VIX -28% in 2 days --> rally signal. Curiously, inflation risk premia now negative -1.35% vs +1.25% in March, showing market believes inflation transitory = another signal against Financials
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We are shifting to a 4-day a week publication schedule:
- Monday
- Tuesday
- Wednesday
- SKIP THURSDAY
- Friday
STRATEGY: Curiously, inflation risk premia now negative -1.35% vs +1.25% in March
UK cases still creeping upwards, due to the Delta variant…
Daily COVID-19 cases are creeping steadily upwards in the UK. We first wrote about this two weeks ago and since then, the reported daily cases have been slowly and steadily rising.
– This is not a parabolic surge ala prior waves
– The “delta” variant of COVID-19 is responsible for this rise
– Hospitalizations are also creeping upwards, so there are severe healthcare impacts as well
The UK tests a far greater number of samples and as shown below, the surge of the Delta variant (B.1.671.2) is a staggering share of cases in the 7 day period measured:
– Delta variant is +33,630 new cases
– next closest is the “alpha” variant which was originally seen in Kent, UK in Sept 2020
Source: https://www.gov.uk/government/publications/covid-19-variants-genomically-confirmed-case-numbers/variants-distribution-of-case-data-18-june-2021
…Dr. Fauci calls the “delta variant” the greatest threat to eliminating COVID-19Dr. Fauci, White House Chief Medical advisor, even called the delta variant the “greatest threat to the nation’s attempt to eliminate COVID-19” — so the delta variant is something that we need to monitor. The reason is the delta variant’s high transmissibility.
– fortunately, the current US vaccines seem to be effective against this strain
– hence, the risk of the delta variant is for the “unvaccinated” Americans
Source: https://www.cnbc.com/2021/06/22/fauci-declares-delta-variant-greatest-threat-to-the-nations-efforts-to-eliminate-covid.html
…mRNA vaccine penetration seem to be associated with reduction of COVID-19 cases
Tireless Ken, our Head of Data Science Research, pulled together vaccine penetration data. Specifically, he looked at the percentage of a nation’s population that received mRNA vaccines –> either Pfizer or Moderna.
– below is a look at 25 countries which report vaccine administered by type
– countries with higher mRNA penetration as percent of population…
– have lowest daily cases figures (per 1mm residents)
In other words, mRNA vaccines seem to be particularly effective. Encouragingly, the mRNA vaccines are effective against the delta variant as well.
…given there are >12,700 COVID-19 mutations already, could multiple future mutations pose a danger?There are already >12,700 COVID-19 mutations identified via genetic sequencing. And scientists recently switched to using Greek letters to refer to variants, to limit xenophobia and other bias. But the “labeled” mutations are a mere fraction of the 12,700+ mutations.
– as shown below, only 4 are given a label to warrant a concern
– and another 7 seem to be ones to be watchful and wary of
STRATEGY: 28% decline in VIX in past two days = rally signal
The VIX has fallen 28% in the past two trading days to 16.66 and as the chart below shows, is nearing new 1-year lows:
– VIX has not mustered any upside
– Despite the dramatic moves in rates markets last week, VIX barely moved above 20
– VIX is threatening to make new lows
So the VIX is telling us that equity investors are getting used to this “inflation transitory” fears.
And more importantly, whenever the VIX backs off a local high, a rally in the S&P 500 typically ensues. See below.
– 4 of the 4 most recent local VIX peaks
– were the start of a major S&P 500 rally of 5%-plus
Thus, this gives us comfort that the S&P 500 can still reach 4,400 before the end of the month. Perhaps we will give it some extra time, ala, first 5-10 days of July. But we see a rally to 4,400 coming.
…curiously, Inflation risk premia falls to pandemic lows
We still believe in reflation and this means we think CPI is going to be running 2-3%. But the market seems to think inflation risk above this, or “risk premia,” has vastly diminished.
Inflation risk premia is a simple calculation –> Fed 5-year inflation breakevens less core CPI –> inflation risk premia:
– inflation risk premia is now -1.373%
– inflation risk premia was 1.25% in March 2021
– this means financial markets now agree with the Fed
– current CPI readings are not indicative of future inflation trends
– hence, future inflation (5-yr breakevens) are now below core CPI
STRATEGY:…negative inflation risk premia is a rotation signal into Healthcare away from Financials
Below is the inflation risk premia measure (from above) and the relative performance of banks vs healthcare, or asset-heavy vs asset light.
– since 2009, there is a pronounced relationship
– falling inflation risk premia –> Healthcare beats Financials
– hence, the crash in inflation risk premia favors Healthcare (Growth proxy) over Financials
This is another reason we are recommending FAANG, even as our favorite structural trade is overweight Epicenter stocks. But with financial markets now seeing downside risk to inflation, this favors FAANG. And less of a tailwind for Financials.
BOTTOM LINE: While a stretch, we still see S&P 500 4,400 before month-end
It certainly seems to be a tall order for the S&P 500 to rally to 4,400 before month-end, but if precedent instances are the framework for Tuesday, a sharp rally is underway. We think leadership from this rally is both Epicenter and FAANG:
– Energy remains our favorite sector, given the positive supply/demand dynamics in oil
– FAANG benefits from the “undershoot” of interest rates, relative to consensus
– this combination is what we see leading to S&P 500 4,400
– we also like Epicenter stocks broadly, and the incoming data this week should be supportive
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 8,780, down -1,014 (ex-FL) vs 7D ago… The speed of case decline has slowed, but daily cases remain in a downtrend…
_____________________________
Current Trends — COVID-19 cases:
– Daily cases 8,780 vs 11,513 7D ago, down -2,733
– Daily cases ex-FL 8,780 vs 9,794 7D ago, down -1,014
– 7D positivity rate 1.9% vs 1.9% 7D ago
– Hospitalized patients 13,739 down -9.6% vs 7D ago
– Daily deaths 281, down 15% vs 7D ago
_____________________________
– As we noted previously, Florida stopped publishing daily COVID stats update on 6/4 and we switched to use CDC surveillance data as the substitute. However, as CDC surveillance data is subject to a one to two-day lag, we added a “US ex-FL” in our daily cases and 7D delta sections in order to demonstrate a more comparable COVID development.
– The latest COVID-19 daily cases came in at 8,780 new cases, down -1,014 (ex-FL) vs 7D ago. If taking WA into account (the data for WA was not available as of Tuesday 7PM ET), the 7D delta in daily cases is likely to reduce to -500 to -600. As the chart below shows, the 7D delta in daily cases (the speed of decline) has indeed slowed down. Did the reopening cause the downward momentum in cases to pause? Or perhaps it was the Delta variant? Maybe it was an aberration and cases are about to accelerate back to the downside? We simply don’t know the answer. But, the good news is case trend remains in a downtrend and the case data will be worth watching in the next few days.
7D delta in daily cases has been < -1,000 in last three days…
The 7D delta has reduced to less than -1,000 over the past three days. The decline in daily cases indeed has slowed down as the chart below shows. The good news is that we have not seen a sudden surge in case figure, but the slow down in the case decline is still worrisome. Therefore, the case data in the next few days are worth watching as it will give us a more clear view on the case trend.
Current hospitalization, daily deaths and positivity rate are at all time low…
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 rolls over again. Positivity rate is also following the similar pattern. Currently, all three metrics – current hospitalization, daily deaths and positivity rate – are at their all time lows since the start of the pandemic.
POINT 2: VACCINE: Vaccination pace has slowed down over the past few days… but likely due to the under-reported data…
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Current Trends — Vaccinations:
– avg 1.0 million this past week vs 1.1 million last week
– overall, 45.0% fully vaccinated, 53.1% 1-dose+ received
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Vaccination frontier update –> all states now near or above 70% 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. We have overlaid our case progress with that of Israel several times to demonstrate what should happen to cases once immunity reaches a certain critical level in the population. That is, the combined value of infections + vaccinations as % population > 60%. The persistent and rapid decline in cases suggest that the US is following a similar path to Israel (see our prior notes) while nations with less penetration continue to struggle more.
– Currently, all states are near or above 70% combined penetration
– RI, SD, MA, ND, CT, NJ, DE, NY, IL, UT, MN, NM, NE, AZ, PA are now above 90% combined penetration (vaccines + infections)
– So gradually, the US is getting to that threshold of presumable herd immunity. So long as a vaccine resistant variant doesn’t spread widely, the continued retreat of cases should continue.
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%. As you can see, all states have reached 60% and 70% combined vaccination + infection. 89.4% of US states (based on state population) have seen combined infection & vaccination >80% and 60.2% of US states have seen combined infection & vaccination >90%.
There were a total of 644,623 doses administered on Tuesday. Over the past 7 days, on average 1,040,387 doses were administered per day, down 7.9% from 7D ago. As the chart below shows, the vaccination has slowed down over the past few days. But this is likely because many states under-reported the number of doses administered (see below). Hence, we expect some “true-up” in the number of doses administered in the next few days.
26 states reported low number of doses administered…
Below we listed the 26 states that reported less than 5,000 doses administered on Tuesday. As shown in the table, the vaccination figures are much lower than its 7D average – less than half of the 7D average. Hence, we believe the vaccination statistics of these states are under-reported and expect some “true-up” in number of doses administered in the next few days. Also, the daily number of vaccines administered seems to fluctuate a lot among states. Therefore, the 7D average daily number of vaccines administered might be a better gauge to measure the vaccination trend.
95.5% of the US has seen 1-dose penetration >40%…
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 35%/40%/45% of its residents fully vaccinated, displayed as the orange line on the chart. Currently, 93.1% of US states have seen 35% of their residents fully vaccinated. However, when looking at the percentage of the US with at least 40% of its residents fully vaccinated, this figure is 66.8%. And only 48.1% of US (by state population) have seen 45% of its residents fully vaccinated.
– While 95.5% of US states have seen vaccine penetration >40%, 78.7% of them have seen 1 dose penetration >45% and 59.4% of them have seen 1 dose penetration > 50%.
– 93.1% of the US has at least 35% of its residents fully vaccinated, However, only 66.8% of US has fully vaccinated >40% and 48.1% of US has fully vaccinated >45%.
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 is generally trending higher (red line is 7D moving avg), but this is largely due to the decline in daily cases.
– the 7D moving average is about ~100 for the past few days
– this means 70 vaccines dosed for every 1 confirmed case
In total, 318 million vaccine doses have been administered across the country. Specifically, 176 million Americans (53% of US population) have received at least 1 dose of the vaccine. And 149 million Americans (45% of US population) are fully vaccinated.
POINT 3: Tracking restrictions lifting and subsequent effects in individual states
Point #3 focuses primarily on tracking the lifting of restrictions, as states have eased the majority of mandates. Keep in mind, easing/lifting restrictions are contingent upon state of emergency ordinances being renewed.
– States in groups 1 and 2 represent states that let their emergency ordinances expire, or that never had one in the first place
– Note: IL and HI are not listed. This is because restrictions lifting is determined at the county / island level, and no statewide policy will be established to lift restrictions until a full reopening
So there is a spectrum of approaches. Our team is listing 3 tiers of states and these are shown below.
– states that eased all restrictions in 2020: AK, OK, MO, FL, TN
– states that have eased all restrictions in 2021 to now: ND, SD, NE, ID, IA, MT, MS, AZ, SC, WY, TX, GA, AR, KS, WI, IN, AL, UT, NH
– states that are still easing restrictions in 2021: OR, ME, WV, WA, MN, MA, NC, KY, LA, CA, DE, PA, NM, OH, CO, NJ, VT, MD, NV, NY, CT, VA, MI, RI, DC
GROUP 1: States that lifted restrictions in 2020…
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 because the case trends in these states look like other states.
GROUP 2: States that have lifted restrictions in 2021 to now…
Similar to the list of states above, the daily case trends in these states are impressive and it seems that lifting restrictions hasn’t caused an increase in cases.
GROUP 3: States that are still easing restrictions in 2021…
These states have begun to lift restrictions, but have yet to ease all restrictions. The date of each state’s most recent restrictions lifting is indicated on each chart. The case trends in these states have been mostly positive.
– Easing restrictions appears to have contributed to an increase in cases in several of these states, most drastically in OR, ME, WA, and MN
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