COVID-19 UPDATE: AZ converging to CT = good. Dr. Fauci reiterates vaccine possibly by early 2021 -- binary for markets and massive cyclical rotation. 28 "trifecta" epicenter stocks.

Wednesday is the start of 3Q2020 and marks the halfway point for 2020.  And compared to the state of the World at the end of March (1Q2020), I am thankful for the progress humanity has made against COVID-19.  The collective tragedy is staggering with total worldwide cases >10.5 million (rising 150k/day) and attributed deaths >500,000.  COVID-19 case growth in the US is, unfortunately not contained, which we have attributed to a combination of three factors:

– nationwide protests taking place in >350 cities for >4 weeks now — 10,000X super spreader events
– surging imported cases from Mexico/Latin America and evidenced by the fact the massive US outbreaks are taking place at the Southern US border states (even FL)
– somewhat careless compliance as economy re-opened (bars, etc.).

So we do not attribute the surge primarily to re-opening the economy.  But mitigating spread is important.  I realize masks are not a popular topic for many, and while there is some science supporting the use of masks, COVID-19 is a novel disease.  Tom Block, our policy strategist, forwarded an email from Senate Majority Leader, Mitch McConnell.  His statement is a commentary in support of the use of masks.  

COVID-19 UPDATE: AZ converging to CT = good. Dr. Fauci reiterates vaccine possibly by early 2021 -- binary for markets and massive cyclical rotation. 28 trifecta epicenter stocks.




The positive aspect of the past few months is that the healthcare tragedy is taking a smaller toll with each case.  We continue to see a curious divergence between cases surging in the US and the downward (not upward) path of deaths. The red lines below are the relationship since May 27th, while the grey lines are the relationship from late March to late-April.

– Ultimately, this is a good thing.  Either patients are healthier.  Or healthcare regimens are better.
– But the bearish argument is that we are simply facing a lag.


COVID-19 UPDATE: AZ converging to CT = good. Dr. Fauci reiterates vaccine possibly by early 2021 -- binary for markets and massive cyclical rotation. 28 trifecta epicenter stocks.


Source: COVID-19 Tracking Project


Dr. Fauci and a vaccine potentially by early 2021…
Dr. Fauci spoke before Congress today and I have two major takeaways:

– US daily cases do not have a ceiling, and he hinted we could surge past 100K/day (but deaths do not have to follow)
– He expects a vaccine potentially by early 2021, a quantum order of magnitude faster than consensus expects.

COVID-19 UPDATE: AZ converging to CT = good. Dr. Fauci reiterates vaccine possibly by early 2021 -- binary for markets and massive cyclical rotation. 28 trifecta epicenter stocks.


https://www.wsj.com/articles/coronavirus-latest-news-06-30-2020-11593505070

COVID-19 UPDATE: AZ converging to CT = good. Dr. Fauci reiterates vaccine possibly by early 2021 -- binary for markets and massive cyclical rotation. 28 trifecta epicenter stocks.


https://www.wsj.com/articles/coronavirus-latest-news-06-30-2020-11593505070


A vaccine/ cure is a binary event for markets…

This latter point is all that really matters, honestly.  Think about the seismic impact of a cure/vaccine.  This provides a path to normalcy and full recovery.  A vaccine/ cure does not need to be fully deployed for markets to make a binary and abrupt change.  But think about Fauci’s comments (we do not know whether this will be correct).

– If a vaccine/cure is 6 months away, how long before equity markets begin to see through the horrific case data
– similarly, as we look at the final 6 months, a bearish view on equities would be predicated on lack of success on healthcare or on mitigating case growth.

And perhaps this is the reason we will see the “V”-shaped recovery in US stocks.  This chart below shows the 10 declines >35% since 1929, and as you can see, stocks recovery is proportionate to the speed of the decline. Hence, the lightning fast decline points to a full recovery far faster than consensus expects.

COVID-19 UPDATE: AZ converging to CT = good. Dr. Fauci reiterates vaccine possibly by early 2021 -- binary for markets and massive cyclical rotation. 28 trifecta epicenter stocks.





STRATEGY: Vaccine (or cure) is a binary market event
Investors that favor earnings visibility and certainty are not finding much to be constructive about in the current equity market.  And this is a reason we found a large contingent of our clients are either “sidelined” or outright bearish.  And given the still rapid spread of COVID-19, many retail investors, particularly Baby Boomers, are negative and sitting on a large cash position. This is why a vaccine/ cure (rather, a clear path) is a binary event for markets because this would change the reaction function of those sidelined.  And of course, in the real world, a cure/vaccine would enable the World to return to some level of normalcy. 

In Congressional testimony today, Dr. Fauci, White House coronavirus task force key member, and de facto “healthcare face” for USA, is cautiously optimistic about a vaccine ready by early 2021.  He based his optimism on the state of human and animal trials and believes that given where these stand, a vaccine is closer than most expect.  Most skeptics cite 2022 as a more realistic window.  And we know there is a huge difference between 6 months and 18 months.


COVID-19 UPDATE: AZ converging to CT = good. Dr. Fauci reiterates vaccine possibly by early 2021 -- binary for markets and massive cyclical rotation. 28 trifecta epicenter stocks.


https://www.bloomberg.com/news/videos/2020-06-30/fauci-cautiously-optimistic-covid-vaccine-ready-by-beginning-of-2021-video?sref=NVS0rEaE


If this “binary event” happens, the stock market will get instantly re-rated higher…
But if this binary event, a vaccine/cure, happens, we will see a binary reaction in the stock market.  That is, we would see a massive wall of liquidity move out of bonds and out of cash into equities.  And there would be a rethink about the length and time needed for GDP to recover. Think about these impacts:

– a cure means the US and World are indeed at the bottom of an economic cycle = recovery
– a cure means the worst is behind us on stresses, and surviving companies are “unkillable”
– because these companies survived, equity risk premia should fall = P/E expands
– companies are cutting costs fiercely now, so we should expect major operating leverage
– investors will seek stocks with greatest sensitivity biz cycle = worst hit outperform = epicenter

So the playbook, if Fauci’s comments play to fruition, is a massive cyclical rotation.


Keep in mind that Epicenter stocks are just 26% of market cap but expected to be 62% of 2021 EPS growth (Consensus)
Much of the EPS “heavy lifting” in 2021 is coming from the 4 epicenter groups: Discretionary, Industrials, Financials and Energy.  And as the chart below shows, just using Consensus estimates, 62% of the EPS growth is from these groups.  These 4 sectors are just 26% of the market cap, so they are “punching above their weight.”
 

COVID-19 UPDATE: AZ converging to CT = good. Dr. Fauci reiterates vaccine possibly by early 2021 -- binary for markets and massive cyclical rotation. 28 trifecta epicenter stocks.





28 “trifecta” epicenter stocks…These 28 stocks below remain “trifecta” names, as they are OW rated by our DQM model (Quintile 1), OW on Technicals (Rob Sluymer) and OW per Brian Rauscher’s models.

Discretionary: GNTX, BBY, GRMN, TPX, DHI, LEN, EBAY, DRI
Energy:           CVX, XOM, COP, PXD
Financials:      GS, MS, SBNY, SIVB, EQH
Industrials:      GD, ALK, FBHS, MAS, CMI, OSK, ITT, GWW, MSM, SNDR, HWM


COVID-19 UPDATE: AZ converging to CT = good. Dr. Fauci reiterates vaccine possibly by early 2021 -- binary for markets and massive cyclical rotation. 28 trifecta epicenter stocks.


Source: Fundstrat





POINT #1: Daily cases rise to +43,994 (+8,075 vs 1D ago) AZ is half due to “payback”
Total cases in the US rose to +43,994, nearly a record high and up sharply from yesterday.  But as we pointed out yesterday, that decline on Monday was an aberration due to AZ having 80% of test results not reported. 

– the good news is that the daily change, compared to 1 week ago is easing somewhat.  Instead of the +14k to +15k seen in recent days, the increases are somewhat flattening
– of course, the best case is to see this chart show red columns, because that signifies a decline.

COVID-19 UPDATE: AZ converging to CT = good. Dr. Fauci reiterates vaccine possibly by early 2021 -- binary for markets and massive cyclical rotation. 28 trifecta epicenter stocks.


Source: COVID-19 Tracking Project


And fortunately, hospitalizations and deaths have not soared to the same extent.  Hospitalizations are rising (see right chart) but the daily increase is not nearly as high as the level of hospitalizations in March/April.

COVID-19 UPDATE: AZ converging to CT = good. Dr. Fauci reiterates vaccine possibly by early 2021 -- binary for markets and massive cyclical rotation. 28 trifecta epicenter stocks.



Similarly, daily deaths are generally trending lower, which is a positive trend.  Given the ultimate cost any infected person incurs is death.  The fact that 587 Americans died from COVID-19 yesterday is a senseless tragedy.


COVID-19 UPDATE: AZ converging to CT = good. Dr. Fauci reiterates vaccine possibly by early 2021 -- binary for markets and massive cyclical rotation. 28 trifecta epicenter stocks.


Source: COVID-19 Tracking Project






6 states with biggest 1D increase
Arizona             4,682 vs    625 (1D) +4,057
Texas                6,975 vs  4,283         +2,692
California          6,367 vs   5,307        +1,060
Florida              6,093 vs  5,266            +827
South Carolina 1,755 vs   1,324           +431
Oklahoma            585 vs     228           +357
Total 6 states                                     +9,424


6 states reported sizable declines
Tennessee       1,212 vs 2,125 (1D) -913
Alabama             870 vs 1,734         -864
Georgia            1,874 vs 2,207         -333
Maryland             305 vs 477            -172
Nevada                562 vs 734            -172
North Carolina   1,186 vs 1,342       -156
Total 6 states                                 -2,610



COVID-19 UPDATE: AZ converging to CT = good. Dr. Fauci reiterates vaccine possibly by early 2021 -- binary for markets and massive cyclical rotation. 28 trifecta epicenter stocks.


Source: COVID-19 Tracking Project





POINT #2: F-CAT converging with NY/NJ/CT in case prevalence…

Arizona about to match up with CT = good thing
We have plotted case prevalence (total cases / 1mm residents) for:

– original epicenter: NY/NJ/CT
– new epi-center F-CAT: FL, CA, AZ, TX

This creates a pretty obvious convergence.  We can see the F-CAT states rapidly catching up to NY/NJ/CT.  But the more interesting thing is that Arizona is close to converging with CT.  CT was a particularly hard hit state, nursing homes especially, but there are close:

–  AZ cases per 1mm residents: 10,833
–  CT cases per 1mm residents: 13,100

Once CT hit that threshold, the state managed to see cases flatten dramatically.  We wonder if F-CAT could be approaching this “disease break point” rapidly.


COVID-19 UPDATE: AZ converging to CT = good. Dr. Fauci reiterates vaccine possibly by early 2021 -- binary for markets and massive cyclical rotation. 28 trifecta epicenter stocks.


Source: COVID-19 Tracking Project



Top 50 largest counties in the US — 5 of them are seeing case growth nearly matching NYC at its “worst point”
We have listed the top 50 counties in the USA (by size) and color coded them based upon:

– DARK BLUE: F-CAT (FL, CA, AZ, TX)
– LIGHT BLUE: NY/NJ/CT
– GREY: Other 43 states

As shown below, the 17 of 20 counties with the fastest case growth (3D avg cases/1mm Pops), are in F-CAT. 

– Florida has 4 of the 5 counties with the fastest case growth
– These 5 counties have daily cases/1mm Pops that nearly match the 792 NYC saw at the height of NYC crisis
– FL population density is far lower than NYC, and thus, population density is not the reason for this surge in prevalence


COVID-19 UPDATE: AZ converging to CT = good. Dr. Fauci reiterates vaccine possibly by early 2021 -- binary for markets and massive cyclical rotation. 28 trifecta epicenter stocks.


Source: Johns Hopkins data



While the case figures have soared in F-CAT, we also know that these states have far fewer fatalities, and hospitalizations relative to the NYC experience.  Part of this is due to the younger demographic of the infected and part of it is better preparation of the healthcare industry at dealing with COVID-19.

Florida has the total case prevalence trajectory that is on track to surpass NYC…
So, of all the states F-CAT, Florida is the closest to matching NYC in overall prevalence.  Miami and Palm Beach have particularly prevalence, measured as total cases/1mm residents.  But Orlando is rapidly surging as well. 

The F-CAT states have all course-corrected, so it is not necessarily the case that these states will keep seeing cases surge.  In fact, Arizona joined the other 3 states in closing/limiting Bars and Clubs in terms of capacity.

 

COVID-19 UPDATE: AZ converging to CT = good. Dr. Fauci reiterates vaccine possibly by early 2021 -- binary for markets and massive cyclical rotation. 28 trifecta epicenter stocks.


Source: Johns Hopkins






POINT #3: More studies show Vitamin D mitigates the severity of COVID-19
It has been about a month since we last discussed the multiple studies that showed deficiencies in Vitamin D are associated with more severe COVID-19 outcomes (see FLASH dated 5/28/2020).  In the past month, >15 additional studies have been conducted on the relationship between Vitamin D (either insufficient or deficient) and COVID-19 severity. And broadly, most are finding a relationship (We did not read all the studies and a few were “questioning” the relationship)


Two recent UK studies find low Vitamin D = severe outcomes COVID-19Two studies about Vitamin D were published on MedRxiv in the past week.  The more recent is one was led by a large tertiary academic NHS Foundation Trust in the North East of England, UK, providing care to COVID-19 patients and had 134 hospitalized patients with documented COVID-19 infection.  Below are the summaries of these two studies:

– The first study found that patients in the ITU (equivalent to ICU) were more frequently Vitamin D deficient (compared to those just in the medical ward), despite being younger.

– The second study found mortality rates from respiratory disease of >9,500 adults (in Germany, following them over the past 15 years) were 2.1X and 3.0X greater for infected with “insufficient” and “deficient” Vitamin D levels.  Thus, they believe this may influence outcomes in COVID-19.

COVID-19 UPDATE: AZ converging to CT = good. Dr. Fauci reiterates vaccine possibly by early 2021 -- binary for markets and massive cyclical rotation. 28 trifecta epicenter stocks.
COVID-19 UPDATE: AZ converging to CT = good. Dr. Fauci reiterates vaccine possibly by early 2021 -- binary for markets and massive cyclical rotation. 28 trifecta epicenter stocks.





https://www.medrxiv.org/content/10.1101/2020.06.21.20136903v2
https://www.medrxiv.org/content/10.1101/2020.06.22.20137299v1 
https://www.medrxiv.org/content/10.1101/2020.05.01.20079376v2
https://www.medrxiv.org/content/10.1101/2020.04.08.20058578v4
https://www.medrxiv.org/content/10.1101/2020.05.01.20087965v1
https://www.medrxiv.org/content/10.1101/2020.04.24.20075838v1



This is the abstract to the ITU hospital study of 134 patients.  The link to the report is at the end.  FYI, the ITU is the Intensive Therapy Unit and seems to be the equivalent of the ICU in the US.

COVID-19 UPDATE: AZ converging to CT = good. Dr. Fauci reiterates vaccine possibly by early 2021 -- binary for markets and massive cyclical rotation. 28 trifecta epicenter stocks.


https://www.medrxiv.org/content/10.1101/2020.06.21.20136903v2


COVID-19 UPDATE: AZ converging to CT = good. Dr. Fauci reiterates vaccine possibly by early 2021 -- binary for markets and massive cyclical rotation. 28 trifecta epicenter stocks.


https://www.medrxiv.org/content/10.1101/2020.06.21.20136903v2



This second study is a longer 15-year study of >9,500 adults in Germany and looked at mortality from respiratory disease.  But the authors believe this also has implications for COVID-19.

COVID-19 UPDATE: AZ converging to CT = good. Dr. Fauci reiterates vaccine possibly by early 2021 -- binary for markets and massive cyclical rotation. 28 trifecta epicenter stocks.


https://www.medrxiv.org/content/10.1101/2020.06.22.20137299v1



Getting enough Vitamin D is an action we can all take…
Hence, among the many actions any of us can take against COVID-19, a simple one is to get enough Vitamin D.  The easiest way to get this is by exposure to direct sunlight.

COVID-19 UPDATE: AZ converging to CT = good. Dr. Fauci reiterates vaccine possibly by early 2021 -- binary for markets and massive cyclical rotation. 28 trifecta epicenter stocks.


Source: Google


Low Vitamin D levels may explain why Latino/Hispanic and Blacks are a disproportionate share of COVID-19 severity…
The NIH has several studies showing both ethnic profile of Vitamin D sufficiency and also the associated conditions that are more to see poor Vitamin D levels (not clear if it is a cause or a byproduct).  The reason we are talking about those groups with vitamin D deficiency is that they overlap with those same cohorts suffering more severely from COVID-19 disease.  The CDC completed a study of racial and minority groups severity from COVID-19 (see below marked in red and also table created).


Table: NIH Study of cohorts with Vitamin D deficiency
% of cohort with vitamin D deficiency:
US overall                    41.6%
– White                         30.9
– Black                          82.1 <- wow
– Hispanics                   69.2 <- wow

– Male                           41.1
– Female                       42.0

Vitamin D deficiency more common among:
– poor health status       59.5  
– obese                          53.8 
– low HDL cholesterol    49.9
– no college education  48.2
– Not consume milk       48.0
– hypertension              46.3  
– Smoker                       43.7

https://pubmed.ncbi.nlm.nih.gov/21310306/
https://tahomaclinic.com/Private/Articles4/WellMan/Forrest%202011%20-%20Prevalence%20and%20correlates%20of%20vitamin%20D%20deficiency%20in%20US%20adults.pdf




As a side note, apparently sunlight actually de-activates Coronavirus within 7 minutes…
There is another ancillary benefit to sunlight (besides getting vitamin D) as it turns out that this is another study (multiple previously showed this as well) that COVID-19 is weakened by direct exposure to sunlight.

COVID-19 UPDATE: AZ converging to CT = good. Dr. Fauci reiterates vaccine possibly by early 2021 -- binary for markets and massive cyclical rotation. 28 trifecta epicenter stocks.


https://www.forbes.com/sites/jvchamary/2020/06/29/light-coronavirus/#2141ef695853

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