First Word

Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)

Click HERE to access the FSInsight COVID-19 Daily Chartbook.

We publish on a 4-day a week schedule:

Monday
Tuesday
Wednesday
SKIP THURSDAY
Friday

STRATEGY: VIX down -20% + VIX term structure steepening = risk-on probability soar

COVID-19 cases will be distorted for the next two weeks due to Thanksgiving
Underlying COVID-19 trends often get distorted due to holidays, something we have written about in the past. Our data science team is showing the following for Thanksgiving’s 2020 impact:

– cases in 2021 are far lower than this time in 2020
– cases were 150,000 in 2020, compared to 70,000 in 2021

– in 2020, post-Thanksgiving, cases fell but this is partially due to closure of testing centers and delays
– but then in the following two weeks, cases soared

Bottom line, expect US COVID-19 cases to surge in the next 10 days, But this is not necessarily due to a rise in trend, but a true-up of cases.

Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)

Pent-up demand: TSA travel throughput back nearly to 2019 levels…
As we stated in yesterday’s First Word, we think the decision to close borders for travel is nearly a ludicrous policy decision — and hardly reflecting policymaker realization that COVID-19 is becoming endemic.

– And as South Africa has noted, by penalizing nations for flagging variants
– it is a disincentive to share variant discoveries

But the good news is the TSA travel throughput data shows US consumers continue to travel with “revenge spend” mindset. Over the weekend, throughput is nearly back to 2019 levels

– see below

Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)

Our data science team is comparing throughput on a “seasonal” basis by lining up the dates for each of the past 3 years:

– 2019
– 2020
– 2021

And as you can see, the 2021 levels are nearly back to matching the seasonality of 2019. In other words, the world is moving back towards normalization faster than markets may be appreciating.

– and this is impressive considering many Americans remain “COVID cautious”
– and business travel has not recovered

Could these figures really surprise to the upside in 2022?

Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)

STRATEGY: Fall in VIX + steepening of VIX term structure = risk-on probabilities soar (buy this dip)
Given the ferocity of the sell-off on Friday, we thought the VIX would be a good indicator to watch and specifically:

– VIX needs to fall given its +45% surge on Friday = falling VIX = risk-on
– VIX term structure needs to steepen = sign of normalization

The intraday chart of the VIX and the VIX term structure below. And in my opinion, and my opinion only, the behavior of the VIX yesterday was quite constructive:

– VIX fell early in the day yesterday and closed in the lows
– VIX is down 20%

– VIX term structure steepened sharply = risk-on
– VIX term structure did not invert Friday = positive divergence vs market crash

So, in our view, the odds that Monday morning futures low is the “low” have increased sharply. Our base remains that equities will rally strongly into YE.

Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)

…Omicron is pushing Fed lift-off window out towards end of 2022 = good
We have also been watching the battle between the bond market and the Fed. The bond market has seen “lift-off” far sooner than the Fed has communicated. But with the uncertainty around the global economic ripples from the Omicron variant, this naturally should cause the bond market to push out Fed “lift-off” expectations:

– indeed, this happened
– the July odds for a rate hike have collapsed

– prior to Omicron, the odds of a July hike were 40%
– but with Omicron news, odds dropped to 25%

A delay in Lift-off from the Fed, in our view, is a positive development. Because we expect markets to be somewhat tumultuous around lift-off. Hence, pushing this window out is positive.

Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)

…Inflation breakevens are also falling sharply = risk-on
Moreover, inflation breakevens have fallen sharply. Inflation breakevens, 5-year, are not necessarily a prediction of future inflation:

– inflation breakevens reflect 3 pieces of market information
– term structure of inflation
– future expectation inflation
– “risk premia” of inflation

Thus, looking at the absolute level of inflation breakevens is not a measure of the future level of expected inflation. But the rise and fall of this figure, shows a market change in expectations.

– falling inflation breakevens means the market is less worried about an intensification of inflation
– less worry = less worry about Fed lift-off
– hence, falling = risk-on

Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)

SECTORS: Leadership still Cyclicals/Early-cycle aka Epicenter
Relative sector performance is shown below and as we can see, 5 sectors are showing positive relative trend:- Energy
– Basic Materials
– Technology
– Transports
– Discretionary

– sort of Financials/Banks

These are all cyclical groups. And also have general positive exposure to reflationary trends. Inflation, incidentally, in isolation is not a bad word. The real risk to markets is:

– too much inflation hurting consumer confidence
– or unanchored inflation expectations, fear of uncontained inflation

This is not necessarily what markets seem to be pricing. If markets were worried about either of the above, Defensive stocks or Growth stocks would be leading. Instead, we are seeing Cyclicals lead.

Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)

Into YE, our recommended strategies are:

– Energy
– Homebuilders (Golden 6 months):  XHB
– Small-caps:  IWM 0.42%
– Epicenter:  XLI -0.05%   XLF 0.48%   XLB 0.39%   RCD
– Crypto equities:  BITO 3.69%   GBTC 3.55%   BITW -5.09%

Into 2022…
– Industrials

Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)

30 Granny Shot Ideas: We performed our quarterly rebalance on 10/25. Full stock list here –> Click here


POINT 1: Daily COVID-19 cases 220,782, up +51,529 vs 7D ago…

Current Trends — COVID-19 cases:

  • Daily cases 220,782 vs 169,253 7D ago, up +51,529
  • Daily cases ex-FL&NE 215,993 vs 167,597 7D ago, up +48,396
  • 7D positivity rate 10.2% vs 7.0% 7D ago
  • Hospitalized patients 48,887, up +4.3% vs 7D ago
  • Daily deaths 856, down -23.0% 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 220,782, up +51,529 vs 7D ago. The data is currently distorted from underreporting due to Thanksgiving. The distortion will likely remain for the next week or two.

Nonetheless, Wave 4 is clearly underway; this is not surprising, and is our base case. We expect this surge to peak below the wave 3 peak of 300,000 cases per day. Case roll over will likely resume in the near future as booster vaccine rates are increasing.

Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)
Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)

Rolling 7D delta to distorted due to Thanksgiving…
The rolling 7D delta is currently distorted due to Thanksgiving. We’ll continue to monitor the data closely.

Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)


33 states are seeing a rise in cases while cases continue to decline in the remaining states…
*** We’ve split the “Parabolic Case Tracker” into 2 tables: one where cases are falling, 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
Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)
Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)

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

Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)
Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)
Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)
Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)

POINT 2: VACCINE: vaccination pace accelerates as boosters become more widely available…

***The CDC hasn’t reported vaccination data since Wednesday, 11/24. As such the data remains the same, and will likely be distorted when they resume collecting data.

Current Trends — Vaccinations:

  • avg 1.4 million this past week vs 1.5 million last week
  • overall, 58.6% fully vaccinated, 69.1% 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 90% combined penetration
– Given the new multiplier. only RI, FL, MA, CT, NM, NY, NJ, IL, CA, PA, DE, SD, KY, UT, OK, ND, NH, AZ, SC, TN, AK, NC, CO, KS, MN, VA, DC, NE, and NV 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

Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)

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).

Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)

There were a total of 1,735,117 doses administered reported on Wednesday, up 23% vs. 7D ago. As per the note above, we believe the low number of vaccines administered is due to Thanksgiving coming up. This distortion aside, we’ve been seeing the vaccination pace accelerate 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.

Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)

77.9% 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 99.5%. And only 88.5% 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 100% of US states have seen 1 dose penetration > 50%, 97.8% of them have seen 1 dose penetration > 55% and 77.9% of them have seen 1 dose penetration > 60%.

Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)

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

Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)

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 ~19 for the past few days
– this means 19 vaccines dosed for every 1 confirmed case

Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)

In total, 424 million vaccine doses have been administered across the country. Specifically, 229 million Americans (70% of US population) have received at least 1 dose of the vaccine. And 195 million Americans (59% of US population) are fully vaccinated.

Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)

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.

Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)
Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)
Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)
Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)
Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)
Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)

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.

Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)
Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)
Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)
Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)
Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)
Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)

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.

Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)
Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)
Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)
Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)
Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)
Fed lift-off getting pushed off + 20% drop in VIX = risk-on probabilities soar (buy this dip)

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