Click HERE to access the FSInsight COVID-19 Daily Chartbook.
We are shifting to a 4-day a week publication schedule:
- Monday
- Tuesday
- Wednesday
- SKIP THURSDAY
- Friday
STRATEGY: 1Q2021 Earnings “don’t matter” as 1Q2020 not realistic comp — 2Q2021, 3Q2021 matter way more
CDC projecting a surge in COVID-19 cases through June 2021 and then a collapse
The CDC has provided updated projections for COVID-19 cases and it is an interesting forecast:
– CDC sees a surge in US cases, nearly doubling vs today’s level from May to June
– this is due to the spread of more contagious variants
– then July to Sep, an utter collapse in COVID-19 to near zero levels
– this is due to the cumulative impact of the vaccination effort
Source: https://www.foxnews.com/health/cdc-projects-sharp-decline-coronavirus-cases-by-july
The forecast from the CDC report is below. And the most eye catching is the forecasted double of USA cases from today to early June.
– do we think this could happen?
– maybe, but this is an “out of left field” projection
– is the CDC trying to scare people into compliance?
Whatever the case, if the CDC forecast is right, this will be a headwind for equity markets. But do we think this is credible? The following is my opinion, and only my opinion –> No and it seems almost borderline ludicrous.
– CDC has been slow to lift recommendations
– CDC is restricting cruises, but allowing sports and indoor dining
– CDC was ignoring science around outdoor transmission and requiring masks, until Dr. Scott Gottlieb commented
Source: https://www.cdc.gov/mmwr/volumes/70/wr/mm7019e3.htm?s_cid=mm7019e3_w
For a sanity check, the IHME, which is one of the principal forecasters for the White House sees no future surge in infections. In fact:
– the IHME baseline is a continuing collapse in USA cases
– if IHME is right, Epicenter will continue to rally
Source: https://covid19.healthdata.org/united-states-of-america?view=infections-testing&tab=trend&test=infections
STRATEGY: 1Q2021 Earnings “don’t matter” as 1Q2020 not realistic comp — 2Q2021, 3Q2021 matter way more
Many clients are concerned that stocks are peaking, because stocks are not reacting to “strong EPS” results, and in fact, selling off. I can think of at least 7 reasons that stocks do not have to react to “great results” — of which, only 2 are actually bad signs.
But in my opinion, the main reason stocks are not “reacting to 1Q2021 results” is that the year ago comparison is to March 2020. That was 6 weeks into the economic shutdown:
– do comparisons vs the “first stage” of pandemic collapse matter?
– like do we think EPS beats/growth vs that horrific period matter?
Realistically, I think the YoY vs 1Q2020 is just simply going to look mental. So I would not place much weight on the results. And to me, it seems like equity markets are reacting as such.
– 2Q2020 and 3Q2020 are more important “year ago” periods
– thus, 2Q2021 and 3Q2021 are more important EPS comparison
And if you are wondering what the fuller list of possible reasons of why stocks do not react to EPS, this is the list below:
On earnings, it could mean a few things:
1. bad —> good news priced in
2. bad —> no shorts have to cover
3. medium —> incremental buyer doesn’t care for earnings thus no reaction
4. medium —> market trying to process hairs of inflation
5. good —> people aren’t chasing earnings
6. good —> retail getting smarter and not chasing earnings
7. good –> Nobody cares about comparisons to March 2020
…1Q2021 EPS has beating by +19%, which any other time period, is considered extraordinary
1Q2021 EPS results have come in +19% above Street consensus — clearly strong results. And the upside has been strongest in the Cyclicals:
– Defensives +8%
– Near-Cyclicals +41%
– Cyclicals +27%
In any other year, the beats, even by Defensives would be considered extraordinary. But as many know, stocks have not necessarily outperformed despite these strong beats.
…since 1Q2021 EPS season started, Epicenter has been leading
For us, “earnings season” really starts with JPMorgan, which reported on 4/13/2021 — might just be tradition, since I worked at JPMorgan for >15 years. And the performance of sectors is shown below since 4/13/2021:
– Leading have been Energy, Materials and Financials +9%/+8%/+7%, respectively
– Worst are Technology/Discretionary down -4%/-2%, respectively
So, there have been strong responses by stocks to EPS results, but it has been the Epicenter groups.
STRATEGY: Structural tailwind for Energy. Per Rystad, $300 billion of Oil capex taken out since 2020 = 4mbpd deficit by 2022
So Epicenter is leading and performing very strongly. In fact, for the first time in nearly 6 months, we are also finding institutional investors becoming incrementally curious about Energy stocks. And as many of our clients know, energy is a sector investors have largely ignored for the past decade and this was especially true since the pandemic started.
But the building structural tailwinds are simply too hard to ignore.
Rystad Energy –> Oil sector cut $300 billion in capex since COVID-19
Rystad Energy (rystadenergy.com), and independent Energy research boutique, headed by Jarand Rystad, published a report today that points out the E&P sector has cut investment (capex) by $300 billion since the start of COVID-19. And in their words, this cut in capex will have “lasting impact”
There is quite a lot of good material in this report and we hope to do a joint webinar with Rystad in coming weeks, so we can more fully explore their views and analysis. But among the key charts, it is this capex model below:
– post-COVID-19, global E&P capex was but by $145 billion in 2020 and $140 billion in 2021
– this level set lower is creating a long-term structural gap of lower spending
This has not been reversed — and thus, the structural deficit is set to cumulatively increase over the next several years. This will only reverse when capex spending is “level set” higher.
…North American oil production is set to fall by 3.0mbpd by 2022 = one OPEC producer
The global impact on production will become staggering over time. Take a look at the impact on North America production alone. By Rystad’s estimates, the decline in 2021 production could be 3.0mbpd.
– this exceeds the production of OPEC members Iran and Kuwait
– and is roughly equal to the production of Brazil, UAE and Iran
The top 10 largest oil producers is shown below (2020 figures, per EIA. And you can see, the 3.0mbpd drop forecast is equal to losing a top 10 producer.
– let’s not dismiss this
– this is a huge structural deficit forming
…who benefits from higher Capex? Oilfield Services (ETF proxy OIH)
So this is a sizable gap being created in 2022 and beyond. The only fix to this is a jump in capex. By the way, what companies benefit from a rise in capex? It is pretty much the entire Energy complex:
– Integrated –> higher oil prices + higher expected return on capex
– E&P –> benefit from higher capex
– Oilfield services –> benefit from higher capex
So, this is an obvious statement. But if this structural deficit is correct, the entire Energy sector is a buy. This is the first real alignment of supply and demand for the sector in more than 20 years:
– for past 10 years, US production ramped up –> supply excess
– now capex deficit since 2020 creating deficit –> and existing production facing declines
– White House make expanded production heading –> less supply
– financial capital dwindling for sector –> private equity bailed out sector in 2016 and lost their “shirts”
But we know that the “equilibrium” is a rising oil price and higher value capture of existing companies. This is an environment for Energy stocks to continue to surge. We have shown the comparative price of oil (WTI) vs OIH:
– at $70 oil, OIH never <$450
– at $80 oil, OIH never <$600
In fact, if OIH were simply to “reset” to end of 2019 levels, OIH would be $269, or ~30% upside. In other words, OIH risk/reward, to us, seems very attractive.
– stay overweight OIH 0.66% and XLE 1.50%
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), Technicals
– Violence in USA –> companies that are involved in some aspect of home or personal security. We are not “recommending” these stocks, but rather, bringing these stocks to your attention.
Granny Shots:
Full stock list here –> Click here
Trifecta Epicenter (*):
Full stock list here –> Click here
Power Epicenter Trifecta 35 (*):
Full stock list here –> Click here
Violence in USA:
Full stock list here –> Click here
(*) Please note that the stocks rated OW on this list meet the requirements of our investment theme as of the publication date. We do not monitor this list day by day. A stock taken off this list means it no longer meets our investment criteria, but not necessarily that it is neutral rated or should be sold. Please consult your financial advisor to discuss your risk tolerance and other factors that characterize your unique investment profile.
POINT 1: Daily COVID-19 cases 42,014, -12,347 vs 7D ago… 7D delta start to accelerate to the downside again…
_____________________________
Current Trends — COVID-19 cases:
– Daily cases 42,014 vs 54,361 7D ago, down -12,347
– 7D positivity rate 3.7% vs 4.1% 7D ago
– Hospitalized patients 34,056 down -9.5% vs 7D ago
– Daily deaths 670, up +1.5% vs 7D ago
_____________________________
– The latest COVID-19 daily cases came in at 42,014, down -12,347 vs 7D ago.
– The US continues to see a steady decline in daily cases. The 7D delta has been negative in the past 23 days. In the past few days, the 7D delta has been accelerating to the downside again. If this speed of decline persists, we could see the daily cases drop sub-20k by mid-May.
– As we wrote before, at this stage of pandemic, as long as vaccinations work, eventually the rollout of the vaccines will lead to a decline in the pervasiveness of the COVID pandemic. And according to the recent data, this decline seems to finally arrive.
7D delta in daily cases has turned negative in the past 23 days…
The US continues to see a steady decline in daily cases. The 7D delta has been negative in the past 23 days. In the past few days, the 7D delta has been accelerating to the downside again. If this speed of decline persists, we could see the daily cases drop sub-20k by mid-May.
US hospitalization still rolling over … and even US deaths seem to be rolling over…
Below we show the aggregate patients who are currently hospitalized due to COVID. After a mini-surge in March, the number of patients currently hospitalized starts to roll over again. Compared to the wave 3 peak, it has fallen significantly.
POINT 2: VACCINE: all states reached ~60% infected + vaccinated… Nearly one-third of Americans have been fully vaccinated…
_____________________________
Current Trends — Vaccinations:
Vaccinations ramping steadily
– avg 2.1 million this past week vs 2.6 million last week
– overall, 32.6% fully vaccinated, 44.7% 1-dose+ received
_____________________________
Vaccination frontier update –> all states now near or above 60% combined penetration (vaccines + infections)
Below we sorted the states by the combined penetration (vaccinations + infections). As we commented in the past, the key figure is the combined value >60%, which is presumably near herd immunity. That is, the combined value of infections + vaccinations as % population > 60%.
– Currently, all states are at this level
– RI, SD, MA, ND, CT, NJ, DE, NY, IL and NM are now above 90% combined penetration (vaccines + infections)
– So gradually, the US is getting to that threshold of presumable herd immunity
All states have reached 60% combined vaccination + infection. Besides, 92.7% of US states (based on state population) have seen combined infection and vaccination >70% and 60.7% of US states have seen combined infection and vaccination >80%. As the chart below highlights, the US is seeing steady forward progress and this figure continues to rise steadily.
There were a total of 2,391,083 doses administered on Thursday. The 7D moving average has been trending downward since mid-April. It could be caused by the pause of JNJ vaccines or/and the vaccine hesitancy resulted from the JNJ vaccines. As both CDC and FDA lifted the recommended pause of JNJ vaccines, the vaccination pace could re-accelerate again in the near future.
95.5% of the US has seen 1-dose penetration >35%…
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 25%/30%/35% of its residents fully vaccinated, displayed as the orange line on the chart. Currently, 97.6% of US states have seen 25% of their residents fully vaccinated. However, when looking at the percentage of the US with at least 30% of its residents fully vaccinated, this figure is 72.3%. And only 25.3% of US (by state population) have seen 35% of its residents fully vaccinated.
– While 95.5% of US states have seen vaccine penetration >35%, 73.2% of them have seen 1 dose penetration >40% and 48.6% of them have seen 1 dose penetration > 45%.
– 97.6% of the US has at least 25% of its residents fully vaccinated, However, only 72.3% of US has fully vaccinated >30% and 25.3% of US has fully vaccinated >35%.
– This is still a small figure but this figure is rising sharply now.
This is the state by state data below, showing information for states with one dose and for those with two doses.
The ratio of vaccinations/ daily confirmed cases is generally trending higher (red line is 7D moving avg) and this is the most encouraging statistic.
– the 7D moving average is about ~40 for the past few days
– this means 40 vaccines dosed for every 1 confirmed case
This figure is rising nicely and likely surges in the coming weeks
In total, about 148 million Americans have received at least 1 dose of a vaccine. This is a good pace and as we noted previously, implies 50% of the population by mid-May.
POINT 3: Tracking “un-restricted” and “restriction-lifted” states
We are changing Point #3 to focus primarily on tracking the lifting of restrictions, as states begin to ease various mandates. Keep in mind, easing/lifting restrictions can take multiple forms:
– easing indoor capacity
– opening theaters, gyms, salons, saloons
– eliminating capacity restrictions
– eliminating mask mandates
So there is a spectrum of approaches. Our team is listing 3 tiers of states and these are shown below.
– states that eased in 2020: AK, OK, MO, FL, TN
– states that eased start 2021 to now: SD, ND, NB, ID, MT, IA, NC, MS, SC, AZ, TX, MD
– states that announced future easing dates: GA, NY, WI, AR, CA, AL, CT
GROUP 1: States that eased restrictions in 2020…
The daily case trends in these states is impressive and it is difficult to say that lifting restrictions has actually caused a new wave of cases. Rather, the case trends in these states look like other states.
GROUP 2: States that have eased all restrictions in 2021 to now…
Similar to the list of states above, the daily case trends in these states are impressive and it is difficult to say that lifting restrictions has actually caused a new wave of cases.
– we have previously written about how ND and SD, in particular, have seen an utter obliteration of COVID-19 cases in those states
– that seems to be a function of vaccine penetration + infection penetration, leading to something akin to “herd immunity”
GROUP 3: States that are still easing restrictions in 2021…
These states have upcoming dates to ease restrictions. The dates are indicated on each chart. The cases trends in these states have been mostly positive, with perhaps the exception of NY state:
– NY state case levels seem awfully stubborn at these high levels
– weather is improving in NY area, so if weather has any effect on virus transmission, it should slow cases
