, doing away with the intrusive nasal swab. And this test, as Dr. Scott Gottlieb notes, has been cross validated across many platforms and is used by the NBA.
Saliva based testing can greatly expand testing for two reasons: (i) avoids the supply chain shortages from nasal testing kits and (ii) makes testing less uncomfortable, which might increase the willingness for those seeking testing.
https://www.cnbc.com/amp/2020/08/17/dr-scott-gottlieb-touts-yale-new-saliva-based-coronavirus-test.html?__twitter_impression=true
Interesting anecdote of how there may be erroneously higher case numbers reported…
But we also think that case figures for US are not always reliable. Certainly, there is A chance that cases are underreported — the fiasco in CA is an example. But we also believe there are nearly as many instances that “over-reporting” is taking place. Previously, we wrote about how FL routinely counts any positive test, even for the same patient on multiple different days, as a positive case. FL is not the only state doing this and it leads to excessive case count on the rise.
But this anecdote shared with me via Bloomberg IB is quite surprising. Basically, this client has a friend who took his son for COVID-19 test.
– the child tested negative but the parent got a sizable bill
– when speaking to the hospital, the hospital said the bill would be much lower if the child was deemed COVID-19 positive.
I spoke to this person and got the back story. The kid had headaches, coughing, etc. and so the hospital ruled out other issues and then decided to test for COVID-19. The bill was large, and the hospital notified them that this bill would be zero if the child was allowed to be deemed COVID-19 positive.
Source: Bloomberg IB
Hospitals are hurting. And CARES Act provides sizable payments for COVID-19 treatment. So, this is understandable. But this is going to contribute to higher reported cases. I have no idea how widespread this is. But this is worth flagging.
STRATEGY: Machines and CTAs will buy “new highs” so we expect follow-through
The news on the margin for the economy and COVID-19 have been mostly positive, so far. We got very good housing starts data and frankly, that validates the demographic work we have been writing about for some time. Below are some charts that we first published in 2018, and refers to the growing influence of Millennials.
– they are the single largest generation ever, and with an average age of 28.5 (26.5 is shown, but that is 2018 vintage).
– they dwarf the Gen-X, which was a small generation.
And no surprise, as Millennials age, they will start making life decisions. If every generation was exactly the same size, the impact from Millennials would not be felt — because there would be a seamless hand-off between Gen-X to Millennials.
– But the differential in size of the generation is massive
– Millennials number 95.8 million vs 65.8 million –> 30 million more units of consumption.
This chart helps us understand why this Millennial wave will be “felt” in the economy. This chart tracks the 5-year growth rate of people age 30-48 in the USA. Again, notice how cyclical this cohort growth rate is?
– Gen-X caused this figure to fall to a 50-yr low at the end of 2009
– It has since been accelerating higher due to Millennials
– It does not peak until 2035
But let’s say we track the size of each generation age 25-45, not the total US number of people that age, but rather, the number within each generation. This is simple because the Census bureau keeps detailed statistics about the US population. And therefore, we can build a model tracking the size of each generation.
– the generations are the lower lines on the chart
– we model the # age 25-45 in each generation
– notice how US housing starts track the growth of each generation?
The rise in Millennials is powering a housing boom. And this boom might last past 2026. The COVID-19 simply accelerated this trend, like gasoline on a fire.
The point of all this is that the resilience of the US economy is not a fluke. There is a demographic tailwind that is positive for the US economic recovery. Of course, important things need to happen:
– Washington needs to pass fiscal CARE Phase 4. After all, millions of Americans are out of work.
– Vaccine/ Cure need to be successful, otherwise, the World is changed permanently
– US needs to see an organic reduction in cases –> we believe this is happening.
The S&P 500 managed to break to a new all-time high today, exceeding 3,393 established in Feb 2020. Yet, somehow it seems like this has is being met with little excitement and mirth. Instead, we get the sense that many investors are looking at equity highs as a sign of the magnitude of distortion of market structure. We expect CTA and algos to be upside breakouts as positive — so we see new money buyers for equities at these levels.
But valuation is often a relative term. Think of this way, valuation is the residual calculation between “price” and “fundamentals” — the key question is:
– which fundamental metric to use (cash flow, EPS, etc.)
– and the “when” question — LTM, or forward 12 months, or 2022?
Thus, valuation is not a straightforward a calculation that many imply. That is, if someone is questioning valuation, it can be too easy to oversimplify if someone is pointing to a single valuation metric. For instance, is 12-month forward EPS relevant, since 2022 is probably the year where EPS is normalized?
Moreover, look below at the P/E of stocks vs P/E of bonds. For bonds, we use the inverse of the yield, akin to P/income ratio. And below you can see:
– US 10-yr is 183X P/E
– US investment grade bonds 53X
– US high-yield 19X
I don’t hear that many protest the ridiculously high P/E of bonds. In fact, many say these valuations are “here to stay.” If so, stocks are pretty attractive.
– P/E of FANG is 32X vs 53X for IG bonds
– Epicenter P/E is 15X vs 19X for HY
– even EM stocks trade at 14X, close to epicenter
This is a reason we see stocks having upside, and this move to all-time highs is positive.
Source: Fundstrat
POINT 1: Daily cases continue organically retreating… daily cases -15,205 vs 7D ago
Daily cases improved again today, coming in at 40,140. This figure includes >1,000 estimated backlog cases for Texas (See below) and thus, would have been another day of sub-40,000 daily cases.
Source: COVID-19 Tracking Project
As we have stated recently, the 7D delta is the key metric to watch and this is down -15,205 vs 7D ago — the largest decline in a few weeks. In fact, it looks like CA has worked through its backlog.
Source: COVID-19 Tracking Project
Texas has a major backlog and the cases reported in Dallas County over the last 3 days were actually cases from June/July. See this tweet below from their health department. So once Texas has worked its way through this, we could see another big drop in daily cases.
Source: Twitter.com
The states with sizable 7D increases are showing very modest gains. Alabama is the highest and it is 526 vs 7D ago. Thus, the skew is highlighting how quickly cases are falling.
Source: COVID-19 Tracking Project
POINT 2: Only Florida, of the big states has a positivity rate >10%
The latest positivity rates are shown below and the level two weeks ago, for comparison. Generally, 10% is considered a high level of positivity and 9 states have positivity rates >10%. Of these, however, only Florida is a major state. Granted, Mississippi has a troubling high 26% positivity rate, but that state is not going to be a risk to the overall US economic opening — compared to FL, CA, AZ, TX, or F-CAT.
Thus, the key state to watch on positivity is FL.
Source: COVID-19 Tracking Project
For the US overall, the positivity rate continues to trend lower and is currently 6.3% — while it is not entirely clear yet, it looks the positivity rate has been steadily drifting lower since early July. At that time, it moved above 10%.
Source: COVID-19 Tracking Project
POINT 3: Possibility of no “second wave” in USA. Flu season non-existent in Southern Hemisphere…
Chief among the COVID-19 concerns are the risks of “back to school” and the risk from flu season (“second wave”). And these are indeed big deals. There is no precedent for modeling COVID-19 and because of that, nobody can really say that COVID-19 will not resurge. In fact, many healthcare experts are warning of the new wave of tragedy from the flu season.
https://www.infectioncontroltoday.com/view/here-comes-the-double-whammy-flu-season-on-top-of-covid
Southern Hemisphere is 4 months into a 5-month flu season (April to Sept)…
However, we can get a sense for the risk of flu season by looking at the Southern Hemisphere.
According to CDC (below), the Southern Hemisphere is 4 months into a 5-month flu season. Therefore, we can compare 2020 flu season (Southern Hemisphere) to prior years.
Flu season by hemisphere:
Southern Hemisphere –> April to September
Northern Hemisphere –> October to May
Based on a recent report by the WHO, the flu season in the Southern Hemisphere is unusually mild. This is measured in multiple ways and the WHO listed several surveillance methods. We also look at Australia and Chile, specifically as well.
– Australia has little COVID-19, so given the low prevalence, there should be a greater risk from flu season (second wave).
– The flu season is non-existent in Australia.
– The other extreme is Chile, which has severe COVID-19 prevalence. Yet, Chile has almost no flu season.
Source: WHO
The summary from the WHO is below. But basically, flu has been below average — in fact, well below average.
Source: WHO
By this time of year, there should be a surge in specimens for flu (see the left side of the chart) but instead, there has been little collection. The WHO does not necessarily say the “flu season” is mild as they believe that behavioral changes affect this data. But this does not seem intuitive to me. If there is a flu season, people get sick.
– the low levels of flu perhaps argue the PPE, hand washing, masks, etc. are reducing the spread of flu.
Source: WHO
Australia has little COVID-19, therefore the flu season should have been a massive second wave…
Australia is worth watching, because COVID-19 is practically non-existent there. Look at the cumulative cases per 1mm residents. Australia is at 932 cases per 1mm residents, or 1/20th the prevalence of the US.
– Lower COVID-19 prevalence should mean greater societal risk in flu season.
– But there has been zero flu in Australia.
Source: Johns Hopkins and Fundstrat
And this influenza report from the Australian Government is quite interesting. They note that influenza-like illness (ILI) is lower than average for the nation.
Source: Australia Dept of Health
For instance, the percent of calls to Healthdirect for ILI is WAY below average as shown below. This is a collapse in calls about ILI.
And look at the lab confirmed ILI. It is non-existent in 2020 while it should be going through the roof at this time. This was the case in 2019 and every year prior to 2020. So, there is a clear and pronounced collapse in flu.
Chile has more cases per 1mm residents than any major country in the world…
Chile is the opposite of Australia. The country has 20,721 cases per 1mm residents which is the highest for any major nation in the world (see above chart). Chile’s prevalence is nearly 33% larger than the US and even above Brazil. So that country has an extremely high prevalence.
Source: Johns Hopkins and Fundstrat
But notice how exceptionally mild the flu season has been? This is a chart created by the WSJ.
Source: WSJ and Chile Public Health Institute
Takeaway? The flu season is non-existent in Australia (low prevalence) and Chile (high prevalence)
If the Southern Hemisphere is a template, there may not be a flu season in the US. Is this our view?
Nope, this is not our base case, as we believe the COVID-19 disease in unpredictable.
