COVID-19 UPDATE: US cyclicals pause but China did not get the memo. Houston local peak still 17 days ago = phew

Uncertainty about the path of COVID-19 worsened this week, as US overall cases rose to new highs and US deaths seemed to “step-up” to 800 per day (past 3 days) vs 500 or so a week ago.  And the path of COVID-19 in the US has departed from Western Europe and Asia, both other regions seeing cases generally fall.   But this is not all entirely negative developments.  Many states have taken significant actions, including mandating masks (see discussion below) and thus, this surge is not growing without action.  But we also cannot escape our general view that this surge has 3 factors: (i) nationwide protests created 10000X superspreader events; (ii) significant imported cases from Mexico and Latin America, explaining the surge in FL, CA, AZ, TX (or F-CAT) and the Southern state, generally and (iii) lax compliance with PPE, mitigation (etc.).

And on top of that, equity markets do not like “contested/close” elections.  So, the tightening of the Presidential race is further fueling market hesitation.  So there are just more building blocks for a wall of worry.

As we approach the weekend, there are two elements we are watching closely:

– F-CAT daily case trends, but TX, and Houston, in particular, as Houston is the “nucleus” of the TX surge.  Houston, so far, peaked 17D ago.
– US daily deaths.  Will the curious divergence continue or will deaths surge in the next week, if so, we should see a spike this weekend.

UK “Eat Out to Help Out”
The UK is proposing a pretty novel stimulus idea.  The government is offering to pay 50% of the restaurant tab, to oil the engine to restart. The U.K. Treasury launched the “Eat Out to Help Out” plan pledging a 50% discount of up to £10 per head for every diner at any participating restaurant, café, pub or eligible food service establishment. 

https://www.forbes.com/sites/jemimamcevoy/2020/07/08/british-gov-will-pay-50-of-restaurant-pub-bills-to-stimulate-recovery/#5c7bd6c63f4c

This is a pretty good idea (my opinion) and the terms are:
– 50% discount of up to £10 per head for every diner at any participating restaurant, café, pub or eligible food service establishment.  
– The discount can be used unlimited times throughout the month of August,
– Valid Monday to Wednesday on “any eat-in meal,” but can’t be used for alcoholic beverages. 
This could be pretty effective in the US, at the right moment.  One of the hardest hit industries in the US has been restaurants and restaurant employees.  This would be an instant mega-stimulus.  


STRATEGY: US Cyclicals “pause” but somehow China did not get the memo…
As visibility and confidence in the US pandemic recovery has faltered, so has the “epicenter” trade (Cyclicals).  We have written about this pretty every day this week.  

– A good proxy for the “epicenter” trade is the S&P High Beta ETF (SPHB)
– This ETF is now pretty oversold, with its 4-hour RSI at 30 (below 30 is oversold)
– The last 5 times RSI <30, we saw some sort of bounce take place

This is the moment where, as Rob Sluymer, our Head of Technical Analysis comments, “cyclicals need to dig in”

If you are wondering what comprises the SPHB, this table below shows it is heavily cyclical and actually is pretty much a snapshot of the Value Index.  Heavily Financials, Discretionary, Energy and Industrials and Tech, even.

– this is the “epicenter” ETF

Source: Bloomberg


China Shanghai Composite saw big upside breakout this week…
China’s equity market had a nice breakout this week.  This was well covered in the media and even China officials seem to be encouraging this.  It is not without justification.  China’s economy has staged a pretty impressive rebound.

China SHCOMP and SPHB ETF usually trade in sync… 
This is the interesting thing.  The SHCOMP (China Index) and SPHB have moved in sync the past 5 years.  

– 2016 to 2017, it was pretty much the same chart
– 2018 to 2018, they mostly moved together

At the start of 2020, they moved together, but “diverged” this past 10 days…
In fact, look at the start of 2020. they had pretty much the same chart.  

– But 10 days ago, we are now seeing a massive divergence.
– It looks like the “cyclical” trade is alive and well, but somehow it is playing out in China.

We think this is another reason not to get too negative on the “epicenter” trade.  While this is a tough call given the worsening COVID-19 trends in the US.  We think there remains a good risk/reward in the epicenter.  

Granny shots: We will post the 3Q rebalance of Granny Shots next week…
We have re-balanced our Granny Shots portfolio.  Recall, this is the “best of the best” list, based on stocks falling most commonly within our 6 thematic and tactical portfolios.  This is essentially our “core list” of stock ideas and what we recommend buying every day.  

– YTD, Granny Shots is outperforming S&P 500 by 1,780bp 
– Up 15.4% vs -2.4% for S&P 500
– 5 of 6 months outperforming S&P 500

Source: Fundstrat


There was simply too much to write about this week, regarding disease and “epicenter” to talk about our Granny Shots.  We will do this next week and discuss updates to our thematic portfolios.  These changes lead to changes in the Granny Shots. 

– Below is the March 2020 list

Source: Fundstrat





POINT #1: Daily cases near highs at +57,797, Houston cases -65% off the peak 17D ago…
Well, the daily cases for COVID-19 remain elevated but at least we did not see a new high on Thursday.  In fact, daily cases were down -5,156 from 1D ago.  But the fact is, COVID-19 is still spreading in the US.

Source: COVID-19 Tracking Project


Daily deaths are becoming the most important metric to watch, because up until this point, daily cases and deaths were diverging.  But see below, we have now had 3 consecutive days of ~800 deaths per day.  

– Is this daily death figure about to surge? 
– This will be the weekend’s biggest question for me.

Source: COVID-19 Tracking Project


Another measure of case intensity is the week ago change in daily cases — sort of a “same store” sales comp.  And as you can see below, this figure is easing to +2,816 vs 7 days ago. 

– It is certainly an improvement from the +10K seen earlier this week. 
– and versus the +15k seen two weeks ago

So this is a sign that the intensity of case growth is slowing.  This is something that we need to be mindful of.  There have already been significant mitigation measures introduced by F-CAT.  So, this is reflecting this course correction, to an extent.

Source: COVID-19 Tracking Project 


F-CAT: Daily cases eased on Thursday… and we are watching Houston, which is now 17 days since its peak… 
The new epicenter is 4 states, FL, CA, AZ, TX, or F-CAT, and as you can see, these 4 states account for 30k cases per day, or more than the rest of 46 states combined.

Source: COVID-19 Tracking Project  


These are the individual state daily case figures and as you can see, TX, AZ, FL seem to have established a local high.  It is somewhat hard to see the daily state cases (4 side by side).  In fact, within these 4 states, we are watching the “nucleus” cities:

– Houston
– Phoenix
– Miami 
– Los Angeles

Source: COVID-19 Tracking Project  


Houston peak still looks like 6/23/2020, or 17 days ago… 
Houston cases peaked on 6/23 and have fallen 65% since.  Think of Houston as NYC for NY.  By the way, the county is the largest in the state of TX.  And even San Antonio and Dallas have eased from their highs.  The only relapse city (of the 4 major counties we are watching) is Austin.

– the 10 largest TX counties are shown below and we highlight in red, the local peak in cases.

Source: COVID-19 Tracking Project   


6 states reported a sizable 1D increase
Alabama               2,212 vs 1,177 (1D) +1,035
North Carolina      2,039 vs 1,435            +604
Arizona                 4,057 vs 3,520            +537
Iowa                         731 vs    480            +251
South Carolina      1,782 vs 1,557           +225
Missouri                    795 vs   575           +220
Total 6 states                                         +2,872

6 states with sizable 1D declines
California             7,031 vs 11,694 (1D) -4,663
Florida                  8,935 vs 9,989          -1,054
Tennessee            1,605 vs 2,472             -867
Georgia                2,837 vs 3,420            -583
Texas                   9,782 vs 9,979            -197
Michigan                 446 vs    610            -164
Total 6 states                                       -7,528

Source: COVID-19 Tracking Project    


Positivity rate >10%, the threshold of “safe” broken…
The US overall positivity rate has surpassed 10% on Thursday, for the first time since early May.  This is not a good thing, as it highlights that testing is not detecting cases fast enough.  In other words, either testing needs to expand or cases need to be contained.

Source: COVID-19 Tracking Project    

The source of this high positivity rate is F-CAT, which is running at 15% overall.

– F-CAT overall 15.2%
– FL                   24%
– CA                    9%
– AZ                  34% <–wow!!!
– TX                  18%

Source: COVID-19 Tracking Project    



POINT #2: Mask requirements improving, but only 65% use regularly
The US seems to have become more open to “masks”…
One of our summer interns, Mr. CJ Woodberry, an undergrad at Dartmouth, spent the better part of a few weeks compiling the state by state mandates regarding masks.  He used a multi-tier system to get to various levels of mask mandate policy.  The table (end of section) also reflects that some cities/municipalities have varying mandates within that state.  The best being “universal mandate”

– 18 states in the US have a “universal mask” mandate = good
– 2 states have no policy for masks: Nebraska and Iowa

This data is updated as of July 2 and is subject to change, as states seeing outbreaks change their associated mandate.  The US epicenter, F-CAT, has mandatory mask requirements for CA and TX and partial mandates for AZ and FL.

Source: State websites and Fundstrat


Masks are not universally popular, and the science is not necessarily conclusive…
We realize mask usage is not necessarily universally embraced.  They are uncomfortable and there is mixed science on their effectiveness.  Most of the negative arguments are that people tend to get sloppy wearing masks.  And compliance across the US is mixed.

The latest Pew Research shows that 65% of Americans use a mask and about 15% “hardly ever” or “never” use a mask.  And that on average, only 44% can say they see proper and widespread use of masks.

https://www.pewresearch.org/fact-tank/2020/06/23/most-americans-say-they-regularly-wore-a-mask-in-stores-in-the-past-month-fewer-see-others-doing-it/


For reasons that are not entirely clear to me, this mask debate seems to be framed along political lines.  Was it always a political issue, or has a mask turned into some type of political symbol?  I am not sure. According to Pew Research:

– 53% of Republicans wore masks in stores
– 76% of Democrats wore masks in stores

https://www.pewresearch.org/fact-tank/2020/06/23/most-americans-say-they-regularly-wore-a-mask-in-stores-in-the-past-month-fewer-see-others-doing-it/

POINT #3: New UK study of Diamond Princess –> “recirculated air” thus, Masks > Social Distance


UK study of Diamond Princess passengers: sharing cabins did not increase infection rates, suggest “recirculating air” risk > “contaminated surface” risk
One of the reasons we are discussing masks today, is a recent UK study (found on MedRxiv) on the Diamond Princess caught our eye.  This is a study of the Diamond Princess coronavirus outbreak.  The outbreak on that ship was unique because passengers were quarantined for several weeks and thus, the spread of the infection during that time could be traced fairly carefully.

The researchers wanted to answer a simple premise: 

– was risk of infection greater if someone shared or later occupied a cabin with an “infected” person?

Intuitively, we should say 100% yes.  But this is not what the study found.

https://www.medrxiv.org/content/10.1101/2020.07.08.20148775v1

Infection risk was not greater in a cabin previously occupied by a confirmed case…
Their finding is that infection rates (SIRR) in cabins with prior infected (CC) was not significantly higher than cabins without prior CC. 

– This is surprising but also interesting.

https://www.medrxiv.org/content/10.1101/2020.07.08.20148775v1


Fox Run Senior Living Facility in Novi, had 13 cases, and most were cases of only one spouse getting infected…
This conclusion actually matches what my father (in Michigan) about Fox Run, a senior living facility in Novi, MI.  Of the 13 known cases, only one involved both spouses catching COVID-19.  


The authors’ conclusion is that “recirculating” air might be the bigger risk and thus, social distance doesn’t help = mask usage
The authors conclusion is that physical distance doesn’t help if the air is re-circulating.  This is similar to the study we cited yesterday regarding getting fresh air.  And that ventilation systems are an issue for:

– restaurants
– hospitals
– nursing homes
– gyms
– offices
– schools
– prisons

https://www.medrxiv.org/content/10.1101/2020.07.08.20148775v1

You get the picture.  

Basically, as the economy re-opens, being “indoors” has to be re-engineered from a facility perspective.  This is capital investment and actually positive for cyclicals (HVAC, etc.).  

Moreover, this makes the logic of using masks indoors even more relevant.  Masks are our own personal filtration systems, to an extent.