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 appears to be a multi-state, simultaneous reduction in COVID-19 reported cases, particularly in all the Northeast states (NY, NJ, CT, MA, PA) and this had led to total reported cases crashing below 20K for the first time in almost 8 weeks. Because no states instituted stricter measures in the past 14 days, the spontaneous drop in cases across the US does seem to suggest COVID-19 could be “burning out” to an extent. In fact, this drop in cases is occurring at a time when residents across the US are less “compliant” with mitigation measures. And COVID-19 tests surged >400k today vs ~300k past few days, so it is not a drop in tests.
Cases reported early in the week (Sun/Mon) tend to be lower than mid-week, so we do not want to read too much into this. But there are other positive data points today. First, NY state cases crashed further to 1,660, down 85% from the peak on 4/1/2020 (37 days ago) — so if one wanted to know the definitive trend in NY, it is down. Gov Cuomo today announced some “low risk” biz could open 5/15–drive-in theaters, landscaping, etc — not big chunks of GDP.
But as states ease and as residents venture out, many will worry about a second wave. Scott Gottlieb, the former FDA commissioner, flagged a study by some UK researchers and the conclusion is that COVID-19 required “herd immunity” may be much lower at 10% (vs 60%-70% conventional thinking) as susceptible cohorts are already exposed (we discuss below) — if true, this reduces the risk of a second wave. And could support the “optimistic” case for economic outcomes.
Incidentally, Energy stocks may prove to be a leading indicator sector. This group bottomed on 3/19/2020, 4 days before the S&P 500 and have since risen 71%. Oil has made a huge move as well (discussed last week). But here is a fact. Nobody in their right mind, could make a bull case for Energy stocks. In fact, we believe most people have removed Energy stocks from their watchlists.
Oil has only one use case today. To power the movement of goods and people (ok, some plastics too). So it is purely a derivative of the global economy. And with the Global Depression, no air travel, no driving and a fractured OPEC, why in the world should energy stocks rise? There is no rational argument for positive speculation.
As such, we infer that the rise in Energy stocks reflects improving global growth outlook — another data point suggesting a rising probability of a vigorous EPS and GDP recovery (later). Hence, stocks are rising for the right reasons.
POINT #1: US cases crash to 17,652, the best figure since 3/26/2020 and 51% off the peak. NY state could open “some” biz by 5/15…
Total US cases fell another 3,444 today vs yesterday to 17,652 vs 21,006 and down -7,439 over the past 2 days.
Total reported tests >400,000 for the first time… so the drop in cases is not due to declining testing… 4% “positive”
Perhaps the most impressive aspect of the drop in reported cases is the surge in reported tests. As shown below, this figure reached a new high of 421,000, higher than the ~290,000 2D ago. Thus, the number of “% positives” is much lower at 4% compared to 9% 2D ago.
– Cases have jumped mid-week vs early in the week, so we do not want to read too much into the reported cases for Monday nor Tuesday. But the fact that it is dropping, is encouraging.
7 states account for 62% of the drop, and most are the Northeast states… is it the weather?
The 2-day drop is huge. And it is spread across many state, but 7 states accounted for the bulk of the decline (2D change shown), or 62%:
– IL 1,266 vs 2,325 (2D ago) -1,059
– NY 1,660 vs 2,715 -1,055
– CA 1,259 vs 2,049 -790
– PA 543 vs 1,078 -535
– FL 386 vs 802 -416
– CO 176 vs 548 -372
– CT 211 vs 573 -362
Total 7 top states -4,589 (62% of 2D change)
Such pervasive and broad improvements are a good sign. But the simultaneous improvement is somewhat head-scratching. Is this weather? We have no idea. And since cases tend to jump mid-week, we do not want to read too much into the Monday reported data.
READY TO GO –> Some parts of NY state could open as early as Friday this week (5/15)
NY Gov Cuomo today announced that NY state is moving tangibly closer to easing restrictions, even suggesting some parts of NY state could open as early as this Friday. The governor outlined 7 metrics below and a region meeting 7 of 7 is ready to open.
7 criteria — need ~6,000 contract tracer (employees) and conduct ~60,000 “new” tests per day (confusing, as “monthly” used)
The criteria are detailed below but it falls into 3 categories:
– case improvements measured as hospitalizations
– healthcare resource capacity (beds available etc)
– tracking infrastructure (testing + contact tracers) –> 30 tests per 1k residents and 30 contact tracers per 100k residents.
On the latter point, the state has ~20 million residents, this implies the state needs to conduct 60,000 tests per day and needs to hire 6,000 contact tracers. This does suggest quite a significant ongoing cost to the state in the future from COVID-19.
– Assuming $60,000 median salary, the labor cost alone is $360 million annually. A huge figure for a state
Only Finger Lakes, Mohawk Valley and Southern Tier of NY state regions meet 7 of 7. NYC is 4 of 7 (worst)…
Drive-in theaters, landscapers and parks and outdoor sports open as of 5/15/2020…
The governor also declared that Low-risk and recreational businesses can open statewide as of 5/15/2020. These are drive-in theaters, landscaping, outdoor sports and parks. These are not big GDP components. And they are relatively small.
– So we are not really scoring NY state as open, until broader categories are included such as offices, etc.
– NYC continues to expect to be closed until at least June.
POINT #2: USA R0 is 0.75, meaning the country broadly seeing a retracement.
The infectiousness of COVID-19 is what has made this disease spread so quickly. And the metric use to calculated spread is the reproduction rate, or R0. If the R0 falls below 1, the epidemic slows as each new patient infects less than “one” person.
Our data scientist, tireless Ken, calculated the R0 for the US counties and states. He based some of his python code on the work done by rt.live, an entity created by Kevin Systrom, the co-founder of Instagram. Kevin’s algorithm is described below.
Based on a case weighted basis, the USA overall R0 is 0.75, so COVID-19 is on the decline…
Because each outbreak is local, we compiled the R0 for each state (sorted highest to lowest) and calculated the USA composite on a case-weighted basis. The overall USA figure is 0.75, well below 1.0
We created composite R0 time series, grouping states into 3 buckets:
– States open prior to 5/1/2020 (13 states, 13% of US pops);
– States open between 5/1 to today (26 states and 57%);
– States which have not yet eased restrictions as of today (12 and 30%)
Because states will move through these tiers, and we do not want “mix” changing sequential values, we restate the entire series as states move from the red line to the yellow line.
The R0 is improving most rapidly for the red line, which are states which have not yet opened. A glance at the 50 state chart below explains this — states like NY, NJ, IL, CT and MA have the best R0 and are not yet opened. Of course, R0 is not the only factor. It is also a function of level of cases. And as many local govt discussed, a function of resource availability.
R0 for each of the 50 states below…
We color code the states based on their status on “opening” their economy (as of today) and applied the same color coding as above (ie, green are those open since before 5/1/2020).
– NY state is now 0.56, a sizable decline and actually the 4th best in the USA.
– Of the states where this R-value > 1, the highest is South Dakota at 1.3 (granted 1.3 is better than 4 or even 2).
– For states like Georgia, which have been open >2 weeks now, the R0 is 0.90, and still below 1.0.
NY state (red line) when from worst of 50 states to one of the best…
The R0 for NY state and the other 50 state is shown below. The time series starts on 3/5/2020 and as you can see, early in the crisis, NY was the worst with an R0 of >4.5. But with the rigorous efforts of the state, this R0 is now 0.56, and among the best of the 50 states. This is another affirming data point that the state is ready to open.
POINT #3: UK study suggests COVID-19 infects “susceptible” population early, depleting the pool of vulnerable, and thus, herd immunity may be achieved with as little as 10% exposed (not 60%-70% commonly accepted) — a study flagged by Scott Gottlieb, the former FDA Commissioner.
Herd immunity matters, because that is one of the reasons society can return to “normal”
One of the greatest concerns regarding COVID-19 is the risk of a second wave out outbreak as local governments ease restrictions. And the prevailing view is that society only achieves herd immunity when 60%-70% of the population is exposed. And with a case fatality rate of 0.2% to 0.5%, that implies US COVID-19 deaths would eventually hit 400k to 1.2 million, based on 60%-70% prevalence.
But it is more than deaths that make herd immunity a big deal. It is the question of when can the society return to some semblance of normality. This will be the point when the risk of spread of COVID-19 becomes just “another ailment” — a status it does not have today. And of course, everyone will worry about a second wave if there is no herd immunity.
UK et al study suggest that “individual variation” to susceptibility drastically lowers herd immunity threshold to 10%…
One of our clients, based in Westport, CT (and unnamed, because we forgot to ask their permission) flagged some commentary by Scott Gottlieb on Sat (5/9) where he referenced a UK study published on MedRxiv on 5/2.
– In the comments from Scott, he hit on the key takeaway, COVID-19 infects the most susceptible first and thus leads to slowing of infection as this pool is depleted. And also, it suggests herd immunity is reached sooner.
The study has a logical premise. Those most probable to catch COVID-19 are infected early, either being more susceptible (weaker immune system, age, etc) or more connected. And also likely to become immune sooner (we wrote about that other study yesterday, that does seem to confirm individuals become immune).
– in their terminology (see below), the subpopulation (of those who can get COVID-19) gets depleted with infections. Their words are shown below.
And the key notion is a “heterogeneous” population. The study is 7 pages and they define heterogeneous generally as “individual differences due to biological susceptibility, physical exposure or a combination of the trait” — so it is not heterogeneous in the sense of genetic diversity (or it could be, since that could full under biological). This CV, or the coefficient of variation, affects disease spread.
– by increasing this CV from 0 to 4, the required herd immunity falls to <10%.
Their takeaway is that the prognosis for the disease path is more optimistic “than currently assumed”
The authors basically believe the existing models overstate the threshold needed to achieve herd immunity and as such, have a more optimistic take on the disease path. The graph below shows (marked red arrow, by us) that herd immunity is achieved at much lower levels. The green and blue bars are the “herd immunity” levels for malaria and tuberculosis.
– so COVID-19 could achieve herd immunity with lower spread than those diseases.
If the study is correct, many states in the US are past the 10% threshold, based on serology tests…
Many states and counties have a case prevalence >10% — certainly, NYC and NY do. And perhaps this explains why the cases are now beginning to fall off sharply, even as there has been no increase in social distance restrictions in the past few weeks. In fact, movement data shows social distance compliance is falling in the NY and NYC area.
STRATEGY: Signal from the stock market increasingly suggesting “vigorous” economic recovery ahead… look at Energy stocks
If someone asked us to point to tangible evidence of “visible” economic recovery — it does not exist. Sure, big-data/alternative data is showing “movement” and “traffic” increases, but these are measured as rate of change. That we are “off the bottom” but this does not suggest a substantial economic boom ahead. Yet, financial markets are mostly suggesting stronger growth ahead. Last week, we highlighted the $62 rise in oil (from -$48 per barrel to +$20s). And that move, no doubt, created fortunes for some fortunate traders.
Energy stocks bottomed on 3/19/2020 (4 days ahead of S&P 500 bottom) and are up 71%… is this a new “leader”?
Energy stocks are in a stealth rally. It is a stealth rally, because most investors have removed every energy ticker from their Bloomberg screen.
But take a look below at the S&P 500 GICS1 Energy sector price index and price relative to S&P 500 are shown below.
– Energy stocks bottomed 3/19/2020, 4 days before the S&P 500 bottom (which we see as the low)
– Energy stocks are up 71% since then, largely confirming the rise in oil.
– Energy stocks relative strength charts are impressive (lower half).
Here is a group that has been underperforming for almost 10 years. Got massacred with the OPEC fracture. Got massacred again with the global shutdown.
And yet, this group is rising from the depths of destruction. The collective signal from Energy, in our view, is not “speculation” of a bounce. There are simply too many groups with better long-term fundamentals that one could “speculate” on. And it is not a credit buyer, since a credit buyer is likely long the debt and short the equity.
– We think the rise in Energy, and it is a sustained one, is telling us the economic growth outlook is likely strengthening. Yup.
Energy is a reminder investors should “barbell” both Epicenter stocks and Secular Growth…
We continue to recommend investors barbell both “epicenter” stocks and “secular growth” — today was a good day for FANG, etc.
Fundstrat “Granny shots” outperforming by 710bp YTD and beat S&P 500 4 of 5 months in 2020…
Incidentally, our thematic-based portfolios are still identifying attractive ideas. Our “granny shots” is based on the stocks that fall most commonly in our 6 portfolios, 3 thematic and 3 tactical.
– the top names continue to be GOOG and AAPL which are not surprises.
– The full list is shown below, to the right of Rick Barry.
And the monthly performance is shown below. We designed Granny shots to produce thematic ideas, but with lower volatility.