Click HERE to access the FSInsight COVID-19 Daily Chartbook.
I think this may sound backwards to many, but I think the safest places are regions where there was a massive COVID-19 outbreak and subsequent containment. This way, there is some level of mitigation within the community, due to t-cell immunity plus antibodies. And the citizens in these regions are also the most vigilant against the new spread. In this way, I think the US is setting up to be a very safe place, once cases fall below 10,000 per day (<30 daily cases per 1mm residents). We are not anywhere near that level now, but as we have pointed out, we could be at that level within a few weeks.
We got more good news today. Daily cases came in at 32,640 and this is down 254 vs 7D ago. Also, of note is the collapse of cases in the 4 major cities at the heart of the US COVID-19 epicenter, FL, CA, AZ, TX, or F-CAT. This is daily cases from their peak:
Now Peak % off
– Miami 520 vs 3,576 -85% WUT?!!
– Los Angeles 1,033 vs 4,814 -79% WUT?!!
– Phoenix 175 vs 3,674 -95% 2X WUT?!!
– Houston 761 vs 2,114 -64%
STRATEGY: Short seller “last stand” is epicenter stocks –> violence of action
One of the great US military leaders is General James Mattis, retired General US Marine Corps. And his battle doctrine is well known and regarded and there is even a published work called “Art of War Papers.”
https://www.armyupress.army.mil/Portals/7/combat-studies-institute/csi-books/the-mattis-way-of-war.pdf
I thought of General Mattis recently, because I re-watched Generation Kill (with my son), about the USMC 1st Reconnaissance Battalion during Operation Iraqi Freedom, and HBO series based upon Evan Wright book (Rolling Stones journalist and the book is even better). But one of the great lines in the movie is from Lt Col Stephen Ferrando, aka “Godfather,” who loves to quote Mattis. And refers to the violence of action.
Source: HBO
This violence of action is part of Mattis doctrine and the notion is the philosophy of speed — not distance, but of use of information, decision making and violence of action. This is one of the excerpts below.
https://www.armyupress.army.mil/Portals/7/combat-studies-institute/csi-books/the-mattis-way-of-war.pdf
For some reason, this notion made me think about how short sellers are betting against “epicenter” stocks. It has been pretty widely discussed in the media that hedge funds are betting big against stocks that benefit from an economy re-opening — aka — epicenter stocks. These fall into these categories:
– travel and leisure
– consumer discretionary
– industrials
– financials
– energy
https://www.cnbc.com/2020/08/13/hedge-funds-are-betting-big-against-reopening-stocks.html?&qsearchterm=betting%20against%20recovery
One of our summer interns, CJ Woodberry, a CS undergrad at Dartmouth, has pulled together the short interest data for the S&P 500. And these are the 20 industries which saw the largest increase in short interest since mid-March. This list is based upon short interest as % market value.
– topping the list are epicenter groups
– hotels, cruise lines, resorts, including casinos
– retailers
– airlines
you get the picture.
Source: Fundstrat
But this is in the context of aggregate short interest contracting. Below is a comment from Trevor Noren highlighting data that overall short interest is the lowest in 15 years — there is a lot less overall shorting.
– But what short interest remains is highly concentrated in the epicenter stocks
https://twitter.com/trevornoren/status/1297612579292946432
So this has me thinking about what circumstances would need to change to create a change in hedge fund shorting of epicenter stocks. After all, for the past 8 weeks, I can understand why hedge funds increased their bets against the epicenter. The US was suffering from a surge in cases from late May to July and the political divisiveness only fueled confusion. And with the second wave, back to school and Europe, one can see how this makes hedge funds more confident.
Violence of action… the rotation of epicenter stocks would be violent given the lack of trading volume (on short covering)
However, we think a violent rotation out of crowded “Growth” and into “epicenter” is becoming more likely everyday:
– Organic COVID-19 cases in the US are in full blown retreat
– US cases could be sub-10,000 in early September
– Arizona had 311 cases on Monday, vs 10,000 only a few weeks ago
– Miami reported 520 cases on Monday, vs 3,000 several weeks ago
PLUS:
– trading volumes in epicenter stocks have WITHERED…
– if there is little volume, the short covering will be “violent”
We understand why people are giving up on epicenter stocks. If AAPL and TSLA and NVDA go up 5% everyday, there is no reason to bother with casinos, airlines, banks, etc.
– But there is a real organic collapse in US cases
– eventually, Americans realize this and start to live again = reduced fear
If you don’t think this will happen, take a look at OpenTable reservation data (YoY % change) for UK, Germany, US and Australia.
– outside the US, massive recovery in dining activity
– OK, UK has an incentive program
– BUT LOOK AT GERMANY!!!!
– it’s just a matter of time for the US
https://twitter.com/SabinaKalyan/status/1295989583067447297
To see how much volumes have collapsed in epicenter stocks. Look at this chart below, which looks at relative trading volumes of cohorts vs market cap. And you can we are below normal for epicenter stocks.
Source: Fundstrat
So this is the obvious observation:
– Hedge funds increased short bets against epicenter
– If short covering starts, there is less volume
– less volume, while covering shorts = explosive price gains
If COVID-19 cases continue to decline and/or a vaccine/cure is developed, we could see a big rotation into epicenter stocks.
Source: Fundstrat
30 stocks with the largest increase in short interest since mid-March (*)
These are the 30 stocks that have seen the largest increase in short interest since mid-March. They are all epicenter stocks, not surprisingly.
– I think these are the ones that could see the “violence of action” in a rotation
Source: Fundstrat
POINT 1: Daily cases come in at 32,640 vs 32,894 7D ago… trend still positive
Daily COVID-19 cases came in at 32,640 which is better than the 32,894 seen the prior Monday (7D ago) and continues the trend of continued organic improvement in daily COVID-19 cases. As this chart below highlights (looks at the last 5 weeks lining up by day of the week), Monday’s 32,640 new cases are 22% lower than two weeks ago and 40% lower than four weeks ago.
– the trend is firmly established. Daily cases are falling at a rapid pace.
Source: COVID-19 Tracking Project and Fundstrat
We continue to believe the best way to look at trends is to compare daily cases vs 7D ago. After all, this is the leading indicator for the 7D moving average. The distortion from CA is behind us now. As we will stop showing the “ex-CA” data soon. Texas disclosed 93 backlog cases for Dallas County and Indiana disclosed 975 backlog antigen test cases, so we adjusted their data accordingly. Considering Massachusetts didn’t report yesterday (due to a planned data system upgrade) and therefore its stats on Monday reflect a 2-day change, daily cases should be down even more vs 7D ago.
Source: COVID-19 Tracking Project and Fundstrat
Source: COVID-19 Tracking Project and Fundstrat
POINT 2: NOT A TYPO: Daily cases in Phoenix -95% since the peak, -85% in Miami
To really appreciate how much COVID-19 is in retreat, let’s look at daily case trends in the 4 “nucleus” cities. These are the 4 cities at the center of the massive US surge within the 4 epicenter states of FL, CA, AZ, TX or F-CAT. The 4 cities are:
– Miami
– Los Angeles
– Phoenix
– Houston
And we have highlighted how many cases have fallen since the peak. It is an astonishing decline:
– Miami -85% WUT?!!
– Los Angeles -79% WUT?!!
– Phoenix -95% 2X WUT?!!
– Houston -64%
Source: Johns Hopkins
You get the picture. Massive massive declines. These declines came, even as these states did not have to implement severe lockdowns. In other words, COVID-19 seems to have simply burned out in these 4 cities.
I am not sure there is any other way to explain it.
Only 26 counties in the US have zero cases… these are not “safe places”
This might surprise some people, but there are only 26 counties in the US with zero reported COVID-19 cases. The sum of this population is a mere 115,000 people — it is an argument against containment.
– I think places with few or no cases are actually the most vulnerable
– the “safest” places, in my view, have seen a massive outbreak and a retreat
Source: Johns Hopkins
POINT 3: In the US, 1 in 471 people has a contagious COVID-19 infection –> high
A question I have asked myself is: every time I am out and about, what are the chances I encounter someone with COVID-19?
This is something that can be roughly quantified, using the following:
– Daily cases per day in a city/US
– Infection to case ratio (4X, per IHME)
– # days someone is contagious 4-7 per CDC
And with these calculations, we can estimate how many people within a city are contagious at any single time.
US ratio –> 1 in 471 Americans is contagious with COVID-19
(a) US daily cases 35,000 cases/day
(b) infections: cases 140,000 infections/day
(c) # days contagious 5
(d) total contagious 700,000 Americans today
(e) total population 330 million
Ratio (e) / (d): 1 in 471 people
So this means 1 in 471 Americans is contagious with COVID-19. This is a high ratio and highlights that it still a dangerous disease. But this is obviously going to change as case trends change. Below is a matrix showing this ratio as daily case trends change.
– if daily cases fall to <10,000 (our view), the chances plunge to 1 in 1,650
– you get the picture
Source: Fundstrat
Middlesex, MA is the safest top 50 county in the USA… 1 in 2,370 people have a contagious infection…
Below is this calculation for the top 50 counties in the USA (based on Pops). The safest places are Middlesex, MA and Nassau, NY.
– Even NYC is safe with a 1 in 1,503 persons
– the worst hit places are now the safest
– the worst is Fresno, CA where 1 in 146 people has a contagious infection.
Source: Johns Hopkins and Fundstrat
Source: Johns Hopkins
(*) Please note that these stocks on this list are the 30 stocks with the largest increase in short interests as % float. They are solely based on the change of “Short Interests as % Float” since Mid March to Mid August. We do not monitor this list day by day. These stocks may not be suitable for all investors. Please consult your financial advisor to discuss your risk tolerance and other factors that characterize your unique investment profile.
