Sept incoming economic data likely 'soft' --> dovish Fed --> good for markets

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STRATEGY: Sept economic data likely ‘soft’ –> dovish Fed –> good for markets

We hosted a webinar with Anthony Scaramucci, founder of Skybridge Capital, Tuesday and it was really well attended with > 900 participants. Scaramucci’s Skybridge is the world’s largest fund of funds, and as a result, the firm has a lot of intelligence into both where capital is flowing ($8 billion) and how asset managers are investing. To me, there were three key takeaways among the many great insights:

– High net worth individuals are making a pronounced shift away from credit. Skybridge was > 88% allocated to structured credit pre-pandemic and is now flipped towards growth-oriented assets, including equities, multi-strategy, and crypto. This is a tailwind for stocks

– Second generation wealth tends to focus on “capital preservation,” and this is costly. Financial capital should be focused on wealth creation and many pools of capital today instead focus on capital stability

– On market psychology, he said March 2020 turned many ‘long-term’ investors into ‘short-term’ sellers. His humorous adage is “everyone says they are a long-term investor until they start losing money.” Skybridge took advantage of the drawdowns in 2020 and “ran into the bullets” generating big returns.

The reason I bring up the latter point is that I see this increasingly today. It seems like institutional investors have become ‘drawdown’ sensitive and this could lead to investors missing the bigger fractal. The bigger fractal today is we are in year 1, exiting a Greater than Great Depression.

The replay link is here —> click here

Central to our positive stance on equities is the view that US economic strength and resilience are stronger than consensus expectations. And in fact, we have remained relatively constructive on the view of pent-up demand, even as the Delta variant triggered a collapse in consumer confidence. Basically, we view these shocks as transitory rather than structural, and hence, markets will ultimately see through these headwinds –> a “glass half-full” view.

In September, we believe incoming economic data might soften. The incremental factor is the expiration of the eviction and mortgage moratoriums. These expired on August 26th and were part of the original rescue plan passed by Congress last year. But this is not bad for markets. This is likely to tilt the Fed towards remaining dovish as the cadence of data likely shows greater softness, and hence, less of an argument for the Fed to taper.

As the Bloomberg article highlights below, there are a significant number of Americans that benefitted from this mortarium:

– > 2 million renters per Fed Reserve Bank of Philadelphia
– about 11% of tenants took advantage
– $15 billion is the “back rent” owed
– 750,000 evictions expected before YE

In other words, this will be a large unknown ripple impact across the economy. There are two sides to this, however, as landowners will soon get relief/payments. So, this not entirely a one-way shock.

As shown below, since the start of the moratorium, even the number of foreclosures in the US collapsed. Prior to the pandemic, about 40k-50k loans fell into foreclosure per month.

– during the pandemic, this fell to 10k-ish
– this is an 80% drop in foreclosures

This should resume in force starting in September.

The law firm, Perkins Coie, has a 50-state tracker describing the status of both tenant and mortgage moratoriums. There is a lot of good data there and the link is provided below.

There are going to be state level efforts to fight this. For instance, in NY, the state legislature is attempting to extend the eviction mortarium (renters). This has already been ruled against by the US Supreme Court. And now NY landlords are threatening to sue the state.

– landlords have suffered under this moratorium
– multiple media stories highlighted property owners who were forced to live in cars because they had lost their incomes

And even in CA, there are predictions of a surge in homelessness. The article below highlights that the L.A. Sheriff predicts a new homeless surge, and the number of homeless could nearly double to 150,000 from 80,000 currently. So this ultimately becomes a social tragedy, while also an economic shift. Landlords will see some relief, which is incrementally positive. But this could lead to further devastation for those suffering hardship.

STRATEGY: Markets likely “climb a wall of worry” and benefit from softer economic data, due to a dovish Fed
Pre-pandemic, and pre-ZIRP, zero rates, the adage on the street was “bad news is good news” when it came to the economy because softer readings led to a dovish Fed. Similarly, strong economic data raises the risk of a hawkish Fed.

This is probably the right way to look at September economic data. After all, the setup surely seems this way. Many investors are arguing the Fed needs to “normalize” its balance sheet because the emergency is over. But a tapering, in our view, will cause substantial short-term market turbulence. That is simply our view and we don’t know the future. But as such, delaying the tapering would benefit financial markets, under our view.

This is a huge data week. Take a look below:

– ISM manufacturing (Wed)
– August payrolls (Friday)
– ISM services (Friday)

So, it’s a biggie and also the last week of the Summer (usually a light volume week). So there is expected to be a sharper market reaction. The economic data Tuesday was soft.

– Conf Board Consumer Confidence missed at 113.8 vs 123 expected
– Chicago PMI was 66.8 vs 68.0

This only reinforces what we have seen recently. The surge in the Delta variant is causing a loss in consumer expectations. But as we highlighted last week, this is paradoxically a bullish signal for consumer and cyclical stocks.

Overall, we think the biggest takeaway is that we expect economic data to soften, but this will be viewed positively as it tilts the Fed dovish. And hence, pushing off the taper is good for financial markets. Moreover, we believe seasonals favor September, particularly when we consider that 1H2021 was up > 13%.

– If 1H gains > 13%, Sept is strong, countering normal seasonals
– median Sept gains are +1.4%
– win-ratio is 67%
– 1H2021 was up > 13%, the 10th best since 1928

So Sept returns are likely to be stronger than consensus. Thus, we believe the “everything rally” is intact and we expect markets to see strong gains over the next 4 weeks.

Our top 3 favorite sectors into YE are:

– Energy XLE0.07%  OIH-0.55%  –> catch-up to oil
– FAANG FNGS0.68%  –> catch-up trade to S&P 500 +25%
– Basic Materials XLB0.07%  –> reflation beneficiaries

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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 138,724, up 1,735 vs 7D ago…
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Current Trends — COVID-19 cases:
– Daily cases 138,724 vs 136,989 7D ago, up 1,735
– Daily cases ex-FL&NE 119,530 vs 115,139 7D ago, up 4,391
– 7D positivity rate 8.6% vs 9.0% 7D ago
– Hospitalized patients 96.738 , up +2.5% vs 7D ago
– Daily deaths 1,264, up +13.1% 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 138,724, up 1,735 vs. 7D ago. Despite Monday’s noticeably positive 7D delta, the 7D delta became flat again on Tuesday. A negative 7D delta indicates a case rollover, so hopefully Tuesday’s 7D delta flattening remains steady and proves Monday’s uptick was an anomaly. If it does, the rolling 7D delta will soon become negative as well which would further emphasize a case rollover.

Currently, we are at the critical stage of case rollover for many states. As noted recently, many states have already peaked while the daily cases in some other states are about to peak. Emphasized by Tuesday’s data, the view on case trends is still in favor of a case roll over. Hopefully the current trend remains steady and we continue to see daily cases fall in “apexing” states. Anyhow, as long as the 7D delta continues to fall, the case rollover is just a matter of time.

7D delta in daily cases fell to ~10,000 now…
As shown in the chart below, the 7D delta in daily cases has been on a downtrend – down 60% from the peak of ~26,000 three weeks ago to a current level of ~10,000. Despite Monday’s uptick in 7D delta, we expect the decline to persist. If the current trend remains steady and the 7D once again turns negative, the rolling 7D delta will soon become negative as well which would further emphasize a case rollover.

Low vaccinated states seem to have a larger increase in daily cases compared to their recent low…
Below, we added a new section called “Parabolic Case Surge Tracker” to monitor 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 0.9 million this past week vs 0.8 million last week
– overall, 52.1% fully vaccinated, 61.2% 1-dose+ received
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Vaccination frontier update –> all states now near or above 90% 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 80% combined penetration
– RI, MA, FL, CT, SD, NJ, IL, NY, DE, NM, UT, PA, ND, NV, CO, KS, TN, OK, WI, SC, AZ, MN, CA, and NE 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 80% combined vaccination + infection. 98.2% of US states (based on state population) have seen combined infection & vaccination > 90% and 71.4% of US states 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 646,333 doses administered reported on Monday, up 1% vs. 7D ago. The overall vaccination trend has been steadily increasing recently. We believe many catalysts could push the vaccination pace even higher.

– 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)

The daily number of vaccines administered remains the most important metric to track this progress and we will be closely watching the relevant data.

53.1% 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, 96.3% 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 85.8%. And only 59.4% 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 92.7% of US states have seen 1 dose penetration > 50%, 77.8% of them have seen 1 dose penetration > 55% and 53.1% 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 6 vaccines dosed for every 1 confirmed case

In total, 376 million vaccine doses have been administered across the country. Specifically, 203 million Americans (63% of US population) have received at least 1 dose of the vaccine. And 173 million Americans (53% 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 new 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.