Valuation not demanding, but visibility still lacking. Earnings yield is 2.82% above 10-yr yield, the highest in 18 months and vs 0.30% avg since 1980

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STRATEGY: Valuation not demanding, but visibility still lacking. Earnings yield is 2.82% above 10-yr yield, the highest in 18 months and vs 0.30% avg since 1980

GLIMMERS: While buyers strike continues, some cyclical equities outperformed
This was another bloody day in markets, building upon a string of such bloody days since early February. And markets gyrated dramatically within the day, from a 2% loss to a +1% gain and back to a loss. The buyers strike for equities continues. Markets do not like uncertainty and the Russia-Ukraine war adds to this for obvious reasons and moreover, creates knock-on effects from rising oil and other commodities.

While Energy stocks have been leading and remain leaders in 2022 so far, Tuesday saw cyclicals and other stocks rally. Take a look at the top 25 best performing stocks Tuesday:

– Airlines, Engineering, Entertainment rallied
– these are typically sensitive to higher inflation risk
– Granted, it is only 1 day of trading
– and they were hard hit yesterday

But to me, this is a glimmer of improvement. Stocks are still suffering badly and technicals remain weak. But as we discuss below, valuations have come in so sharply, that valuations are no longer “demanding”

– meaning stocks have attractive prices
– as long as there is no recession
– the long-term yield curve suggests recession risk is low

And the uncertainty around this war continues to linger and the future path of outcomes remains uncertain. Still, the measured approaches by US and Europe on banning imports of Russian oil, in our view, is a modest step in policymakers realizing their sanctions could create bigger problems than the war itself:

– global policymakers need to find ways to reliably and cost-effectively implement sanctions
– if the sanctions deliver pain to the entire World, what is the goal?
– relative “destruction”?

I don’t know if that is a winning strategy.

VALUATION: Equity valuations vs bonds the cheapest since Summer 2020 = “not demanding”
Equity valuations have come in sharply and this is a positive development. After all, many bears and critics over the past 18 months have cited valuations as a reason to be bearish. Take a look at a common valuation measurement, the “earnings yield” of S&P 500 compared to the 10-year bond:

– the EY less BY is 2.82%
– owning a stock gives an investor an earnings yield of 4.8%
– owning a bond is a yield of 2.0%

This is the most attractive valuation that we have seen in the last 18 months. This is evident looking at the chart below.

In fact, compared to the last 40 years, this is a very attractive valuation. The average valuation differential since 1980 is 0.30%.

– average differential is 0.30%
– the higher the value, the more attractive equities
– 2.82% is the upper end of the last 40 years

So, stocks have valuation support.

VALUATION: Equity valuations are just not demanding. Median P/E 16.7X now vs 18.6X in 2019
There has been tremendous P/E multiple compression since the start of 2022:

– Median P/E start of 2022 18.1X
– Median P/E now 16.7X

– Median P/E end of 2019 18.6X

The S&P 500 trades at 2X less than the multiple at the end of 2019.

– this is true even with
– higher profit margins
– lower interest rates
– better pricing power

So, valuation is not the issue for equities.

VALUATION: Median FCF yield now 5.5% versus 4.7% in 2019
The same is true for free cash flow yield. Below is the median FCF yield of the S&P 500:

– FCF yield start of 2022 5.0%
– FCF yield now 5.5%

– FCF yield at end of 2019 4.7%

In other words, the S&P 500 is far cheaper now than it was two years ago. And has fallen sharply even since the start of the year.

If there is no recession, which is our base case, then stocks are very attractively valued currently.

POTENTIAL POSITIVE: Omicron might be peaking in Hong Kong — please squint
While COVID-19 has largely disappeared from the US scene, Omicron continues to rage in Hong Kong and possibly other parts of Asia. Previously, we noted the severity of the HK surge was staggering:

– HK saw cases surge past 43,000
– this was 5,722 cases per 1mm residents
– USA saw a peak on 2,300 cases per 1mm residents and 42k cases today

– HK surge was 2.5X worse than USA peak

But as we look at the data below, it looks like HK cases might be peaking. This is a positive development. Why?

– peak in HK means there is an end in view
– takes tail risk of it rapidly worsening
– Omicron appears and retreats symmetrically
– Asia is one of the last regions to be hit

Several US states are seeing somewhat stubborn level of COVID-19 cases
Overall, USA COVID-19 trends are positive but 7 states seem to be have a stubborn level of COVID-19 cases. These are shown below:

– the states are Alaska, Washington, Maine, Kentucky, Iowa, Idaho and Montana
– we show the full vaccination rates for those respective states
– is this the reason?

– not really clear
– many individuals can be re-infected
– so it might just be one of those mysteries

DATA ON RUSSIA-UKRAINE WAR: Tracking Russia-Ukraine war statistics — 1,335 Ukrainian civilian casualties so far
Our data science team, led by tireless Ken, is scraping data from several sources to track some high level data around the Russia-Ukraine war.

– Ukrainian civilian casualties
– Ukrainian population movements
– Ukrainian military losses, except personnel
– Russian estimated losses of personnel and material

The number of casualties is 128 on 3/8, and a total of 1,335 have been reported to the UN. This is after 11 days of information and could increase because there are simply lapses and lags in reporting.

The flow of migrations out of Ukraine had been steady at about 170,000 to 200,000 per day, but dropped to 94,000 recently. And a total of 2 million have fled so far. This sudden drop could be a data error, and we will continue to track it closely. The UN may retroactively change this figure if this is an error.

– 60% are entering into Poland
– curiously, 5% or 100k or so, have entered Russia

If one is wondering about reported losses of equipment, we are citing statistics provided by the opposing ministry officials. Thus, for Ukraine, data from the Russian Ministry, and last updated as of Friday 3/4/2022.

– est. 62 Ukrainian planes lost
– est. 635 tanks lost

– this seems like a lot of equipment
– I am wondering how many tanks and aircraft are in the Ukraine military arsenal

Russian losses are higher
– est. 11,000 Russian soldiers killed
– est. 290 tanks
– est. 46 aircraft
– est. 999 armored vehicles

Our team says this data is scraped and can be updated daily. So, we will post these figures for now. And that way, we can get a sense for the intensity of the hostilities.

Thomas Hu, of Kyber Capital, also shared this website which is a crowd sourced view of reported activities. There is a lot to the website, and I encourage you to check it out. The website URL is https://maphub.net/Cen4infoRes/russian-ukraine-monitor

For instance, if you click on one of the icons, a verified post is shown. There is geolocation and other data attached.

STRATEGY: 2022 theme –> BEEF –> Bitcoin (B) + Bitcoin equities (E) + Energy (E) + FAANG (F)
As for sectors, the pleas by Ukraine and sanctions are strengthening the case for our “BEEF” strategy. That is, BEEF is

– Bitcoin + Bitcoin Equities BITO1.04%  GBTC1.04%  BITW1.27%
– Energy
– FAANG FNGS-4.09%  QQQ-2.08%

Combined, it can be shorted to BEEF.

PS: Homebuilders (Oct – Apr aka Golden 6 months) XHB

Why is this making stronger BEEF?

– Energy supply is now a sovereign priority
– this helps Energy stocks

– Ukraine and Russia both want access to alternative currencies
– this strengthens case for Bitcoin and bitcoin equities

– if Global economy slows, growth stocks lead
– hence, FANG starts to lead FB AAPL-1.22%  AMZN-2.56%  NFLX-9.18%  GOOG-1.30%

All in all, one wants to be Overweight BEEF

_____________________________

33 Granny Shot Ideas: We performed our quarterly rebalance on 2/3. Full stock list here –> Click here_____________________________

POINT 1: Daily COVID-19 cases 27,842, down -14,824 vs 7D ago…

Current Trends — COVID-19 cases:

– Daily cases 27,842 vs 42,666 7D ago, down -14,824
– 7D positivity rate 3.9% vs 6.1% 7D ago
– Hospitalized patients 28,614, down -26% vs 7D ago
– Daily deaths 1,349, down -28% vs 7D ago

The latest COVID-19 daily cases came in at 27,842, down -14,824 from 7D ago. All states had <5000 new cases. in fact, except texas and california, all other states reported < 2000 with the great improvement on covid-19 for each state, overall us daily cases, measured by 7d avg, have fallen below 40,000 are currently at 37,909. Connecticut and California are the only two states with relatively “higher” cases compared to 7D ago. But, in terms of the positivity rate, both states maintain very low levels (CT at 2.28% and CA at 1.9%). So, the “higher” daily cases could be because people are extra cautious, or simply the “reopen” requires people to get tested more often. We are not 100% sure. But the low positivity rates show the conditions in both states remain good. Starting Tuesday (3/8), Kentucky Department of Public Health will stop reporting COVID-19 data on a daily basis and switch to a weekly update. KY is the 4th state that recently changed its way of reporting from daily to weekly. The other three are AZ, DC, and OK. This is a good sign as the policymakers positively respond to the improvement on COVID-19 situation. We will see more states make similar arrangement as the pandemic transitions into the endemic phase (we hope).

7D delta in daily cases remains negative. The steady decline persists…
While remaining negative, the 7D delta in daily cases has crept up recently. But, if looking at the case decline in percentage term, we can see the speed of decline has not really slowed much. The steady decline in daily cases persists.

All US states are seeing decline in daily cases now… 48 states have seen daily cases fall over 90%…
*** We’ve split the “Parabolic Case Tracker” into 2 tables: one where cases are falling (or about to fall), and the other where cases are rising

In these tables, we’ve included the vaccine penetration, case peak information, and the current case trend for 50 US states + DC. The table for states where cases are declining is sorted by case % off of their recent peak, while the table for states where cases are rising is sorted by the current daily cases to pre-surge daily cases multiple.
– The states with higher ranks are the states that have seen a more significant decline / rise in daily cases
– We also calculated the number of days during the recent case surge
– The US as a whole, UK, and Israel are also shown at the top as a reference

Daily deaths, positivity rates, and hospitalization rate are falling rapidly…
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 hospitalization and positivity rates have plunged – both have fallen to the pre-Omicron levels
– Daily death finally started to decline after the daily cases peaked for a month. And as you can see below, daily deaths have also dropped rapidly, consistent with we have seen in other metrics.

POINT 2: VACCINE: vaccination pace has slowed recently… likely due to the improvement in COVID situation

Current Trends — Vaccinations:
– avg 0.3 million this past week vs 0.4 million last week
– overall, 29.1% received booster doses, 64.9% fully vaccinated, 76.2% 1-dose+ received

Vaccination frontier update –> all states now above 100% 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 above 100% combined penetration
– 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

There were a total of 263,162 doses administered, as reported on Tuesday. The vaccination pace has slowed from the recent peak of 2 million doses per day in mid-December to ~500,000 recently. The booster dose was the main driver of the vaccination campaign in the winter. However, it seems that the improving COVID case trend across the nation have influenced people’s desire and sense of urgency to get the booster doses. As a result, we have seen the speed of booster shot given has slowed. That said, as more and more states lift their COVID-19 restrictions, we believe vaccination remains a key to support us to smoothly transition back to “Normal”. Therefore, the daily number of vaccines administered is still one of the most important metrics to watch.

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

In total, 555 million vaccine doses have been administered across the country. Specifically, 253 million Americans (76% of US population) have received at least 1 dose of the vaccine. 215 million Americans (65% of US population) are fully vaccinated. And 97 million Americans (29% of US population) received their booster shot.

POINT 3: Tracking the seasonality of COVID-19
***We’ve updated the seasonality tracker to show figures from the last 9 months, from this calendar day, in each of the last two years***

As evident by trends in 2020 and 2021, seasonality appears to play an important role in the daily cases, hospitalization, and deaths trends. 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
– Opposite effects hold true in the winter

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.