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We are shifting to a 4-day a week publication schedule:
- Monday
- Tuesday
- Wednesday
- SKIP THURSDAY
- Friday
STRATEGY: Equity markets “de-equitize” faster in 2021 = upside + $3.2T dry powder
There are central views about markets and among the most accepted of these is that underlying inflationary conditions are going to “surprise” markets and the Fed is already behind the ball. I don’t personally have a view on this but at the extremes, inflation is indeed a headwind for markets. That is, too much inflation is bad for equities just as much as too little inflation is bad for stocks.
But the best contemporaneous gauge is looking at the absolute level of the US 10-yr. Sure, other measures are useful such as inflation breakevens, etc., but the US 10-yr is going to reflect the market’s fears about inflation. Think about it:
or
– if deflation was a risk, rates would be plunging
– if inflation was a risk, rates would be rising
Looking at the recent trend in rates, it seems like interest rates are actually trending lower. Take a look below.
– the 10-yr was nearly 1.8% in early March
– it has made lower highs since
– it is currently 1.5687%
There are many ways to interpret this, but to me, one takeaway is the bond market is saying that inflationary conditions are less now than they were in March. I don’t think reported CPI is lower, but instead, this suggests to me bond markets are seeing reduced “inflationary risks” — in other words, the bond market panicked about inflation in March and now the level of panic is subsiding.
To me, this is positive for equities. After all, if interest rates are stabilizing, this reduces the “tail risk” for equity markets. It was in March when many pundits were talking about 10-yr soaring to 4%-plus within 12 months and how this would crush equity P/E. But now, the 10-yr has seen rates drift lower, and this is positive, from my vantage point. In short, we still think equities are about to break to the upside and we see S&P 500 reaching 4,400 by mid-year.
…Russell 2000 breaks to the upside Monday — tactical call still intact
It was also encouraging to see small-caps break to the upside Monday. The surge in the Russell 2000 (IWM ETF) might be due to some technical factors:
– upcoming re-balance/constituent additions caused some stocks to surge
– GME and AMC, two reddit stocks and heavily shorted, surged Monday
But as shown below, this has strengthened the price chart for IWM. And we see IWM making its way above the March highs of $235.
– hence, our tactical call for an IWM rally to $235-$240 is intact.
– we had extended this view 5-10 days from our earlier call
– we see this reaching $235-$240 by June 14th or 15th (mirroring XLE move)
– The upcoming June options expiration on June 18th is a triple witching. Stocks tend to be weak into that period so we don’t see IWM rising into June 18. The future is uncertain, but we would not expect IWM to be strong on 6/18.
Equity markets are de-equitizing at a faster pace in 2021, including a nearly 3X in stock buybacks
JPMorgan’s Niko Panigirtzoglou’s latest “Flows and Liquidity” has some good insights on equity net issuance by corporates — that is, the net increase in equity float as a result of corporate activity. A summary chart is below:
– Net issuance in 2021 forecast to be $350 billion
– Net issuance in 2020 was $750 billion (approx.)
– Net issuance this year is down 55% versus a year ago
In other words, the supply of equities, as determined by issuers, is actually dropping sharply in 2021. This is somewhat surprising given one would have expected bigger issuance in 2021 (vs 2020) given the strong equity markets and the potential financing needs of companies.
This is not the case, and because the net issuance is lower, means there is an improvement in supply & demand alignment.
The ramp up in equity buybacks is significant and is shown below.
– 2021 global buybacks announced tracking to $1.2 trillion
– 2020 global buybacks $400 billion
– 2021 pace is 3X what it was in 2020… wow!
Recall that many pundits last year claimed stocks would fare poorly in 2020 due to the falloff in buybacks. The drop in buybacks did not hurt stocks in 2020. And this massive ramp in 2021, in our view, provides an underlying bid for stocks in 2021.
And another source of “de-equitization” is the acceleration of M&A and LBOs in 2021. M&A doesn’t necessarily reduce float, as it is dependent on the composition of financing paid for the target. But LBOs are de-equitizing.
– 2021 M&A announced volumes are $6T
– 2020 announced M&A was $4T
– 2021 is 50% ahead of 2020…big increase
– 2021 LBO activity is also 33% above 2020 to $400 billion or so
Corporate confidence is the primary driver of M&A and to an extent LBOs, so this substantial ramp is also a sign of the improving business conditions and visibility for 2021. And especially compared to 2020.
…despite “confidence” by corporates, institutional investors continue to raise cash on sidelines to $3.2T
The confidence by corporates is contrasted with the seeming rising caution by institutional investors. The latest institutional money market cash balances shows institutional investors continue to raise dry powder:
– last week, another $8 billion added to sidelines
– currently stands at $3.176T and nearing the $3.221T seen May 2020
– massive dry powder
– of the ~25 weeks so far in 2021, institutions decreased cash balances in 5 of those weeks
– last time “cash balances declined” was mid-April
There may be other reasons to explain this rise in cash — i.e., corporate LBOs return cash to shareholders, which is cash paid to institutional investors. Or, institutional investors are selling bonds.
But in this environment where corporates are reducing equity issuance, accelerating M&A and LBOs, we see this rising “dry powder” as constructive. This money eventually gets invested.
Moreover, as we wrote Monday, the fact that equity breadth is increasing, evidenced by the upside breakout in cumulative advance/decline lines, means we see stocks being accumulated.
– and this means equity indices have upside risks.
– thus raises the further potential for positive surprise
– in other words, this is a signal to keep buying the dip
BOTTOM LINE: We remain positive on equities, and see signs of capitulation. Our top 3 sectors remain:
TACTICAL:
– IWM set for a tactical 10 day rally, back to $235-$240 possibly
– IWM needs a few more days, like 5-10 days
OVERWEIGHT “Positive Surprise”
– Top 3 sectors still Energy, Materials and Financials –> XLE XLB XLF
UNDERWEIGHT “Falling on a Slope of Hope”
– Cautious on Technology and recommend using strength to reduce –> XLK QQQ
ADDENDUM: We are attaching the stock lists for our 3 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), Technicals
– Violence in USA –> companies that are involved in some aspect of home or personal security. We are not “recommending” these stocks, but rather, bringing these stocks to your attention.
Granny Shots:
Full stock list here –> Click here
Trifecta Epicenter (*):
Full stock list here –> Click here
Power Epicenter Trifecta 35 (*):
Full stock list here –> Click here
Violence in USA:
Full stock list here –> Click here
(*) 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: Daily COVID-19 cases 13,079, +6,884 vs 7D ago…Data distortion caused the spike in 7D delta… steady case decline likely to persist…
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Current Trends — COVID-19 cases:
– Daily cases 13,079 vs 6,195 7D ago, up 6,884
– 7D positivity rate 1.9% vs 2.1% 7D ago
– Hospitalized patients 17,514 down -14.4% vs 7D ago
– Daily deaths 416, down 9.1% vs 7D ago
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– The latest COVID-19 daily cases came in at 13,079, up 6,884 vs 7D ago. The 7D delta in daily cases has turned positive after being negative for nearly 8 weeks. However, as we noted Monday, the jump in 7D delta is expected and just a result of the under-reporting 7 days ago on Memorial Day. Although it will take a few more days to clear out the data distortion, we don’t believe the downtrend in daily cases will be reversed. With the continued efforts for a higher penetration of vaccines, the steady decline in daily cases is likely to persist.
7D delta in daily cases turned positive due to the data distortion….
After being negative for nearly 2 months, the 7D delta in daily cases turned positive on Monday. This sudden jump does not really warn of a trend reversal in daily cases, but purely is a result of the under-reporting 7 days ago on Memorial Day. In the coming days, the 7D delta is likely to fall again and we expect the steady decline in daily cases to persist.
Current hospitalization, daily deaths and positivity rate are at all time low…
Below we show the aggregate patients who are currently hospitalized due to COVID. After a mini-surge in March, the number of patients currently hospitalized rolls over again. Positivity rate is also following the similar pattern. Currently, all three metrics – current hospitalization, daily deaths and positivity rate – are at their all time lows since the start of the pandemic.
POINT 2: VACCINE: Vaccination progress has stalled – the average daily number of dose administered fell to 1.1 million…
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Current Trends — Vaccinations:
– avg 1.1 million this past week vs 1.1 million last week
– overall, 41.8% fully vaccinated, 51.2% 1-dose+ received
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Vaccination frontier update –> all states now near or above 70% combined penetration (vaccines + infections)
Below we sorted the states by the combined penetration (vaccinations + infections). As we commented in the past, the key figure is the combined value >60%, which is presumably near herd immunity. We have overlaid our case progress with that of Israel several times to demonstrate what should happen to cases once immunity reaches a certain critical level in the population. That is, the combined value of infections + vaccinations as % population > 60%. The persistent and rapid decline in cases suggest that the US is following a similar path to Israel (see our prior notes) while nations with less penetration continue to struggle more.
– Currently, all states are near or above 70% combined penetration
– RI, SD, MA, ND, CT, NJ, DE, NY, IL, UT, MN, NM, NE, AZ, PA are now above 90% combined penetration (vaccines + infections)
– So gradually, the US is getting to that threshold of presumable herd immunity. So long as a vaccine resistant variant doesn’t spread widely, the continued retreat of cases should continue.
Below is a diffusion chart that shows the % of US states (based on state population) that have reached the combined penetration >60%/70%/80%/90%. As you can see, all states have reached 60% and 70% combined vaccination + infection. 78.0% of US states (based on state population) have seen combined infection & vaccination >80% and 51.9% of US states have seen combined infection & vaccination >90%.
There were a total of 1,470,968 doses administered on Monday. As we noted last week, the vaccination progress has stalled – the average daily number of doses administered fell to approximately 1.1 million dose. And the vaccination hesitancy following the pause of JNJ vaccine could be one of the biggest factors. Also, according to the data from Kaiser Family Foundation (KFF), Hispanic and Black communities have relatively lower rates of vaccination. Therefore, if the US wants to boost vaccine penetration further, Hispanic and Black communities should be the focus.
93.4% of the US has seen 1-dose penetration >40%…
To better illustrate the actual footprint of the US vaccination effort, we have a time series showing the percent of the US with at least 35%/40%/45% of its residents fully vaccinated, displayed as the orange line on the chart. Currently, 85.1% of US states have seen 35% of their residents fully vaccinated. However, when looking at the percentage of the US with at least 40% of its residents fully vaccinated, this figure is 62.4%. And only 31.3% of US (by state population) have seen 45% of its residents fully vaccinated.
– While 93.4% of US states have seen vaccine penetration >40%, 78.7% of them have seen 1 dose penetration >45% and 54.8% of them have seen 1 dose penetration > 50%.
– 85.1% of the US has at least 35% of its residents fully vaccinated, However, only 62.4% of US has fully vaccinated >40% and 31.3% of US has fully vaccinated >45%.
This is the state by state data below, showing information for individuals with one dose and two doses.
The ratio of vaccinations/ daily confirmed cases is generally trending higher (red line is 7D moving avg), but this is largely due to the decline in daily cases.
– the 7D moving average is about ~70 for the past few days
– this means 70 vaccines dosed for every 1 confirmed case
In total, over 300 million vaccine doses have been administered across the country. Specifically, 170 million Americans (51% of US population) have received at least 1 dose of the vaccine. And 139 million Americans (42% of US population) are fully vaccinated.
POINT 3: Tracking restrictions lifting and subsequent effects in individual states
Point #3 focuses primarily on tracking the lifting of restrictions, as states have eased the majority of mandates. Keep in mind, easing/lifting restrictions are contingent upon state of emergency ordinances being renewed.
– States in groups 1 and 2 represent states that let their emergency ordinances expire, or that never had one in the first place
– Note: IL and HI are not listed. This is because restrictions lifting is determined at the county / island level, and no statewide policy will be established to lift restrictions until a full reopening
So there is a spectrum of approaches. Our team is listing 3 tiers of states and these are shown below.
– states that eased all restrictions in 2020: AK, OK, MO, FL, TN
– states that have eased all restrictions in 2021 to now: ND, SD, NE, ID, IA, MT, MS, AZ, SC, WY, TX, GA, AR, KS, WI, IN, AL, UT, NH
– states that are still easing restrictions in 2021: OR, ME, WV, WA, MN, MA, NC, KY, LA, CA, DE, PA, NM, OH, CO, NJ, VT, MD, NV, NY, CT, VA, MI, RI, DC
GROUP 1: States that lifted restrictions in 2020…
The daily case trends in these states are impressive and it is difficult to say that lifting restrictions has actually caused a new wave of cases because the case trends in these states look like other states.
GROUP 2: States that have lifted restrictions in 2021 to now…
Similar to the list of states above, the daily case trends in these states are impressive and it seems that lifting restrictions hasn’t caused an increase in cases.
GROUP 3: States that are still easing restrictions in 2021…
These states have begun to lift restrictions, but have yet to ease all restrictions. The date of each state’s most recent restrictions lifting is indicated on each chart. The case trends in these states have been mostly positive.
– Easing restrictions appears to have contributed to an increase in cases in several of these states, most drastically in OR, ME, WA, and MN
