COVID-19 UPDATE: Daily cases rise over weekend, yet hospitalizations + death in persistent downtrend (both 90% down from peak). Past 4 US pandemics saw vaccines developed 4-9 months, vs 12-18 expected for COVID-19. 32 Epicenter stock ideas.

In the US, today is Father’s Day.  The holiday originated in Spokane, WA at the YMCA in 1910 by Sonora Smart Dodd, who herself was born in Arkansas.  Her father was a Civil War veteran and a single parent who raised 6 kids.  So, Happy Father’s Day to everyone who is a parent, has a parent (or knows a parent).

The improving narrative around COVID-19 has been setback because many states in the US are seeing a rise in cases.  There has been some alarm raised recently given the rise in US COVID-19 cases.  In fact, cases have also risen in Western Europe (Germany, see below).  But cases alone is not the reason to be wary — it is the risk that cases drive hospitalizations, which drive ICUs/deaths and therefore, further health and economic tragedy.

Notably, the states seeing sustained rises in cases are not seeing a proportionate rise in healthcare utilization (hospitalization rate) — Texas, Florida, Arizona, California, Utah and to a decreasing extent, Arkansas (looks like it has already peaked).  This continues to be the case, even for states like California.

And while some see this as an indictment of state openings, the timeline for the case increases is more consistent with the nationwide protests (>3 weeks now), rather than economic re-opening.  6 states account for 94% increase in cases over the past week –> TX, FL, AZ, CA, OK and Iowa.  Hence, why would closing the states be the solution? Mitigation steps certainly need to be taken, but among the menu of options, closing a state seems the least likely.  Even Germany, which is seeing its R0 surge to 2.9 is not planning to rollback any easing of restrictions (see below).

As markets focus on 2H2020, we thought it would be useful to take quick stock of where our analysis drives differing views relative to a consensus baseline.  We list 7 items below, which collectively, suggest we are more optimistic than baseline for a US recovery.

– rise in US cases more attributable to nationwide protests >350 cities rather than state re-opening
– mitigation measures do not require states to “close” but course correction needed
– curious divergence as US cases rising but hospitalizations and death falling, unusual divergence
– consensus vaccine timeline 12-18 conservative given last 4 US pandemics saw vaccine developed 4-9 months from virus ID
– US economy showing ever more “V” shape recoveries
– employment losses > income losses, so the US consumer recovers more quickly
– corporates will find deep cost savings in 2021, hence, 2021 EPS likely to surpass 2019 EPS


The US remains the best performing asset class in 1H2020 (YTD, really) and NASDAQ is even beating the almighty Treasury bond.  In an ironic way, the NASDAQ is a better safety trade than bonds, when it comes to pricing in a global pandemic and global depression.  Even S&P 500 Growth stocks (65% of S&P 500) is almost as good a proxy as a US bond.  If this is the case, it further reinforces our view that US corporates likely get re-rated higher post-crisis, because they are not only “unkillable” but have proven considerable resilience.  This is a stress test for markets that we have not seen for 5 lifetimes and likely never see again.

POINT #1: US Daily cases are rising, but curious divergence as hospitalizations and daily deaths trending down
Over the weekend, US daily cases surged to >30,000 on both Friday and Saturday, before falling to +28,368 on Sunday.  The overall trend has been rising in cases, and we know a few things:

– 5 states account for the bulk of the increase –> TX, CA, AZ, FL and NC
– the timeline for this surge fits the nationwide protests >350 cities which have been ongoing for >3 weeks

The reason we highlight this latter point is that some will point to the economic re-opening as the primary factor, rather than protests. And if the latter is the driver, it would not justify closing the economy.  Moreover, as we discuss below, the fact that >70% incremental cases in CA are Latino/Hispanic is a strong contra-argument that this is due to economic re-opening.  After all, if there is greater overall movement, the demographics of incremental cases should mirror that of the state/US overall.

Source: COVID-19 Tracking Project


Looking at daily cases today vs daily cases 7 days ago…
Daily cases are up +7,152 vs 7 days ago, so we can see a pronounced increase in the past week.  Again, the timeline fits well with the nationwide protests causing a surge in cases.

Source: COVID-19 Tracking Project

6 states account for 94% of the +7,152 increase:

United States     28,368 vs 21,216 (-7D) +7,152

Texas                   3,866 vs    1,843         +2,023
Florida                 3,494 vs    2,016         +1,478
Arizona                2,592 vs    1,233         +1,359
California             4,515 vs    3,212        +1,303
Oklahoma               478 vs       158           +320
Iowa                        467 vs       209           +258
Total 6 states                                           +6,741


6 States with Largest Daily Cases decrease in past 7D
Alabama                   472 vs 1,014            -542
Tennessee                656 vs    891            -235
Virginia                       551 vs  637               -86
Massachusetts           125 vs  208               -83
Oregon                       187 vs  259               -72
Connecticut                 40 vs     94               -54
Total 6 states                                          -1,072

But a greater curiosity is the fact that hospitalizations and daily deaths are still 90% off their highs, despite this surge in cases…
The strange divergence remains that cases are up but hospitalizations and deaths are down.  This is true in most of the 5 states which are accounting for the bulk of the increase in cases.

– in other words, the rise in reported cases is troubling
– but it seems like healthcare severity of cases today vs cases two months ago is vastly different
– the ratio of incremental hospitalizations seems much lower

Source: COVID-19 Tracking Project



Take a look at the state by state hospitalization data.  The grey charts are those which report “net hospitalizations” not daily admissions.  But you can see the trend.  There is not a sustained surge, even in the states reporting a surge in cases.

Source: COVID-19 Tracking Project 


Below is the state breakdown of the daily COVID-19 cases reported today and the last few days.  As you can see, the same states dominate the top 5-10 states in overall cases.   It is pretty amazing to see how the NY-tristate area has improved.  Earlier in the crisis, these 3 states were consistently among the top 5 states. Now:

– NY  664
– NJ  308
– CT   40

Very few reported cases here now.

Source: COVID-19 Tracking Project





POINT #2:  Even as R0 rise in Europe and US, does not necessitate “shutting down” economy

Germany saw its R0 jump to 2.88 is not planning on instituting lockdowns again…
Germany’s R0 jumped in recent days to 2.88, including +1,300 workers at a single meat processing plant.  But the nation is not considering re-instituting lockdowns again.  Instead, they are relying on other measures to mitigate spread.

https://www.dw.com/en/coronavirus-latest-german-reproduction-rate-spikes-60-in-a-day/a-53886880 


California, per their data, 57% of their cumulative COVID-19 cases are Latino–how is this a consequence of re-opening?
According to data from the CA Dept of Health, 57% of their cumulative COVID-19 cases (70% in the past week) are Latino/Hispanic.  How is this disproportionate representation stemming from opening the economy?

– after all, if this was a consequence of mobility and movement, the cases, particularly, incrementally, should be representative of the state overall.

Again, I view this as more contra-evidence against the idea that opening the economy is contributing to the spread of cases.

https://update.covid19.ca.gov/#top 




Plus, while not scientifically proven, is COVID-19 weakening?
For several weeks, Italian doctors and scientists have made a somewhat controversial suggestion that the COVID-19 virus may be weakening.  These assertions have been met with widespread criticism, mainly because there is not a great understanding around the disease.  So to consider the possibility the disease is weakening can be viewed as too optimistic.

https://www.dailymail.co.uk/news/article-8444151/Coronavirus-withered-aggressive-tiger-wild-cat-Italian-scientist-claims.html?ITO=applenews

But still, the comments that doctors in Italy make around the disease is quite telling. For instance, Professor Matteo Bassetti, Chief of Infectious Diseases at San Martino Hospital (Genoa, Italy) speaks about how the elder COVID-19 infected patients they see today are in considerably better health, compared to few months ago.

– a few months ago, they might have passed away after 2-3 days, and now they are breathing on their own.

https://www.dailymail.co.uk/news/article-8444151/Coronavirus-withered-aggressive-tiger-wild-cat-Italian-scientist-claims.html?ITO=applenews


A client recently shared an article from Pittsburgh’s Pennlive.com where the UPMC Hospital in Pittsburgh, Emergency Medicine Chair, Dr. Donald Yealy, commented that the COVID-19 disease seems to be weakening and the patients now seem to have a smaller viral load.

– this bears watching –> cases are rising but if hospitalizations and deaths do not surge, this is less worrisome.

https://www.pennlive.com/news/2020/06/upmc-doctor-says-covid-19-has-become-less-prevalent-and-less-severe.html


POINT #3: Is a vaccine a lot closer than 12-18 months?  The last 4 US pandemics saw vaccines developed 4-9 months after identification of virus… +27 new candidates in past 3 weeks

Consensus expects a vaccine 12-18 months from now, but past 4 US pandemics saw a commercial vaccine 4-9 after virus ID, and China already offering workers coronavirus vaccine…
There seems to be a consensus that a COVID-19 vaccine is 12-18 months away, which in practical terms, means that such a vaccine would not be widely available until Summer/Fall 2021. 

https://slate.com/technology/2020/05/vaccine-timeline-coronavirus.html 


This is a central issue, if an investor believes a vaccine is the key solution.  While we have not commented on this for some time, one could argue a vaccine is secondary to treatment, given the general reluctance of the general population to use a vaccine broadly:

– treatment > vaccine, as this targets those who actually contract a disease
– vaccines might be more useful to protect essentially workers and vulnerable
– in the 4 most recent global flu-related pandemics since 1957, a commercial vaccine was developed 4-9 months after identifying virus (vs 12-18 months current consensus)
– WHO lists 13 vaccines under clinical evaluation + 128 in pre-clinical evaluation –> 141 total “shots at goal” and +27 compared to 3 weeks ago
– China is already administering a coronavirus vaccine to workers in Beijing (developed by China National Biotec Group Co, CNBG).


CNBG has two vaccines under trial, and neither is under Phase III trials yet.  And as the Bloomberg article notes, it is not clear which of these will be administered and offered to the workers.

https://www.bloomberg.com/news/articles/2020-06-18/china-extends-vaccine-offer-to-beijing-workers-amid-outbreak?sref=NVS0rEaE 





Since May 27th (~3 weeks ago), Vaccines in clinical evaluation 13 (+3) and 128 in pre-clinical evaluation (+14), or +27 new “shots at goal” in past 3 weeks…The number of vaccine candidates continues to rise, or at least those tracked by the World Health Organization (WHO).  Their latest document shows:

– 13 vaccines in clinical evaluation, +3 vs 3 weeks ago
– 128 in pre-clinical evaluation, +14 vs 3 weeks ago

https://www.who.int/publications/m/item/draft-landscape-of-covid-19-candidate-vaccines



The 4 most recent US flu-related pandemics saw a vaccine developed within 4-9 months…
Our data science team, led by tireless Ken, put together a timeline for the 3 pandemics pre-dating H1N1 (2009) as these earlier episodes are not as commonly discussed in the media.  We did not include the 1918 Spanish flu, partly because modern vaccination programs were not developed until well into the 1920s (polio vaccine, etc.).

– the 1957 Asian flu killed ~120,000 Americans of 172 million Americans, or 0.07% of the population
– the 1968 Hong Kong flu killed 1 million worldwide and 100,000 Americans, of 200mm, or 0.05% of US citizens
– COVID-19 has killed 122,000 Americans, of 330 million population, or 0.035% of US citizens

Thus, the 1957 and 1968 pandemics were larger in scope (share of the US population) than COVID-19 and thus, the vaccine timelines are potentially the most relevant.  Keep in mind, the technology to develop vaccines has vastly improved in the 70 years since scientists were trying to create the 1957 Asian flu vaccine.

– But surprisingly, a commercial vaccine was developed in 4 months for both 1957 and 1968 pandemics.
– Even H1N1, the 2009 Swine Flu, saw a vaccine developed within 5 months of virus ID

Source: various sources and Fundstrat


Detailed vaccine development timelines for the 3 precedent US pandemics shown below…
I was personally surprised to see how quickly these vaccines were developed.  As noted above, it took 4-9 months to develop the commercial vaccine.  And these were developed prior to much of the improved technology and tools available in healthcare today.  In fact, this is a reason we are surprised that the consensus timeline for a COVID-19 vaccine is viewed as 12-18 months away:

– we are not scientists, so consider these comments are merely observations.
– but if you have insights as to why 12-18 months is the proper timeline, please send this to us

STRATEGY:  2H Outlook: US equities are the “dominant and quality” equity trade and US epicenter likely 2H story.  32 Epicenter stock ideas…
We expect a 2H2020 “continuation” trade with US equities outperforming Rest of World
With 1H2020 almost behind us, the focus will be on opportunities in 2H2020.  As shown below, US equities dominated returns in 1H2020, with NASDAQ outperforming even US Treasuries.  In fact, even S&P 500 Growth (65% of S&P 500 market cap) gained +7%, nearly matching the return of US Treasuries and trouncing investment grade bonds.

–  The dominant asset trade in 1H2020 was US equities, particularly the “dominant + quality” groups, which are Growth and Technology
–  As many are aware, the strong relative performance of US in 1H tends to lead to follow through in 2H, assuming underlying factors remain consistent.
–  The variation in 2H2020, in our view, is the re-opening of the US + Global economy, leading to cyclical factors becoming more important

So if the US led in 1H2020, and likely leads in 2H2020, the change likely, is epicenter group, typically more cyclical sectors in the US (aka S&P 500 Value), will likely lead.

In other words, the logic is as follows:

– S&P 500 is the “dominant + quality” equity trade
– Nasdaq + Growth is the “dominant + quality” trade in US equities
– HY is strong and credit outlook positive
– Epicenter trades (aka S&P Value) is beneficiary of HY credit + US equity performance in 2H

2021 Consensus S&P 500 EPS growth is 31%, led by Epicenter sectors +33% to +140%
More simplistically, as we move into 2H2020, 2021 EPS growth becomes the focus.  As such, those sectors driving EPS growth in 2021 will likely be more attractive to GARP and momentum investors.  

– Epicenter sectors will be the largest drivers of EPS growth in 2021, with 33% to 140% EPS growth
– Epicenter groups will account for 62% of EPS growth in 2021, and are only 26% of market cap

Source: Fundstrat

Source: Fundstrat 


32 epicenter stock ideas meeting 3 of 3 criteria — a trifecta
We have asked our team to find the “intersect” of stock ideas within the epicenter + Technology.  We found 32 stocks within the Russell 1000 that meet 3 of 3 criteria:

– Ranked DQM quintile 1 (quant model)
– Rated OW by Brian Rauscher, Head of Global Portfolio Strategy
– Rated OW by Rob Sluymer, Head of Technical Strategy.

Discretionary: GNTX, BBY, GRMN, TPX, DHI, LEN, EBAY
Energy:          CVX, XOM, COP, PXD
Financial:       GS, MS, SBNY, SIVB
Industrials:     GD, ALK, FBHS, MAS, CMI, OSK, ITT, GWW, MSM, SNDR
Technology:   MXIM, OLED, XLNX, MSFT, AAPL
Comm Svcs:  GOOGL, Z

Source: Fundstrat