COVID-19 UPDATE: Florida announces re-open plans (5/4) -> 22 states = 38% GDP. Lessons from GFC -> Discretionary EBIT = ATH with 11% lower sales

COVID-19 remains a global crisis and we realize that many people need to keep up with COVID-19 developments, particularly since we are moving into the more critical stage (“restart economy”), so feel free to share our commentary to anyone who has interest.

There were three notable positive developments on the COVID-19 front today.  The biggest is the Phase 3 trial of Gilead’s remdesivir, a government-funded study, found that patients who took remdesivir recovered faster than patients who did not from an average of 15 to 11 days. The improvements were so notable that the study was ended early and according to the NY Times, the FDA plans to announce an emergency-use authorization for remdesivir.  Ultimately, when effective treatments are developed for COVID-19, this will become another treatable ailment.  Thus, clearly a positive on the treatment front = reduce seriousness of COVID-19 = reduced consumer fear = re-open economy faster.  

Also, NY Governor Cuomo accelerated further the re-start of NY state.  He announced today several NY counties, all of them upstate, will be permitted to resume elective surgeries, but only if they can keep 30% of their hospital beds and ICU beds free.  And Florida announced plans to re-open in phases beginning 5/4, making it 22 states = 38% GDP on track to re-open.

In all, it looks like the US continues to see positive steps forward in mitigating this pandemic tragedy, and at a pace that seems faster than many expected even a week ago. The fact that 22 states may be open within the next 10 days is tremendous progress.

The S&P 500 gained about 3% today, totaling 8% gains in the past week.  We have remained in the camp that the market shifted into the hands of buyers since 3/23 (“half full”) and given the cautious positioning of investors, stocks have been steadily gaining.  There remains so much uncertainty that one cannot reasonably make “bold” or “high conviction” statements.  But in financial markets, uncertainty leads to cautious positioning = same as being bearish.  And as “uncertainty” abates, if the incremental shift is positive, this is a shift in positioning to “buyer hands.” If an adverse development, a cautious position remains the same. 

This is the framework we have been using and it does hint at the asymmetry of risk/reward — positive developments lead to buying.  One thing to be mindful of is that companies are not sitting still.  During this pandemic, they are assessing all their processes and cost structures and likely preparing for a slow recovery.  This is what happened during the GFC (great recession 2008) and this resulted in enormous operating leverage.

Consumer Discretionary saw EBIT recover to all-time highs by 1Q2010 (+10% higher actually) with 11% less sales.  Homebuilders, the epicenter of that crisis, saw EBIT at ATH with a 69% reduction in revenues (see below).  So, there can monstrous operating leverage. In fact, this is another reason to look at the “epicenter” stocks (Consumer Discretionary) because of the potential to dramatically re-engineer costs.  For instance, Discretionary employee expense is est. at 32% of all cash costs, the highest of any sector in the S&P 500. 


POINT #1: USA cases 25,856 (27% off highs) but US reports deaths 2,609, still not from all-time high of 2,685
Our data scientist, tireless Ken, aggregates USA case data by combining information from COVID-19 tracking project, Johns Hopkins and his scraping from the various state dept of health websites.  So, our figures do not always match what COVID-19 or Johns Hopkins reports.

USA case count creeping up slightly but still well off 35,512 highs from 4/25/2020…
The USA case count crept up today to 25,856 which is up from yesterday.  This entire rise is attributable to NY state, which reported +1,475 increase in cases from 3,110 to 4,585.  The US case numbers will fluctuate for several reasons including: each region has its own curve, testing numbers vary by day and delayed reporting causes increases.

– since NY state is accounting for this rise, this does not represent a new breakout.  And given Gov Cuomo is even allowing upstate NY hospitals to perform elective surgery, it does not look like the state believes the rise in daily cases represents a change in trend.

Source: COVID19 Tracking Project, Johns Hopkins, various state dept of health sites

Looking at the state data, only NY report any meaningful rise in cases in the past day.  In fact, NY still reports 2X the number of cases of the next largest state NJ.  So unless the roster of top 10 states (sorted by new cases) sees any meaningful change, the overall picture is of COVID-19 being well past the peak of the crisis.

Source: COVID19 Tracking Project, Johns Hopkins, various state dept of health sites

Deaths from COVID-19 remain elevated, with total deaths at 2,609 near all-time highs of 2,685 reported on 4/21/2020…
Unfortunately, the reported deaths from COVID-19 have not followed the easing of daily case counts.  The last two days have seen >2,000 deaths which is quite high and lingering near all-time highs. 

– The +394 increase in daily deaths is entirely attributable to Pennsylvania and MA reported the largest increase in daily deaths, PA 479 (vs 119 yesterday) and MA 252 (vs 150).  

Source: COVID19 Tracking Project, Johns Hopkins, various state dept of health sites


The top 10 states (deaths) account for 75% of all deaths in the US as shown below.  PA, NY and NJ have the highest deaths >200 and 6 states in total report >100 deaths per day.

– In a way, the mortality from COVID-19, while tragic, is largely in the Northeast with 60% of the report USA deaths coming from 5 states — NY, NJ, CT, MA and PA.

Source: COVID19 Tracking Project, Johns Hopkins, various state dept of health sites

Why any particularly state is reporting a rise is hard to pinpoint.  The same factors that cause lumpiness in case data also apply to other attributable outcomes.  And also, states have become better at identifying cases and thus, attributable deaths could be rising from this improved accounting.  As we noted in prior reports, 30% of NYC attributed COVID-19 deaths were not “confirmed with a COVID-19 test” but the likely cause was COVID-19. See below.

Source: NYC dept of health

COVID-19 calculated fatality rate is highest in Michigan, CT and Minnesota
We have not published CFR by state frequently, but thought we should post an update here (below).  Overall reported CFR is 5.3% in the US and 0.6% for NY state.  But the CFR (case fatality rate) is subject to revision on both deaths and # cases and given the significantly higher “cases” implied by antibody tests, we think these figures are best used to see mortality rates between states.

Source: COVID19 Tracking Project, Johns Hopkins, various state dept of health sites


Anyone can now order the Quest Diagnostic antibody test kit for $119…
Regarding serology testing, Quest Diagnostics now has its antibody kit available for purchase from their website. The test costs $119 and does require a visit to one of their labs so they can take blood.  It looks like most healthcare insurance will cover this cost.

– this is another example how testing is expanding pretty rapidly  I know several people who ordered these as soon as they were available. 
– I was told if someone had recovered from COVID-19, it could take an additional 3-4 weeks for the antibodies to be in sufficient quantity to be detected.  If this is incorrect, please let me know.

https://questdirect.questdiagnostics.com/products/covid-19-immune-response/b580e541-78a5-48a6-b17b-7bad949dcb57

POINT #2: Florida announces date for re-opening economy.  22 States announce plans = 38% GDP
Florida Gov. Ron DeSantis today announced the state will reopen certain businesses starting on May 4th.  Florida brings the total states re-opening to 22 = 38% of US GDP.  The state will open restaurants (25% capacity) and emphasis on outdoor seating.  Theaters are closed and bars, gyms are not in the first set of openings.  The opening approach mirrors much of the White House phase 1 guidelines.  And does not necessarily adhere to the NGA (National Governors Association) requirements of a massive ramp in testing.

– Miami-Dade County will not be on the initial list.  And Florida had already opened some beaches previously.

Florida cases are 78% off their peak and it has been 26 days since peak with 44% of counties >75% off peak…
Florida has seen consistent improvements in their case data.  The top 24 are shown below (sorted by county diffusion 75% off peak) and is currently #15 on this list. 

– But with the opening set for May 4th, Florida’s figures could improve by then.
– Many of the states below have not advanced any re-opening dates but their case statistics suggest a higher level of readiness.  Washington state is one of the larger ones among this list.

Source: COVID19 Tracking Project, Johns Hopkins, various state dept of health sites


22 states = 38% GDP… so this list is steadily rising
The summary statistics and rough outline of opening plans is shown below.  Texas and Florida are the two largest states on this list (+13% of the 38%) and really are among the most important to watch.  After all, these two states are top 8 in GDP terms.  

POINT #3: St Louis Fed + Goldman research support notion coming employment  losses > income losses
In the past week, there has been some encouraging work on the economy, particularly looking at the income impacts from 20%-30% unemployment. 

– the first study is by the St Louis Fed which looked at the “simulated” impact on consumer spending from the pandemic. They believe consumer spending will fall 3.3%. While large, this is far less than one would expect given a 30% UE rate.
– the second is from Goldman Sachs which shows that the unemployment income from about half the industries seeing job losses 100% offset lost wages.

Our clients know we have written several weeks ago, several analyses showing that the headline job losses from the “social distance victim” companies will be greater than the income impacts.  Several factors account for this but the primary factor is the low median income of the “impacted” industries.  US median income is ~$63,000 and the median income of the 20 industries reporting the largest job losses is $35,000, or about half (see below).  

– thus, headline losses from employment > income. 
– this is the opposite of the GFC where unemployment rose to 9% but income impact was much greater given the higher median income of the industries impacted.

We have discussed other factors as well, such as fact that 50% of household income is non-wage (social security etc.) and the wallet share of “social distance” activities/services is less than 7% of the total consumer spend.

St Louis Fed study on consumer spending — est 3.3% hit to consumption…
This study, authored by Juan Sanchez looks at how financial stress impacts will affect consumer spending (St Louis Fed study here).  It is a useful post and there are many takeaways.  But the one we want to highlight is their estimate of the impact on the average consumer’s consumption.

– They believe the average consumer consumption will fall 3.3% (see below). While this is quite sizable, it is less than one would expect if unemployment were down 30%

– And it also shows that despite what many expect to be a -40% 2Q2020 GDP quarter, the actual level of consumption decline will be more modest.

Goldman Sachs looks at detailed earnings data to look at overall impact from $600 federal benefit to income…
Goldman Sachs economist recent economics report looked at impact of the $600 federal benefit (for unemployment) by industry.  And as shown below, half of industries have unemployed earning roughly the same income.  Notably, on this list is Construction and Healthcare and Education.  These industries are seeing furloughed and unemployed workers but are among the first industries to see resumption of activity as economies re-open.

STRATEGY: The S&P 500 is not necessarily irrational –> it could be sensing operating leverage
The S&P 500 has held above the 50% retracement of 2,794, which in the 10 prior declines of >30% was the level that indicated the “low was in.”  And yesterday closed at 2,940.  This is a big level for those who use Fibonacci as this is 62% retrace.  The next fibo level would be 3,110 and at that price, the stock market has largely retraced the entire COVID-19 pandemic.

I want mention something again —  I learned a long time ago not to “tell the market” what to do.  If you ask me, does the S&P 500 recovering to ~3,000 jibe with 30% unemployment, a Great depression, Fed at zero rates?  I would clearly answer No.  

But we also believe the equity markets, along with high-yield and credit broadly, may be suggesting that an earnings recovery stronger than one could logically perceive may be underway.  As we wrote about in past reports, this is actually the norm.  V-shaped EPS recoveries happen even if there is a W-shaped, L-shaped, U-shaped, I-shaped GDP recovery.  Why?

– If topline is weak, companies will cut costs and with low interest rates today, we see big operating leverage.
– If topline is strong, revs and EPS soar.
 
The “epi-center” of social distance victim companies surged >20% in the past week…  pointing to V-shaped eco scenario
Last week, there were a number of strategists pointing out how the recent market recovery was all FANG and the cyclical stocks, particularly the “social distance” victim cos were left in the dust.

– in the past week, these social distance victim stocks have seen incredible gains (see red shaded below).
– Motorcycle and home furnishing stocks +>30% in the past week and we count over 20 groups rising more than 20%

The strong moves have not brought these stocks to near highs.  Most of these stocks are 30%-50% off their highs.  Thus, if an economic recovery is stronger than expected, these names could still double.

We think investors should have exposure to these “epicenter” stocks.  In fact, the best time to own them is when consumer confidence is troughing, like it is now (see our several FLASH on this — or ask us, we have the data).

Lessons from GFC — Discretionary EBIT hit ATH with 11% less revs = operating leverage
We do not want to sound heartless nor insensitive.  But companies are no doubt taking a hard look at their cost structure in the midst of this economic shutdown.  It makes sense.  Even the smallest business is doing this. This is why corporations emerge with such EPS vigor on the upturn. During the downturn, they re-engineer their cost structure. 

This happened during the GFC. 

– Take Consumer Discretionary.  All-time-high EBIT was 2Q07 (see below).
– Discretionary did not re-attain that ATH until 1Q2010, or 1-year after economy bottomed.
– While EBIT was 10% higher, sales was 11% lower.
– Topline did not get to ATH until 2012 — a full 2 years later

Yup, sales was down 11% but cash expenses fell 12% (faster) so EBITDA and EBIT went to ATH.

Source: Fundstrat

Top-line for Discretionary took 5 years to get to ATH.  But EBIT got to ATH 2 years earlier.  The lesson? Companies re-engineer costs during a downturn.

Source: Bloomberg

Lessons from GFC: Homebuilders achieved ATH EBIT with 69% less sales…
We show the 27 GICS4 Consumer Discretionary industries below.  And of these 12 of the 27 re-attained ATH in EBIT with lower sales.  The biggest examples are Autos.  But that doesn’t count since several went into receivership/ bankruptcy to achieve this.

– a more organic example is homebuilders.  They managed to get to ATH EBIT with 69% less revenues.
– Wow.  Revs only 1/3 of prior high, yet the same profits.  

This is the takeaway.  This pandemic is going to force businesses to streamline their cost structure.  They are preparing for a weak topline world.  Thus, they can achieve EPS levels that are higher than expected, even with weak sales.

32% of Discretionary cash costs are “employee” expense and it is 21% for S&P 500 overall…
Given the vast numbers of employees working from home, many corporations are likely rethinking their operations.  Below show the estimated employee expense as % of cash costs. 

– the highest is Discretionary, followed closely by Technology.
– the lowest is Energy and Healthcare.

These companies potentially see margin improvement by reducing their employee reliance — replacing this with technology spend.

Implications? Replace employee cost –> tech spend.  Beneficiaries are cos with high employee cost and beneficiaries are Tech.
The takeaway is the epicenter of stocks, mainly Consumer Discretionary, might actually be well positioned to emerge from this pandemic with re-engineered cost structures.

– there is some circularity in our reasoning.  If Discretionary employs 6mm workers, wouldn’t cutting jobs create greater economic hit? YES

But the point is, we think companies are generally in a good position to re-engineer their costs so that even in a weak top-line environment, they can re-attain ATH EBIT/EPS.

Source: Fundstrat