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.
Daily cases for COVID-19 jumped today to +3,666 to 22,757 but it is not really a case of new breakouts. Testing rose 62% to >471,000, so that partially explains the 19% rise in 1D cases. There is a pattern of midweek cases jumping and this has continued for enough weeks, that we added 7D comparisons, to neutralize the day by day jumpiness. Looking at “week ago” vs “today” we can see there is steady progress each day this week. We still think we need to watch 1D changes and spot sustained dislocations, but for understanding the trend, this chart below makes clear US COVID-19 cases are slowing.
Source: COVID-19 Tracking Project
But it has been a good week for COVID-19 progress, particularly on the re-opening front. There are more and more signs of an America returning to normalcy. Texas Gov. Greg Abbott announced professional sports will allow fans to attend with 25% capacity (see link –> TX Governor Order) and we believe it is the first state to allow fans into the stadium. This is a major step forward. And with yesterday’s Disney re-open plans, the “social distance” victim businesses are proving they are finding ways to adapt. Again, American businesses are survivors and adaptable.
https://www.espn.com/espn/story/_/id/29235637/texas-let-fans-attend-pro-sports-events-25-capacity
This is a short trading week in the US because of the Memorial Day weekend holiday. But in the 3 days this week, the S&P 500 is up 2.5% and we saw a pronounced strong relative performance by the “epicenter” groups (Discretionary, Financials, Industrials and Energy). For the most part, it appears the US is now past the bottom on many fronts:
– past the peak on COVID-19 cases, hospitalizations and deaths
– past the bottom on economic fundamentals
– past the bottom on equities
And if these 3 are indeed correct (we cannot know ahead of time), this is the time for “epicenter” (aka cyclicals) to lead. Cyclicals that have survived this “Greater than Great Depression” intact (no equity dilution) have survived the most severe gauntlet that company will ever face in its lifetime. In other words, they have proven themselves “unkillable” and given their low valuations (see below), the risk/reward is attractive. Epicenter stocks are trading at ~1.5X P/S compared to P/S 2.1X for S&P 500 and 4.3X for FANG. (P/S makes sense because of depressed margins).
And as we analyze below, FANG and Growth stocks are highly correlated to 10Y bonds, so they are literally bond proxies and their valuation expansion is due to low rates. That is why the S&P 500 appears expensive, because 76% of the market cap is correlated to the 10Y. But “epicenter” stocks have low correlation to the 10Y and are set to see strong revs and EPS growth next year. Another reason for “less barbell”
POINT #1: USA cases rise 19% to 22,757 (+3,666) on a day tests rise 62% to 470,931. CA now leading USA in total cases 3 days in a row…
Total daily reported COVID-19 cases surged today to 22,757, +3,666 from 1D ago and up 19%. This is a typical midweek surge and as we can see on the chart below, there is a general roller coaster to the daily cases. But on a week over week basis, this is an improvement.
– many states reported a rise in cases (see below), so this is not a positive sign. But it is probably best to say progress has been given up
– daily tests surged 62% to 471,000 today, so that 62% rise also explains more cases.
– serology test results are added to the daily totals, even though these do not represent new infections, but the presence of antibodies.
Source: COVID-19 tracking project
If we look at 7D change in COVID-19 reported cases, we can see this is in a steady downtrend…
We can strip out the weekday seasonality by looking at 7D change. Monday cases compared to Monday a week ago, etc. And this chart is rendered below. As we can see, there are sustained improvements on a week over week basis, even as testing has surged. Thus, while daily cases have been surging ups and downs, when looked at compared to the prior week, there is progress.
Source: COVID-19 Tracking Project
Total daily tests surged today. Again, testing varies by day because of both reporting and testing lags. And we also now know that serology tests are included in these figures. So someone could be a recovered patient, but their serology test and positive antibody result is in the total.
Source: COVID-19 tracking project
Total positivity is trending lower and today fell below the 6.6% yesterday. So it is a good thing that positivity did not rise today, with the 62% increase in cases. If it did, it would be a negative sign.
– there is still a risk of a second wave, and while we have not seen evidence of this yet, this bears watching.
– falling positivity is suggesting this is not the trend
Source: COVID-19 Tracking Project
Lots of big jumps today… CA now has highest number of daily cases…
As usual, there is a lot of day to day churn and any single day does not mean much. But it is important to watch, in case, of a sustained breakout.
The 6 states with the biggest 1D change are:
– New York 1,768 vs 1,129 (1D) +639
– Maryland 1,286 vs 736 +550
– Texas 1,855 vs 1,361 +494
– California 2,717 vs 2,247 +470 <- 3 days now highest cases
– Illinois 1,527 vs 1,111 +416
– New Jersey 1,187 vs 864 +323
Total 6 states +2,892
6 states saw substantial declines:
Iowa 226 vs 657 (1D) -431
Pennsylvania 625 vs 780 -155
Louisiana 305 vs 443 -138
Kansas 0 vs 119 -119
Michigan 406 vs 504 -98
Wisconsin 512 vs 599 -87
Total 6 states -1,028
For the most part, day to day changes are noise.
Source: COVID-19 Tracking Project
Texas cases are rising but it is mainly due to finding more cases in prisons…
Texas is easing restrictions and even announced allowing fans into professional sports stadiums. These are big steps and one could if it is sensible given that Texas has reported a pretty big rise in daily COVID-19 cases in the past few days (see below).
– daily cases rose from <600 two days ago to 1,855 today
– 1,855 is a new high in cases.
Source: COVID-19 tracking project
But part of the reason for Texas’s surge in cases is due to two factors. First, is the holiday weekend lag (fewer reported two days ago) and secondarily, the inclusion of test results from Texas prisons. According to Fort Worth Star-Telegram, Chris Van Deusen, a spokesman for the Texas Department of State Health Services, wrote in an email Thursday night that another factor in the spike in new cases is partially due to seeing results from the Texas Department of Criminal Justice’s COVID-19 testing.
– Jones and Walker have reported surge in cases from this factor.
Source: Texas Dept of Health
We have attached photos of the two prisons (from a google search) of some of the facilities in these two counties.
Source: google
California cases are jumping in counties with few previously reported cases…
California numbers are surging in counties that had previously had fewer cases. The county level data, extracted by our data scientist, tireless Ken, are shown below. The counties that seem to jump out:
– San Bernardino
– Riverside
– Kings
– Kern
In fact, as Ken points out, 8 counties are now 79% of the daily reported cases. For our clients that live in these areas, if you have insights, please share them with us. Thanks. But it is this surge that is leading to CA to have the highest number of cases.
POINT #2: Growing body of research shows high levels of vitamin D reduce the severity of COVID-19. Less risk of “second wave” in Summer –> “sunshine” = Vit D
Early in the COVID-19 crisis, there was some talk about the benefits of Vitamin D in the prevention and reducing the severity of COVID-19. Vitamin D is technically not a vitamin (aka vital mineral, vitamin for short) but is a prohormone (precursor of a hormone) and unlike vitamins, which our bodies cannot create, vitamin D is produced by our body. There are many benefits to vitamin D but the 3 most known benefits are:
– Boosts the immune system
– Regulates mood
– Boosts weight loss (possibly by suppressing appetite)
4 recent studies show the high severity of COVID-19 associated with low levels of vitamin D…
We have listed 4 of recent studies of the role of Vitamin D and COVID-19 outcomes, all published within the past 6 weeks. There are more studies out there, but this is a good representative sample set. Each of the studies (summarized below, and MedRxiv link as well) come to the same conclusion. Patients with severe cases of COVID-19, ICU or hospitalizations, tend to have deficiencies in Vitamin D. Other studies look across populations and temperature (Davies).
– the April 28, 2020 study caught my attention. It showed that 100% of ICU patients age <75 had vitamin D deficiencies.
– the May 18, 2020 study showed CPR (C-reactive protein, a surrogate marker for VitD deficiency) data suggests VitD could reduce cytokine storms, which is the inflammation that ultimately leads to the need for a respirator.
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
We can “self-medicate” vitamin D by getting some sunshine…
The easiest way for us to Vitamin D is by exposing ourselves to the sun. When our skin is exposed to the sun, our bodies make vitamin D from cholesterol (https://www.healthline.com/nutrition/vitamin-d-from-sun, I am not a science expert). According to the NIH, most people get sufficient Vitamin D from early April to the end of September from sunlight.
But if the sun is not available, vitamin D is found in a small number of foods, including oily fish such as salmon, mackerel, herring and sardines, as well as red meat and eggs. Or taking a vitamin D tablet works as well.
42% of Americans are Vitamin D deficient… so it is not as simple as it sounds…
It turns out that a surprising 42% of Americans have vitamin D deficiency. There have been numerous studies supporting this conclusion. I have attached an NIH study from 2010. The link is below.
https://pubmed.ncbi.nlm.nih.gov/21310306/
There is a surprisingly big difference in Vitamin D deficiency by race (higher in Blacks, Hispanic) and by health characteristics (higher if obese, bad cholesterol, hypertension) and habits (smokers and non-milk drinkers). The study defined Vitamin D deficiency as a serum 25-hydroxyvitamin D concentrations ≤20 ng/mL (50 nmol/L).
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
Sound familiar? Vitamin D deficient cohorts are similar to those suffering from severe outcomes in COVID-19…
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).
https://www.cdc.gov/coronavirus/2019-ncov/need-extra-precautions/racial-ethnic-minorities.html
This study was published about a month ago and focused on NYC area COVID-19 patients. Recall, NYC is the hardest hit area of the USA in terms of COVID-19 prevalence. Per CDC Study of COVID-19 (April 17, 2020) of COVID-19 580 patients hospitalized with lab-confirmed COVID-19. Two things really jumped out at me.
– first, Black were nearly 2X the share of hospitalized patients compared to the community
– second, death rates were much higher for Black and Hispanic patients
Table: CDC Summary of NYC study COVID-19 patients (April 17, 2020)
Of hospitalized patients:
% %
Hospitalized Community
– White 45% 59%
– Black 33 18 <– much higher
– Hispanic 8 14
Among COVID-19 deaths in New York City:
– Black 92.3 deaths per 100,000 population
– Hispanic 74.3
– White 45.2
– Asian 34.5
https://www.cdc.gov/mmwr/volumes/69/wr/mm6915e3.htm?s_cid=mm6915e3_w
Similarly, take a look at the listed “risk factors” from the CDC for COVID-19. Many of these risk factors overlap with those same groups with low Vitamin D deficiency: chronic lung (ala smoking), diabetes/obesity, heart conditions (hypertension), obesity, etc.
– again, it is a striking similarity.
https://www.cdc.gov/coronavirus/2019-ncov/need-extra-precautions/groups-at-higher-risk.html
If Vitamin D plays a “silent” role in COVID-19 severity, the summer months might help prevent a second wave…
I was surprised to see 42% of Americans are vitamin D deficient. And if the research is correct, and vitamin D mitigates the risk of severe outcomes for COVID-19, I am 100% in favor of suggesting everyone get their vitamin D. I know there are multiple types and I don’t know which supplements are the best.
But if Americans naturally get more Vitamin D during the Summer, this does reduce the risk of a rapid spread or potentially COVID-19 cases will be milder. Either would be a positive. But there are risks to too much vitamin D (see link –> https://www.healthline.com/nutrition/vitamin-d-side-effects#9) so I would not suggest getting too much Vitamin D either.
Brazil, a sunny country, actually has a high level of vitamin D “insufficiency” at 45% of the population… ???
Incidentally, according to a study by Taylor and Francis Online, titled “Epidemiology of vitamin D insufficiency and deficiency in a population in a sunny country,” about 45% of Brazilians suffer from vitamin D “insufficiency.” I am not a scientist. Does this explain why it is rapidly spreading in Brazil?
POINT #3: CNBC’s Kelly Evans interview of Larry Kudlow, NEC Director for White House, shows still quite a lot of policy levers available. T&E deductibility would be helpful, but incentives needed to re-start Corporate Travel
Larry Kudlow, the National Economic Council Director for the White House was interviewed by CNBC today. I found it to be quite informative regarding potential future policy actions and also what the White House is monitoring. The link to the interview is below.
https://www.cnbc.com/video/2020/05/28/kudlow-were-looking-at-deductions-for-restaurants-travel.html
Among the topics discussed, the two that I find most interesting was first, the discussion about moving the supply chain back to the US. It is something that every business is likely considering, considering the global disruptions, and the general anti-China backlash that is likely to be a story in 2021. The second is looking at tax-deductibility around corporate T&E (travel and expenditures). Corporate travel has been frozen and replaced by Zoom/WebEx meetings. And it is a huge category of spend. Thus, priming this category would be important to help normalize the economy. The topic of payroll tax holidays (+7.6% to worker wallet) was also broached.
On supply chains, Kudlow spoke about ways to incentivize and also facilitate this move. Among the topics mentioned:
– 100% expense of fall expenses, equipment, structures and related “matters”
– extend law past 2022, no phase-out
And agencies involved could be:
– The US International Development Finance Corp (DFC.gov, formed by combining OPIC and DCA) which provides financing for private development projects including equity, debt, political risk insurance and technical development.
– US ExIm Bank (exim.gov), the Export-Import Bank of the US, which provides credit insurance, working capital guarantees and guarantees of commercial loans.
So there is a ton of policy initiatives available to make this happen. Whether this requires legislation, or can be achieved by Executive Order, is not entirely clear. Our policy strategist, Tom Block, believes any potential required legislation would run into problems at the House.
Kudlow’s comments about incentives around T&E
But the other thing discussed was some incentives for businesses around hard hit areas:
– Restaurants
– Tourism
– Air travel
Collectively, this is T&E. According to the US Travel Association (ustravel.org), total domestic and international air travelers spent $1.1 trillion in the US in 2019, or 5.5% of US GDP. US travels are the vast majority, representing $972 billion, or 86% of the total. I have not been able to get a great breakdown between business and leisure, but given our past work on leisure travel (~$200 billion), this implies business related travel spend is 80% of the total.
https://www.ustravel.org/
About 50% of business travel is airlines and lodging (56%), with restaurants another 15% or so…
Chase Treasury Services is the business unit at JPMorgan that services the cash management and business side of large and medium enterprises. So they are not investment bankers but on the bank side of the business. And Chase Treasury provides some details about clients spending habits. This data is from a presentation that unit made a few years ago that details the breakout of corporate T& E expenses. I am not clear if this is data for systemwide spending by a client or only those expenses using the Chase card.
– Air Travel is about 1/3 of T&E, not surprising given the cost of business travel
– Lodging is 1/5 of the total T&E spend
– Restaurants are about 15%
So combined, these 3 categories make up about 70%-75% of the total expense. So Kudlow comments about T&E deductibility make sense, because it is a huge category of corporate travel spending.
Source: Chase Treasury Services
Rough numbers, middle market businesses might be half of all T&E expenses…
Chase also provided some statistics around credit card usage, based upon the size of the organization. By their definition:
– Fortune 500 30,000 employees/co
– Large Market 4,600
– Middle Market 700
And the usage profiles are similar with about 20% of employees having a corporate card but the actual per employee metrics vary by size of business (see below). Basically, smaller biz see higher per unit spend by an employee. This makes sense. In a large company, a smaller percentage of employees will do travel, but if the same percentage of employees are issued cards, T&E spend/card would be lower.
Avg monthly spend:
– Fortune 500 $755/month
– Large 1,247
– Middle market 1,776
Source: Chase Treasury Services
Using this data, and some US Chamber of Commerce estimates, we can aggregate T&E spend. Middle markets ~50%
We thought it useful to sum up the figures to get to an estimate of how each of these organizations contribute to the $700b-$800b of total travel spend. The math is very crude and based on “wild guesses” for number of organizations in each category. So if you would like to play with data, our data scientist, tireless Ken, is happy to send this along.
– Small biz is not reflected here. Neither is government sector. Both are big spenders as well.
– But Fortune 500, which is a good proxy for S&P 500 is estimated to spend about $25 billion annually.
– So their share of T&E is smaller than I expected.
Source: Fundstrat and Chase Treasury Services
STRATEGY: Cyclicals surviving the “depression” are equivalent to winners of “America Ninja Warrior” — unbeatable
There is an entertaining show on NBC called America Ninja Warrior (https://www.nbc.com/american-ninja-warrior) and it involves athletes navigating a gauntlet of seemingly impossible physical challenges and the winner completes the course in the fastest time. There are so many types of challenges that a winner needs a combination of strength, reflexes, strategy and timing to survive. Some images from the 2019 are below.
Source: https://www.nbc.com/american-ninja-warrior
The challenges these contestants face are not everyday obstacles. So a normal person with no training, would have little chance of completing the course.
COVID-19 Depression is a gauntlet that Cyclical businesses could never really prepare for…
Growth companies do not really have sensitivity to the business cycle, nor Defensives. I mean they all do, but to a lesser extent. Cyclicals, on the other hand, are “beta” plays on GDP growth. So they are not all-weather groups. But this economic downturn is worse than the Great Depression. Hence, no contingency could have really been established from this.
– 2020 could be the survival course that will happen only once in a corporate’s entire lifetime (hopefully)
– If a company survives this gauntlet, especially a cyclical, isn’t it pretty much “unkillable’?
Think of it this way. If a cyclical survives a 40% GDP drop, with its equity not diluted, doesn’t this mean that business is a lot stronger than we realized? This happened with homebuilders in 2008, by the way.
The “epicenter” stocks that survive this is another reason to have “less barbell” and add more to epicenter…
Banks came out of the GFC much stronger, and the stronger banks improved their market position. And look at the resulting price performance. Good examples are JPMorgan and Goldman Sachs. The same is probably playing out today in “epicenter stocks:”
– Retailers
– Restaurants
– Airlines
– Hotels
– Casinos
– Industrials
– Banks
– Energy stocks (-$48 oil)
The weaker companies will fail. But they were not meant to survive this Greater Depression.
Now this is an “intangible” argument, because we are saying that they are strong enough to survive and thus, should do better on the recovery. But if we are correct, this will result in these stocks surprising on both EPS and with higher multiples. So it’s a win-win on both “E” and “P/E” — the “E” is from operating leverage, something we have talked about for some time.
Epicenter stocks are only 26% of the market cap of the S&P 500, but we believe could represent 62% of the points gains in the next few quarters (see our prior comments on this) — hence, we recommend investors have “less barbell”
Source: SNL
“Epicenter” stocks attractive on P/S and Sales Growth — arguably logical given depressed margins…
Naturally, if one wants to see risk/reward, comparative valuation matters. So we plotted the following 2021 metrics for the Growth, Defensive and “epicenter” groups:
– P/B 2021
– P/S 2021
– P/E 2021
– sales growth 2021
All of these figures are based upon bottoms-up consensus estimates
Source: Fundstrat
As you can see, the “epicenter” stocks (in red) are inexpensive on a P/S basis especially compared to 2.1X for S&P 500 overall. And yet, the 2021 sales growth is forecasted to be 1.5X or better than the overall S&P 500. Again, because margins are depressed, we think it is penalizing these stocks to look at EPS. Moreover, we believe 2021 EPS will surprise to the upside because of cost savings.
76% of the S&P 500 are “bond proxies” (highly correlated to 10Y) and “epicenter” stocks are low correlation…
Another thing to keep in mind is that Growth stocks and Defensives are becoming bond “proxies” and as shown below, have a fairly high correlation to bonds. Whereas, “epicenter” stocks have none.
– Thus, the valuation expansion of FANG, Growth, Defensives can be explained by falling rates.
– The “epicenter” are reasonably priced.
Similarly look at the VIX. Falling VIX has helped Growth stocks, because they are the most inversely correlated to falling VIX. Thus, Growth and bond proxies have seen valuations expand by the dual effects of lower VIX and falling 10Y.
Source: Fundstrat
