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STRATEGY: The “oil fat lady is singing” –> Not trying to be too “contrarian” but $130 oil far less a burden vs 2008 or 1980s. Median P/E now 16.7X vs 18.6X YE2019
Russia has lost 7.5% of its frontline military so far, and could be down to 50% within 7 weeks
Our data science team, led by tireless Ken, has been collecting as much battlefield information that is locatable, for the purpose of tracking the statistics of the Russia-Ukraine war. The casualty data (see below) is reported by opposing sides. And the statistics for Russian military causalities are interesting:
– UK ministry reports 11,000 Russian military casualties so far
– Russia has 150,000 frontline troops
– This is about 7.5% of military strength
– if this pace continues, Russia will be down to 50% frontline military strength in 7 weeks
– in early May
Are these stats correct? We can only state that these are reported figures. But if this correct, Russia is seeing significant attrition of its military strength.
– this counters the consensus view that time is on Russia’s side
– if Russia is losing 1% of its force daily, Russia will quickly be weakened
– Ukraine and Russia have plenty of ammunition and weapons
Market is hysterical about two risks –> Oil at $130 and risk of WWIII –> perspective is key
For 2021, our top sector pick was Energy, which we argued Energy stocks were cheap vs oil.
For 2022, our top sector pick is Energy (made in Dec 2021), as we believe world was structurally short oil + equity cheap = strong upside
And with oil now > $125 per barrel, aided by a multitude of factors, but the strongest being Russia-Ukraine war and the strong global economy. And for pundits, this is a panic level of oil:
– pundits panic because oil price > $100
– pundits say this will cause gasoline to soar so high
– consumers will be “shocked” and squeezed
– leading to a recession
– this happened in 2008 and 1980s, notably
– which drives markets down sharply
For reasons we discuss below, we think markets are panicking about oil prices here, when the actual economic hit is far lower. I am not dismissing that there is certainly a price level, where oil triggers sufficient pain, that drives a recession. But our analysis argues it is not $130 oil. Consider these facts below:
– two major factors have changed: per capita use and per capita income
– gasoline per capita use today is 414 gallons, -11% and -20% lower than 2008/ 1980
– per capita income today is $63.5k vs $48k and $10.7k respectively
This is shown on the table below
So, this is why $130 oil is far less than the “alarm bells” seen around 1980 and 2008 prices for oil. Of course, if oil gets to $250 or higher, this is a different story. But our point is that oil prices, while a burden, are just not as damaging as what was seen in prior $100 scenarios.
A table showing gasoline per capita consumption is below and you can see the change over time. Since 2000s, in particular, per capital usage of gasoline has been falling. We did not use the 2020 figure because COVID-19, we believe, severely restricted miles driven.
And the simple income per capita is shown below. These are also straight forward.
OIL BURDEN FAR LOWER: $130 is 3% of consumer wallet, still below 4.5% in 2008 and 6.5% in 1980
– yesterday, oil at $130, gasoline is 3% of wallet
– this is 33% less than 2008 impact
– because the economy is larger and energy intensity is down
– even $200 oil is 4% of wallet
– this is less than 4.5% of 2008 and 6.5% of 1980
So, while the increase in gasoline prices is a shock, and certainly the “rate of change” is as well. This is a far lower hit to consumers compared to 2008. That said, this is still going to be painful for those who have smaller wallets, or drive gas guzzlers.
But of course, these are merely theoretical explanations. Consumers can panic and lose confidence over many factors. And the war and the threat of further surges could certainly drive this reaction.
RECESSION RISK LOW: Yield curve steepening, which is contrary to inversions in 2006 (pre-2008) and 2018 (pre-2020)
There are growing risks of a recession and many pundits are warning of this. But our favorite recession leading indicator, the long-term yield curve, has not inverted. And as shown below:
– the long-term yield curve inverted prior to 2008 and 2020
– roughly 24 months before a recession
– 2022 has seen the curve steepen
– perhaps because this is an exogenous shock “war” the curve might not invert
– but then again, wars do not lead to recessions
– in fact, they generally lead to booms
– because depleted materials must be replenished (see above)
– thus, perhaps markets are over-estimating the risk of recession
STRATEGY: Valuations on P/E and FCF basis now material discount to Dec 2019 = risk/reward strong despite “WWIII risk”
There is no shortage of pundits stating the world is on the brink of WWIII. There was even a sell-side strategist who predicted a “10%” probability of WWIII. This seems unrealistically high:
– chances of coup > chance WWIII, maybe 100X
– chances of Ukraine agreeing to terms > chance WWIII, maybe 1000X
– chances of Russia running out of fighting will > chance WWIII, maybe 1000X
So, the chances of WWIII must be far lower than the conditional outcomes of above.
Although is one is into numerology, then the “68” might suggest WWIII is underway. This is only for amusement, and I am not being serious. This is a tweet from James Bowater @CityAM_Crypto and he shows
– sum of digits for the start dates of WWI, WWII and Russia-Ukraine
– the sum of digits adds to 68
Wut?!!
VALUATION: Median P/E 16.7X now vs 18.6X in 2019
There has been tremendous P/E multiple compression since the start of 2022:
– Median P/E start of 2022 18.1X
– Median P/E now 16.7X
– Median P/E end of 2019 18.6X
The S&P 500 trades at 2X less than the multiple at the end of 2019.
– this is true even with
– higher profit margins
– lower interest rates
– better pricing power
So, valuation is not the issue for equities.
VALUATION: Median FCF yield now 5.5% versus 4.7% in 2019
The same is true for free cash flow yield. Below is the median FCF yield of the S&P 500:
– FCF yield start of 2022 5.0%
– FCF yield now 5.5%
– FCF yield at end of 2019 4.7%
In other words, the S&P 500 is far cheaper now than it was two years ago. And has fallen sharply even since the start of the year.
If there is no recession, which is our base case, then stocks are very attractively valued currently.
DATA ON RUSSIA-UKRAINE WAR: Tracking Russia-Ukraine war statistics — 1,207 Ukrainian civilian casualties so far
Our data science team, led by tireless Ken, is scraping data from several sources to track some high level data around the Russia-Ukraine war.
– Ukrainian civilian casualties
– Ukraine population movements
– Ukraine military losses, except personnel
– Russian estimated losses of personnel and material
The number of civilian casualties is 84 on 3/7, and a total of 1,207 have been reported to the UN. This is after 10 days of information and could increase because there are simply lapses and lags in reporting.
The flow of migrations out of Ukraine has been steady at about 170,000 to 200,000 per day. And a total of 1.7 million have fled so far.
– 59% are entering into Poland
– curiously, 3% or 50k or so, have entered Russia
If one is wondering about reported losses of equipment, we are citing statistics provided by the opposing ministry officials. Thus, for Ukraine this is data from the Russian Ministry. Note, the Russian Ministry of Defense has not published Ukrainian equipment losses since 3/4/2022. This could be due to the recent ban of Facebook by the Russian government. We are trying to locate the latest data from other sources and will update them ASAP.
– est. 62 Ukraine planes lost
– est. 635 tanks lost
– this seems like a lot of equipment
– I am wondering how many tanks and aircraft are in the Ukraine military arsenal
Russian losses are higher
– est. 11,000 Russian soldiers killed
– est. 290 tanks
– est. 46 aircraft
– est. 999 armored vehicles
Our team says this data is scraped and can be updated daily. So, we will post these figures for now. And that way, we can get a sense for the intensity of the hostilities.
Thomas Hu, of Kyber Capital, also shared this website which is a crowd sourced view of reported activities. There is a lot to the website, and I encourage you to check it out. The website URL is https://maphub.net/Cen4infoRes/russian-ukraine-monitor
For instance, if you click on one of the icons, a verified post is shown. There is geolocation and other data attached.
STRATEGY: 2022 theme –> BEEF –> Bitcoin (B) + Bitcoin equities (E) + Energy (E) + FAANG (F)
As for sectors, the pleas by Ukraine and sanctions are strengthening the case for our “BEEF” strategy. That is, BEEF is
– Bitcoin + Bitcoin Equities BITO -3.30% GBTC -2.40% BITW
– Energy
– FAANG FNGS 2.01% QQQ -1.56%
Combined, it can be shorted to BEEF.
PS: Homebuilders (Oct – Apr aka Golden 6 months) XHB -2.34%
Why is this making stronger BEEF?
– Energy supply is now a sovereign priority
– this helps Energy stocks
– Ukraine and Russia both want access to alternative currencies
– this strengthens case for Bitcoin and bitcoin equities
– if Global economy slows, growth stocks lead
– hence, FANG starts to lead FB AAPL -3.66% AMZN -2.85% NFLX -3.15% GOOG -2.56%
All in all, one wants to be Overweight BEEF
_____________________________
33 Granny Shot Ideas: We performed our quarterly rebalance on 2/3. Full stock list here –> Click here _____________________________
POINT 1: Daily COVID-19 cases 63,785, down -21,770 vs 7D ago…
Current Trends — COVID-19 cases:
- Daily cases 63,785 vs 85,555 7D ago, down -21,770
- 7D positivity rate 4.8% vs 5.6% 7D ago
- Hospitalized patients 29,014, down -28% vs 7D ago
- Daily deaths 1,420, down -33% vs 7D ago
The latest COVID-19 daily cases came in at 63,785, down 21,770 from 7D ago. Except California, all other states had <5000 new cases. this is especially good given states normally report a higher case figure on Monday (due to the skip over weekend). Alabama and Connecticut are two with highest rise compared 7d ago. “case rise” in was not surprise as we noted yesterday that changed its way of reporting covid stats from 7 days week weekday-only. regarding Connecticut, it seems like primarily due “larger than usual” number tests performed weekend. current positivity rate CT remains low at 2.8%. following AZ, DC, Oklahoma state department health also announced started transition away daily updates weekly “as moving toward endemic phase pandemic”. another sign.
7D delta in daily cases remains negative. The steady decline persists…
While remaining negative, the 7D delta in daily cases has crept up recently. But, if looking at the case decline in percentage term, we can see the speed of decline has not really slowed much. The steady decline in daily cases persists.
All US states are seeing decline in daily cases now… 47 states have seen daily cases fall over 90%…
*** We’ve split the “Parabolic Case Tracker” into 2 tables: one where cases are falling (or about to fall), 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
Daily deaths, positivity rates, and hospitalization rate are falling rapidly…
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 hospitalization and positivity rates have plunged – both have fallen to the pre-Omicron levels
- Daily death finally started to decline after the daily cases peaked for a month. And as you can see below, daily deaths have also dropped rapidly, consistent with we have seen in other metrics.
POINT 2: VACCINE: vaccination pace has slowed recently… likely due to the improvement in COVID situation
Current Trends — Vaccinations:
– avg 0.3 million this past week vs 0.4 million last week
– overall, 29.1% received booster doses, 64.9% fully vaccinated, 76.2% 1-dose+ received
Vaccination frontier update –> all states now above 100% 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 above 100% combined penetration
– 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 219,903 doses administered, as reported on Monday. The vaccination pace has slowed from the recent peak of 2 million doses per day in mid-December to ~500,000 recently. The booster dose was the main driver of the vaccination campaign in the winter. However, it seems that the improving COVID case trend across the nation have influenced people’s desire and sense of urgency to get the booster doses. As a result, we have seen the speed of booster shot given has slowed. That said, as more and more states lift their COVID-19 restrictions, we believe vaccination remains a key to support us to smoothly transition back to “Normal”. Therefore, the daily number of vaccines administered is still one of the most important metrics to watch.
This is the state by state data below, showing information for individuals with one dose, two doses, and booster dose.
In total, 555 million vaccine doses have been administered across the country. Specifically, 253 million Americans (76% of US population) have received at least 1 dose of the vaccine. 215 million Americans (65% of US population) are fully vaccinated. And 96 million Americans (29% of US population) received their booster shot.
POINT 3: Tracking the seasonality of COVID-19
***We’ve updated the seasonality tracker to show figures from the last 9 months, from this calendar day, in each of the last two years***
As evident by trends in 2020 and 2021, seasonality appears to play an important role in the daily cases, hospitalization, and deaths trends. 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
– Opposite effects hold true in the winter
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.
