Click HERE to access the FSInsight COVID-19 Daily Chartbook.
We are shifting to a 4-day a week publication schedule:
- Monday
- Tuesday
- Wednesday
- SKIP THURSDAY
- Friday
STRATEGY: If equities 2021 are bonds of 2011, then P/E goes to 33X???!!!!
North Dakota and South Dakota BARELY have any cases now…
This past week, ND and SD crossed into that 60% region, where the combined vaccinations + confirmed infection = 60%. And at this level, the “herd immunity” should begin to positively impact reported cases.
– indeed, this seems to be the case.
Source: COVID-19 Tracking Project and Fundstrat
Remember when ND and SD were reporting thousands of cases per day?
– ND and SD are below 100 now.
– Wow
– This could be an anomaly, or is this for real?
Source: COVID-19 Tracking Project and Fundstrat
Sanity check on the more transmissible variants –> cases are falling in UK, South Africa and Brazil
At the moment, it seems scientists and disease experts are most worried about 3 variants of COVID-19. These 3 are known as:
– UK variant B.1.1.7
– South Africa B.1.351
– Brazil B.1.248
And while the exact mechanisms that make these 3 strains more transmissible are not entirely clear (seem to bind to ACE receptors more easily, etc), they are becoming common variants in the genetic testing done. The US is not sequencing the virus as often as other nations, so the US situational awareness is not as strong.
The key question for policymakers and scientists is whether these “more transmissible” strains make COVID-19 more difficult to contain, either because the vaccine is not effective, or because more people catch the disease. As a sanity check, we can see whether the 3 nations, originating these strains, is having trouble containing COVID-19.
– UK cases are down 50% in the past few weeks
– South Africa cases down >60% in past few weeks
– Brazil cases might be plateauing
In other words, the nations with these more potentially transmissible strains, is not necessarily seeing COVID-19 re-accelerate, or even plateau. But of course, we would all feel better knowing the vaccine is effective against these strains.
Source: Johns Hopkins and Fundstrat
STRATEGY: Epic short squeeze on GME (+ others) could mean of 3 things: top, change in rules of game, or nothing important
Over the weekend, this tweet by Jim Bianco caught my eye. The surges in most heavily shorted stocks are exploding higher.
– Monday saw a continuation of the painful meltup in Gamestop (GME)
– It was not just GME up, but as several noted, BB and EXPR, also doubled.
– Many heavily shorted names rose
Source: https://twitter.com/biancoresearch/status/1353341786480136192?s=21
Now I do not have a fundamental view on Gamestop, nor its valuation. But there have been few incremental and material fundamental developments in the past few days. So this surge is an “old-fashioned” short squeeze. And the prevalence of this type of squeeze is what has alarmed many institutional investors. In our view, this surge in heavily shorted stocks means one of 3 things (could be more):
Sign of…?
– top, as the “last buyer” is the short covering
– regime change, are equity inflows changing the game? maybe
– nothing, but just another short position busted (could be).
I don’t know which one of these 3 things is the factor at work. But based upon our conversations with our institutional money managers, many point to the “sign of a top” as their most probable.
I certainly cannot rule this out. After all, there is no real bell rung at the top. But the reason I am less inclined to see this is the high prevalence of caution and skepticism out there. I think the consensus was pretty bullish at the start of 2018 (turned out to be a bust) and in early 2020 (same thing). But now, it seems like many signs are being offered as proof of a bubble.
SIDE NOTE: Are Retail traders the “Red team” of the 2021 equity market “war games”?
For some odd reason, when I hear discussions of “Robinhood retail traders” versus professional investors, the analog that comes to mind is the US military (institutional investors) and the smaller armies of third world nations (everyone else). The comparisons are logical:
– US military, large size and well equipped,
– US institutional investors supported by massive infrastructure and budgets
– Iran (example) small forces and less equipped
– US retail less likely to have Bloomberg and army of data services
But large size does not always win.
Millennium Challenge 2002 — US lost a fictional war to Iran
If you are a fan of military history (me, yes I am), you might remember the Millennium Challenge in 2002. During this wargame, Iran was able to destroy the US naval fleet within a day. There is a lot of nuance to the strategy, but let me highlight the more prominent facts:
– “red team” was Iran
– using nimble boats and swarms, overwhelmed US defenses
– quick decision making also helped
Source: https://www.popularmechanics.com/military/a30392654/millennium-challenge-qassem-soleimani/
So a simplified graphic of the Red team is below. Iran with small speed boats, beat the massive resources of the US Navy.
In fact, Iran has been quite successful for some time employing this strategy. So the war game results actually follow “real world” happenings.
https://www.opendemocracy.net/en/why-iran-has-a-speedboat-swarm-thats-punching-above-its-weight/
Well, in a way, in the equity world, the “red team” is the Robinhood trader. And they are proving to be quite capable of mounting some successful “value capture” against Wall Street institutional investors:
– GME and BB and others are examples of “red team” assaults
– will their strategies endure?
– likely, systematic funds and quants will soon “adjust” their models to incorporate this “red team”
– so this effect could wane
Is the equity market in 2021, the bond market of 2011? That is, are equity inflows about to commence?
In our view, one that could be a significant impact on stocks in the next decade is the potential for positive investor inflows. Since 2008, the equity market has seen scant equity inflows. Of the $3T cumulative investor inflows into financial assets, only 6%, or $180 billion has been equity inflows.
– 94% of all financial savings flow has been into bonds.
– The starkness of this evident in the pie chart below
Source: ICI and Fundstrat
TBT — “turn back time” to 2011…
It might help us to take a walk back to the start of 2011. For context, this was >1 year after the bottom of the GFC and at a time when the Fed, ECB and BoJ were unleashing unprecedented monetary easing.
– at the start of 2011, the investor had put more money into cash than into bonds
– so 2011, was the start of the flood of money into bonds
As this chart below shows, by the start of 2011, every single fixed income and credit market yield was at “all time lows.” Think about that
– investors were about to pour $3 trillion into a bond market
– which was already trading at all-time low yields
– would that not have been called “insane”?
Naturally, if UST and bond yields were at “all-time” lows, and retail was about to invest more heavily into bonds, many institutional investors would have gladly taken the other side of that bet. In other words, many professional investors would have been shorting bonds.
“Bond shorts” were taken out in stretchers over the next decade…
But instead of yields rising, this $3T of retail investor inflows, coupled with aggressive balance sheet expansion by central banks pushed rates even lower. Look at the chart below:
– rates “now” are drastically lower than the “all-time lows” seen in 2011
– CCC bond yields at 7.5% used to be impressive BB yields
– The past 10 years have seen bonds enter the “bizarro world” compared to pre-2011 times
Fast forward to 2021… If equities 2021 are bonds of 2011, then P/E goes to 33X???!!!!
Moving to today, we wonder if equities in 2021 are facing the same set of circumstances that bonds faced in 2011. The Fed and ECB and BoJ are still dovish, focused now on facilitating markets pricing in a reflationary world — less about bonds behaving only, but getting asset prices to create feedback loops.
– Fed + CB dovish
– Retail investor inflows could abruptly shift next decade to stocks from bonds
– Where can P/E go?
The natural question is where can P/Es go? Take a look at the chart below, but we added equity P/E.
– Equity P/E (2022 EPS) is ~20X
– this is within the range seen in the past 90 years
– yet, we have dovish CB + $3T potential inflows
Our take? P/E could go a lot higher than people expect.
– Does P/E go to 33X?!!
We think stocks are still going through a “healthy consolidation” but the underlying currents are “risk-on”
Bottom line, we think stocks have positive risk/reward in the near term. Our base case remains seeing the S&P 500 reach 3,900-4,000 sometime between Feb and April. And that would likely represent the local top before a large correction ensues.
But the future is uncertain, and COVID-19 is uncertain. So this is subject to change.
ADDENDUM: We are attaching the stock lists for our 2 portfolios:
We get several requests to give the updated list for our stock portfolios. We are including the links here:
– Granny Shots –> core stocks, based on 6 thematic/tactical portfolios
– Trifecta epicenter –> based on the convergence of Quant (tireless Ken), Rauscher (Global strategy), Sluymer (Technicals)
Granny Shots:
Full stock list here –> Click here
Tickers: AAPL, AMZN, AXP, BF.B, CSCO, EBAY, GOOG, GRMN, GWW, INTC, KLAC, LEN, LOW, MNST, MSFT, MXIM, NVDA, OMC, PM, PYPL, QCOM, TSLA, XLNX
Trifecta Epicenter (*):
Full stock list here –> Click here
Tickers: AN, GM, F, HOG, GRMN, LEG, TPX, PHM, TOL, NWL, HAS, MAT, PII, MGM, HLT, MAR, NCLH, RCL, WH, WYND, SIX, DRI, SBUX, FL, GPS, LB, CRI, VFC, GPC, BBY, FITB, WTFC, ASB, BOH, FHN, FNB, PB, PBCT, RF, STL, TFC, WBS, PNFP, SBNY, NYCB, MTG, AGNC, EVR, IBKR, VIRT, BK, STT, SYF, BHF, AGCO, OC, ACM, WAB, EMR, GNRC, NVT, CSL, GE, MMM, IEX, PNR, CFX, DOV, MIDD, SNA, XYL, FLS, DAL, JBLU, LUV, MIC, KEX, UNP, JBHT, R, UBER, UHAL, HP, NOV, SLB, EOG, PXD, HFC, MPC, PSX, XEC, LYB, EXP, MLM, CF, MOS, ESI, NEU, NUE, RS, SON, STOR, HIW, CPT, UDR, KIM, NNN, VNO, JBGS, RYN
(*) Please note that the stocks rated OW on this list meet the requirements of our investment theme as of the publication date. We do not monitor this list day by day. A stock taken off this list means it no longer meets our investment criteria, but not necessarily that it is neutral rated or should be sold. Please consult your financial advisor to discuss your risk tolerance and other factors that characterize your unique investment profile.
POINT 1: COVID-19 is retreating in USA, and cases fall to 130,000-ish for the past few days
The latest COVID-19 daily cases came in at 132,641, down -16,077 vs 7D ago.
– ND and SD barely have any cases
– COVID-19 cases have declined (vs 7D ago) for 13 consecutive days
– The strongest retreat in cases since Wave 2
Source: COVID-19 Tracking Project and Fundstrat
Remember when ND and SD were reporting thousands of cases per day? ND and SD are below 100 now. Take a look below.
Source: COVID-19 Tracking Project and Fundstrat
The 7D delta has turned negative for the past 13 days consecutively. This is impressive and the rate of change is accelerating to the downside.
– this is contributing to the sense that this receding of cases is a much faster retreat than seen in the past few months
Source: COVID-19 Tracking and Fundstrat
US hospitalization still rolling over … and even US deaths seem to be rolling over…
Below we show the aggregate patients who are currently hospitalized due to COVID. It certainly seems to be rolling over = good sign.
Source: COVID Tracking Project and Fundstrat
Source: COVID-19 Tracking and Fundstrat
Source: COVID-19 Tracking and Fundstrat
POINT 2: Daily vaccinations >1.2 million per day. Crossed 20 million doses on Sunday
Ramping up the vaccination efforts in the US is a massive undertaking, with multiple jurisdictions and policymakers making decisions on each step of the way. This, of course, creates a lumpy supply chain as well, probably not that different than what is seen under any construction or infrastructure project — think home construction and the needed coordination across all suppliers.
An example of this is NYC. The city is postponing mass vaccinations. Originally, NYC was…
– opening mass vaccination sites at:
– Yankee Stadium, Citi fields, Empire Outlets in Staten Island
– But the shortage of vaccine supplies makes this pointless until more supplies available
Source: https://www.newsday.com/news/health/coronavirus/covid-19-virus-long-island-nyc-vaccine-updates-1.50130588
In numbers, NYC can do 500,000 per week, but has only ~19,000 doses on hand. And to do mass vaccinations, NYC needs 200,000 doses.
Source: https://www.newsday.com/news/health/coronavirus/covid-19-virus-long-island-nyc-vaccine-updates-1.50130588
The takeaway for me is that this is still “growing pains” and the pace of vaccinations will be accelerating in the coming weeks. This progress may not be linear. As shown:
– reported vaccinations for Sunday was 835,295
– last Sunday was “lumped” with Friday-Monday, so no comparable figure available
– this figure is expected to keep accelerating, and
– if JNJ vaccines become available, this is a step function higher (more supply)
Source: CDC and Fundstrat
The ratio of vaccinations/ daily confirmed cases is trending higher and this is also encouraging. After all, this would argue that the US is getting vaccinations out faster than Americans are getting infected. So the rise in this ratio is intuitively positive.
– this figure dipped today, but that is due to the lower vaccinations administered, and not due to case surge
Source: CDC, COVID-19 Tracking Project and Fundstrat
The ratio of vaccines administered as % vaccines distributed is creeping up. Nationwide, this figure is now 55%. While this is certainly less than ideal (higher is obviously better), the fact this figure is rising is a good thing.
Source: CDC, COVID-19 Tracking Project and Fundstrat
POINT 3: Nasal Spray that blocks COVID-19 for 48 hours could be out by Summer…
UK researchers have been working on a nasal spray that could block COVID-19 for up to 2 days. And it could be an “over the counter” product by the Summer. According to the article in the Telegraph (reported by the related NY Post):
– the spray works by coating the nasal passages
– and wraps itself around the virus
– so it is like a “venus fly trap” for the virus
Source: https://nypost.com/2021/01/25/covid-19-blocking-nasal-spray-may-be-available-by-summer/?utm_campaign=iphone_nyp&utm_source=Slack
The product itself is composed of two parts:
– an antiviral agent called carrageenan — also used as a thickening agent in food, and
– a solution gellan, a gelling agent that sticks to cells in the nose.
So it is like glue with sanitizer.
We had written about this spray in passing a few months ago, and the researchers have been working on it since April 2020. And they suggest using it 4X per day and as much as every 20 minutes.
This idea of personal protection is obviously appealing, as a supplemental source of protection, or a primary source for those not taking the vaccine.