Financial Research

Tom Lee's Equity Strategy

Tom Lee's Equity Strategy

In the United States a steady and persistent decline in cases continues. The 7D delta has been negative in the past 23 days. In the past few days, the &D delta has also been accelerating to the downside again. If the speed of this decline continues at its current pace then we could the daily cases drop below 20k by mid-May. As we wrote before, at this stage of the pandemic, as long as vaccinations work (evidence overwhelmingly suggests they do), eventually the successful rollout will lead to a persistent decline in cases. Based on the recent data, we think that decline has arrived. Despite what is clearly playing out in the data and the undisputable fact that with the dramatically increased immunity, particularly amongst the most vulnerable cadre, there is simply less places for the virus to go the CDC has provided a pretty strange forecast for a major spike from May to June. Their forecast is apparently due to the spread of dangerous variants that elude the immunity provided by the vaccines. However, our preferred forecaster for COVID-19 data the IHME shows no such rise. The CDC has been generally slow to lift recommendations. They are allowing sports and indoor dining but not cruises with all vaccinated passengers. Dr. Scott Gottlieb also pointed out that they were wrong on the science surrounding outdoor transmission. So, we are taking the CDC forecast with a grain of salt, while accepting that it is certainly possible that it could occur. If they are right it would be a headwind for markets. In mu opinion, and only my opinion, the CDC’s latest forecast seems to be borderline ludicrous. The IHME baseline is a continued collapse in US cases. If the IHME forecast is correct than Epicenter will rally. STRATEGY: 1Q2021 Earnings “Don’t Matter’ as Comps Not Realistic- 2Q2021, 3Q2021 Matter Way More Many clients are concerned that stocks are peaking, because stocks are not reacting to ‘strong EPS’ results, and in fact, are often selling off. I can think of at least 7 reasons that stocks do not have to react to ‘great results’- of which, only 2 are actually bad signs. But in my opinion, the main reason stocks are not ‘reacting to 1Q2021 results’ is that the year ago comparison is to March 2020 when the economy was six weeks into an unprecedented economic depression caused by a synchronized shutdown. Do comparisons vs the ‘first stage’ of the pandemic collapse, when revenues were often near zero, matter? We don’t think they matter all that much. Realistically I think the YoY vs 1Q2020 is simply going to look mental. So I would not place much weight on the results. And to me, it seems like equity markets are reacting as such. The next two quarters are more important than comps to the heights of COVID induced economic devastation. If you were wondering what the fuller list of possible reasons of why stocks do not react to EPS, here it is. Two potential bad reasons are that 1) good news is already priced in and that 2) no shorts have to cover. Two medium reasons could be 3) incremental buyer doesn’t care for earnings and thus doesn’t react and 40 market is trying to process hairs of inflation. Three good reasons for why stocks aren’t booming on good earnings could be that 5) people aren’t chasing earnings 6) which could mean retail is getting smarter and not gambling on earnings calls or 7) nobody cares about comparison to March 2020. 1Q2021 EPS had been beating estimates by 19% which would be considered extraordinary under normal circumstances. The upside has been strongest in Cyclicals (+27%) and Near-Cyclicals (+41%) as compared with Defensive (only +8%). The beats by even Defensives, let alone the others, would be considered very outstanding in normal years. STRATEGY: Structural Tailwind for Energy. Per Rystad, $300 bn of Oil Capex Taken Out Since 2020 This is one of the reasons why we continue to be so bullish on Energy. Epicenter is leading and performing very strongly. In fact, for the first time in nearly 6 months of being bullish on Energy we are finding institutional investors developing incremental curiosity about the sector. And as many readers know, Energy is a sector investors have largely ignored for the past decade and this was even more true since the beginning of the pandemic. Rystad Energy (rystadenergy. com) is an independent Energy research boutique, headed by Jarand Rystad, published a report today that points the E&P sector has cut investment (capex) by $300 bn since pandemic started. This will have lasting impact in their words. There is quite a lot of good material in this report and we hope to do a joint webinar with Rystad in coming weeks, so we can more fully explore their views an analysis. The dramatic cuts will result in a structural gap that can only be corrected by setting capex higher. North American oil production is set to fall by 3.0mbpd by 2022 alone. An additional 1mpbd will be taken off as well. That is a level on par with the annual oil production of Iraq and exceeds Iran’s and Kuwait’s production. This is a pretty stark deficit and would be hard to dismiss. This goes further to support our recently reiterated bullish call on the Energy sector. Bottom Line: Despite the diminished importance of 1Q2021 earnings due to anomalous comps, Epicenter is leading in terms of beating expectations. Energy is looking particularly appealing and has the best of alignment of supply/demand dynamics developing for a decade or more. We continue to recommend Energy and think it will be among the best, if not the best, performing sectors of 2021. Figure: Way forward ➜ What changes after COVID-19Per FSInsight Figure: FSInsight Portfolio Strategy Summary - Relative to S&P 500** Performance is calculated since strategy introduction, 1/10/2019

Earnings Comps Distort Picture, Energy CAPEX Shortfall
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Bear Arrives; Markets Want to See U.S COVID-19 Case Peak

I asked for a sanity check last week since the S&P 500 index was selling at a 16 P/E and Treasuries at over a 100 P/E but the response was simple panic. Indeed, in the frenzied and sharply downward trading last week in reaction to the spread of coronavirus, or COVID-19, it seems the market sees the cure as worse than the disease. That is, it appears increasingly possible that the volatile lurching in financial markets could drive the US economy into a recession, a self-fulfilling prophecy. The market has digested a lot of negative news in the past week, leaving little room for a sanity check. Several companies drew down credit facilities, like Boeing (BA), Wynn Resorts (WYNN); the World Health Organization declared COVID-19 a pandemic; President Trump’s initiatives fell short of expectations. Tom Hanks and his wife Rita revealed they tested positive for COVID-19 and major league sports have suspended their play. So the disruption is becoming tangible in the US. and “price discovery” remains non-existent in equities. By that, I mean the market is so uncertain that stock prices are moving in unison on one or two simple macro factors, with high correlations to each other, instead of on their own corporate merits. Source: FS Insight, Bloomberg Markets have become deeply pessimistic because the “cure” for the pandemic seems worse than the disease. Social distancing, limiting movement, managing intercity and international movements look to be disruptive. Already, industries linked to travel and entertainment, among others, are suffering. The financial markets volatility is worsening an already weak liquidity environment. Italy has now taken drastic measures to curtail movement. What remains unknown is the ultimate path and level of spread in the US, which has a case count ~1,300 and growing. The paths seen by Iran and even Europe are very similar but Italy seems to be accelerating at a pace that makes this the worst case scenario. This is the reason many investors say the US is two weeks behind Italy. Despite the panic, rationality is required, and the best way to compare COVID-19 spread between countries, in my view, is to look at cases per 1 million population. Among the fastest spreads have been Italy, Iran and South Korea which saw 85-152 cases per 1 million within two weeks after passing the US milestone (1.4 cases, or 100 times increase in two weeks). This particular measure implies the U.S. could see 50,000 cases by the end of March. (See chart above.) However, this is only one potential path and if cases peak towards the end of the month (Italy seems the exception), this should result in a turning point for the equity markets. This was the case with China, Hong Kong, South Korea and even Japan, so that’s the “bright side” of an adverse case. I will also point out that the countries with the highest number of cases have the lowest level of toilet hygiene (measured as “percent of people washing hands after using toilet, as China and South Korea are among the worst). Perhaps this could be differentiating national experiences. The U.S. is in the middle on this metric. Source: FS Insight, Bloomberg Currently, the US has about 1.5 cases per 1 million pop, about the same as Canada. Both nations have reported their first case 40 days ago. This is curious, as it suggests both countries are tracking similarly in terms of disease outbreak. Yet, the US is only testing 5 people per 1 million Pops vs Canada at 222. In a sense, while we expect the cases in US to grow sharply in coming weeks (and no doubt there are many undiagnosed cases), perhaps the path does not have to follow Italy or Iran. The market bottom in the Asia equity markets (vs MSCI) all coincided with the peak in Corona COVID reported cases. (See chart above.) This is why the Street is so fixated on the “case count” in the US and Europe. In the meantime, stocks remain relentless oversold by many metrics. Some 75% of cumulative 10-day volume is down, an event that has happened only four times since 1990. Just 1.6% of industries are up month over month, something not seen since December 24, 2018 and before that, January 21, 2016. Those times turned out to both be good times to be long. Finally, another positive development last week was the yield curve fixed itself and is no longer “inverted” from 1 month forward. What could go wrong? COVID-19 could indeed morph into a more dangerous disease, changing the risk profile and the required response of markets. The good news is China’s cases seem to have peaked and are falling. Moreover, US policy makers and central bankers are ready to take necessary action. BOTTOM LINE: Price discovery remains non-existent as investors view fundamentals as uncertain. In our view, the panic by US households and markets, while disruptive, is likely to limit the spread of COVID-19. Case peak remains key bogey for markets at the moment. Figure: Comparative matrix of risk/reward drivers in 2020Per FS Insight Figure: FS Insight Portfolio Strategy Summary – Relative to S&P 500** Performance is calculated since strategy introduction, 1/10/2019 Source: FS Insight, Bloomberg

Continued Positive Trends In US, Earnings Strength Continues

In the past week, incoming news in the US was overall very positive. COVID-19 cases are legging down, apparently due to higher vaccine penetration. And the US economy is on track for a strong revival and full reopening by mid-2021. Earnings seasons is so far affirming this trajectory. Good news has continued to proliferate on the case front, the vaccination front, and the re-opening front. Perhaps the most salient example this week is NY Governor Cuomo’s announcement that NYC is likely to see full re-opening by July 1st. Source: Fundstrat, State Health Depts. The best evidence for the progress in the US is the continuing substantial “leg down” in daily cases. The &D delta has been negative in the past 16 days! In the past few days, the decline has been at a stable -8k to -10k per day. If this decline persists, we could see the daily cases drop sub-20k by mid-May. But this is positive progress in the US has been achieved largely by vaccine penetration, more so than behavior modification. This is something that healthcare experts like Dr. Gottlieb also spoke about. This achievement is quite rare globally though. There are only 18 countries with more than 20% vaccine penetration. The US ranks #11 with Gibraltar and Israel on top. Thus, few nations are in the same position as the US and this should have direct economic impacts. As you can see, the difference between trying to control COVID-19 with restrictions instead of vaccinations will likely have radically different outcome. This is a key point. Only a handful of countries will emerge from COVID-19 like the US. Some countries like China, Australia and Japan have been more successful than many others with lockdowns but nonetheless lag on vaccination progress. We believe these nations risk recurrent waves of cases that could possibly lead to more lockdowns while the US and these other 17 nations head toward a semblance of normalcy. My takeaway is that the US and these countries will have a stronger economic rebound and the resulting local equity markets should outperform. In other words, I would rather own US equities, and instead of EM, I would stick with US small-caps or US multinationals instead! STRATEGY: 1Q2021 Earnings Driving a +900bp jump in projected 2021 EPS growth +32% (vs. +23% in Jan) We are in the midst of earnings season. Over the next few weeks, Technology takes a back seat and the Epicenter/Cyclical companies will report. The strong beats in the first quarter are already causing EPS estimates to rise significantly, as we’ve been forecasting. EPS forecasts have been significantly rising for every quarter except 4Q2021, which is generally a ‘plug.’ 2Q2021 EPS is now +59% cs. +46% in January. The other quarters are up in the high single digits. So the trends are higher and point to sustained improvements. Furthermore, we believe the margin story will really dominate over the next few weeks. Below is the EBIT margin of the Epicenter sectors and they have been absolutely destroyed in 2020 due to the pandemic. The recoveries in margins were lighting fast post-2008 and post-2015. We think it’s reasonable to expect an even stronger margin recovery given the massive cost-cutting by US corporates, and do-or-die nature of business model revamps and efficiencies. Hence, we think there’s a lot more upside in Epicenter stocks. It also appears that oil has broken out of the “India shutdown” slump which means we think the March highs of $67.98 should be taken out pretty soon. If WTI exceeds those levels, then the next key level is $79, which are the October 2018 highs and would be consistent with Goldman’s forecast. So, if commodities are rising, the associate equities should be similarly gaining. That is, unless the economic relationship/value-capture model has changed. Of the sectors, this is the key question for Energy stocks. Oil is 3% above its 2020 start prices and Energy stocks, XLE and OIH are down -17% and -29% respectively. More importantly, we know most institutional investors are underweight energy. The entire sector’s weight is less than AAPL. If oil rises to levels that are implied ($79/$80) and takes out 2 year highs, then we don’t think institutional investors will be able to ignore that surge and will pile in quickly and earnestly to ensure they aren’t missing one of the market’s main sources of risk/adjusted return. The result will likely be institutional FOMO that results in significant price appreciation . It also looks like the threat of lockdowns in India, which markets have been consternating over, is reduced. Our favorite COVID-19 data source predicted India’s COVID infections peaked on 4/26 which means the worst is hopefully over. We see this as potentially being a major catalyst for Epicenter stocks. Likely that Mumbai/Delhi start to improve followed by a gradual realization that the crisis is past the worst point. This should result in a new ‘leg up’ for the Epicenter trade (Energy, Industrials, Financial, and Small-caps). $XLE, $OIH, $XLI, $XLF and $IWM Figure: Way forward ➜ What changes after COVID-19Per Fundstrat Figure: Fundstrat Portfolio Strategy Summary - Relative to S&P 500 ** Performance is calculated since strategy introduction, 1/10/2019

Cases Break Downward, Epicenter and Small Caps Primed

We sent out an alert earlier this week about a pretty dramatic improvement in the case trend. The 7D delta took a major down leg with cases collapsing across several states in particular. Michigan and New York both had drops greater than 1,000 in their 7D delta which is encouraging. This trend is so far continuing and the rate of vaccinations compared to new cases is at about 45 to 1. This is one of the most important numbers and it has remained consistently high. Source: FSInsight and state health departments The key question is whether this is just noise or if it is a genuine collapse. Given that the United States has recently eclipsed the level of 40% vaccine penetration which proved a turning point in Israel, we are venturing that this is the beginning of some serious downward action with regards to COVID-19. If the US were to match Israel’s path with regard to vaccinations and new infections then we would be at 8,500 cases a day by June. This is exciting news and if it is true we think that the natural implication is that Epicenter will rise. If there is truly a downside breakout occurring in the case data then Epicenter, which has lagged as COVID progress has stalled, should take-off. Travel, Hotels and Airlines should be big beneficiaries. We also like Epicenter proxies like $IWM and $SPHB. We think the Energy and Materials trade will resurge in a big way. $XLE, $OIH, $KLXE and $CLF should all be beneficiaries of this as well. The bottom line is that the collapse in cases is a very significant bullish development. Recall, that we saw a ‘13’ buy signal for XLE recently (based on DeMark indicators) and this improvement in case trends would likely amplify that even further. For more from Tom DeMark’s updated views on Equities and Bitcoin be sure to tune in for a webinar that I will be hosting with him on April 28th. We’re grateful to do events with this Wall Street legend and you definitely DO NOT want to miss this event. You can register for that webinar here. STRATEGY: Food for thought on small-caps and EnergyWe have been expecting that small-caps and Epicenter stocks would get “rejuvenated” once US COVID-19 cases started to roll over.  And this week, we believe we got the “leg down” in USA COVID-19 cases.  And as the chart below shows, if cases are rolling over, then the “epicenter” trade is back. Not only are health trends moving in the right direction but a lot of Epicenter names have been having very strong earnings that seem to indicate our thesis about the businesses becoming lean and mean when revenue was constrained. Operating leverage has been off the charts for many names. Because of the convergence of tailwinds on both the top and bottom line and stable interest rates, I think the S&P 500 could see 4,400 by June. While there have been more rumblings about a potential correction bubbling up in the financial media, I believe the ongoing ‘rolling corrections’ that have been occurring sector by sector have primed the market pretty well for a leg higher after stalling for the last month. Some think the good news is all baked in and we do not agree with that. We think the Cleveland Cliff’s earnings among others are showing that the consensus has undershot the scale of the EBITDA recovery significantly in their forecasts. We believe this macro environment will be favorable for Epicenter stocks for a while as it is more reminiscent of a post-war cyclical expansion than a typical run-of-the-mill recovery. STRATEGY: Buy small-caps (proxy is IWM), Epicenter (SPHB, etc) and EnergyAnd to reiterate, we believe the Epicenter trade is coming back on strong. The trade consolidated for the past few weeks and it was a rocky period. But today, it looks like the Russell 2000 is on its way to breaking out.– the key level on IWM is $226.69 (the most recent high), but once that is cleared, we think IWM can make all-time highs– Small-cap index Russell 2000 is a good epicenter proxy because it is chocked full of cyclicals. The other sector that we think will soon be a major beneficiary, if US COVID-19 cases are legging down, is Energy.  Energy is arguably the most sensitive to an economic re-opening because the movement of goods involves consuming some form of Energy.– Oil is now +1% compared to where it was on 12/31/2019– Energy sector (XLE) is still -21% lower and Oilfield Services (OIH) is -33% lowerHow can the Energy equities retracement be lower than the commodity price?  This makes little sense to me.  This is why we see a big catch-up trade in XLE and OIH coming.  One where XLE could rise >45% or more and OIH >100% Figure: Way forward ➜ What changes after COVID-19Per FSInsight Figure: FSInsight Portfolio Strategy Summary - Relative to S&P 500** Performance is calculated since strategy introduction, 1/10/2019

7DDelta Turns Negative, Energy Poised For Turnaround

We want to revisit the progress of Israel in its battle with COVID-19. That nation now has vaccinated 62% of its population. And even with mutations being present in Israel, they have seen a drastic reduction in COVID-19 cases. The latest 7D average is a mere 26 cases per 1mm residents when it was 952 only 3 months ago. As we said before, COVID-19 looks to have been largely obliterated from Israel. The takeaway for me is that Israel’s experience does strongly argue for the effectiveness of vaccines. That nation solely relied upon Pfizer for its vaccinations. North Dakota and South Dakota have a better “daily cases per 1mm” vs. Israel at this same point and could be “obliterated by June.” Tireless Ken and his team overlaid Israel’s case results compared to North and South Dakota. Those two states have among the highest vaccination rates in the US and also the highest overall combined infections + vaccinations. And as our clients know we have looked at ND and SD as templates for the rest of the US. SD has 42% vaccine penetration so far and ND has 37%. SD daily cases are 227 per 1mm, while Israel was 803 at the same point. ND is well below Israel at the same point as well, as you can see when we overlay. Source: FSInsight, State health depts. The 7D delta in daily cases has turned negative in the past few days. After surging to +16k on Tuesday it has since retreated and as far as we know this is an organic drop. Hence, if this persists, we could see the case trend resume its downtrend. US hospitalizations are rolling over and US deaths also seem to be rolling over. Michigan is now leading states in the largest decrease in cases from 7 days ago at -1,516. Louisiana had the most new daily cases, but it was only 349. Vaccinations seem to be working and hopefully these positive trends resume. The 7D moving average for shots/cases is about 50 to 1 and this impressive figure is likely to surge even further in coming weeks. In total, about 125 million Americans have received at least 1 dose of vaccine. This is a good pace and as we noted previously, implies 50% of the population by May. STRATEGY: Epicenter stocks endured a month-long sell-off, but oil is arguing an upside breakout is ahead, Energy secular bull market could be forming. Source: Bloomberg, FSInsight Over the past month Epicenter stocks have underperformed the broader market, evident in the chart below. Economic momentum remains strong and the increase in EPS estimates steadily over the past few weeks shows the Street is still in the process of raising their forecast and outlook. There seems to be a few reasons that even in the midst of this ‘beat and raise’ environment that Epicenter and Cyclicals are still struggling. Some investors think that the good news is already baked in, and thus, Growth stocks should lead. We would counter that Epicenter/Cyclicals are projected to have 2022 EBIT >50% to 100% above 2019 levels. However, the stocks are only at their 2019 levels. The lull in interest rates rising, reason some investors, should cause Growth to continue leading. We would counter that interest rates are falling partially due to crowded positioning for the higher rate (aka “buy the rumor, sell the news” but the bottom line is this; higher growth (which is forecast by pretty much everyone) necessarily means higher rates. Finally, some investors posit that cyclicals are mere ‘rentals’ and that Growth stocks are the mightiest of the equity asset-class. Part of this is likely simply because many managers are comfortable with Growth and it’s made them rich. Paradigm changes are scary and one of Wall Street’s main weapons, historical data, is of relatively limited use compared to more normal times. Perhaps the most important thing to consider is that cyclicals have the capacity for positive surprise. To me, it seems like most investors are more comfortable buying Growth/FANG after the recent pullback. So again, we see consensus being overweight Growth, and underweight Epicenter. While the future is uncertain, we remain confident being on the other side of the consensus is the right call here. We believe we might be able to discern something about the path of Epicenter based on oil prices. WTI is currently $63 and if it goes to $70-$80 by summer what groups would lead? Based on the tight linkage between oil and Energy stocks we know they would do VERY well and likely lead the market. If oil rises meaningfully, you can expect Epicenter to follow suit. If oil strengthens to $80 this summer, XLE’s implied level would be $71, which is roughly 45% upside. The linkage between WTI and XLE is very close. In fact, they have moved in tandem for the most part. In other words, if the WTI prices do indeed strengthen, we could see a significant rise in Energy equities. Energy seems to be a very good buy here. Let’s look at the bigger picture. When you zoom out you see that Energy stocks might be finally ending a 12-year bear market in place since 2008. The current bear market is the worst ever for the sector, and secular bull markets in Energy typically have an average length of 9 yrs. If Energy is indeed bottoming, as you can see from our analysis the implied upside is 322% over the 9 yr. average which is 30% CAGR per year outperformance vs. S&P 500. As we’ve said supply/demand dynamics are good. Figure: Way forward ➜ What changes after COVID-19Per FSInsight Figure: FSInsight Portfolio Strategy Summary - Relative to S&P 500** Performance is calculated since strategy introduction, 1/10/2019

COVID Cases Stable, VIX and Credit Suggest Epicenter Upside

COVID-19 trends have been fairly stable in the past few weeks (vs the sharper declines in cases seen earlier in the year), but as we wrote about in recent weeks, daily cases is not necessarily the important benchmark. Vaccinations are increasing and averaged 3.0 million this week. Many states are moving forward with re-openings. As we noted earlier this week, it was a milestone to see CA, one of the most conservative states with regard to re-opening, announce a full re-opening by June 15th. Given CA is a good barometer for the strictest states, it seems that essentially the entire US will be open by the Summer. Source: FSInsight and State Health Departments Daily cases are 73,907 vs 71,277 7D ago which is up a modest 3,630. The 7D positivity rate is 4.8%, lower from the 5% a week ago. The level of 5% is important. Hospitalized patients are up about 7.2% from a day ago, but daily deaths are still down by nearly 20% versus a week ago. So progress is a mixed picture, but it does appear that vaccine penetration is making a difference. Hospitalizations are primarily rising in CT, NK, PA, MD, MI and VT. Take a look at the comparative ratio of vaccine penetration (x-axis) and the death rates (y-axis). The key to understanding the chart below is to realize the Y-axis is log scale. Thus, if this chart is true, as vaccine penetration rises, the death rate should be exponentially collapsing. Indeed, this seems to be the case. Death rates collapse when vaccine penetration reaches about 33%. States with higher vaccine penetration have seen death rates drop to .05%, or approximately 1/20 of the aggregate US level. This is incredibly positive news and seems to be reaffirming the evidence from Israel, the vaccines are working. Coincidentally, they are also helping folks who already had COVID-19 and were having long-term symptoms. Vaccines are leading to a drop in mortality in the real world. This is promising for the re-opening timeline. Strategy: Equities Are Acting Defensive, VIX and Credit Say “Risk On” Since the start of 2Q2021 (April 1), equity markets have taken on a somewhat defensive tone. We expected a ‘face ripper’ rally and while the MTD of 3.1% does qualify, we were surprised to see it led by Defensive and Large-Cap Growth names. Clients have told us they’re shifting toward a quality bias because of the opinion that economic momentum has peaked. Other may worry that a market top is near given the warnings of technicians and the always unpopular specter of tax hikes. However, despite this attitude, the data is telling a different story. Remember that equity is the junior part of the capital structure. While stocks have been shifting to quality (Nasdaq 100 vs. Russel 2000) credit markets have been telling a different story. The quality shift that is being seen in stocks is not showing up in credit markets. The last two weeks has seen a divergence between with credit favoring ‘high-yield’ and the Russel 2000 lagging behind the Nasdaq. We think that credit and the VIX are saying the reversion to Tech/Defensive leadership is short-lived. Our bet is still on Epicenter having the best risk/reward. Credit and equity generally move in lockstep in terms of quality. So these two indices have moved in tandem for many years. Below is the last 3 years and it is quite evident that quality usually moves in tandem. For the past 3 years the correlation of these two indices is 94%. So, the VIX continues its journey lower and closed today below $17. HYG is surging significantly since March. These two indicators are not suggesting we are on the verge of a slow-down in economic momentum. The natural question is what this implies for small cap stocks. Since the correlation is so tight, we can expect equities to catch up to the quality trade in credit. Foremost, we view small caps as a good proxy for Epicenter and cyclicals because of their higher composition of cyclical stocks. There’s a 94% correlation between equity and credit ‘quality’ indices. We usually view credit as leading since it’s senior in the capital structure. The two indicators together, VIX and credit make us think small caps and Epicenter (including Energy) are due for a catch-up. Check out what the scatter plot we did based on the correlation implies. The x axis is credit and the y axis is equities and you can see that the current ratio is below the regression line. So the equity quality ratio should be .71 with QQQ at $335.08 the implied price of IWM is $238.80, an all-time high. This implies a +7% catch up coming up for small cap stocks. The catalyst could be 1Q2021 EPS season. STRATEGY: Updating our Power Trifecta, adding net 10 stocks, now Power Trifecta 35 (*)3 Deletions:$PBCT, $NVT, $VNO 13 Additions:$AZO, $HOG, $GRMN, $MGM, $WH, $GPS, $LB, $VIRT, $AGCO, $OC, $UBER. $EXP, $NUE Figure: Way forward ➜ What changes after COVID-19Per FSInsight Figure: FSInsight Portfolio Strategy Summary - Relative to S&P 500** Performance is calculated since strategy introduction, 1/10/2019

7D Delta Continues to Be Positive, EBIT Recovery for Epicenter

After surging to 13,171, the 7D delta fell slightly to 7,216 on Tuesday. Michigan remains the biggest contributor to the 7D delta surge and reported over 5,000 cases on Tuesday (vs. 3,576 7D ago). As, shown below the daily cases (7D avg) in Michigan has surged to the highest level since mid-December. Source: FSInsight and State Health Depts. Despite the problematic developments in cases, US hospitalization is still rolling over. After all this time, we may forget that the reason for lockdowns is to prevent the healthcare system from being overwhelmed. Due to the progress in vaccine penetration this outcome seems less and less likely. The aggregate level of patients who are currently hospitalized has fallen significantly from the wave 3 peak. Encouragingly, 41 states are now near or above 60% combined penetration (vaccines + infections). SD, ND and RI are now above 80% combined penetration. Collectively, these 41 states are approaching about 80% of the US population. As the below chart highlights the US is seeing impressive and steady progress toward vaccine penetration. Source: FSInsight and State Health Departments The bottom line is that vaccination progress continues to outpace infections. This should increase when J&J supplies become widely available. The ratio of vaccinations/daily confirmed cases, a particularly important metric in our estimation, continues trending higher. There have been roughly 50 people vaccinated for every new case. STRATEGY: Look at 2022E EBIT vs 2019 EBIT. Epicenter revealed relative strength and Energy is most attractive of these... We predicted that stocks would likely rally into the end of the week after the market turmoil caused by a deleveraging event earlier in the week. Several factors made us think the last two trading days before Good Friday would result in a rally and we were proven correct. Wednesday was the last trading day of the month, Thursday is the first day which usually means inflows, massive prime brokerage unwinding just ended, hedge funds have been waiting to buy until the market turmoil cleared, which it did. While I was encouraged to see the breadth of today’s rally we still think the best risk/reward is in Epicenter, and the best risk/reward in Epicenter is Energy. Let’s do a simple sanity check. Take a look at 2022 EBIT forecast vs the 2019 EBIT. We are using our topline estimates, but consensus margin forecasts. We compared this EBIT level to the stock levels (now vs. 2019). Anything on or above the diagonal line is discounting a full 2022 EBIT forecast. Since the “% change” in EBIT 2022 vs 2019 is reflected in the current stock price vs. 2019 it shows where upside is. So, anything below this line is attractive as a stock and has upside. Energy, materials and Discretionary (excluding AMZN and TSLA) are the best from a valuation perspective using this method. In other words, stick with Epicenter. These sectors have tailwinds and also have the greatest capacity to surprise on earnings. We’re most constructive on Energy. We sent out a blast on Wednesday saying that the IWM clearing the level of $220.93 would be an important indicator as to the direction of markets. We believe this leading indicator closing above this level on Thursday is positive. We believe that IWM likely moves toward it’s recent ATH of $235 in the near-term. It’s been an eventful first quarter of 2021 full of challenges. We’re happy to report that April is typically a strong month. Even more so when there is two positive consecutive closes on 3/31 and 4/1. Since 1945 two positive close on these days portend a stronger performance in April As many are aware, April is the strongest month of the year. In two other bullish developments the VIX closed at the lowest levels since the pandemic at $17.33 and there was a blowout ISM reading. BOTTOM LINE: If VIX is pre-COVID-19 levels shouldn’t Epicenter stocks recover? We favor Energy, Industrials, Consumer Discretionary (Ex. AMZN, TSLA) and Small-Caps! Happy Easter Everyone! He is risen indeed! Figure: Way forward ➜ What changes after COVID-19 Figure: FSInsight Portfolio Strategy Summary - Relative to S&P 500** Performance is calculated since strategy introduction, 1/10/2019

7D Delta for New Cases Flat, Focus on Structural Tailwind

The decline in daily cases seems to be paused. They have been flat over the past 12 days as you can see below. We suspect that we will likely not see the usual corresponding uptick in hospitalizations and deaths since vaccination penetration of the most vulnerable cohorts has been extensive. Indeed, US hospitalizations are still rolling over as are deaths. US Net Hospitalizations and US Daily Mortality have declined 73.2% and 70.5% since their highs in wave three respectively. Source: FSInsight and State Health Depts. Importantly, the significant progress by the United States in vaccine penetration is starting to make itself shown in the data. Vaccination efforts in Latin America and Europe have been far less effective than those in the United States and you can see the path of new cases is clearly starting to diverge. Thankfully, progress seems to be forthcoming in both these areas as access to more vaccines seems likely. Remember, our initial efforts didn’t go perfect either. The evidence from Israel is also highly encouraging. Once they reached 26% of their population vaccinated cases began rolling over hard presumably since infected plus vaccinated resulted in R0 collapsing. The United States has just reached that level and progress is continuing at a rapid pace. The US is vaccinating about two and a half million Americans every day and soon the penetration will be great enough where some type of herd immunity will begin kicking in. The US has been vaccinating about 50 people for every new case. This is the key takeaway for me from our close monitoring of the healthcare situation. The US is vaccinating so many Americans everyday that soon the virus will have no place to go. Israel has proven the vaccination works in essentially eliminating cases. The US is likely on the verge of a significant Israel-style collapse in cases that bodes well for the stock market. STRATEGY: Buy stocks benefitting from structural tailwinds and the capacity to positively surprise… hint, Epicenter So far in 2021, stocks have been very challenging and there has been a noticeable change in leadership. Energy is the best performing sector YTD with a gain of approximately 30% while last year’s clear leader, Technology, is down half a percent. We think that four structural factors have contributed the challenges that have plagued stocks in 2021 so far. Long-term interest rates are beginning the first real rise (non-Fed) since before the 1980s reallyInflation expectations are rising, with 5-yr inflation breakevens making one of its fastest ever ascents.2021 Washington is talking about raising taxes, and a seemingly less ‘pro-capitalist’ agenda vs 2020 White HouseUS economy is re-opening and we are now in a ‘post-war’ recovery period, not ‘pandemic shutdown’ Each of these reasons alone would be difficult for a fund manager to discount. However, they are all happening simultaneously, and we are just coming out of an exogenous shock that essentially broke many of the predictable cycles. The first two factors have not been part of the investment playbook for a generation, so uncertainty is natural. Perhaps this is why hedge funds are down so far in March when the S&P is up. So, the markets of 2020 versus those of 2021 have completely different playbooks. 2021 winners should be completely different than what worked in 2020. We’ve developed a simple checklist/table So, as you can see, we think Energy is the sector facing the best tailwinds in 2021. Recall, Goldman Sachs and other commodity teams forecast oil to rally +30% by Summer. This will translate into higher FCF and higher equity prices for the Energy Sector broadly (ETF-XLE), and oilfield services (ETF-OIH). Source: Bloomberg Lots of market congestion was cleared and position squaring done last week. The VIX closed below $19 today. We have heard clients concerned about a drawdown and equities are extended and overbought and a pullback is possible. However, we think the positive catalysts are stronger and a rally into the end of the first half is more likely. Consider the following positive catalsts; Q1 earnings seasons, improving safety in US from vaccine penetration, markets had good day despite high rates, NASDAQ showing relative strength, and fiscal relief has been delivered to American consumers whose personal balance sheet is the best it’s been in years. On top of this there have been rolling correction in the market. Because many parts of the market have respectively been down more than 10% in the last weeks at different times, we think a market-wide correction in 1H2021 is unlikely. Figure: Way forward ➜ What changes after COVID-19Per FSInsight Figure: FSInsight Portfolio Strategy Summary - Relative to S&P 500** Performance is calculated since strategy introduction, 1/10/2019

7D Delta Turns Positive, Market Chop Way Paves Way For Rally

Daily cases unfortunately have returned to slightly positive coming in at 58,468 which is up 2,869 cases from a week ago. The 7D positivity rate declined to 4.4% from 4.5% 7D ago. Importantly, hospitalizations and deaths are still moving in the right direction and are down 5.1% and 7.4% from 7 days ago respectively. Dr. Fauci said on Friday that up to 30% of the new US cases are due to the variants. Luckily, despite the vaccines not being as effective against some of the newer COVID-19 variants it still appears to prevent severe illness and hospitalization to the degree that it would mean the risk for overwhelming the hospital system which we may forget after all this time is still the primary reason for lockdowns that interrupt economic activity much lower. Be sure to check out point #3 in our dailies that monitors the progress in re-opening across the United States. The 7D delta turning positive is definitely not a good thing. However, we wanted to point out that despite the very vocal criticism of the bears about vaccination progress the White House has actually achieved its’ goal of 100 million vaccines in 100 days 42 days early. This highlights a reality that we’ve been trying to keep our subscribers apprised of; the number of previously infected (those with natural immunity) plus those vaccinated is getting to a point where the R0 will begin to drop because the virus simply will eventually run out communicable subjects to come into contact with. This doesn’t mean the numbers suddenly go to zero, it means they steadily trickle down to zero. Source: Fundstrat, state health departments We think one of the most important numbers to remember right now is this; the 7D delta of vaccinations compared to new cases is now around 50:1. Yup. About 92% of the United States has now seen 20% 1-dose penetration. Progress is steady and further vaccine approvals and J&J rollout could speed up timeline even further. Source: Fundstrat, state health departments Despite the improving fundamentals there was a major sell-off on Thursday around interest rate fears that surely wasn’t helped by Friday being a quadruple witching date. These tend to heighten short-term volatility as traders attempt to square positions in the lead-up to their contracts expiring. STRATEGY: We think Thursday is textbook chop and probabilities favor a rally next week Equity markets fell on Thursday. Energy was hit the worst, followed by Technology stocks. Firstly, we’d like to address that we believe the Energy sector’s pullback yesterday was a healthy consolidation and does not alter the sector’s status as having our favorite risk/reward profile for 2021. Despite the significant outperformance of the sector since November, most institutions are still way behind the ball on their exposure and are equal-weight at best. Our work on energy continues to suggest a lot of upside and we think those who used yesterday’s market weakness to buy-the-dip will be happy they did next week. Patient hands! On Friday, the VIX dropped despite the approach to the 1.75% level by the 10 yr. Tech continued weakness on Friday although found some footing as the day progressed. Taking a step back, the question on everyone’s mind is whether the market turmoil of the week hints at a broader decline on the horizon or if this is another short-lived ‘rate-mageddon’ tantrum that will precede a market recovery. We are clearly leaning toward the second option. Firstly, we know markets have developed inflation anxiety, given the absence of inflation risk for decades. Thus, it is understandable to see “fire, ready, aim” every time interest rates surge. Second, while 10-YR rates surged today, the VIX hardly budged. It was >30 last time the 10-yr was above 1.6% It closed at $20.95 today. So, we aren’t seeing hedge funds seeking broader market protection, nor did Thursday trigger a lot of the de-grossing we see during periods of heightening market uncertainty. Financials were the only sector up and only slightly. Third, the bond market, particularly credit is currently functioning in an orderly fashion despite rising rates. This is quite crucial. The Federal Reserve even felt confident enough to remove emergency bank regulation shoring up demand for Treasuries. I would be far more concerned if the 10-year was rising and we heard stories of diminishing fixed income and credit liquidity. This is part of reason VIX didn’t spike. Fourth, Friday is a ‘quadruple witching event’ where single-stock options, futures and index options and futures all expire. These are known to cause market instability due to the gamma hedging and other activities by dealers. Moreover, given the rising popularity of call options, and the associated skew these events likely carry even more weight than usual. Fifth, the economy is on a far stronger path of recovery than compared to any expectations at the start of 2021. In fact, stimulus checks are only starting to filter into the economy. This is going to be a known positive tailwind for multiple cohorts: retailers, recipients of spending, household confidence (get substantial liquidity) and this will ultimately have a positive spillover for stocks. Sixth, Epicenter and cyclicals have significantly outperformed in March and on Thursday the crowded sectors Communication Services and Tech experienced acute weakness. This was an acceleration of rotation our of Growth into Epicenter. Seventh, as we wrote last week, after markets make new highs, a pattern of chop for 7-10 days often follows. This was at play this week. Our base case is still a +10% rally to 4,300. Bottom Line: This week’s chop will likely soon subside and we expect a rally next week. We expect Energy, Materials, Industrials, Financials and Discretionary ex. Mega-weights to lead the rally. We think Tech bottomed, but we think risk/reward is best in Epicenter. Figure: Way forward ➜ What changes after COVID-19Per Fundstrat Figure: Fundstrat Portfolio Strategy Summary - Relative to S&P 500** Performance is calculated since strategy introduction, 1/10/2019

Case Trends Positive, Market-Chop Hides Cyclical Rotation

Daily cases continue to show improvement, but the pace has slowed somewhat. As you can see below, the figures are still lower than a week ago, but at a slower pace. In the past week, there has been a pick up in cases in AZ, NJ, DE, MI and MA. But these rises coupled with stubborn case levels in FL and NY keep this from showing faster improvement. Source: FSInsight, State Health Departments The 7D delta in daily cases has now been negative for 14 consecutive days As you’ll recall it was negative for 40 plus days and then likely spiked due to testing distortions caused by the destructive cold snap that hit the country weeks ago. US hospitalization rates are still rolling over. Vaccination progress continues steadily, and the President’s announcement last night of making vaccinations available for adults by May 1st is a major positive for markets. Many people had doubted the original timeline and now we are significantly ahead of schedule. This is incredibly bullish for markets and is a scenario that exceeds what consensus expectations were if it can be pulled off. A goal of a semblance of normalcy around Independence Day is a big deal and means the White House is going to focus on getting buy in from governors and mayors to achieve this target. Given the skepticism we find among investors regarding a reasonable chance to return to normalcy, if the White House aim for this, it is a positive surprise for consensus thinking. There was a 10% increase in average weekly vaccinations, up to 2.2 million from 2 million last week. Overall, 10% of the US population is fully vaccinated and 19.1% have received their initial dose. Half of US states have now achieved the significant 60% level or combined vaccinations and infections that is presumable approaching herd immunity. However, these states are concentrated in the least populous of the fifty, so we have reached a total vaccination + infection level in the United States of around 26.5%. Importantly, the amount of vaccinated compared to new cases has been above 40 to 1. Furthermore, states have begun lifting impediments to commerce. Many states have been easing indoor capacity, opening theaters, salons and saloons. Capacity restrictions are being lifted as well as mask mandates. STRATEGY: S&P 500 breaks to all-time high on Thursday, next stop, another +10% rise before next possible ‘correction’ The most significant market development this week, in our view, is the upside breakout of the S&P 500. Upside breakouts matter, representing a significant development in the price levels for equities. Upside breakout ends the ‘consolidation’ that has been occurring since mid-February. Even more impressively this breakout is occurring under a backdrop of ‘rate-mageddon’ that led to recent weakness. The underlying concerns still exist, yet markets continue higher. We also see the collapse of the VIX to levels only mildly above recent lows as confirming our thesis. Why is this a big deal? Because Upside ‘breakouts’ have been followed by a 10% rally in S&P 500. So you might wonder, well, it is only a modest ‘breakout’ and what does it all mean? Take a look at the S&P 500 over the past year, and we marked some key points. The S&P 500 has seen 3 consolidations last year. 6/6/20-7/18/20 – post breakout 11% rally9/2/20-11/9/20-post breakout 10% rally2/16-NOW +10% Rally? YES, we think so! So, our base case is a 10% plus rally following the recent breakout. Remember how scary the last few weeks were? Those with patient hands are happy today. We think there are fundamental underpinnings to the coming upside action. COVID-19 could be retreating faster than perceived, pent-up demand could be greater than expected, operating leverage could surprise to the upside as well, interest rates could stabilize and the general cautious positioning of investors is a contrarian positive. Climb on wall of worry, fall on slope of hope! All of these potential upside risks are potential drivers for the coming the rally. While we are advocating ‘Epicenter’ as having the best risk/reward we are very heartened to see Technology recover. The Epicenter cadre of stocks have rallied despite the latest market turmoil over rate and inflation fears. It rallied even as the broader index was driven down 6% by Technology. Epicenter also outpaced Growth in the bounceback that occurred. Our Head of Portfolio Strategy Brian Rauscher upgraded Energy and Financials last week. Last Friday, we flagged to our clients that Technology was making 1H2021 lows. The rally this week seems to validate this view and it is a big deal since Technology is 30% of the S&P 500. This is why the bounceback in Tech is such a positive thing. It helps pave the way for the Index to start moving toward that 4,300 level. Bottom Line: We see a +10% move to the S&P 500 to 4,300, but we do expect a jagged path over the next 7-10 days. We anticipate markets will remain relatively flat in this period as they ‘catch their breath’. Just in time for Spring Break! As a reminder tireless Ken and I will be on vacation next week! Figure: Way forward ➜ What changes after COVID-19Per FSInsight Figure: FSInsight Portfolio Strategy Summary - Relative to S&P 500** Performance is calculated since strategy introduction, 1/10/2019

Vaccines Sooner, Leadership Shifting, Sell-Off Likely Over

The Biden Administration has announced it now has enough vaccine supply for all Adults by the end of May. This moves up the re-opening timeline and is very positive. The pace of vaccinations is also dramatically increasing. There was an average of 2 million doses given this past week. 8.3% of Americans have two doses and 16.2% have received their first dose. These figures are set to exponentially increase. Daily cases are down almost 12,000 from 7 days ago which means it looks like its accelerating to the downside. The 7D positivity rate has also dropped below 5%, which we consider majorly positive. Daily death, importantly, have also dropped by nearly 18%. Source: COVID-19 Tracking Project, Fundstrat Right now, about 14 million Americans are being vaccinated every week which comes to about 50 million a month. The J&J vaccine has made the supply picture significantly rosier. We could get up to 20 million doses a week, or maybe even 30 million. If we get to this pace, you can expect a lot more states to begin re-opening. We understand the Texas re-opening decision is controversial, but if the vaccination pace continues, we think more and more states will likely follow suit. We still see a substantial perception gap between policymakers/media and the realized COVID-19 data. We suspect that as this gap continues to close it will be a highly positive force for the price of risk assets. In addition to this, the market sentiment this week certainly didn’t feel like the base case of most economists is a robust and frankly unprecedented boom. JPM’s Chief Economist Bruce Kasman has recently predicted that US growth will exceed what has recently been seen in China. So, we think the volatility and market turmoil has distracted a lot of investors from the underlying bullish shift in what is rallying on ‘risk-on’ days and what is getting sold on ‘risk-off’ days. For the past 10 years Tech was bought as part of the ‘risk-on’ trade and it worked well. Now, as the market focusses on re-opening, despite the volatility associated with the market high-flyers, cyclicals and ‘Epicenter’ sectors have actually gone up despite what happened to the indexes. Yup. As you can see below, despite the carnage in markets in the past few weeks associated with inflation fears and expectations of preliminary tightening by the Fed, cyclical sectors that we believe will outperform during re-opening have had a vastly different course than the rest of the index. One of our favorite sectors for the year, Energy, is up about 10 times more than the S&P 500 YTD, so we think the FOMO that occurs as institutions chase the returns that they are missing out on will push prices even higher. Especially since the supply/demand picture is supportive of further gains. We think you should be OW Energy if you are not already. The question is whether this recent change in what’s getting bought and sold on risk on/risk off days has legs and will endure. We think it will. It has become a tale of two markets where Epicenter/Cyclicals rally while the crowded trades in Growth suffered. This is intuitive since Growth is more sensitive to rising rates. We also think investors are realizing the upside potential in the cyclical trade as we approach re-opening and are selling their Growth names to get exposure. So, the takeaway from this week is that you should still be adding to Cyclical Exposure in our opinion. It is now Cyclicals, not growth, holding up well during corrections! However, the current sell-off in Growth is likely overdone. We think there’s a better than even chance (51%) that the Technology sector has made its ‘local’ low for 1H2021. For context, as you know, we’ve been urging our clients to OW Epicenter stocks in 2021 with a particular focus on Energy. Nearly half of our last 40 daily notes have had the strategy focused on Energy. We have also written we were much less enthusiastic about crowded ownership in Growth. However, given today’s market carnage (and subsequent impressive recovery) we think a lot of Technology stocks are now attractive buys. The Nasdaq was about 13% off its highs and Technology stocks were being fire-sold. In fact, Ark Investments which is comprised of the hottest and highest multiple Growth names was down significantly more than that. So much at 33%, in fact, that it appears to us very likely that the bottom is in for the latest wave of selling, at least the disorderly and frantic selling that occurred this week. This was a scary week for equities but we’d point out that our core reasons for owning ‘Epicenter’ are still strongly in place. We would also point out that that market showed a great deal of strength today and ended a very tough week on a very strong note. In a contrarian way, the market carnage that occurred is a positive as it de-levers market participants and paves the ways for moves upward. The market action in names like ARK suggest to us that the bottom is in. If your familiar with Tom DeMark’s counter-trading system, you’ll see that the set-up looks positive. We encourage equity investors to have patient hands. We suspect those of you who used the down-days to add to good positions ended up happier than most this week! Bottom Line: We think ‘Epicenter’ and Cyclicals will lead the market higher. Growth has likely bottomed for 1H2021. Vaccination progress forces focus on re-opening. Figure: Way forward ➜ What changes after COVID-19Per Fundstrat Figure: Fundstrat Portfolio Strategy Summary - Relative to S&P 500** Performance is calculated since strategy introduction, 1/10/2019

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