COVID-19 UPDATE: Wut? Olumiant (baricitinib) reduces COVID-19 mortality by 71%. 7 reasons we still favor "epicenter" stocks despite record cases

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

STRATEGY: 7 reasons we still like “epicenter” stocks despite record cases
Olumiant reduces COVID-19 mortality by an astonishing 71%… 
There is some very good news on COVID-19 treatments over the weekend.  Perhaps the most notable is the results of a Swedish study that found the drug, Olumiant (baricitinib, used to treat rheumatoid arthritis) was shown to reduce COVID-19 mortality by 71%, by protecting patient lungs.  This is a dramatic effectiveness, and it was shown to be effective for elderly patients.  The DailyMail article is below.  The news is important in several dimensions.  

– Foremost, this looks to be a very effective treatment for those with serious complications from COVID-19
– By protecting the vulnerable, this reduces the need for pursuing lockdowns.
– treatments to prevent the worst symptoms improves the ability of the global economy to function smoothly

https://www.dailymail.co.uk/news/article-8949605/Arthritis-drug-cuts-elderly-Covid-19-deaths-two-thirds-say-researchers.html


What makes this drug discovery interesting is that it was a UK AI computer, BenevolentAI, that identified and suggested this drug as an effective treatment for COVID-19.  This is the third instance AI has found useful insights into COVID-19 (see point #3).


UK considering providing Vitamin D supplements to all its citizens…
The other good news over the weekend is regarding the prevention of COVID-19.  The UK government is being advised to issue Vitamin D supplements to all its citizens.  This after multiple studies have shown Vitamin D potentially beneficial in preventing COVID-19 and even reducing the severity of the disease.

– for all you reading this, please take heed of this advice and take Vitamin D
– or get as much sunshine as possible

https://www.theguardian.com/world/2020/nov/14/covid-uk-government-requests-guidance-on-vitamin-d-use



7 reasons we still like Epicenter, despite record cases… US Governors are pursuing targeted lockdowns = good.  Tailwind for “epicenter” stocks
COVID-19 continues to spread across the US at a rapid pace and there is no sign (yet) for a peak in US daily cases.  In fact, it looks like the US will exceed 200,000 daily cases sometime this week.

Given the massive increase in case growth, many of you have asked why we continue to “double-down” on the epicenter trade (aka Cyclicals).  There are a few reasons for this.  And if I had to provide the multiple factors:

– Vaccine momentum dramatically strengthening = bring us closer to post-pandemic world
– Treatments are seeing vast improvements, including Olumiant (above), reducing the risk of “full lockdowns”
– US cases are surging but the related coefficient for hospitalizations (~1% of cases vs >3.3% of cases in wave 2) and deaths is lower
– US governors are pursuing targeted lockdowns, not “full stay at home” order = good news
– Europe COVID-19 cases are rolling over
– $4.5T of cash on the sidelines is finally moving into stocks
– China and Asia are back to normal

So you can see, we believe the risk/reward is still favorable for epicenter stocks, despite the tremendous tailwinds of the scourge of wave 3 in the US.  We also believe the consensus is still not that bullish on epicenter aka cyclicals.


Last week, based on our many conversations with institutional investors, we got the sense many remain unconvinced about the epicenter stocks:

– they expected cyclicals to rally for a few days, then the market would fade it severely
– they see the best opportunities in FANG, Growth given the risks of a lockdown and rising COVID-19 cases

So, you can see, the positioning might also be favorable.  We do not get the sense the majority of clients want to risk a significant overweight in the epicenter.  This is understandable.  These stocks have been tough all summer and face risks if the US economy falters.  But as we have commented in the past, we see earnings upside the strongest in these names in 2021, given the operating leverage (cost cutting) plus potential topline tailwinds.

– we still positive tailwinds over the next 6-9 months (see below)

Source: Fundstrat



And the rally in the past 14 days for epicenter is mere baby steps.  As this chart below shows, epicenter stocks could rally 70% in 2021, and that would be a simple mean reversion.  Thus, we think we are in the early days of an epicenter rally

– for the latest epicenter stock list –>  Click here

ADDENDUM: We are attaching the stock lists for our 3 portfolios:
We get several requests to give the updated list for our stock portfolios.  We are including the links here:

– Granny Shots  –>       core stocks, based on 6 thematic/tactical portfolios
– Trifecta epicenter  –> based on the convergence of Quant (tireless Ken), Rauscher (Global strategy), Sluymer (Technicals)
– Biden vs Trump  –>   based on correlation to either candidate odds

Granny Shots:
Full stock list here –> Click here

Trifecta Epicenter:
Full stock list here –> Click here

Biden White House vs. Trump White House:
Full stock list here –> Click here

POINT 1: Daily cases 140,761, +36,633 vs 7D ago — on pace to hit 200,000 by mid-Nov
The latest COVID-19 daily cases came in at 140,761, up +36,633 vs 7D ago. Wave 3 is gaining momentum, so we are not really near a peak in daily cases

– the spread of cases across the US is widening
– the fastest spread remains in the wave 3 states, in particular, WI, IL, ID, ND, SD, UT, or WIINSU.
– but other states are seeing higher cases and dominating top 10 are essentially all previously “unscathed” states
– we all should be cognizant that cooler weather is making spread faster, perhaps due to weaker immune systems or “indoor” time

Source: COVID-19 Tracking Project  and Fundstrat


7D delta is now running at >35,000, which means we could be at 200,000 cases in two weeks
Again, the daily change vs 7D ago, in our view, is the leading indicator as it is what influences the 7D moving average.
– Daily cases are rising vs 7D ago,
– It is rising at >35,000 7D delta

At this pace, we could see daily cases rise to >200,000 within two weeks.  So wave 3 is clearly gaining momentum.

Source: COVID-19 Tracking and Fundstrat  

We have been looking at different ways to give the best context to Wave 3.  Up until now, Wave 3 for COVID-19 differs from Wave 1 and wave 2 for several reasons:
– it is spreading across states previously unscathed in wave 1 and wave 2
– it is more geographically disperse but mostly in the Mountains region
– 6 states are seeing the fastest spread, WI, IL, ID, ND, SD, UT, or WIINSU
– Unlike Wave 1 and wave 2, states caught up in wave 3 are largely laissez-faire, without any policy intervention

New:
– Daily cases per 1mm for wave 1 (NY tristate) and wave 2 (F-CAT) are identical for the first time

Source: COVID-19 Tracking and Fundstrat  

Source: COVID-19 Tracking and Fundstrat




POINT 2: Wave 3: Deaths are rising, but remain very low in wave 1 and wave 2 cities
Daily deaths are rising in the US, and foremost, this is a stark reminder that COVID-19 remains the same deadly disease that has killed nearly 1 million people globally.  And the fact that death rates are not as high is a good thing in the US, but deaths are still occurring.

– Daily deaths are about to surpass Wave 2 peak, but not quite at Wave 1 levels
– It is not a foregone conclusion that daily deaths will surpass wave 1

Source: COVID-19 Tracking Project and Fundstrat




Top 15 cities are 25% of US GDP… daily deaths are down 70% to 95% or more compared to prior highs…
Wave 3 of COVID-19 is seeing a record number of cases.  And while deaths are rising, the cities hit hardest in wave 1 (NY tristate) and wave 2 (F-CAT) have seen a magnitude of death far lower in this current wave. 
Take a look at the chart below:

– NYC wave 1 deaths peaked at 66 per 1mm and is currently 0.8 per 1mm, or down 99%
– Miami wave 2 deaths peaked at 16.8 per 1mm and is 1.3 per 1mm, or down 93%
– Even Chicago peaked in wave 1 at 16.2 per 1mm and is currently 5.7 per 1mm, or down 65%

As you can see, the top 15 cities in the US are seeing significantly much lower levels or mortality per capita.

Source: Johns Hopkins and Fundstrat


These 15 cities represent about 25% of US GDP.  But are also the most important cities in the US, in terms of impacting media perception and federal policy.  Thus, with significantly lower levels of mortality, the need for these cities to pursue full lockdowns is much lower.



In one of many examples, NY Gov Cuomo urged NYC Mayor DeBlasio to reconsider DeBlasio’s plan to close all schools.  As Cuomo correctly noted, NYC public schools have a far lower positivity rate than the city overall.  So why shut down schools?

https://gothamist.com/news/cuomo-urges-de-blasio-reconsider-public-school-shutdown-plan


But some governors are taking more drastic steps.  In Michigan, the state is issuing 3-week restrictions, closing in-person classes for colleges and high schools.  And closing casinos.  Michigan is a state where compliance with existing mitigation measures were mixed, so this is a more aggressive step taken by the state.

https://www.freep.com/story/news/health/2020/11/15/covid-19-restrictions-3-week-lockdown-shutdown-high-schools-colleges/6305432002/




POINT 3: Olumiant (baricitinib) reduces COVID-19 mortality by 71% and works on elderly –> AI selected this drug and it really works… WUT?
Artificial intelligence and big data are playing some surprising roles in COVID-19.  We have written a few previous commentaries highlighting this:

– US supercomputer preferred the notion of the bradykinin hypothesis is more responsible for COVID-19 progression versus a simple cytokine storm — so far, that is gaining further traction
– Japan supercomputer suggested that ventilation is a big mitigating factor for COVID-19 exposure — again, correct


Just recently, London-based BenevolentAI, which examined thousands of existing medicines for signs they might combat COVID-19, picked baricitinib, suggesting it might protect lungs.  This proved to be validated by Swedish researchers.  This story first broke in the DailyMail (see below).

https://www.dailymail.co.uk/news/article-8949605/Arthritis-drug-cuts-elderly-Covid-19-deaths-two-thirds-say-researchers.html



The drug was picked out by London-based BenevolentAI, which examined thousands of existing medicines for signs they might combat COVID-19.  Its artificial intelligence program predicted baricitinib would ‘reduce the ability of the virus to infect lung cells’.  This was reported several weeks ago. 

But pan-European researchers, led by Sweden’s Karolinska Institute, reporting baricitinib slashes death rates in those admitted to hospital with the disease by two-thirds.  This is an incredible development.   In fact, perhaps the most encouraging thing is this drug is considered very effective for elderly patients.

https://www.dailymail.co.uk/news/article-8949605/Arthritis-drug-cuts-elderly-Covid-19-deaths-two-thirds-say-researchers.html


As we all know, the elderly are considered the most vulnerable.