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SKIP THURSDAY
Friday
STRATEGY: “Demand destruction” overblown. Why $80 oil today = $110 oil in 2014
COVID-19 trends are still showing consistent improvement…
The September jobs report is coming out on Friday am. So all eyes will be on whether economic momentum is sufficient to offset the impacts from caution stemming from the Delta-variant surge. Fortunately, COVID-19 trends are improving and continuing in the past week.
– The latest COVID daily cases came in at 94,993, down -8,942 vs 7D ago
– The positivity rate continues to fall as it is down to 6.1% and has clearly fallen since its recent high of nearly 10%
…Next surge in COVID-19 will be “led” by a rise in positivity rates
And looking at positivity rates by region, we can see the generalized decline across all regions. Something self-evident: the next COVID-19 wave will be driven by a rise in positivity rates, along with cases. Thus, the continued and sustained move downwards is encouraging.
INFLATION: Oil could rise a further 40% before it even begins to impact demand
For those in the “peak everything” camp, $80 oil is likely a key factor for expecting global economic growth to cool substantially in 2022. One doesn’t have to look far to see such predictions of calamity. Below is a headline from theStreet.com and cites a strategist who says $80 oil leads to beginning of demand destruction.
– foremost, the future is uncertain, so anything is possible
– however, the price of the commodity itself doesn’t matter
– it is whether the burden on households becomes too great
How big a burden is $80 oil for US households? Not much
Oil has reached close to $80 recently, matching its price in 2014. This means oil is at a 7-year high. But that figure simply lacks context. The real question is how $80 oil impacts household finances. Consider the following:
– $80 oil = $3.22 gasoline
– Based on BEA data, gasoline purchases as percent of household purchases is now 2.35% of all expenses
We think this hardly represents a burden to households:
– 2.35% share of wallet is quite small and barely a top 20 category
– in 2014, $80 oil = $3.22 gasoline = 3.26% of wallet
– gasoline has shrunk wallet share from 3.26% to 2.35%
– since 2014, other consumer items have risen in cost
– big macs, iPhones, coffee, cars and cereal
$80 oil is 2.35% of consumer wallet, down from 3.26% when oil was last $80 (2014)
This is the key point, in our view. Below, we have plotted the daily price of gasoline. And as shown, at AAA average price of $3.22, gasoline is identical to its price in October 2014:
– interesting that its price is identical to where it was exactly 7 years ago
– looking at the 20-year range, the price of gasoline is at the 60th percentile
The problem is context, specifically, inflation.
2.35% now vs 3.26% in 2014: makes more sense to look at gasoline as % consumer PCE (personal consumption expenditures)
Naturally, it makes more sense to look at the actual burden that $80 represents for consumer wallets. Fortunately, the US government actually tracks this.
– They have a dataset that looks at gasoline as a percent of PCE (personal consumption expenditures)
– Data is available since 2000, or 21 years
The time series is shown below. As of the most recent month, gasoline is 2.35% of PCE aka wallet.
– today, gasoline is 2.35% of wallet
– 2014 (same gasoline price), gasoline was 3.26%of wallet
– current wallet share is below the 20-year average of 2.91%
Taking a step back, how is $80 oil going to create demand destruction? Granted, I understand there is a rate of change issue here. Plus, there is a crowding effect. But this is not demand destruction:
– inflation of a price of a good
– doesn’t mean the whole economy comes crashing down
To put gasoline in perspective, take a look at this chart by howmuch.net. We highlighted gasoline share of total wallet. And you can see that it is among the top 20 categories, but hardly the top expenditure.
…Shouldn’t we worry more about the surge in cost of a Starbucks latte? Or a Big Mac?
To give you perspective, our data science team compiled comparative 2021 vs 2014 prices for a selection of well-known and commonly consumed items. This is where the comparative changes in those prices is striking, particularly against gasoline:
– Wut?
– Big mac +16% from $4.80 to $5.59 and a latte is +10% from $4.30 to $4.75
– Even cars surged as the entry-level Toyota Camry is +14% more expensive from $22k to $24.970k
– Gasoline 2021 vs 2014 is FLAT
– Yup
So, again, is $80 oil aka $3.22 gasoline, really that alarming?
…Oil needs to be $110 to match 2014 burden and $252 to match 2008 burden
One last comment on oil and its associated household burden. As we noted, household burden from gasoline is really “share of wallet” and we have a simple list below to show where oil needs to be to match the burden of oil in past years:
Hist. 2021
Year Price Share wallet —> Equivalent
2021 $80 2.35%
2014 $80 3.26% $110
2008 $133** 4.47% $252
**monthly average price
Source: Fundstrat
So oil has a long way to rise before it matches the wallet impact of 2014 or 2008. This is merely a framework. Because consumer confidence is impacted by the general perceptions of prices. And if the collective view is that $80 oil today is negative, consumers act in a way that reflects demand destruction. We saw this happen already with Consumer Confidence broadly, which collapsed even as contemporaneous conditions did not deteriorate:
– a long-winded way of saying that it is not really that clear what level of oil is a required to cause demand destruction
– or even more mildly, negatively hurt sentiment
STRATEGY: Investor bearishness highest since April 2020 –> wow –> means lots of bad news baked in
Equity markets have been very treacherous for the past 6-8 weeks. And in the past 4 weeks, markets endured a 5% drawdown – the largest since October 2020. It got really choppy over the past week. As many our clients know, we have highlighted how stocks have become so oversold and sentiment so negative, in many ways, we have to go back to March-May 2020 to find similar sentiment. We can now add the Investors Intelligence survey to this:
– % bulls is down to 40%
– this is the lowest figure since April 2020
– Investors Intelligence is a survey of newsletter writers and advisors
Think about that for a moment. Does it make sense that the level of negativity should match what we saw during the depths of the panic. Similarly, we know that market internals, such as % stocks >50D, have fallen to the same levels.
– when everyone is negative
– case can be made that a lot of bad news is baked in
That is the point of looking at sentiment. When investors are extreme, either negative or positive, it is time to counter-trade that view. That is what happened this week.
…Mark Newton, Head of Technical Strategy, likes both Epicenter and FAANG = “everything rally”Our new head of Technical Strategy, Mark Newton, hosted a webinar yesterday. A replay is available and I believe that link was emailed to you already. The slide I want to highlight is his sector favors and avoids:
– He likes Epicenter, Energy and Financials
– and FAANG
– so it is consistent with our “everything rally”
– I found his recommendation of dry bulk shippers interesting
– one of our clients, ES of SF, is also an advocate of these names
As for avoids, these are consistent with our views, except for some consumer stocks.
Energy sector has revealed its relative strength — rallying in September and continuing to lead in October
We think Energy stocks remain attractive risk/reward. There are multiple factors (see our previous notes) which we have cited multiple times. The most incremental comment today is that oil at $80 is less a burden than many perceive. Thus, we continue to favor Energy stocks into YE.
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26 Granny Shot Ideas: We performed our quarterly rebalance on 07/30. Full stock list here –> Click here
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POINT 1: Daily COVID-19 cases 94,993, down -8,942 vs 7D ago…
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Current Trends — COVID-19 cases:
– Daily cases 94,993 vs 103,935 7D ago, down -8,942
– Daily cases ex-FL&NE 90,290 vs 98,008 7D ago, down -7,718
– 7D positivity rate 6.1% vs 6.4% 7D ago
– Hospitalized patients 62,474, down -12.3% vs 7D ago
– Daily deaths 1,733, down -11.5% 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 94,993, down -8,942 vs 7D ago. As indicated by the consistently negative 7D deltas, cases are currently rolling over. At the individual state level, we’ve recently been at the critical stage of case rollover as more states begin to turn. We will continue to monitor all relevant data closely, but as long as 7D deltas remain negative, case rollover will continue.
Rolling 7D delta in daily cases remains negative…
As shown in the chart below, the rolling 7D delta in daily cases remains negative. The negative rolling 7D delta further emphasizes the case roll over.
Low vaccinated states seem to have a larger increase in daily cases compared to their recent low…
The “Parabolic Case Surge Tracker” monitors 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 recent peak daily cases divided by the daily cases when their case surges started.
– 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 during the recent case surge; 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
Hospitalizations, deaths, and positivity rates are rolling over amidst case rollover…
Below we show the aggregate number of patients hospitalized due to COVID, daily mortality associated with COVID, and the daily positivity rate for COVID.
– Net hospitalizations peaked below the Wave 3 peak and are currently rolling over
– Daily death peaked slightly above the Wave 2 peak and are currently rolling over
– As per the decline in daily cases, the positivity rate is currently rolling over
POINT 2: VACCINE: vaccination pace trending up once again…
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Current Trends — Vaccinations:
– avg 0.9 million this past week vs 0.7 million last week
– overall, 55.8% fully vaccinated, 64.6% 1-dose+ received
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Vaccination frontier update –> all states now near or above 80% combined penetration (vaccines + infections)
*** We’ve updated the total detected infections multiplier from 4.0x to 2.5x. The CDC changed the estimate multiplier because testing has become much better and more prevalent.
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
– Given the new multiplier. only RI, FL, MA, CT, NM, NY, NJ, IL, CA, PA, DE, and SD 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 90% combined vaccination + infection. 90.0% of US states (based on state population) 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 876,888 doses administered reported on Thursday, down 3% vs. 7D ago. We are once again seeing the vaccination pace pick up as booster shots are becoming more widely available. Also, the same catalysts remain in place:
– Proof of vaccination required by many US cities and venues
– Booster shots
– Full FDA approval of Pfizer COVID vaccines (hopefully it could help overcome vaccine hesitancy)
– Biden’s vaccination plan
The daily number of vaccines administered remains the most important metric to track this progress and we will be closely watching the relevant data.
69.9% 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 lines on the chart. Currently, 100% 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 96.1%. And only 81.6% of US (by state population) have seen 50% of its residents fully vaccinated.
We have done similarly for residents with at least 1-dose of the vaccination, denoted by the purple lines on the chart. While 98.7% of US states have seen 1 dose penetration >50%, 87.1% of them have seen 1 dose penetration >55% and 69.9% of them have seen 1 dose penetration > 60%.
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 ~9 for the past few days
– this means 5 vaccines dosed for every 1 confirmed case
In total, 399 million vaccine doses have been administered across the country. Specifically, 214 million Americans (65% of US population) have received at least 1 dose of the vaccine. And 185 million Americans (56% 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, hospitalization, and deaths. 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 section within our COVID update which tracks and compare the case, hospitalization, and death 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.
DEATHS
Current death rates appear to be scattered compared to 2020 rates. This is likely due to varying vaccination rates in each state. States with higher vaccination rates seem to have lower death rates given the vaccine’s ability to reduce the severity of the virus; states with lower vaccination rates seem to have higher death rates.
