Delta wave might be the 'final wave' in 2021. Upgrading Financials from N to OW

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STRATEGY: Delta wave might be the ‘final wave’ in 2021. Upgrading Financials from N to OW
This Delta wave might get us to something akin to herd immunity –> no Fall surge
Dr. Gottlieb made a really salient insight Monday AM on CNBC. He said this wave (4) is probably the “final act” for 2021:

– this wave is infecting people who are not vaccinated
– we reach population-wide exposure via infected, the unvaxxed + vaccinated
– prevalence level will then decrease

Basically, Dr. Gottlieb is saying the current Delta variant is likely the last major wave of cases in 2021. This is different than what we saw in 2020, where the Northeast surge started in the Fall. And the plurality of our clients are also suggesting that they expect a renewed wave with back to school season:

– Dr. Gottlieb’s view, if correct, will be a positive surprise = risk rally into YE
– IHME’s forecast affirms this, seeing a peak of US COVID-19 infections this week

Source: https://twitter.com/SquawkCNBC/status/1424705505059033090

…Vaccine breakthrough data from DC + OK –> Moderna outperforms PFE and JNJ vaccines
Several states are starting to share data on breakthrough cases, and our data science team, led by tireless Ken, pulled figures for Washington DC and OK.

– DC 386,925 fully vaxxed
– OK 1,594,255 fully vaxxed

So there are about 2 million fully vaxxed Americans in the datasets published by the two states. The results of breakthrough cases shows the effectiveness of the various vaccines. Look at the charts below, and it’s really interesting:

– Moderna is by far the most effective vaccine
– In DC, 38% of vax but only 29% of breakthroughs
– in OK, 42% of vax but only 33% of breakthroughs

– J&J is the least effective
– in DC, 8% of vax but 14% of breakthroughs
– in OK, 6% of vax but 9% of breakthroughs

In other words, the chances of a breakthrough case are somewhere between 50% to 75% higher if one has the J&J vaccine.

Similarly, the overall risks are not that elevated. The number of vaccinations (by type) and COVID-19 breakthrough deaths are shown. As shown, the risks of mortality are far lower, to the extent that few Americans fully vaccinated are perishing due to COVID-19. We understand that many of you might point out the shortcomings of these charts. Foremost, this is only a point in time, and these figures could change if breakthrough cases continue. Also, future variants could change these figures.

– 1.6 million vaccinated in OK
– 25 COVID-19 breakthrough deaths

This is a very small figure.

STRATEGY: If there is no Fall wave, amplifies “everything rallies” –> upgrade Financials to OW from N
We are upgrading Financials to OW from N. We had downgraded Financials (ETF XLF0.25% ) in June 2021, and as shown below, Financials have underperformed the S&P 500 during the past few months.

– the primary headwind for XLF0.25%  has been falling interest rates
– we think interest rates are now heading higher
– hence, we are upgrading Financials to OW as we see a catch-up trade coming

We continue to expect an everything rallies in 2H2021, as the peaking of this Delta wave will be a sigh of relief. And moreover, there is decreasing probabilities of a Fall surge. As such, this would be a positive surprise for markets.

– Bitcoin BTC just crossed above its 200D moving average
– Bitcoin was the first risk asset to peak and has since languished
– a move above 200D is a bullish sign and amplifies the “everything rallies”

In this context, we see strong upside to Financials. Financials have consolidated in a range for the last two months. But tailwinds are building:

– rising interest rates –> + financials
– strengthening confidence of economy –> + financials
– breaking out of range –> + financials

The DeMark count looks solid for Financials, based on combo v1b. And we think XLF0.25%  could easily rise +10% into YE. This is greater upside than the S&P 500 broadly.

And the rise in interest rates will broadly support Epicenter stocks. As shown below, the move in 10-year rates and Oilfield Services (OIH-1.21% ) have been in sync. Thus, if rates are moving higher, we expect OIH-1.21%  to strengthen as well.

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Granny Shots:
We performed our quarterly rebalance on 07/30. Full stock list here –> Click here

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POINT 1: Daily COVID-19 cases 163,708, up +27,673 (ex-FL&NE) vs 7D ago… 7D delta seems to roll over now… If so, early sign of case figure rollover…
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Current Trends — COVID-19 cases:
– Daily cases 163,708 vs 153,036 7D ago, up +10,672
– Daily cases ex-FL&NE 163,708 vs 136,035 7D ago, up +27,673
– 7D positivity rate 8.5% vs 7.8% 7D ago
– Hospitalized patients 65,729, up +31% vs 7D ago
– Daily deaths 492, up +29% vs 7D ago
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*** Florida and Nebraska stopped publishing daily COVID stats updates on 6/4 and 6/30, respectively. We switched to use CDC surveillance data as the substitute. However, since CDC surveillance data is subject to a one-to-two day lag, we added a “US ex-FL&NE” in our daily cases and 7D delta sections in order to demonstrate a more comparable COVID development.

The latest COVID daily cases came in at 163,708, up +27,673 (ex-FL&NE). The COVID stats this week are important to watch. As we noted previously, both IHME’s forecast and the COVID patterns in UK and India point to a case rollover by mid-August. If this is truly going to happen, we should see the 7D delta start to roll over first as an early indicator.

In fact, as shown below, the 7D average of the 7D delta in daily cases seems to be rolling over now. It is been down from Sunday’s 26,613 to 24,189. This is good news. But we also need more data points to confirm this rollover. If this decline persists, we will also see the case figure start to peak (and roll over) very soon.

7D delta in daily cases seems to be rolling over now…
The 7D delta in daily cases seems to be rolling over now as shown in the chart below. However, we do need more data points to confirm this roll over. If this decline in 7D delta persists, we should see the daily cases apex soon.

Low vaccinated states seem to have a larger increase in daily cases compared to their recent low…
Below, we added a new section called “Parabolic Case Surge Tracker” to monitor the possible parabolic surge in daily case figures. In the table, we included both the vaccine penetration and the recent case trend for 50 US states + DC. The table is sorted by the multiple of their current daily cases divided by their recent low in daily cases.

– The states with higher ranks are the states that have seen a more significant rise in daily cases
– We also calculated the number of days between now and the recent low date; a state with a high multiple but low number of days since its low means the state is facing a relatively rapid surge in daily cases
– The US as a whole, UK, and Israel are also shown at the top as a reference

Hospitalization and positivity rate continue rising… Daily deaths is also trending upwards now…
Below we show the aggregate number of patients hospitalized due to COVID, daily mortality associated with COVID, and the daily positivity rate for COVID.

As you can see, hospitalization and positivity rate have exceeded the peak level we’ve seen in April’s “mini” wave. Daily deaths have been trending upwards recently, but far less “dramatic” than the cases or hospitalization trends.

POINT 2: VACCINE: vaccination pace has been gradually rising over the past three weeks… Over half of Americans are fully vaccinated…

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Current Trends — Vaccinations:
– avg 0.7 million this past week vs 0.7 million last week
– overall, 49.8% fully vaccinated, 58.3% 1-dose+ received
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Vaccination frontier update –> all states now near or above 80% combined penetration (vaccines + infections)
Below we sorted the states by the combined penetration (vaccinations + infections). The assumption is that a state with higher combined penetration is likely to be closer to herd immunity, and therefore, less likely to see a parabolic surge in daily cases and deaths. Please note that this “combined penetration” metric can be over 100%, as infected people could also be vaccinated (actually recommended by CDC).

– Currently, all states are near or above 80% combined penetration
– RI, MA, SD, CT, NJ, IL, NY, DE, NM, UT, PA, ND, AZ, MN, CA, FL, NE are now above 100% combined penetration (vaccines + infections). Again, this metric can be over 100%, as infected people could also be vaccinated. But 100% combined penetration does not mean that the entire population within each state is either infected or vaccinated.

Below is a diffusion chart that shows the % of US states (based on state population) that have reached the combined penetration >60%/70%/80%/90%/100%. As you can see, all states have reached 80% combined vaccination + infection. 77.2% of US states (based on state population) have seen combined infection & vaccination >90% and 49.0% of US states have seen combined infection & vaccination >100% (Reminder: this metric can be over 100%, as infected people could also be vaccinated. But 100% combined penetration does not mean that the entire population within the state is either infected or vaccinated).

There were a total of 524,897 doses administered reported on Monday. The vaccination pace apparently has improved over the past three weeks (although slowly). As we noted earlier this week, it seems that people are becoming more inclined to get vaccinated over growing Delta variant concerns. Especially, the states with lower vaccine penetration appear to have a greater improvement. This is a great sign. Currently, over half of Americans (50.2% according to CDC) have been fully vaccinated. Although vaccine breakthroughs still happen, we continue to believe that vaccination is the key to combatting the pandemic.

44.9% of the US has seen 1-dose penetration >60%…
To better illustrate the actual footprint of the US vaccination effort, we have a time series showing the percent of the US with at least 45%/45%/50% of its residents fully vaccinated, displayed as the orange line on the chart. Currently, 88.8% of US states have seen 40% of their residents fully vaccinated. However, when looking at the percentage of the US with at least 45% of its residents fully vaccinated, this figure is 69.7%. And only 44.9% of US (by state population) have seen 50% of its residents fully vaccinated.

– While 83.8% of US states have seen vaccine penetration >50%, 56.3% of them have seen 1 dose penetration >55% and 44.9% of them have seen 1 dose penetration > 60%.
– 88.8% of the US has at least 40% of its residents fully vaccinated, However, only 69.7% of US has fully vaccinated >45% and 44.9% of US has fully vaccinated >50%.

This is the state by state data below, showing information for individuals with one dose and two doses.

The ratio of vaccinations/ daily confirmed cases has been falling significantly (red line is 7D moving avg). Both the surge in daily cases and decrease in daily vaccines administered contributed to this.

– the 7D moving average is about ~10 for the past few days
– this means 10 vaccines dosed for every 1 confirmed case

In total, 350 million vaccine doses have been administered across the country. Specifically, 194 million Americans (58% of US population) have received at least 1 dose of the vaccine. And 165 million Americans (50% of US population) are fully vaccinated.

POINT 3: Tracking the seasonality of COVID-19

In July, we noted that many states experienced similar case surges in 2021 to the ones they experienced in 2020. As such, along with the introduction of the more transmissible Delta variant, seasonality also appears to play an important role in the recent surge in daily cases and hospitalization. Therefore, we think there might be a strong argument that COVID-19 is poised to become a seasonal virus.
The possible explanations for the seasonality we observed are:

– Outdoor Temperature: increasing indoor activities in the South vs increasing outdoor activities in the northeast during the Summer
– “Air Conditioning” Season: similar to “outdoor temperature”, more “AC” usage might facilitate the spread of the virus indoors

If this holds true, seasonal analysis suggests that the Delta spike could roll over by following a similar pattern to 2020.

We created this new section within our COVID update which tracks and compare the case and hospitalization trends in both 2020 and 2021 at the state level. We grouped states geographically as they tend to trend similarly.

CASES
It seems as if the main factor contributing to current case trends right now is outdoor temperature. During the Summer, outdoor activities are generally increased in the northern states as the weather becomes nicer. In southern states, on the other hand, it becomes too hot and indoor activities are increased. As such, northern state cases didn’t spike much during Summer 2020 while southern state cases did. Currently, northern state cases are showing a slight spike, especially when compared to Summer 2020. This could be attributed to the introduction of the more transmissible Delta variant and the lifting of restrictions combined with pent up demand for indoor activities.

HOSPITALIZATION
Current hospitalizations appear to be similar or less than Summer 2020 rates in most states. This is likely due to increased vaccination rates and the vaccine’s ability to reduce the severity of the virus.