COVID-19 UPDATE: USA daily cases rise to 22,610 (+2,868, +14.5%) as testing rises +16%. Interest burden of $3.6T stimulus plan --> $24 billion/year or 0.1% of GDP. Yup. It's almost "free"

COVID-19 remains a global crisis and we realize that many people need to keep up with COVID-19 developments, particularly since we are moving into the more critical stage (“restart economy”), so feel free to share our commentary to anyone who has interest.


There are widespread signs of a “return to normalcy” from stories of crowds in Indiana to 41% of homes sold in the past 4 weeks seeing bidding wars, to China reporting auto SAAR is back to pre-crisis levels.  Of course, as restrictions, movement increases, and the risk of a wave of new infections is what keeps anyone wary.  The future remains uncertain, and thus, we are not confident in saying a second wave cannot happen — but the good news, there has yet to be a second wave in re-opened economies, either in Europe (16 nations) or the US (basically all 50 eased to some extent).

Financial markets have certainly moved far faster than the economic data has moved. This always happens at the trough of an economic cycle.  And for those who rely on fundamental visibility to make investment decisions, the rise in stocks since mid-March would appear to be completely disconnected from reality.  We have written about how this happens at every trough and 2009 had a similar lack of visibility from March to Nov 2009 (even Warren Buffet said he saw NO GREEN SHOOTS on June 24, 2009).

We remain in the half-full camp and believe stocks offer pretty good risk/reward, even here.  In fact, because credit markets are functioning pretty well, we believe stocks will show the symmetry seen in the 10 declines >30% since 1929, with a move to “all-time highs” (ATH) in 2.5X it took the market to decline –> new highs by 3Q2020 or so.

One thing to keep in mind is that there is a mountain of “dry powder” both private and public capital.  Granted, we understand “public” stimulus and Fed money is not the same as the “private” money market + private equity dry powder.  But it is a dry powder, nonetheless. Take a look at the table below.

– Public sector “dry powder” is 43% GDP
– Private sector “dry powder” is 32% GDP

The total “dry powder” is 75% of GDP and about half is the private sector.  I would say this is a ton of firepower.  And a reason to not get too negative, even as the crisis is still troughing.

Source: CRFB.org, Fundstrat and Bloomberg.


Thus, we think the upside for stocks is still very good and believe the roadmap to ATH will be led by the “epicenter” stocks, more than the secular growth leaders.  Consider today that the “epicenter” stocks are only 27% of the S&P 500 market cap (4 groups, Financials, Discretionary, Industrials, and Energy) but if they recapture their Feb 2020 highs, they would account for 66% of the S&P 500 points gain.  Thus, the epicenter stocks punch “above their weight” and have 30%-40% upside as we discuss below.  Including the possibility that Energy’s 12-year bear market is over.



POINT #1: USA cases rise to 22,610 ( +2,868, +14.5%) as total test hit new high at 431,959 (+60,341, +16%)
US COVID-19 cases, in their typical midweek pattern, rose to 22,610.  Several of our clients commented that because testing is rising, case numbers would rise (serology testing supports this) as more asymptomatic and undetected cases are found.  And thus, at some point, we will need to rely more on healthcare capacity measures, such as hospitalizations.  Not every state reports hospitalization data on a timely basis currently.  Our data scientist, tireless Ken, believe about 30-35 report hospitalization data, and of this, the methodologies fall into either gross or net.  So we are working on this but it may take a few more iterations.

– the case rise today is substantial and falls within the mid-week bump we are used to seeing.
– today, total tests administered reached a new high of 431,959, up 16% from 1D ago, so this could explain most of the jump in cases (+14.5% increase in daily new cases vs 1D ago).

Source: COVID-19 Tracking Project

Daily churn again, as 6 states account for this entire increase…
6 states accounted for most of the 1D rise.  And what seems like it is becoming daily “ping pong,” it is the same set of states reporting alternate big rises and falls.  Today’s risers are shown below:

– Wisconsin is a curious one.  This state has not been among the top risers or decliners.  The absolute case numbers are small, so we are not necessarily alarmed, but it bears watching.

–  California     2,262 vs 1,365 (1D)   +897 <
–  Illinois          2,388 vs  1,545          +843 <-ping pong
–  New Jersey 1,386 vs     974          +412 <-ping pong
–  Wisconsin      528 vs     198          +330
–  Georgia          926 vs     640          +286 <-ping pong
–  Connecticut    587 vs     314         +273
Total 6 states                                 +3,041

6 states saw some sizable declines.  And again, case numbers can jump due to reporting lags and testing increases or decreases.  So none of declines below are necessarily noteworthy.

–  Maryland            777 vs  1,784 (1D)  -1,007  <-ping pong 
–  North Carolina    422 vs    677             -255
–  Virginia               763 vs 1,005             -242 <-ping pong 
–  Tennessee         154 vs    367              -213
–  Iowa                   275 vs    394              -119
–  Arizona               331 vs   396                -65  <-ping pong 
Total 6 states                                       -1,901

Source: COVID-19 Tracking Project


Total testing is ramping up, and new high today at 431,959 –> 158 million tests annualized… wow
The US is really increasing its testing capacity weekly.  Take a look at the chart below, the daily tests are now consistently in the 350,000 to 400,000 per day.  And the latest figure annualizes to a rate of 158 million tests annually.  This means half of the US population would be tested in the next 12 months.

– guess this will benefit companies that conduct testing (LH, Quest, etc)?

Source: COVID-19 Tracking Project



POINT #2:  20-yr Treasury auction highlights borrowing costs down dramatically.  COVID-19 Stimulus cost $25 billion/year interest expense…

The US Treasury issued 20-year bonds today, the first such note since 1986
The US Treasury issued 20-year bonds today and the auction was successful.  Interests across the US treasury curve actually fell (bond prices up) post-auction.  The interest rate at issue is 1.213%.  Given the large and sizable moves in asset markets, the rate paid by the US Treasury may not raise eyebrows, especially for most non-bond types (which is me).

But it is interesting to think about what it means for the US government to borrow money for 20-years (thru May 2040) at 1.213% and perhaps the best way to understand this is to look at existing bonds with a maturity date of 2040.  The 30-year bonds issued on 5/17/2010 are now 20-year bonds.  And for the comparison below, we look at the debt service for the issuer, not the “yield received” by the buyer of such a bond (the bonds issued in May 2010 trade above par).

– the 20-yr issued today has interest expense of $12.1 million for each $1 billion borrowed;
– the 20-yr current (issued 2010) has annual interest expense of $43.8 million for each $1 billion;
– the interest burden on current 20-yr is 72% lower than existing bonds

That is a massive decrease in interest borrowing costs.  Think about that.  If an individual had a chance to get a new mortgage with 72% lower borrowing costs, few would not refinance.  This is the opportunity that many commentators refer to when they see how much US interest rates have fallen for US debt.

Source: Fundstrat and US Treasury.



The US COVID-19 fiscal stimulus totals $3.6 trillion, according to reports by CRFB
The Committee for Responsible Federal Budget (CRFB.org) has detailed the potential total costs of US legislative and Federal Reserve actions.  These are highlighted below.

– The total 4 legislative actions will cost up to $3.6 trillion for the US Federal government;
– The Federal Reserve has up to $5.6 trillion committed, but the Fed actions are not part of the US debt burden (directly)

Source: http://www.crfb.org/blogs/covid-money-tracker-policies-enacted-to-date

The “tab” for borrowing $3.6 trillion?  $24 billion per year…  or <0.1% of GDP per year.  Yup… <0.1% of GDP
Using the existing US treasury rate structure, we can roughly estimate that this $3.6 trillion increase in US spending will cost the US government in annual interest expense.  The actual US Treasury curve is below, showing the interest rate at different maturities.

– for the purposes of this exercise, we will use the 10Y as the point of borrowing;
– Steve Mnuchin today noted he wanted to try to extend to ” extend the length of time the U.S. has to pay off its debt.”

Source: Bloomberg


Using the 10-yr yield of 0.67% (per year), the annual extra interest cost is $24 billion per year.  This is incredibly low.  This amounts to <0.1% of GDP per year.  With such a low added interest burden, this $3.6 trillion of spending has little risk of crowding out private sector spending on the recovery.

Source: CRFB.org and Fundstrat


This turns to be the strange irony of COVID-19. The plunge in US rates, across the interest rate curve are lowering the long-term borrowing costs of the US government.  Thus, despite a $3.6 trillion stimulus plan, total US debt service, per CBO projections, is actually set to fall in the next decade.  It is almost “free money”

– But the bigger takeaway is the sizable US stimulus spending increases pose less risk to crowding out a robust recovery (via high debt service).

By the way, the US housing market is also responding to low-interest rates + “de-urbanization”
The drop in interest rates, coupled with residents de-urbanizing (moving out of cities) is leading to a housing price recovery.  Below is a CNBC story published by Diana Olick and she notes that 41% of homes faced a bidding war in the past 4 weeks, per Redfin. That is astounding.  41% of homes. 

–  This is highlighting there remains a fairly robust consumer, underneath this “frozen” economy.

Source:  https://www.cnbc.com/2020/05/20/coronavirus-bidding-wars-in-a-pandemic-housing-is-heating-up-fast.html




POINT #3:  Roadmap to ATH for S&P 500 –> “epicenter” stocks 66% of points gained, yet only 27% market cap…
We have broken the S&P 500 into 8 groupings below (not the 11 GICS Level 1 sectors).  For instance, we combined Tech + Comm services.  Grouped Defensives into one group and listed Cyclicals individually.

– The S&P 500 has retraced 64% of its losses (above the key level of 2,934);
– 4 groups have retraced >64% of their losses since 2/19/2020 (below)

The 4 below this retracement are the “epicenter” groups:
– Discretionary (ex-AMZN)  (54% retracement)
– Energy   (50%)
– Industrials  (42%)
– Financials  (33%)

And naturally, these 4 groups are also 19% to 29% off their 2/19/2020 levels.  So if one was thinking about where “upside” exists for markets to recover to 2/19/2020 levels, it is in these 4 groups.  Of course, the reason someone may ignore these stocks is that they are truly impacted by the stay-at-home orders and global shutdown.  And without economic visibility, many view these groups as simple “gambles”

– But buying these groups when visibility has been worst is historically the best time to actual put capital to work. 
– A few weeks ago, for instance, we highlighted how Consumer Discretionary performs best when Consumer Confidence is lowest (see below for chart).

Source: Fundstrat + Bloomberg

For the past 50 years (since 1979), the best time to buy Consumer Discretionary stocks is when Consumer Confidence is rock bottom (in bottom deciles)…
Take a look at the relationship between Consumer Confidence (U Mich) and the forward returns of Consumer Discretionary stocks over next 3M, 6M and 12M.  Since 1979 (50 years), the single best time to put new capital into Consumer Discretionary is when consumer confidence is in the lowest deciles. The latest U Mich survey (mid-May prelim.) showed consumer confidence at 71.  And as shown, this is the 9th decile.

– the 3M, 6M and 12M returns have been +6%, +11% and +20%, respectively. 
– very nice upside and another reason to own “epicenter” groups.

Source: U Mich and Fundstrat.

If the S&P 500 were to retrace to Feb highs, Epicenter is 66% of the points and only 27% of market cap…
To see the risk/reward in owning the “epicenter” groups (4 above), take a look at the table below and the right columns:

– Epicenter stocks are 27% of the current S&P 500 market cap;
– But if they move to their Feb 2020 highs, this is 66% of the points gained;
– The upside is +24% to +41%, with the highest upside in Energy and Financials at ~40%.

Source: Bloomberg + Fundstrat


Energy has become stealth leader, bottoming 5 days before the S&P 500 bottomed and has most upside to retracement…
We noted a few weeks ago the stealth leadership of Energy stocks.  They bottomed on 3/18/2020, 5 days before the broader market and at a time when the fundamental argument for buying Energy did not exist.  OPEC fracture.  Airline traffic down 99%.  Global economy shut. etc.

And yet, Energy has continued its stealth rally as shown below.  It has a similar ceiling that the S&P 500 is facing (S&P 500 has broken through it) and this sector would solidify its recovery if it did manage to break above this.  We get very few questions on Energy, so this is a sector that seems largely forgotten. 

And in fact, Energy has been in a bear market since June 2008 (vs S&P 500).  We think the price gains since this March low could be a sign that this 12-year bear market is ending. 

– And if it is, this would also be a turning point for value stocks.

Source: Bloomberg

Even oil (WTI is shown below) has managed to show signs of life.  It has already rallied +$71 in the past month.  How many times in our life would we ever witness a +$70 move in oil prices?

Source: Bloomberg