Half of COVID-19 hospitalizations are likely asymptomatic = wut? Oil creeping to new highs is strong signal for Epicenter stocks

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STRATEGY: Oil creeping to new highs is a strong signal for Epicenter stocks

Positivity rate is down to 7.7% and falling, the surest sign yet that COVID-19 is retreating in USA
In perhaps another confirming sign, the positivity rate for COVID-19 tests is now down to 7.7%. As this time series below makes clear, a decline in positivity rate, assuming adequate testing, suggests that the incidence of detected cases is down. In other words, the Delta variant surge is retreating.

– for now, this is a good sign
– COVID-19 is unpredictable and thus, we could see a winter resurgence
– but this is not uncertain and the decline in positivity rate, in my view, is a good thing

Half of all hospitalized US COVID-19 patients likely have mild or no symptoms
A few weeks ago, Matt F, one of our long-time clients in Boston (thank you!) forwarded me the story from the Atlantic, with a really provocative and eye-catching headline and byline:

– “a new study suggests that almost half of those hospitalized with COVID-19 have mild or asymptomatic cases”

– study based on ~40,000 patient records across the 100 VA (Veterans Administration) hospitals
– Since January 2021, about 48% of hospitalized patients had mild or no symptoms

Obviously, this is a surprising conclusion. In fact, the Atlantic itself had written that prior to this study, it viewed hospitalizations as the “most reliable” pandemic metric. There are just too many questions that come to mind:

– it was 36% in 2020, so this figure is rising sharply
– what is behind this shockingly high share?
– is this a sign vaccines are working?
– or is this a sign that hospitalization resources are used excessively?

The actual study and the link are below. There were 28,731 lab-confirmed positives (not clear if PCR). This is a study of the VA hospitals, so there could be a different cohort and results across the rest of the US.

– severe cases are defined as:
– patients required supplement oxygen
– or had oxygen level (saturation) <94%
– they also looked at those share of patients requiring anti-inflammatories

…Falling symptomatic cases and 40% of unvaxxed need anti-inflammatories vs <20% for vaxxed
One chart that caught my eye is shown below. There are several interesting takeaways:

– the % with severe symptoms (need oxygen or low oxygen) has been falling

– for those needing anti-inflammatories, unvaxxed is 40%
– for vaxxed, <20% need anti-inflammatories

So, there seems to be a case that vaccinations are mitigating symptoms, even for those hospitalized. But the broader question to me is why are asymptomatic people hospitalized?

– Are some of these COVID-19 cases incidental?
– Is this coming via the ER, so those testing positive are diverted?
– ICU usage is up, so there are clearly severe cases out there

STRATEGY: Oil creeping to new highs is a strong signal for Epicenter stocks
During the market turmoil of the past few weeks, it was increasingly clear to us that a progressively larger share of investors are becoming defensively tilted. That is, the combination of headwinds had shifted consensus away from a pro-cyclical tilt, aka Epicenter, towards Defensive/Growth. It was obviously a laundry list of issues.

– Delta wave
– China increasingly hostile actions
– Fed tapering
– Evergrande debt default
– US debt ceiling
– US govt shutdown prospects
– Afghanistan
– US border crisis
– Peak everything
– Supply chain issues worsening
– “inflation everywhere”
– Demand risk given Nike results
– Technicals weaken as S&P 500 fell below 50D

So, I can’t blame anyone for deciding that this wall is too tall of a mountain to overcome — after all, stocks usually climb a wall of worry, but sometimes it is not a wall, it is a “dead end” — think 2008. But as we noted multiple times last week, we did not see Evergrande as the trigger for a Lehman-like debt event.

Our base case remains Overweight Epicenter into YE –> Energy remains top sector pick, its been a painful but still a positive thesis
But our base case remains that stocks will finish 2021 strong — strong markets stay strong and given the 1H gains > 13%, we see 2H2021 gaining 9% or 23%-25% total return. That would make for an exceptionally strong year.

As for our sector tilt, we believe Epicenter stocks have the most upside. It is these groups that have the capacity for positive surprise:

– demand recovery surprise = epicenter good
– little “price competition” = topline surprise epicenter
– cost discipline by Epicenter = margin surprise
– unkillability factor = epicenter cyclicals faced a 4-sigma extinction event and survived

– buy underowned = epicenter
– buy non-consensus = epicenter
– buy US economy beta = epicenter

Sticking with these stocks has been painful since late-June. They absolutely tanked as Delta-variant driven surge in COVID-19 cases caused a dramatic downshift in consumer confidence.

– one only has to look at this chart by JPMorgan Economics
– US consumer confidence saw one of the largest declines
– even as the UK and other nations had far worse Delta-variant surges

Interest rates are signaling a stronger reflationary environment
Given the COVID-19 fueled Depression wrought upon the world, our general inclination is to view rising interest rates as a good harbinger. At a minimum, a sign of things moving back towards normalcy. And interest rates are making solid progress as evidenced below. After falling to around 1.13% in mid-July, rates have now steadily crept higher.

– a decisive rise in interest rates signals a potentially larger regime change
– the key levels were 1.4%
– and now the next key level, in our view, is 1.8%

If interest rates are rising, this is a tailwind for Value stocks. And its a tailwind for Epicenter.

…Oil creeping to new highs = confirmation signal
Further confirming this upward move is oil (WTI spot). As shown, Oil has nearly regained its 2021 highs. And as several brokers have pointed out, oil could see $80, even $100 before year-end. Recall, our positive thesis on oil is a function of several factors:

– structural shortage as capital availability has declined (unlike 2016 when private equity bailed out the sector) = less supply
– US govt and White House is hostile to expanded exploration = less supply
– strong economic recovery = demand surprise

So there is a trifecta of tailwinds for oil.

…What is good for oil is good for Energy equities
The above factors listed are also positive for Energy stocks. And yet, Energy stocks have dramatically lagged the recovery in oil prices:

– Oil is now +14% above 12/31/2019 levels (pre-pandemic)
– Energy stocks (XLE0.07%  ETF) is 12% below
– Oilfield Services (OIH-0.55%  ETF) is 24% below

– Energy equities are trailing oil by 2,600bp
– Oilfield Services equities are trailing oil by 3,800bp

These are sizable performance gaps. And this would be justified if Energy equities are worse businesses.

…Energy FCF margin is already 218bp higher than pre-pandemic… wut?
Take a look at the free cash flow margins for the S&P 500 Energy sector. These are trailing 12 months, or TTM:

– we used WTI futures, 4m forward instead of spot prices
– WTI CL4 was last $74 in late 2018

– Energy FCF margins were 5.46% in 2018
– Energy FCF margins currently 7.64%

– FCF margins are +218bp higher
– This is a far higher level of FCF generation despite a similar level of oil prices

Energy equities can lead into YE
The conclusion? We think there is a strong fundamental case for long Energy equities. Thus, we continue to view this as our favorite sector into YE:

– XLE0.07%  has moved solidly above the 50D, 100D and 200D
– thus, XLE looks to have regained a strong trend

– Consensus is shifting from negative on Energy to positive
– this is literally like the first day we have seen consensus shift

Thus, we see plenty of upside

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26 Granny Shot Ideas:
26 Granny Shot Ideas: We performed our quarterly rebalance on 07/30. Full stock list here –> Click here
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POINT 1: Daily COVID-19 cases 193,946, down -5,443 vs 7D ago…
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Current Trends — COVID-19 cases:
– Daily cases 193,946 vs 199,389 7D ago, down -5,443
– Daily cases ex-FL&NE 193,946 vs 192,431 7D ago, up 1,515
– 7D positivity rate 6.3% vs 7.1% 7D ago
– Hospitalized patients 74,179, down -11.6% vs 7D ago
– Daily deaths 1,872, down -16.0% vs 7D ago
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*** 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 193,946, down -5,443. The overall 7D delta trend appears to be accelerating to the downside as we see case roll 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 is negative…
As shown in the chart below, the rolling 7D delta in daily cases remains negative and is accelerating to the downside. 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

Hospitalization continues rising, while positivity rate has plateaued… Daily deaths also start to surge now…
Below we show the aggregate number of patients hospitalized due to COVID, daily mortality associated with COVID, and the daily positivity rate for COVID.

– Hospitalization has exceeded the peak level we’ve seen in Wave 1 and 2 in 2020 and continues surging.
– With the increasing number of daily tests, positivity rate has plateaued over the past week. As daily cases have already start to roll over in some states, the positivity rate could roll over soon.
– Daily deaths have been surging recently, but less “dramatic” than the cases or hospitalization trends. Currently, daily death has surpassed the peak we have seen in Wave 2.

POINT 2: VACCINE: vaccination pace has been steadily rising…
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Current Trends — Vaccinations:
– avg 0.6 million this past week vs 0.8 million last week
– overall, 55.0% fully vaccinated, 63.8% 1-dose+ received
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Vaccination frontier update –> all states now near or above 95% combined penetration (vaccines + infections)
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
– RI, MA, FL, CT, SD, NJ, IL, NY, DE, NM, UT, PA, ND, NV, KY, ND, CO, KS, TN, OK, WI, SC, AZ, MN, CA, NE, LA, DC, MT, AK, MD, ID, VI, AR, AL, MS, and NC 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. 90.5% 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 543,856 doses administered reported on Monday, down 16% vs. 7D ago. As a larger percentage of the population is now vaccinated, the vaccination trend is beginning to decrease. With booster shots becoming more widely available, we believe that the vaccination pace could once again pick up. 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.

57.1% 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 89.5%. And only 78.4% 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 97.8% of US states have seen 1 dose penetration > 50%, 81.7% of them have seen 1 dose penetration > 55% and 57.1% 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 ~5 for the past few days
– this means 5 vaccines dosed for every 1 confirmed case

In total, 394 million vaccine doses have been administered across the country. Specifically, 212 million Americans (64% of US population) have received at least 1 dose of the vaccine. And 182 million Americans (55% 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.