COVID-19 UPDATE: F-CAT plateauing = good. Retail investor grown in 2020, but $1.5T in retail cash still on sidelines.

In the past week, COVID-19 US daily cases surged to record highs and are now averaging about 500,000 per week.  Equity markets rallied this week and are near cycle highs of early June (~3,220 on S&P 500).  Yet, in early June, daily US cases were about 18,000 per day and today this figure is about to surpass 70,000, or a nearly 4X increase.  And this surge has caused states to pause and even rollback easing of the economy.  I can think of three reasons equity markets have managed to rise in the face of this:

– Markets are distinguishing between infection rates and “confirmed cases” and the surge reported in the past month is due to better detection (testing).  Models such as the IHME show the peak in US infection rates was in Feb/March;

– Markets are focusing on severe outcomes = deaths and hospitalizations, and these have largely diverged from cases;

– Markets are focusing on the rapid progress of vaccines/ cures and believe these surges now do not represent a new baseline;

– Markets saw how NYC/ NY tristate experienced its outbreak and sees the new epicenter, FL, CA, AZ, TX, or F-CAT, following this path.


So in total, I can see 4 reasons for the markets to have taken this absolute explosion in cases “in stride.”  In fact, Dr. Fauci spoke publicly today and reiterated his belief that the US would develop a commercial vaccine before year-end.  This is an utter binary and game-changing development.  Many skeptics have said a vaccine is at least 12-18 months away, so something seen in the next 6 months completely changes the roadmaps for 2020 and 2021.

COVID-19 UPDATE: F-CAT plateauing = good. Retail investor grown in 2020, but $1.5T in retail cash still on sidelines.



https://www.reuters.com/article/us-health-coronavirus-fauci-idUSKCN24G2ZY

Another development this week is the realization that states are using “probable cases” and “antibody” tests in its case counts.  And while we do not know the aggregate magnitude of these effects, the state of TX on Wednesday announced that 3,484 of its case counts included “probable” cases.  So there is a chance this number could be sizable.

COVID-19 UPDATE: F-CAT plateauing = good. Retail investor grown in 2020, but $1.5T in retail cash still on sidelines.


https://twitter.com/AlexBerenson/status/1283816961823170560


But the US has dropped the ball on COVID-19.  Instead of a glide path of declining cases and contained outbreaks, COVID-19 is spreading in the US at an uncontained rate.  We have written extensively about what we see as the root causes.  We list them below, but interestingly, none is really due to “economic opening” but rather, tangentially connected to movement:

– poor mitigation such as “no masks” or not maintaining social distance practices
– imported cases from Mexico (Southern states) and resulting high share of Latinos
– BLM protests and >350 nationwide protests ongoing for 4 weeks = 10,000X super spreader events

But there is a common thread, as Dr. Fauci below notes, young people are propagating the pandemic.  So, this is the key.  

COVID-19 UPDATE: F-CAT plateauing = good. Retail investor grown in 2020, but $1.5T in retail cash still on sidelines.


https://www.cnbc.com/2020/07/16/dr-anthony-fauci-pleads-with-young-people-youre-propagating-the-pandemic.html?__source=iosappshare%7Ccom.tinyspeck.chatlyio.share




STRATEGY: Retail investors = good for financial markets.  Tons of cash still on sidelines
The retail investor’s surging interest in equity markets has been generally characterized as negative by financial professionals. But some of this probably stems from the fact that retail investors are realizing some impressive gains in equity trading.  2020 has brought in a new type of retail investor.  This post by @ROIChristie shows the surge in new account openings at traditional retail brokerage only firms like Schwab, etc.:

– Schwab opened 800k new accounts YTD
– TD Ameritrade +691k YTD
– Robinhood >3 million new accounts opened YTD

These are impressive figures and add to the surge seen at Robinhood (the stock trading app).   

COVID-19 UPDATE: F-CAT plateauing = good. Retail investor grown in 2020, but $1.5T in retail cash still on sidelines.


https://twitter.com/ROIChristie/status/1283105910144016387


And the active retail investors have been largely absent from equity markets for the past decade.  Pre-GFC, retail investors were more active but since the GFC, aggregate flows data (by Fed, Flow of Funds, for instance) have shown the public has been steadily withdrawing funds from the equity market.


Alpha is a zero-sum game, so the withdrawal of retail investors is one reason hedge funds performance weakened post-2009…
Alpha is the “excess return” generated by a constituent relative to the overall return of the asset class.  But the sum of the performance of all investors in that asset class is the “market return” — hence, aggregate alpha is zero.

– 2000 to 2009 retail alpha negative = HF alpha positive
– 2009 to 2019 retail withdraws = HF chasing alpha contracts (less retail)
– 2020 YTD retail alpha positive = HF alpha mixed?

The year is only half completed, but as many statistics show, hedge fund returns have trailed market gains.  And moreover, hedge funds were “short” equities in June and early July.  We wrote about this earlier this week.  Thus, in a world of “zero aggregate” alpha, who captured alpha?

– in all likelihood, it was the retail investor. 


76% of the $98 trillion of household net worth controlled by retail investors is controlled by “Baby Boomers”
But the real source of retail net worth is “Baby Boomers” who control 76% of the $98T in US household net worth.  The Millennials, which are active on Robinhood, control a mere 5% of the total net worth of households. 

– So it is the Boomer and what they do that ultimately matter.

COVID-19 UPDATE: F-CAT plateauing = good. Retail investor grown in 2020, but $1.5T in retail cash still on sidelines.

    

Baby Boomers have been bearish in 2020, so tons of “retail dry powder”
We have written many past commentaries about the persistent bearishness of older retail investors.  We can see this in the 2020 negative AAII readings (AAII is mostly baby boomers) and we can especially see this in the high retail money market cash balances.

– Since the start of the year, retail money market cash has risen by $400 billion.
– While it has come down by $35b since May
– More than 90% of the cash raised since the start of the year is still on the sidelines.

COVID-19 UPDATE: F-CAT plateauing = good. Retail investor grown in 2020, but $1.5T in retail cash still on sidelines.



Do you have to wonder why stocks seem to have a hard time falling on bad news?




POINT #1: Another new ATH in US daily cases, led by a surge in FL (not new high)
Daily cases in the US broke above 70,000 for the first time ever.  This is a weekly rate of 490,000 cases per week, or nearly half a million Americans getting COVID-19 every 7 days.  This is utterly astonishing.

– FL reported 13,965 cases (+3,784 vs 1D ago) and while not a record high, still a massive 1D increase

COVID-19 UPDATE: F-CAT plateauing = good. Retail investor grown in 2020, but $1.5T in retail cash still on sidelines.


Source: COVID-19 Tracking Project

6 states saw a large 1D increase
Florida           13,965 vs 10,181 (1D) +3,784
Nevada            1,447 vs     849            +598
Utah                   954 vs      413             +541
Iowa                   841 vs      442            +399
North Carolina 2,160 vs   1,782           +378
Arkansas            817 vs      564           +253
Total 6 states                                    +5,953

California          8,544 vs 11,126 (1D) -2,582
Texas              10,291 vs 10,791           -500
Oklahoma            628 vs   1,075           -447
Georgia            3,441 vs    3,871           -430
Michigan              645 vs       891          -246
Pennsylvania        781 vs      994           -213
Total 6 states                                       -4,418

The good news is FL positivity rate is beginning to roll over from a peak of >25% 10 days ago to 15% today.  10% is the level that is considered “acceptable” and as you can see, the 7D moving average is rolling over.

COVID-19 UPDATE: F-CAT plateauing = good. Retail investor grown in 2020, but $1.5T in retail cash still on sidelines.


Source: COVID-19 Tracking Project

Daily deaths are up but the pace of increase is very mild relative to the surge in daily cases.  There are many who are predicting deaths will rise dramatically.  And that will be the test.  There is so much uncertainty around COVID-19, but we believe deaths have really diverged from case growth. But in the coming weeks, this could certainly change.


COVID-19 UPDATE: F-CAT plateauing = good. Retail investor grown in 2020, but $1.5T in retail cash still on sidelines.


Source: COVID-19 Tracking Project


The Atlantic published an article today talking about how the natural lag of 14 days means we should see an explosion in deaths soon.  The Atlantic is one of the main supporters of the COVID-19 Tracking Project.  The future is uncertain.  And their view is as valid as anyone’s.  But this is what bears watching.

COVID-19 UPDATE: F-CAT plateauing = good. Retail investor grown in 2020, but $1.5T in retail cash still on sidelines.


https://www.theatlantic.com/health/archive/2020/07/second-coronavirus-death-surge/614122/


COVID-19 UPDATE: F-CAT plateauing = good. Retail investor grown in 2020, but $1.5T in retail cash still on sidelines.


Source: COVID-19 Tracking Project

The rate of case growth, daily change, compared to 7D ago (“seasonality”) is higher than the past few days, but it kind of looks like a plateau.  This is partial proxy for R0, in the sense that if 7D change in cases is not rising, the rate of spread is not necessarily accelerating.

COVID-19 UPDATE: F-CAT plateauing = good. Retail investor grown in 2020, but $1.5T in retail cash still on sidelines.


Source: COVID-19 Tracking Project


And US testing is hitting nearly new highs today, surpassing 800k for the 2nd time ever.  The US is testing at a pace that nearly covers every citizen annually.  That is how big this figure is compared to the population.

COVID-19 UPDATE: F-CAT plateauing = good. Retail investor grown in 2020, but $1.5T in retail cash still on sidelines.


Source: COVID-19 Tracking Project









POINT #2: The “storm” seems to be finally passing the “nucleus” cities of F-CAT
After the parabolic spread of cases in F-CAT, it seems like the rate of growth of cases is finally slowing. There are multiple ways to measure this and we have commented on many of these in the past week: positivity rates, daily cases, etc.  But the leading edge for each of these states is the “nucleus” cities within each state.  The place where the outbreak took on its strongest form:

– FL Miami
– AZ Phoenix
– CA Los Angeles
– TX Houston

And as the daily cases charts below highlight, the daily case growth in these cities is beginning to plateau.

COVID-19 UPDATE: F-CAT plateauing = good. Retail investor grown in 2020, but $1.5T in retail cash still on sidelines.


Source: Johns Hopkins



And this is the reason we are seeing cases plateau in F-CAT.  CA and TX certainly could see surges, but the rate of change in the past 4 weeks seems to be flattening.  And we know these states took corrective measures, so this is not a case of states moving blindly forward.

COVID-19 UPDATE: F-CAT plateauing = good. Retail investor grown in 2020, but $1.5T in retail cash still on sidelines.


Source: COVID-19 Tracking Project


Within these cities, Miami and Phoenix have already matched/exceeded daily case gains posted by NYC in its darkest April days…
Using a “common size” unit (daily cases per 1mm), we can compare these 4 nucleus cities to the NYC case profile.  And as shown, Miami and Phoenix daily cases per 1mm matched/ exceeded NYC.  Los Angeles was close on a single day.  And Houston’s figures are still far lower.  

– So, if NYC serves as the template, Houston could still be vulnerable.  
– But if Houston is able to contain the spread, the city will have outperformed NYC.

COVID-19 UPDATE: F-CAT plateauing = good. Retail investor grown in 2020, but $1.5T in retail cash still on sidelines.


Source: Johns Hopkins

And unfortunately, deaths are increasing at F-CAT states, to about 350 per day from 200 per day a month ago.  This is a reminder that COVID-19 has deadly consequences, but the rate of increase is nowhere near as steep as what was seen in NY tristate during April.  So, there is a positive divergence there.

COVID-19 UPDATE: F-CAT plateauing = good. Retail investor grown in 2020, but $1.5T in retail cash still on sidelines.


Source: COVID-19 Tracking Project




POINT #3: Surprised to see 33% positivity in FL children tested…
This article from the South Florida Sun-Sentinel really surprised me.  The article states that 1/3 of children tested (not clear if serology or PCR) were COVID-19 positive.  According to their data, only 6% of total confirmed cases are under age 17.  But the 33% positivity rate is surprising.  As the article states, children tend to be asymptomatic when they have COVID-19, or very mild symptoms.

COVID-19 UPDATE: F-CAT plateauing = good. Retail investor grown in 2020, but $1.5T in retail cash still on sidelines.


https://www.sun-sentinel.com/coronavirus/fl-ne-pbc-health-director-covid-children-20200714-xcdall2tsrd4riim2nwokvmsxm-story.html

This Sun-Sentinel article reminded me of 4chan.org post from Feb 22, 2020, which made which seemed like crazy statements, but have proven to be quite prescient…If you are not familiar with this infamous post, it was circulated to me around late-February.  I remember that, as I was in Istanbul at the time at a conference.  And this post described COVID-19, making some really interesting claims about the disease at the time:

– COVID-19 binds with ACE2 receptors
– viral load matters
– the risk from COVID-19 is the cytokine storm (excess immune response)
– Hydroxychloroquine works
– Anti-HIV works
– Vitamin D helps

There were some other allegations that have not yet played out:
– “you’re already infected”
– “kids will get sick and die faster”
– “COVID-19 was released”

COVID-19 UPDATE: F-CAT plateauing = good. Retail investor grown in 2020, but $1.5T in retail cash still on sidelines.
COVID-19 UPDATE: F-CAT plateauing = good. Retail investor grown in 2020, but $1.5T in retail cash still on sidelines.

https://www.4chan.org/ on 2/22/2020



We have not shared this post, even when we first received it, because we would have been one of many sending around rumors. But with the passage of time, and the fact that many of these allegations have already been stated in public, we thought it was interesting to share.

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