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.
One of the more interesting comments President Trump made today was his questioning of the benefit and need for global supply chains. In fact, he spent some time talking about how he ran on the platform for bringing jobs and assets home. It is possible that future policy, post-COVID-19, creates incentives for businesses to bring assets back to the US. Governments, by policy mandate, pick “winners and losers” so if this ends up being a policy initiative, this will have meaningful investment implications (at first glance, greater for US Technology, Industrials, Financials, and even Healthcare, because the US leads in Healthcare). And might also complement their desire for infrastructure spend, to re-ignite the US economy. After all, bringing assets back to the US, is asset-heavy = investment spend = good for EPS. The White House concluded their press briefing this evening and the overall tone was positive, with much progress on case front (peak was 4/10/2020 and still falling), testing availability, PPE (protective eq.). As cases drift lower across multiple metropolitan areas, policymakers and residents will face the question about when they will be amenable to easing restrictions.
POINT #1: US daily cases ~27,000, down 22% from “peak” 34,550 on 9 days ago on 4/10/2020
The overall picture for the US is encouraging. Daily net new confirmed cases reported in the past two days were ~27,000 (Sunday + Mondays, for unexplained reasons, seem to be low), which is trending lower and remains below the current “high watermark” of 34,550 on 4/10/2020.
– Given the “Phase” gating criteria of the White House is a 14-day trend in lower cases, the US overall looks to be on the right track, as overall cases are down 22% since 9 days ago.
– the deadliest date for the US was 4/15/2020 with 2,492 deaths and reported deaths of 1,654 is an improvement off those levels.
NY State daily new cases is -44% from the peak 15 days ago 4/4/2020…
NY state could be already meeting the approximate criteria of White House defined Phase I (see below), even as Gov Cuomo has extended the current “stay at home” into May. As shown, the cases reported over the weekend ~6,000 to ~7,000 per day, while still high, is -44% from the 4/4/2020 level of 10,841.
– we labeled the 4/16/2020 11,571 as a “fake peak” because this figure reflected a step-up to reflect a methodology change. Without this “true-up” NY state cases have been trending lower mostly consistently since 4/10/2020.
– NY state still suffers deaths with 507 newly reported deaths but as this graphic below shows, this is off the 799 peak of daily new deaths reported on 4/10/2020. So NY state reported mortality is trending to fewer daily reported deaths.
On a state basis, only NJ seems to be reporting a meaningful sustained gain in cases…
The daily new cases report (each of the 3 most recent days shown) is down for most of the top 30 states. Of these, only NJ saw a meaningful +1,000 increase in new daily cases. Some states are reporting increases that might be large on a “%” basis, but the number of cases is small and will not have the same magnitude effect of NYC/NY.
In the absence of a massive outbreak in a new region, with the passage of time, the COVID-19 will be largely seen as an NYC-metro area outbreak…
Below is a snapshot of COVID-19 cases per 1mm residents, by state, and you can see the NY/NJ dwarf the rest of the country with 12,480/9,604 cases per 1mm, respectively. This is 4X-5X the US overall at 2,258 and way ahead of CA/TX (top 2 in the GDP share of the US) at 768/653 cases per 1mm residents.
– the relevance of this is the devastation, proportionately, has been lower for many other states, and if other states are seeing a positive trend in cases.
– moreover, the damage to the confidence and general feeling of “safe” is probably better for residents in our states/counties with less severe outbreaks.
POINT #2: 18 states might meet Phase I White House “Opening Up American Again” – Phase I.
Last week, the White House released its framework for restarting the economy “Opening Up America Again” (WH presentation here) with the idea of surveillance, case growth and resources governing the 3 phase steps to open up the economy.
– the 3 phases have varying levels of easing of restrictions (see our grid below)
– and with a minimum of 14 days between “gating criteria” re-check, a region could be in Phase III by as little as 28 days.
This is purely theoretical for several reasons. First, these are only guidelines by the White House and the state/local governments will make their own decisions about the way forward. Second, the steps and easing of restrictions will require quite a number of rules to be established and communicated to businesses, communities, and citizens.
So the reality is, we are likely to see most states muddling through Phase I for a long time.
18 states/territories have cases down 14 days since the peak…
While there are 3 criteria outlined for gating factor, the most important is case count trending down for past 2 weeks. And the simplest way to measure that today is to look at the number of days since case peak. We realize this is not perfect because of lumpiness and potential methodology changes. We made a table showing days since peak cases.
– And currently, 18 are 14 days since the peak case (NY is there as well).
– this does not account for the testing criteria (the trend in positives from tests). We have that data but we need more time to see what happens if states have fewer tests (thus positives could go up).
Phase I looks a lot like Hong Kong today…
We compiled the information from the White House presentation below and listed the various constituents and cohorts and the related restrictions. We left out “employee” and “workplace” restrictions because those are not necessarily “social restrictions” nor “demand inhibitors” compared to the status of travel, restaurants, schools, etc.
Phase I, as shown below, opens restaurants but with strict social distance. And keeps schools closed and bars closed. In some ways, this is the state of Hong Kong today. And frankly, if workers are able to resume returning to the office, this would be likely viewed as a welcome change from the current “stay at home”
Phase II is really just an incremental easing from Phase I (schools and bars and travel) and would be based upon another “gating check” and meeting those improvements.
Again, we have no idea when and how states move with each of these. And lastly, Phase III is largely back to normal.
Phase III is the only time the vulnerable can return to normal activities…
The strictest measures of protection are for “vulnerable individuals” and in the most common definition, both older Americans (>age 65), but also those with pre-existing health conditions.
How will “vulnerable individual” definition be applied? >33% of American adults fit criteria of “pre-existing health condition”
We are curious about how this second category will be applied. Using data from the CDC, we listed the share of US adults that meet these various pre-existing conditions:
– topping this list, 33% of US adults have high blood pressure;
– 31% of US adults are “obese” based on a BMI (body mass index >30);
– even 15% of US adults are smokers;
Based on single criteria, about 78 million adults (of 234 million) have at least one criterion.
Does this mean 1/3 of US adults will remain isolated? This is not something we know the answer for.
POINT #3: 3 studies (and growing) point to COVID-19 case spread to be 50X-80X or more than “officially” reported. This arguably changes the mortality risk –> lower health risks –> restart economy sooner and faster
When the world first heard about COVID-19, one of the more terrifying aspects was the very high fatality rate. Initially, it was estimated to be over 5%-10% (1 in 10 or 20 perish). And when COVID-19 started spreading across Europe, the mortality rates of >10% in Italy were seen as the “real mortality rate” and thus, made COVID-19 a highly deadly threat.
This CFR (case fatality rate) has fallen with time but it is still cited as “3%” – a still deadly figure of 1 in 33 face death. But the issue with calculating CFR (case fatality rate) is that the deaths and case figures can be incorrect. And arguably, the “case” number is the one that is understated.
Actual cases look to be 40X, 50X, 80X higher than “officially” reported…
As more studies are conducted, it looks like the number of cases (denominator) is vastly higher, but massive orders of magnitude. We have highlighted the summary results of 3 studies below. The largest was conducted by Stanford University on Santa Clara, CA (discussed below).
– The takeaway from each of these studies (University of Bonn on Gangelt, Germany to Stanford on Santa Clara and Mass General for MA) is that based on serological tests (antibodies), the number of COVID-19 cases in each region is way higher than officially reported.
– For Chelsea, MA, 33% of residents tested positive for COVID-19 (of study), or a case per 1mm rate of 333,000 which 42X the officialtabulation.
– Think about that, in Chelsea, MA, one could argue that COVID-19 has reached everyone in that county. And as such, there is probably diminished need for any stay at home restrictions.
Stanford University’s study is published on Medrxiv.org (link). They used serological tests for a large sample in Santa Clara, CA with >3,300 participants. Santa Clara, CA has the largest outbreak in CA, thus, is a good region to study. Their work found that based on number of people with antibodies, the actual number of residents with COVID-19 is likely 50X to 85X larger.
Stanford Santa Clara study on Medrxiv here
Question — if the World knew CFR would be 0.12%-0.2% instead of 10% or even 3%, would they have acted differently?
Policymakers should be credited for “flattening” the curve, as social distance measures did slow the spread of COVID-19. And as we slowed spread, and as treatment options improve, we will have much fewer deaths.
But the 3 studies really challenge some operating assumptions. If the spread is indeed much greater, by 50X to 80X:
– first, social distance measures may not have been as effective initially believed (since it is already widespread). Applying the 50X to 80X for US overall of 2,258 cases per 1mm, this suggests that the real COVID-19 prevalence in US is actually 11%-18% of US residents. And for NY state, close to 60% of NY state residents have been exposed.- second, if the risk of death is 0.12% to 0.20%, this is about the same level of mortality as the flu.
This is a big deal. For instance, if the first point is true, then many states already have or are close to “herd immunity” (30%) or conversely, many more workers and citizens are less likely to be contracting a “new case” of COVID
On the second point, it raises the question if policymakers would have reacted differently. But in the current context, the real issue is that one could argue there is a lot less risk in “re-opening” the economy, as the healthcare consequences are lower.
STRATEGY: As we move past the 3 waves of this crisis (below), “asset heavy” is likely an investment theme
A new market week starts Monday. For the past few weeks (since 3/23), we believe control of this market has shifted to the hands of buyers (“half full”), reflecting not only incrementally encouraging COVID-19 and economic developments, but of the increasingly apparent efficiency of the extraordinary fiscal and monetary policy measures. And as we have written about frequently, stock market recoveries tend to be V-shaped, even if GDP is U-, W-, or L-shaped.
The reason for V-shaped stock recoveries, is the fact EPS tends to recover quite quickly. Think of it this way, US businesses will seek cost engineering if we are in a slow GDP growth environment (=weak topline). That is, labor cost is their single highest cost and thus, if GDP is weak, labor costs will be low. Thus, cost engineering will lead to better margins.
Thus, EPS recoveries take place in a slow topline environment. This is very observable. Look at how US homebuilders created full EPS + margin recoveries post-2008 even as US housing starts were 50% below prior peaks. This is actually the norm, not the exception.
Strategy –> US-centric move towards asset heavy…
President Trump, in the White House briefing today said that he believes businesses will question why they had supply chains spread across the world. And this is no doubt the question that many corporate boards will be asking. But looking further out, a shift of the supply chain back to the US equates to a coming infrastructure boom to US. And this strategy could also be pursued by individuals. We summarize some strategy thoughts below. These are preliminary, but the high level thoughts are, post-crisis, we will see a rise in asset investment in the US:
– US corporations bring supply chains back to the US
– US government might do an infrastructure program
– Residents de-urbanize and move to suburbs, buying larger homes
– More “work at home” which is investment in home office.
This makes US dominant sectors stronger –> Technology, Healthcare and Financials
But is a boon to groups levered to capital spending –> Homebuilders, Industrials and even Consumer Discretionary
