COVID-19 obliterated in 17 states = retreat accelerating. Energy still a "fat pitch"

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We are shifting to a 4-day a week publication schedule:

SKIP — Federal Holiday
Tuesday
Wednesday
SKIP THURSDAY
Friday

STRATEGY: COVID-19 obliterated in 17 states = retreat accelerating. Energy still a “fat pitch”

17 states Obliteration: COVID-19 continues to retreat at what seems an accelerating pace…

Tracking the path COVID-19 requires one to look at local trends. That is, national data tends to obscure the mix shift taking place. And as been apparent abundantly for the past 18 months, surges start as local flare-ups and move through the rest of the USA. This was clearly on display with the Delta-variant surge.

Thus, to track the state of COVID-19, we should look at those regions where the Delta-variant has finished “burning through” a community. Based on the data compiled by our data science team, we have identified 17 states. As an aside, tireless Ken is still on paternity leave, but will return before Halloween (unless he is planning a trick):

• In these 17 states, COVID-19 has receded dramatically
• Look at FL, TX, TN, LA, HI, etc
• Wow

Just a few weeks ago, these states that were speaking about healthcare shortages and rationing ICU beds. And how, COVID-19 has retreated and in some cases, to near lows of the entire cycle. This is very encouraging.

• Our view is that 17 states becomes 25 states in a few weeks
• 25 becomes 35, then 45, then 50

If this is the roadmap, this would be a net positive. Foremost, this would enable the US to continue to push towards full opening. And consumer’s over-reaction will mitigate. And COVID-19 will become endemic, instead of pandemic. This is not a certainty, however. And the risk is that the flu season triggers a renewed wave of cases.

• However, the current case trends point to a continued decline in COVID-19 throughout the USA.

Only 7 states are seeing a troubling surge in cases… so # states obliteration > surging

There are 7 states where COVID-19 is actually accelerating visibly. These are the states where one could be alarmed by trends. Of these:

• 3 Northeast ME, NH, VT
• 3 Midwest MI, MN, WI
• CO

So, this could be a sign of flu season. There could be a seasonal factor here as well. These bear watching, but the surges here are fewer than the 17 states seeing “obliteration” of COVID-19.

Cannabis sales surging but is Cannabis leading to COVID-19 breakthrough cases?

This tweet caught my eye on Tuesday. In 2019, Michigan was the first Midwest state to legalize recreational cannabis use. I am from Michigan, so news from this state will get disproportionate mindshare (for me). And as shown below, sales rose 53% in September:

• this is nearly 3 years after legalizing recreational use
• so sales continue with strong momentum

…Marijuana might be associated with COVID-19 breakthrough cases

The reason I am highlighting the above tweet is because of a study published by World Psychology. They found that those with substance use disorder (SUD), were more likely to have a “breakthrough infection”:

• those without SUD saw 3.6% breakthrough infection rate
• those with SUD saw 7% breakthrough rate
• this is 2X risk
• highest risk was those using marijuana at 7.6%

This is surprising. Basically, those using cannabis were most likely to have a COVID-19 breakthrough infection. In fact, the risk might be higher:

• those cannabis SUD users were far younger than USA population overall
• these were SUD users, not just recreational users
• but given the younger profile, it suggests the breakthrough risk is far higher

The study did not explain the mechanism for how cannabis leads to greater breakthrough infections. While they could not rule out a medical factor (i.e., THC is the culprit), neither could they rule out a behavorial effect — sharing vapes, equipment, etc.

But this is interesting, nonentheless, since cannabis use is growing throughout the US.

STRATEGY: Investors are bearish = we would not be sellers here and still see YE rally

As we noted yesterday, the S&P 500 is on a knife-edge level, sitting at the 100-day moving average of 4,360.54. In this short term, this is a level that needs to be watched, because this is where tactical considerations come into play. However, we think the set-up remains very favorable into YE:

• investor sentiment is sufficiently bearish to counter-trade = bullish
• COVID-19 is retreating = bullish
• consumer confidence should improve = bullish
• risks of high oil overstated in near-term = bullish
• 4Q seasonals still strong = bullish
• 3Q2021 earnings season likely to positively surprise on margins = bullish

Thus, we see a favorable risk/reward into YE.

…S&P 500 still at knife-edge but we think this is “noise”

The S&P 500 is still sitting near the knife-edge of the 100-day moving average. We highlighted this recently at 4,360.54 because this is the level where stocks continue to ping-pong around. We know investors are grappling with inflation risk, supply chain woes, etc but we also believe this is an important tactical level, as this would impact investor sentiment:

• S&P 500 was fighting around this level most of the session Tuesday morning
• after hovering around this level most of the days, stocks weakened into the close
• I don’t think this is particularly important from our fundamental thesis but it does mean investor will remain wary near term
• Earnings season sort of starts Wed, with JPMorgan, and we think stocks will strengthen through earnings season

…Bearish bets near record –> inverse ETF volumes at all-time high = bullish

Generally, when we see bearish bets hit an extreme, this is a contrarian signal. That is, when bearish bets are at highs, this is the peak level of bearishness and stocks risk/reward changes:

This is true when:

• AAII (American Association of Individual Investors) is bearish extreme
• Investors Intelligence is bearish extreme
• VIX spikes to high levels
• VIX term structure inverts to extremes

This chart below shows that trading volume of inverse ETF (bearish ETFs) rose to a new record of 1.75% of volumes:

• as shown below, this level of extreme reading is positive
• stocks are at the end of a sell-off when this happens

So, in our view, this is a positive development. This is another reason we do not think investors should get too bearish here. We still see a strong rally into YE. In fact, with stocks weak into quarterly earnings season, this is a set-up for positive surprise as well. And recall, JPMorgan will report 3Q2021 results on Wed am, before the bell.

…Energy remains a “fat pitch”

Oil continues to perform well and Energy remains our favorite sector. We have written exhaustively about the positive thesis for Energy throughout the past year, so we will not be providing a rundown of this thesis in this note. Last week, we highlighted that gasoline share of the customer wallet was:

• stands at 2.35% of wallet
• 25-year average is 2.91%
• was 3.26% in 2014 when oil was last $80

So, the consumer’s burden from gasoline is far lower now than it was for most of the last 25 years. Yup.

…JPMorgan Economics data shows Oil intensity of USD GDP is at 65 year lows

JPMorgan’s team also shows the US economy overall is far less dependent on oil As shown below, the amount of oil consumed per $1 trillion of GDP is at 65-year lows:

• the chart shows the amount of Oil, measured in Exajoules, per $1T of real GDP
• current figure is below 2
• it was 6 in 1970

So, compared to 1970, the energy intensity of the US economy is down 66%. Wow.

Energy stocks still at fat pitch as Oil outperforming Energy stocks

We still this chart matters. Oil has outperformed Energy equities since the end of 2019:

• Oil USO +19%
• S&P 500 Energy XLE0.48%  -6%
• Oilfield Svcs OIH0.33%  -18%

So there is an obvious catchup trade. Energy companies are better at managing capital and margins, thus, one should argue that equities should be outperforming, instead of underperforming.

…Energy stocks XLE0.48%  just moved above the 50-week moving average

Taking a step back, we can see that XLE0.48%  is now just cleared the 50-week moving average. This is a potential trend reversal sign:

• XLE has been in a downtrend since 2014
• Oil was last $80 in 2014, so this is an important date
• XLE has fallen from $102 to $56 from 2014 to Tuesday
• XLE is now in an uptrend

So, the weekly chart suggests that XLE still has plenty of upside

…Zooming out further, Energy has not been this cheap since Moby Dick era –> worse than “whale oil” era?

But we need to zoom out further and the below chart is Energy versus S&P 500 since 1933.

• the red line is support where Energy historically reversed
• reversed in 1945, 1960, 1999
• But it brokedown in 2020, due to COVID-19

This figure is so low, we have to go back to pre-1933. This is Moby Dick era levels of weakness. We were using “whale oil” back then. So you can see, Energy is still a fat pitch.

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POINT 1: Daily COVID-19 cases 116,262, up +30,329 vs 7D ago…

Current Trends — COVID-19 cases:

• Daily cases   116,262 vs 85,933 7D ago, up +30,329
• Daily cases ex-FL&NE   113,305 vs 81,876 7D ago, up +31,429
• 7D positivity rate  5.6% vs 6.0% 7D ago
• Hospitalized patients   58,056, down -10.4% vs 7D ago
• Daily deaths  1,704,   down -6.3% vs 7D ago

*** 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 116,262, up +30,329 vs 7D ago. Several states didn’t provide updated on Monday due to Columbus Day, and as a result, those states reported larger numbers on Tuesday. As such, Tuesday’s 7D delta is positive due to the distortion. We expect the distortion to clear out quickly.

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…

*** The CDC didn’t update vaccine data over the weekend due to Columbus Day, so data is as of Thursday.

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

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 Tuesday, 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.