Delta-plus is a non-issue in USA, so far... Energy + Bitcoin most logical YE strategies

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STRATEGY: Delta-plus is a non-issue in USA, so far… Energy + Bitcoin most logical YE strategies

While Delta-plus (AY.4.2) needs to be watched, not an issue for USA currently
Outbreak.info, a group dedicated to tracking key COVID-19 metrics, has added tracking data for Delta-plus variant (AY.4 in this dataset) which includes the UK variant (AY.4.2):

• AY.4 has been identified for >3 months now
• AY.4 is ~10% of cases in past two months
• AY.4 is rising but at the expense of B.1.617.2

Recall, B.1.617.2, is the “original” Delta variant (technically called “kappa” variant first detected in India) and was the dominant variant for the US for the past few months. Thus, Delta-plus seems to be eating share of Delta variant. This needs to be monitored and we will be revisiting this data from outbreak.info periodically.

This chart speaks of the trend. USA cases are falling in aggregate. As we noted yesterday, there are 9 states where cases are rising but that means in 41 states, cases are falling. The 7D average is now 65,769.

VACCINATION: Vaccination for kids 6-11 to begin soon
The FDA will meet today to review the Pfizer vaccine for children age 6-11. This is widely expected to be approved as Pfizer has already provided extensive data on the efficacy of the vaccine:

• many parents are eager to get their children vaccinated
• but at the same time, whether a vaccination is necessary for all children remains unknown
• those children with existing co-morbidities certainly should be candidates
• Moderna has also provided safety data that shows its children’s vaccine dose is effective
• Sweden paused Moderna mRNA vaccinations for younger males because of an increased risk of a rare side effect (myocarditis and pericarditis)

Bottom line, there are roughly 50 million Americans under age 12. Of which, roughly 25 million are in the age 6-11 range. Thus, this move towards vaccination of children does substantially increase the footprint of those covered by the existing vaccines currently. Notably, there is no timeline for J&J vaccine for children yet.

HYPERINFLATION: Is hyperinflation the “central case” for the public?
Over the weekend, Jack Dorsey, founder and CEO of Twitter (TWTR) and founder and CEO of Square (SQ), posted the following tweet. The message is self-evident. Dorsey believes hyperinflation is happening. There is not a lot of additional context. But here are my observations:

• Dorsey might have some situational awareness due to Square’s penetration with merchants
• So one cannot say this is pure conjecture
• hyperinflation seems to have become the “central case” for pundits
• exactly what is hyperinflation?
• if enough people believe this, will it actually happen?

I am not even sure I could quantitatively define “hyperinflation” — but it does seem like a growing share of our clients feel that inflationary pressures in the US are not transitory, but structural. Hence, there are a growing share of investors falling into the “inflation for longer” category.

…Visibility on underlying trends simply unclear because of glitches in the COVID-19 pandemic era
The contemporaneous inflationary pressures are evident. CPI is running hot. There are indeed shortages for products and labor and lead times for delivery are stretched. This is undeniable:

• but “hot” inflation now does not mean the trajectory of inflation is set higher
• supply chain “glitches” can cause inflation near-term, as buyers scramble to find inventory
• but this is not “inflation” that the Fed needs to worry about
• as we noted last week, the US labor market does not have a “supply” problem
• but it does have a “participation” problem
• does labor shortage due to “low participation rates” qualify as the type of inflation the Fed needs to worry about?

HYPERINFLATION: Is it even possible with capacity utilization only <75% and labor utilization only 59%
Conceptually, an economy will see “pricing pressures” aka “bad inflation” when utilization of resources is tight. And the continued use leads to rising prices and an eventual unhealthy expectation of rising prices. So here is some perspective:

• two type of asset utilization matter
• asset capacity, aka capacity utilization
• labor capacity, aka employed to population ratio

As shown below, current levels of capacity utilization of 75% and labor utilization of 59% are quite low:

• in 1970s, capacity utilization was >80% and as high as 90%
• hence, inflation of the 1970s
• labor utilization reached 65% in the late 90s
• hence, Fed tightened

Does it make sense for us to think inflation is a long-term problem right now? The data below argues against it.

In fact, most states are way off their pre-pandemic labor market size. The chart below shows that most states will take 12-20 months of jobs growth to get back to 2019 levels.

INVENTORY: US economy not really mid-cycle since inventories are still low
As many have seen first hand, there is indeed a shortage of inventory across the US economy. This would be evident for anyone doing any type of retail shopping –> cars, appliances, clothing, furniture, etc. And it is evident in the economic data compiled by the BEA:

• Retail inventories (real dollars, seasonally adjusted) is down sharply since pre-pandemic
• Retail inventories in absolute terms is back to 2016 levels
• The economy has grown 20% since 2016, so this is a huge shortfall in inventory
• Inventory as of 2Q2021 (latest available) has been de-stocking since the pandemic
• This is what is typically seen exiting a recession (see below)

Thus, for anyone saying the US economic is mid-cycle is sort of overlooking the inventory dynamic.

STRATEGY: S&P 500 breadth making new highs = affirming YE rally intact. Overweight Epicenter even with Inflation risk

The S&P 500 closed at a new high yesterday. That is a good thing. But more encouragingly, the advance/decline line reached a new high. This is a sign of expanding market breadth and affirming the YE rally is intact. In other words, we see S&P 500 rising to 4,800 before YE.

History has shown strong markets tend to stay strong. And the tweet below caught my eye by CMT @jonathanharrier. He notes that when:

• S&P 500 is up 7 days in a row
• AND S&P 500 up 3 weeks in a row

9 of 9 times, the S&P 500 is higher 3 months later. The average gain is 6%. This is true over the past 10 years and 20 years.

So again, YE rally intact.

SECTOR STRATEGY: Stick with Energy + Bitcoin

The relative performance of sectors in the past two months is shown below. There is an evident breakout:

• Energy and Oilfield Services XLE1.20%  OIH0.82%  clearly have broken out +30%
• Bitcoin as well +27%
• Rest of S&P 500 is fighting for smaller relative performance

…Energy + Bitcoin does show market is worrying about inflation surging
Does this make sense? Below is simplified checklist. And we look at 3 scenarios:

• Inflation surge
• Cyclical recovery (reflation)
• “peak growth” = bad

The two best performing sectors under inflation surge should be Energy (oil) and Bitcoin (hedge). This seems to be what the market is discounting at the moment. That is not our central case, however. But this seems to be what the market is discounting.

• into YE, our favorites
• Energy
• Epicenter XLI-0.18%  XLF1.38%  XLB-0.08%  RCD
• Crypto BITO1.04%  GBTC1.04%  BITW1.27%

30 Granny Shot Ideas:
AAP1.93% , AAPL-1.22% , AMZN-2.56% , ATVI, AVGO-4.31% , AXP6.23% , AZO0.42% , BF/B, CSCO0.44% , EOG1.07% , GOOG-1.30% , GRMN-0.85% , KLAC-2.67% , MPC0.70% , MSFT-1.48% , NVDA-9.55% , PHM-0.50% , PM2.82% , PSX0.91% , PYPL0.24% , QCOM-2.68% , QRVO-2.74% , ROST1.17% , TGT, TSLA-1.92% , TXN, ULTA, USB, WRB, XLNX

POINT 1: Daily COVID-19 cases 102,220, down -25,566 vs 7D ago…

Current Trends — COVID-19 cases:

• Daily cases 102,220 vs 127,786 7D ago, down -25,566
• Daily cases ex-FL&NE 125,797 vs 77,854 7D ago, down -23,577
• 7D positivity rate 5.2% vs 5.0% 7D ago
• Hospitalized patients 47,499, down -10.2% vs 7D ago
• Daily deaths 1,383, up +6.6% 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 102,220, down -25,566 vs 7D ago. As evident by the once again consistently negative 7D deltas, Columbus Day distortion appears to be largely cleared out. And, as seen below, cases are currently rolling over.

Rolling 7D delta in daily cases remains negative…
The rolling 7D delta remains negative as the Columbus Day distortion is largely cleared out.

Low vaccinated states seem to have a larger increase in daily cases compared to their recent low…
*** We’ve updated the “Parabolic Case Surge Tracker” to measure case % off recent peak as the more recent “delta surge” is rolling over.

In the table, we’ve included both the vaccine penetration, case peak information, and the current case trend for 50 US states + DC. The table is sorted by case % off of their recent peak.

• The states with higher ranks are the states that have seen a more significant decline 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

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 slows, but room for pickup as boosters become more widely available…

Current Trends — Vaccinations:

• avg 0.8 million this past week vs 0.8 million last week
• overall, 57.0% fully vaccinated, 65.9% 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, SD, KY, and UT 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 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 651,748 doses administered reported on Monday, up 25% vs. 7D ago. While we are seeing the vaccination pace slow down, we believe it may soon pick back 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.

73.9% 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 97.3%. And only 81.9% 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 98.9% of US states have seen 1 dose penetration >50%, 90.6% of them have seen 1 dose penetration >55% and 73.9% 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, 408 million vaccine doses have been administered across the country. Specifically, 219 million Americans (66% of US population) have received at least 1 dose of the vaccine. And 189 million Americans (58% 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.