COVID-19 UPDATE: Cash is the anomalous position. Key is whether NYC can manage the recent outbreak. Cruises plan to test 100% passengers. Why keep the ban?

Click HERE to access the FSInsight COVID-19 Daily Chartbook.

STRATEGY: The most distorted position arguably cash
Odds makers raised the probability of Biden win yesterday–> market rally due to Biden gain?
Post the first 2020 Presidential debate, odds makers raised the probability of a Biden win.  As shown below, to bet on a Biden win, one needs to pay $162 to win $100.  This was $104 to win $100 on 9/1.  As you can see below, the odds rose for Biden since the debate.

– Yesterday, markets are responding to two effects: post-debate and progress on stimulus plan (CARES V)
– Does rally yesterday mean equity markets prefer a Biden win? 

That is not entirely clear, because of the clear impact of progress on a fiscal stimulus package.

Source: bookies.com


But the acrimony of the first debate was enough to prompt the election committee to change the debate format and structure to ensure a “more orderly discussion” takes place.  The only winner of last night’s debate is the enemies of the US.

Source: Washington Post

The stimulus bill seems closer and Tom Block believes enough Republicans will support it…
Our Head of Policy Strategy, Tom Block, believes a COVID-19 bill is closer than many realized.  He points out 13 Republicans in the Senate need to approve this deal, of 21 running for re-election.  And assuming the White House supports this, a bill should pass. 

– this is a positive for those suffering and for the US economy overall
– this is therefore a good thing for financial markets = good.

Markets are acting fearful into election day… but over the next 30 days, we could see therapeutic/vaccine news…
The natural question is where can we find anomalous positioning.  Most would likely suggest that mega-caps or FANG are crowded trades.  But, in our view, given we are early in an expansion, the most over-crowded trade, is cash.  We have commented that cash on the sidelines is $4.3T today and AAII retail investor sentiment is negative.  This would be appropriate if the US was entering (not exiting) an economic depression and given the massive 36% drawdown in stocks, would seem out of place.

So we think investors are slowly allocating capital into equities, but buying the “safety trade” which is mega-cap and FANG.  Thus, the most contrarian impact on markets is a sharp move in cash to risk-on and it finds its way into cyclicals.  This would cause a massive move in cyclical stocks.  

https://twitter.com/AwardsDarwin/status/1311376374347763712


October returns will tell us about the election… per Stock Trader’s Almanac
Thursday is the start of October and the first day of the 4th quarter.  And the price performance of October seems to inform us about the potential outcome in Presidential election years.  I like to check up on what Jeffrey Hirsch, of Stock Trader’s Almanac, says about equity returns.  

– If the incumbent party wins (10 of 19 years), markets are usually up, 8 of 10 times
– If the incumbent party loses (9 of 19 years), markets are down 6 of 9 times

I know 2020 is an unusual year.  And markets seem to see Biden as market friendly.  But this market history suggests if Biden odds rise in the month, S&P 500 should have a weak October.  Conversely, a strong October could mean Trump is victorious. 

Please don’t yell at us. 

This is just what the table below says.

https://jeffhirsch.tumblr.com/post/630234708561821696/sp-500-october-gains-frequently-precede



S&P 500 holding “line in the sand” but close just below next key level –> 3,363.31
So far, the equity markets have held that line in the sand, S&P 500 3,224.50.  As we commented last week, this is a 62% retrace of the gains the market staged from June to August.  That was the level where we thought stocks essentially fully priced in “worst is yet to come.”  And we think that if equities can then manage to close above 3,361.31, we could have a greater sense the worst is indeed behind us.  

– Over the past 3 days, we can see equities have struggled against this level of 3,363.31 (below).
– On 9/30, the S&P 500 closed just below this key level — 9/30 close 3,362.69, or 0.62 below the key level

Hmmmm…. October is key

POINT 1: Daily cases rising vs 7D ago, not clear why, but the key question is if it turns exponential
Daily new COVID-19 cases came in at 43,380, which is up 5,141 vs 7D ago. This is the biggest 7D rise since mid-July if we don’t count the post-Labor Day spikes due to the data distortion. Generally, daily cases are rising across the US.

We can think of a few factors explaining this rise, but the most important question is whether this leads to an exponential rise:
– is this due to back to school?
– is this due to flu season (which started early August in the South)
– is this due to more testing? maybe
– is this a “Rosh Hashanah effect”? maybe

We just don’t know.  Ultimately, it is better if Americans are scared because they will be more careful.

 

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 6 “flat” days, the daily cases jumped on Tuesday and Wednesday. This is a notable rise compared to other days in the past two months. 

 

Source: COVID-19 Tracking and Fundstrat 



In fact, if we ignore the post-Labor Day spike which is primarily caused by the data distortion, yesterday’s 7D delta in daily cases of +5,141 is the highest level since mid-July.

Looking at the tiers of the US states, in the past 7D, the largest contributor to case rises are F-CAT (essentially Texas) and those 22 states still facing an outbreak.  But NY tristate area (+MA and RI) and the 25 states that saw case rise along with the F-CAT also have a material increase in daily cases.

Source: COVID-19 Tracking and Fundstrat  




Daily death trends are muted which is a good thing
Daily deaths are not tracking the surge in cases.  This could change, but it remains curious how daily deaths remain in a stable downtrend.  As you can see, daily deaths 7D delta remains declining, which is a good thing.  This suggests many of the incremental cases are not seeing as severe healthcare outcomes.

Source: COVID-19 Tracking Project

Source: COVID-19 Tracking and Fundstrat




POINT 2: Manhattan positivity rate has been tame, despite surges in Rockland,  Brooklyn and Staten Island…

We were alarmed by the surge in cases in Brooklyn and Rockland County, but as we noted yesterday, this can be a double-edged sword.  If NYC cases do not rise exponentially over the next few weeks, then this is proof that expanding testing capacity is doing a better job of detecting cases and therefore limiting spread.

– We know that there has been an outbreak among the orthodox community, but we see this as more due to lax compliance  (people losing fear);
– daily cases need to be watched and if cases don’t exponentially grow, this is a positive outcome.

As shown below, the surge in Brooklyn has been followed by a surge in Staten Island.  I think this bears watching.  The positivity rate is a mere 2.2% but this is a change in pattern.

But what is notable is Manhattan positivity rate is only 0.6% and this is ridiculously low.  In fact, given specificity errors of testing, one could wonder if the majority of the “detected” cases in Manhattan are actually false positives.

Source: NY Dept of Health


Yesterday is the first day of in-room dining…
In the meantime, we think NYC needs to re-open the economy soon.  Yesterday is the first day of indoor dining (25% capacity) and this is a big milestone.  As the WSJ article below notes, the NYC office occupancy is back to 10% compared to 25% for the US overall and 40% for Dallas and even 32% for Los Angeles.

– NYC has maintained the most restrictive economic policies
– Yet, NYC is seeing a surge in cases

Are these restrictive policies a major error? maybe.

Source: WSJ

Source: WSJ



POINT 3: Organic demand for travel is recovering…
Demand for travel, measured by TSA throughput is beginning to rise again, as shown by the chart below.  This is pretty interesting, since we know that travel remains a “taboo” service and broadly not considered acceptable behavior.  Yet, despite this, the 7D moving average has started to rise.

– the current fiscal stimulus plan is also offering some relief for travel-centric companies
– thus, we see “epicenter” stocks benefitting from the passage of fiscal stimulus.

Source: TSA



And yesterday, the White House over-ruled the CDC on the maintaining of a cruise ban.  I agree with the White House’s view on this.  The cruise industry used many accepted health experts to propose new guidelines to improve the safety of sailings.  And if the testing is appropriately expanded, we can see the benefits of reduced spread.

– witness how well primary schools and colleges have managed their associated outbreaks.
– cruise lines have new measures to manage spread, with guidelines established by relevant health experts.

https://www.axios.com/scoop-white-house-overruled-cdc-cruise-ships-florida-91442136-1b8e-442e-a2a1-0b24e9a39fb6.html

https://www.washingtonpost.com/travel/2020/09/21/cruise-return-report-covid-19/


But if I had to flag what I see as a “repeat” theme among cohorts managing this crisis — it is testing, testing, testing as prescribed by many experts. 

And the cruise industry plans the same. They propose 100% testing of all passengers and mandatory masks.

Source: Washington Post.


If 100% of cruise passengers are tested and masks are required, why would the CDC ban cruising?  This is why I agree with the White  House’s view on this.