Click HERE to access the FSInsight COVID-19 Daily Chartbook.
FYI, we will be following a shortened publication schedule this week:
– Thursday morning (9/3)
Labor Day holiday –> no reports Friday and Monday
– Tuesday morning (9/8)
Daily COVID-19 cases saw a surprising improvement today with daily cases coming in at 38,377 which is down -5,235 vs 7D ago. Typically, Wednesday cases see a big surge vs 1D ago (usually up +6k or so) but was flat with yesterday.
This is a break in pattern vs the last 10 days where daily cases were flat vs 7D ago. So, I don’t want to jump the gun, but this positive surprise to the downside is a nice inflection. Perhaps the surge associated with back to school is being offset by the organic retreat in cases.
STRATEGY: Vaccine news will cause equity risk premia to fall
Stocks reacted strongly Wednesday to the CDC notifying states to prepare for a vaccine by November 1. As the Bloomberg story below notes, the CDC is asking states to remove obstacles to prepare for widespread distribution on that date.
– if a bona-fide vaccine is available Nov 1, this is a big big deal
– it is a pathway to see a safer world = economy recovers
Source: Bloomberg
US equities survived a “stress test” not seen in 5 lifetimes = equity risk premia MOON = P/E go up
The US Project “Warp speed” targeted the availability of a vaccine by early 2021, and one rolling out November 1 is “way ahead” of schedule. The US survived a stress test not seen in 5 lifetimes, not really since the medieval plagues, and equities similarly survived.
– any US company surviving this “stress test” will see forward equity risk premia fall
– falling equity risk premia = higher P/E
– hence, “wen moon”
A proxy for equity risk is the delta between earnings yield (inverse of P/E) and bond yield (IG corporates) and as shown below, since 2009, this risk premia has been 1.61%.
– Current equity risk premia is ~1.61% or right on top of where it has been since 2009, stocks not expensive
– But if we look pre-2009, risk premia is actually negative -1.48%
Source: FRED and Bloomberg
Wen moon… if equity risk premia moves back to 1996-2009 average…
We can calculate the implied equity P/E if equity risk premia moves back to pre-2009 levels. We think this is warranted given these companies survived and many prospered during the greatest stress test of our lifetimes.
– if risk premia moves to pre-1996 average
– equity P/E implied would be 192X EPS
Thus, wen moon
(a) BY current 2.00%
(b) EY prem ’96-’09 -1.48
(c) Target Risk Premia 0.52%
(a)+(b)
1/(c) Implied P/E 192X <– yikes
Source: Star Wars
We do not seriously expect the S&P 500 P/E to move to 192X anytime soon. But you get the idea. Stocks can be dramatically re-rated higher. Thus, we would still be long equities here.
Money on sidelines has “barely” budged… and now down to “only” $4.5 trillion, from peak of $4.75 trillion
The mountain of cash on the sidelines has diminished reluctantly somewhat and is down to a “mere” $4.5 trillion from $4.75 trillion.
– clearly, investors remain cautious
– more cash on sidelines than versus Feb 2020 highs when it was $2.8 trillion
– going to Feb levels is $1.7 trillion of cash going into stocks
Is it any wonder stocks have massive upside still?
Source: ICI and Fundstrat
Epicenter stocks are a binary trade…
And we remind investors that epicenter stocks, those hardest hit by the economic seizure and virus pandemic, are binary trades to any vaccine/cure as this table highlights.
Source: Fundstrat
We have listed our list of epicenter stocks based on the criteria:
– Global Strategy OW by Brian Rauscher
– Technical Strategy OW by Rob Sluymer
– Quant OW by DQM Model managed by tireless Ken
Source: Fundstrat
Source: Fundstrat
POINT 1: Daily cases fall to 38,377, -5,235 vs 7D ago and could be a downside break…
As you lamented last week, the rapid improvement in daily cases in July stalled about 10 days ago. But Wednesday’s case data seems to be seeing a renewed downside break.
– no new outbreak in NY tristate nor Northeast
– no new outbreak in 4 epicenter states, FL, CA, AZ, TX, or F-CAT
– but continuing rise in cases from states with low case prevalence
Source: COVID-19 Tracking Project
Again, the daily change vs 7D ago, in our view, is the leading indicator as it is what influences the 7D moving average. After seeing daily cases essentially flat for the last few days, today saw daily cases plunge -5,235 vs 7D ago.
– this is the largest improvement in over two weeks
– at this pace, we could see daily cases sub-30,000 next week
– that would be a convincing improvement
Source: COVID-19 Tracking and Fundstrat
Few states posted large gains today. In fact, Puerto Rico saw the largest gain vs 7D ago and that was only +340.
But see how sizable these declines are? There is some lumpiness to be expected. But Alabama is a notable improvement.
Source: COVID-19 Tracking and Fundstrat
POINT 2: County-level shows COVID-19 in retreat faster than implied by case retreat…
If you want to get a sense for how quickly cases can retreat, take a look at the 4 cities at the center of the 4 states seeing the June-July surge — 4 states at the epicenter were FL, CA, AZ, TX, or F-CAT and the 4 nucleus cities:
– Los Angeles
– Miami
– Phoenix
– Houston
The charts below show the daily cases per 1mm residents, to common size it, and compare it to NYC. As you can see, all 4 cities are seeing the same rapid collapse seen in NYC after its peak. The only issue, however, is Los Angeles and Houston did not see daily cases per 1mm match the high levels seen in NYC at its peak. Thus, one could worry that those cities could have an elongated period of spread.
Source: Johns Hopkins
As commented above, COVID-19 case data improvement has stalled recently, with daily cases flat for the past 10 days or so (vs 7D ago) but hardly the rapid pace seen a few weeks earlier. Part of this is due to the rise in cases associated with returning students to colleges and universities. But another way to track the COVID-19 data is to look at county-level data and look at the population share (based on the populations of the counties) and see if daily case data is improving as rapidly.
This is what we look at below.
– 40% of the US counties (based on Pops) have daily cases 75% off their highs. This is the highest level ever
– COVID-19 is retreating (% off highs) at the largest share since the pandemic started
This is a good thing.
Source: Johns Hopkins
Even death statistics seem to be improving. The metric we use is 4.3 deaths per 1mm residents, a metric that matches the level seen by NY tristate at their time of re-opening.
– 75% of the US is at this level and this share is steadily rising
– it is not at its best level, as this was at 90% in June
But we would be approaching this level soon. As you can see, this 7D moving average is rising rapidly.
Source: Johns Hopkins
POINT 3: What does supercomputer/AI think about COVID-19? Bradykinin hypothesis
One of our global partners shared with us a fascinating article about how the Summit Supercomputer at Oak Ridge National Lab in Tennessee analyzed COVID-19, by ingesting data on 40,000 genes from 17,000 genetic samples, or 2.5 billion genetic combinations (https://elemental.medium.com/a-supercomputer-analyzed-covid-19-and-an-interesting-new-theory-has-emerged-31cb8eba9d63). The article was written by Thomas Smith, Co-founder and CEO of Gado Images.
It is a fascinating read and I would encourage anyone to take a read, it is pretty short (8 minute read per Medium). There are so many great insights, but here is what jumped out at me, and in not in any particular order:
– The computer revealed a new theory about how COVID-19 impacts the body: the bradykinin hypothesis
– As known, COVID-19 enters ACE2 receptors via nose and then intestines, kidneys and heart
– Once inside, COVID-19 hijacks body and tricks it into producing ACE2 receptors in other parts of body such as lungs
– virus changes RAS (renin-angiotensin system) which regulates bradykinin and causes body to stop breaking bradykinin down
– women have 2X levels of RAS, which could explain why more men perish from COVID-19
The result is a bradykinin storm:
– massive runaway build-up of bradykinin in the body
– this pathology is responsible for much of the deadly side effects
– and while linked to cytokine storms, is different
Bradykinin storm:
– bradykinin build-up increases vascular permeability
– this could explain why clinical data suggests COVID-19 is a vascular disease, not respiratory
– this causes lungs to fill with fluid
– explains why 1 in 5 patients suffers damage to the heart
– and neurological effects as well given it can breakdown blood/brain barrier
– might explain why COVID-19 acts “pharmacologically as an ACE inhibitor” (also explains loss of smell)
AI computer also shows:
– COVID-19 increases production of HLA (hyaluronic acid) in the lungs
– HLA is used in soaps/lotions because it holds immense volume of liquid for its mass
– HLA forms a hydrogel in the lungs, which is like “breathing through jello”
– hence, this could explain why ventilators don’t seem to work well
Treatment pathways, if this theory is correct… even Vitamin D!!!!
If this bradykinin thesis is correct, the article suggests that drugs that target RAS could be effective:
– Danazol
– Stanozolol
– Ecalluantide
– Icatibant
– Hymecromone (to reduce HLA)
And also, Vitamin D. Yup.
– Vitamin D is involved in RAS system and reduces the levels of REN, which potentially stops the deadly bradykinin storms from forming.
As our clients know, we have written multiple commentaries and cited numerous studies showing the importance of Vitamin D and Vitamin D sufficiency.
PS, get lots of SUN!!!!
