South Africa has no ICU / ventilator increase. FOMC meets this week, bond market has now priced in 3 rate hikes = is "hawkish pivot" priced in?

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STRATEGY: FOMC meets this week, bond market has now priced in 3 rate hikes = is “hawkish pivot” priced in?

Incoming COVID-19 data from Omicron continues to be a “half-full” story = good news
Over this weekend, the incoming news on COVID-19 was, on balance, positive:

– South Africa positivity rate seems to have peaked = early sign Omicron peaked
– Despite explosion of cases in South Africa, there is no increase in ICUs or patients needing oxygen
– Israel study shows boosters provide good protection from Omicron = good
– US daily vaccinations surging post-COVID, UK making similar push

So, while Omicron is still burning through many communities and nations, there is an expiration date. And the incoming data shows Omicron is mild. And this is what is arguably positive.

…Positivity rate flattening/down in South Africa
The positivity rate in SA has been trending downwards, from > 30% to around 22%. This is a positive development, as it shows that:

– testing is adequate
– declining positivity also suggests declining prevalence

…Despite surges in cases, no rise in ICUs or ventilator usage
Daily cases in South Africa have soared in the past two weeks. This is a reflection of the high transmissibility of Omicron. Omicron has crowded out every other strain.

– why do other strains get pushed out?
– why cannot an individual be infected with two strains?
– ie, why would COVID-19 virus “cooperate” with other strains?

Here one can see that Omicron has a monopoly on South Africa. There is no other strain

…Despite a surge in cases, there is no rise in ventilated nor ICUs
But despite this surge in cases, there is no detectable rise in severity of COVID in South Africa:

– ICU usage collapsing
– Ventilator usage collapsing
– Omicron has pushed out other strains

So, is Omicron making COVID-19 a milder disease? Maybe

Our data science team, led by tireless Ken, has scraped together ICU and ventilator usage in the provinces across South Africa. In every single region, this same pattern is shown. Omicron seems mild.

…Israel study shows boosters are effective against Omicron
And as the article below highlights, booster shots are effective against the Omicron variant. This is a positive development.

– this suggests that boosters are an effective strategy against Omicron

And the good news is the US is seeing a massive rise in vaccinations, due in part to fears from Omicron. This is a positive response to the fears around Omicron.

STRATEGY: FOMC meets this week, bond market has now priced in 3 rate hikes = is “hawkish pivot” priced in?
There has been a wholesale capitulation of the “transitory inflation” view. Yet, our base case remains that inflation is transitory, to the extent that the level of inflation in 2022 will be lower than in 2021.Yet, pundits continue to push hard towards the inflation risk view.

– Mohamed El-Erian, a well regarded investor at Allianz
– calls “transitory inflation” likely Fed’s worst ever

I want to fade this comment.

Investors often look at contemporaneous data and cannot see conditions changing. Think about how those who preached fear around Delta variant, etc. If there is anything that we learned in the past 18 months, it is this –> consensus gets a lot wrong

…Financial markets have now priced in 3 hikes = hawkish pivot priced in
The bond markets have priced in 3 rates hikes, meaning the Fed’s hawkish pivot is largely priced in. As JPMorgan Fixed Income Strategists note:

– 65bp of tightening is priced into 2022
– lift-off by June 2022
– FOMC meeting this week and expected to announce faster tapering

…Despite all this, S&P 500 at all-time highs = base case remains YE rally
Despite all of this, the S&P 500 is hovering near all-time highs. As shown below:

– despite two 5% drawdowns in the past few months
– S&P 500 has moved to all-time highs

We continue to see a YE rally as the base case driven by:

– positive seasonals (Santa Clause)
– positioning data (record cash on sidelines)
– negative sentiment (AAII panic reading)
– improving COVID-19 visibility
– positive vaccine / booster news
– Fed hikes priced into bond market

…Markets still favoring Cyclicals, Growth and Quality
As shown below, style leadership is still coming from groups trading > 200D:

– Growth
– Cyclicals aka Epicenter
– Quality

This is consistent with our view:

– Energy
– FANG
– Technology
– Epicenter

SECTORS: Leadership still Cyclicals/Early-cycle aka Epicenter
Relative sector performance is shown below and as we can see, 5 sectors are showing positive relative trend:

– Energy
– Basic Materials
– Technology
– Transports
– Discretionary

– sort of Financials/Banks

These are all cyclical groups. And also have general positive exposure to reflationary trends. Inflation, incidentally, in isolation is not a bad word. The real risk to markets is:

– too much inflation hurting consumer confidence
– or unanchored inflation expectations, fear of uncontained inflation

This is not necessarily what markets seem to be pricing. If markets were worried about either of the above, Defensive stocks or Growth stocks would be leading. Instead, we are seeing Cyclicals lead.

Into YE, our recommended strategies are:

– Energy
– Homebuilders (Golden 6 months): XHB
– Small-caps: IWM 0.05%
– Epicenter: XLI 0.11%  XLF 0.60%  XLB 0.85%  RCD
– Crypto equities: BITO 2.64%  GBTC 2.72%  BITW 3.20%

Into 2022…
– Industrials

30 Granny Shot Ideas: We performed our quarterly rebalance on 10/25. Full stock list here –> Click here

POINT 1: Daily COVID-19 cases 30,107, up +2,100 vs 7D ago…

Current Trends — COVID-19 cases:

• Daily cases 30,107 vs 28,007 7D ago, up +2,100
• Daily cases ex-FL&NE 30,107 vs 28,007 7D ago, up +2,100
• 7D positivity rate 8.2% vs 8.5% 7D ago
• Hospitalized patients 60,042, up +11.4% vs 7D ago
• Daily deaths 1,258, up +2.9% vs 7D ago

*** Florida and Nebraska stopped publishing daily COVID stats updates on 6/4 and 6/30, respectively. We switched to use CDC surveillance data as the substitute. However, since CDC surveillance data is subject to a one-to-two day lag, we added a “US ex-FL&NE” in our daily cases and 7D delta sections in order to demonstrate a more comparable COVID development.

The latest COVID daily cases came in at 30,107, up +2,100 vs 7D ago. The Thanksgiving distortion appears to be clearing out as per the more consistent trend in the recent data. As such, Wave 4 is clearly underway; this is not surprising, and is our base case. We expect this surge to peak below the wave 3 peak of 300,000 cases per day. Case roll over will likely resume in the near future as booster vaccine rates are increasing.

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Rolling 7D delta Thanksgiving distortion beginning to clear out…
The rolling 7D delta Thanksgiving distortion is beginning to clear out as evident by the more consistent trend in the data. Nonetheless, we’ll continue to monitor the data closely.

33 states are seeing a rise in cases while cases continue to decline in the remaining states…
*** We’ve split the “Parabolic Case Tracker” into 2 tables: one where cases are falling, and the other where cases are rising

In these tables, we’ve included the vaccine penetration, case peak information, and the current case trend for 50 US states + DC. The table for states where cases are declining is sorted by case % off of their recent peak, while the table for states where cases are rising is sorted by the current daily cases to pre-surge daily cases multiple.

• The states with higher ranks are the states that have seen a more significant decline / rise in daily cases
• We also calculated the number of days during the recent case surge
• The US as a whole, UK, and Israel are also shown at the top as a reference

Hospitalizations, deaths, and positivity rates are rolling over amidst case rollover…
Below we show the aggregate number of patients hospitalized due to COVID, daily mortality associated with COVID, and the daily positivity rate for COVID.

– Net hospitalizations peaked below the Wave 3 peak and are currently rolling over
– Daily death peaked slightly above the Wave 2 peak and are currently rolling over
– As per the decline in daily cases, the positivity rate is currently rolling over

POINT 2: VACCINE: vaccination pace accelerates as boosters become more widely available…
***The Thanksgiving distortion appears to be mostly cleared out.

Current Trends — Vaccinations:

• avg 2.0 million this past week vs 2.3 million last week
• overall, 60.4% fully vaccinated, 71.3% 1-dose+ received

Vaccination frontier update –> all states now near or above 80% combined penetration (vaccines + infections)
*** We’ve updated the total detected infections multiplier from 4.0x to 2.5x. The CDC changed the estimate multiplier because testing has become much better and more prevalent.

Below we sorted the states by the combined penetration (vaccinations + infections). The assumption is that a state with higher combined penetration is likely to be closer to herd immunity, and therefore, less likely to see a parabolic surge in daily cases and deaths. Please note that this “combined penetration” metric can be over 100%, as infected people could also be vaccinated (actually recommended by CDC).

– Currently, all states are near or above 90% combined penetration
– Given the 2.5x multiplier, all states besides AL, AR, IA, HI, LA, MS, IN, WA, WV, OR, TX, OH, ID, MI, MO, and GA are now above 100% combined penetration (vaccines + infections). Again, this metric can be over 100%, as infected people could also be vaccinated. But 100% combined penetration does not mean that the entire population within each state is either infected or vaccinated

There were a total of 1,494,757 doses administered reported on Sunday down 16% vs 7D ago. With the introduction of the Omicron variant, we’ve been seeing the vaccination pace accelerate. Also, the same catalysts remain in place:

• Proof of vaccination required by many US cities and venues
• Booster shots
• Full FDA approval of Pfizer COVID vaccines (hopefully it could help overcome vaccine hesitancy)
• Biden’s vaccination plan

The daily number of vaccines administered remains the most important metric to track this progress and we will be closely watching the relevant data.

This is the state by state data below, showing information for individuals with one dose and two doses.

In total, 437 million vaccine doses have been administered across the country. Specifically, 237 million Americans (72% of US population) have received at least 1 dose of the vaccine. And 200 million Americans (61% of US population) are fully vaccinated.

POINT 3: Tracking the seasonality of COVID-19

In July, we noted that many states experienced similar case surges in 2021 to the ones they experienced in 2020. As such, along with the introduction of the more transmissible Delta variant, seasonality also appears to play an important role in the recent surge in daily cases, hospitalization, and deaths. Therefore, we think there might be a strong argument that COVID-19 is poised to become a seasonal virus.

The possible explanations for the seasonality we observed are:

– Outdoor Temperature: increasing indoor activities in the South vs increasing outdoor activities in the northeast during the Summer
– “Air Conditioning” Season: similar to “outdoor temperature”, more “AC” usage might facilitate the spread of the virus indoors

If this holds true, seasonal analysis suggests that the Delta spike could roll over by following a similar pattern to 2020.

We created this section within our COVID update which tracks and compare the case, hospitalization, and death trends in both 2020 and 2021 at the state level. We grouped states geographically as they tend to trend similarly.

CASES
It seems as if the main factor contributing to current case trends right now is outdoor temperature. During the Summer, outdoor activities are generally increased in the northern states as the weather becomes nicer. In southern states, on the other hand, it becomes too hot and indoor activities are increased. As such, northern state cases didn’t spike much during Summer 2020 while southern state cases did. Currently, northern state cases are showing a slight spike, especially when compared to Summer 2020. This could be attributed to the introduction of the more transmissible Delta variant and the lifting of restrictions combined with pent up demand for indoor activities.

HOSPITALIZATION
Current hospitalizations appear to be similar or less than Summer 2020 rates in most states. This is likely due to increased vaccination rates and the vaccine’s ability to reduce the severity of the virus.

DEATHS
Current death rates appear to be scattered compared to 2020 rates. This is likely due to varying vaccination rates in each state. States with higher vaccination rates seem to have lower death rates given the vaccine’s ability to reduce the severity of the virus; states with lower vaccination rates seem to have higher death rates.