White House is keeping the market on "the cliff edge" this week, cases now rising in 30 states (+14)

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STRATEGY: White House is keeping the market on “the cliff edge” this week, cases now rising in 30 states (+14)

14 more states see rising cases —> wave 4 underway
There are now 30 states with rising cases, a significant uptick since our last update on 11/15.

– previously was 16 states when we updated this analysis 3 days ago
– 14 more states are now seeing a rise in cases: CT, DE, MA, AR, NJ, MD, RI, KY, PA, OK, TN, MO, SD, UT

Wave 4 is underway and this is not surprising this is our base case. We also expect this surge to peak below wave 3 peak of 300,000 cases per day.

Israel saw cases collapse when booster penetration hit 33%
This delta wave 4 surge in the US will have an expiration date. This is the reason for markets not to lose their heads. This surge is happening in northern states and not where wave 3 was fiercest.

And Israel is a template for how the booster efforts contain the surge. As shown below, when penetration of boosters hit 33%, cases utterly collapsed in Israel.

– so there is an end date

Delta is basically 100% of cases globally
It is all about delta. A recent study by WHO looking at nearly 800,000 cases in the past 60 days found that the delta variant was 99.7% of all cases. It does appear that few people are simultaneously infected with multiple variants of COVID. Thus, the dominant strain is delta. And once this ebbs, the global surge should similarly slow. But we should be aware of the risk of a new variant that can reignite another wave of cases.

White House calls for FTC probe into high gasoline prices… but the issue is there is a shortage of oil
President Biden called for an FTC probe into oil and gas companies alleging their “anti-consumer” behavior has driven higher gas prices. The rationale is these producers have cut costs and thus cannot justify higher prices.

– the higher gasoline prices stem from higher oil prices
– higher oil prices are a result of a shortage of oil supply

For nearly everybody, it is hard for someone to believe higher gasoline prices are due to anti-consumer behavior of oil and gas companies.

…the Strategic Petroleum Reserve, SPR, holds 606 million barrels (highest level was 727 million), or 30 days of US oil demand
There are some who think releasing the SPR could cure high oil prices. But the SPR holds 606 million barrels. That might sound like a lot:

– US consumes 20 million barrels per day
– SPR holds 606 million barrels
– SPR holds about 1 months worth of oil

Even releasing the entire SPR would only have a temporary effect. There is just not enough oil in the SPR to cure high oil prices. Moreover, this is only temporary.

Oil prices have fallen since this announcement, with WTI at $79. And while it is down 5%, this is hardly a massive sell-off and in my view, this reflects the reality that this problem is difficult to solve by launching an FTC probe. This is hurting oilfield services stocks, but this seems to me to be a case of the White House shooting the messenger:

– it’s like blaming the pizza delivery guy for an expensive pizza

OSHA suspends enforcement of vaccine mandate
OSHA, the Occupational Safety Health Administration, is suspending enforcement of the White House vaccine mandate. The US Court of Appeals Fifth Circuit already upheld a stay on the mandate — therefore, OSHA is simply complying with the court.

– several healthcare experts including Dr Gottlieb suggested this mandate is probably adding to economic confusion
– vaccine mandates have already led to shortages in public safety workers
– with a COVID-19 antiviral pill coming, these mandates are becoming less central

STRATEGY: White House is keeping the market on “the cliff edge” this week
Equites have been volatile this week. Part of this is technical, as our Head of Technical Strategy, sees strong probabilities that equities made a local high this week. That is, a short term pullback/pause and a subsequent rally. Thus, our everything YE rally view is intact.

That said, the White House has taken several steps this week that have unnerved markets:

– the fate of Fed Chair Powell is still being decided by the White House (his term is up in Feb 2022)
– White House calls on FTC to launch on oil and gas industry for anti-consumer behavior

These are hardly pro-capitalist actions and thus, it should be no surprise that markets are somewhat rattled.

If the Fed chair is replaced, we believe this is a negative for stocks in the short term. Longer term, we think a new Fed chair is not a negative for markets, at least not until the next emergency. Why in the short term?

– financial markets are comfortable with Fed Chair Powell
– bond markets will “test” the new Fed Chair
– bond market liquidity is already weakened into December, due to inventory and balance sheet issues for banks
– replacing Fed chair speaks poorly of the turmoil in Washington
– Fed chair replacement is due to the squabbles over stimulus bills
– and is a concession to Democratic progressives

All in all, I see this as a short-term negative.

Similarly, we think the White House actions with FTC will only have a limited impact on Energy equities. Investors do not like event risk, so they are naturally going to be reacting to the news.

– but the higher prices are due to the shortage in oil
– thus, until there is greater production
– oil prices are high
– raising production in the US means raising energy capex

– White House firing barbs at the oil and gas industry risks diminished capex
– Capital markets don’t want to fund an industry under attack by the White House
– these actions could backfire high in 2022, with a bigger surge in oil prices
– due to growing shortage of production

So, we would be buyers of Energy stocks on this pullback.

3Q21 EPS trends show energy is the strongest
Below are the 11 sectors of S&P 500 and commensurate EPS trends. The global economy is one year into an economic expansion.

– we are fully 5 quarters into the expansion
– so we would expect analyst EPS forecasts to have already caught up to underlying trajectory
– but companies are still surprising to the upside

– strongest positive revisions are Energy and Financials with 23% and 16% respectively
– positive revisions means positive surprise
– this signals energy and financials still remain attractive for risk/reward

SECTORS: Leadership still Cyclicals/Early-cycle aka Epicenter
Relative sector performance is shown below and as we can see, 5 sectors are showing a 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.

Into YE, our recommended strategies are:

– Energy
– Homebuilders (Golden 6 months) XHB
– Small-caps IWM-0.85%
– Epicenter XLI0.30%  XLF-0.58%  XLB0.71%  RCD
– Crypto equities BITO1.47%  GBTC0.93%  BITW1.17%

Into 2022…
– Industrials

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

POINT 1: Daily COVID-19 cases 100,794, up +48,371 vs 7D ago…

Current Trends — COVID-19 cases:

• Daily cases 100,794 vs 52,4237D ago, up +48,371
• Daily cases ex-FL&NE 97,542 vs 48,711 7D ago, up +48,831
• 7D positivity rate 7.0% vs 5.0% 7D ago
• Hospitalized patients 46,112 , up +6.6% vs 7D ago
• Daily deaths 914, down -25.8% 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 100,794, up +48,371 vs 7D ago. The Labor Day distortion remains as evident by the recent fluctuating 7D deltas. 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.

Rolling 7D delta distorted due to observance of Veteran’s Day…
The rolling 7D delta is currently distorted due to the underreporting resulting from the observance of Veteran’s Day.

30 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

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 accelerates as boosters become more widely available…

Current Trends — Vaccinations:

• avg 1.5 million this past week vs 1.3 million last week
• overall, 58.5% fully vaccinated, 68.2% 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

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 1,453,611 doses administered reported on Thursday, down 3% vs. 7D ago. We are 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.

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 98.9%. 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%, 94.4% of them have seen 1 dose penetration > 55% and 77.9% 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 ~17 for the past few days
– this means 17 vaccines dosed for every 1 confirmed case

In total, 420 million vaccine doses have been administered across the country. Specifically, 226 million Americans (68% of US population) have received at least 1 dose of the vaccine. And 194 million Americans (59% 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.