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Friday
STRATEGY: While 2022 brought cascade negative headlines, metrics show institutional investors already positioned for recession = more evidence bad news baked in
Institutional equity investors have positioned for a recession…which means?
It is an understatement to say equities have been treacherous so far in 2022. It has been a cascade of scary developments from:
– runaway inflation fears
– Fed becoming hawkish
– WWIII risks
– “market top” calls
– “yield curve about to invert” calls
Perhaps the “darkest” report is the following headline, shared by @DougKass on twitter from another sellside firm.
– on March 4, 2022
– this firm placed 10% odds of a “civilization ending nuclear war”
– yup, 10%
To me, this is a bottom tick of market sentiment. Unless, of course, the world is hurtling towards nuclear WWIII.
But as shown below, the 3/4/2022 was contemporaneous with a general panic by the market:
– but the 2/24 lows held
– despite a cascade of negative headlines
– Fed hiked this week
– market has continued to rally
Institutional Equity investors are positioned for a recession = lots of bad news priced in
For now, this seems like a “win” — 2022 has not been easy. And Mark Newton, Fundstrat’s Head of Technical Strategy, generally expects the broader equity markets to bottom around mid-2022. But as much as 1H remains “treacherous” for markets, we do not want to be a “risk-off only” 1H. This week reminds investors of the risks of being too tactical. That is, short-term risk-on and risk-off repositioning results in painful churn.
– consumer confidence has dropped so sharply
– history shows forward returns are > 15% over next 12M
– thus, we think beyond the short-term noise, the risk/reward remains excellent
…Announcement from China-US call on Friday
Incidentally, Tom Block, Head of Washington Policy
– notes that there could be a positive announcement coming from China-US call on Friday
– see his tweet below
Equity strategists are cutting 2022 Targets, which will prove to be appropriate if the US “breaks” into recession
We are already seeing strategists cut their 2022 outlooks. As shown below:
– 4 of 24 strategists have cut their 2022 outlooks
– these are modest cuts so far of 200 points or so
– the driver is the factors mentioned above
– but their moves will be prescient if the US “breaks” into recession
Our base case remains that the US avoids a recession. And this clarity will emerge in 2H2022. Thus, we still see S&P 500 managing to close at 5,100 or higher by YE.
Looking back at April 2020, 8 weeks into the COVID-19 pandemic, we see that 18 of 25 strategists slashed their 2020 outlooks:
– 17 of 23 cut their outlooks
– many slashed YE 2020 targets from 3,300 or so to 2,500 or worse
– S&P 500 ended 2020 at 3,756
– so sellside had “over-compensated” for the downside risks
– when we see strategists call for a 10% risk of nuclear annihilation, we wonder if that is also a “bottom tick”
Latest BofA Fund Manager Survey (FMS) shows institutional buyside is positioned for a recession
Similarly, the latest BofA FMS shows the buyside is positioned for a recession. Take a look at two highlights below:
– cash balance is now nearly 6%
– matches April 2020
– as annotated below
– this is “peak” positioning in a recession
Two takeaways:
– if the US does not “break” into recession, this is a contrarian signal
– lots of “bad news” is baked in
Pessimism is similarly high. The “% respondents expecting a stronger economy” has collapsed
– it matches the pessimism of October 2008
– Oct 2008 was still 6 months before major bottom
– but many sectors had bottomed in Oct 2008
Thus, two takeaways:
– if markets “break” into recession, the buyside is positioned for this
– lots of “bad news” is baked in and arguably much more than warranted
This is another sign that the institutional world is positioned for a recession. Could a recession happen? Of course. But that is not our base case and we expect the US to manage to avoid a recession.
COVID-19 cases are rising in Europe and in 4 states in the US…
Policymakers have broadly rolled back all COVID-19 restrictions. And given the natural immunity combined with better therapeutics, this makes sense to us. But an implicit expectation for markets is that COVID-19 cases would decline:
– policymakers probably expected COVID-19 retreat in 2022
– possibly receded to manageable levels
– this is mostly true
– but recently, cases are rising in the UK, Germany, Italy and France
– it is obvious below
– We are not entirely clear on the driver for this
– BA.2 is the primary variant
The question some might be asking is whether the Russia-Ukraine war and the migration of those Ukrainians fleeing is driving higher cases.
– 56% of the > 3 million refugees have Poland as the point of entry
– these refugees could move elsewhere throughout the EU
The trend in Poland’s COVID-19 cases is pretty stable. So it does not seem like this movement of refugees is behind the rise in cases. Instead, it just looks like the new variant BA.2 is more transmissible.
– but there are not reports of a surge in hospitalizations
– that is what matters more
And in the US, there are 4 states where cases might be ticking up. There are plenty of supporting exhibits including a rise in wastewater samples nationwide showing COVID-19. Again, this bears watching, but given the improved therapeutics and high penetration of vaccinations, this is very different than prior waves.
It takes 14 days before hospitalizations might pick up. So it’s early. But as shown below, none of the states are seeing an uptick.
DATA ON RUSSIA-UKRAINE WAR: Tracking Russia-Ukraine war statistics — 2,032 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
Ukraine has lost an estimated 63% of its tanks and 85% of its aircraft
Our data science team, led by tireless Ken, has been tracking the casualties and losses associated with the Russia-Ukraine war. And while Ukraine has staged an impressive resistance, the reported losses of equipment show that Ukraine has lost a substantial share of its equipment:
– by our team’s analysis, using reported data
– Ukraine has lost 1,379 tanks or 63% of its equipment
– Ukraine has lost 112 aircraft, or 85% of its fleet
By these measures, the armament of that army is rapidly depleting. I am not sure if this is a well known fact. But this also highlights why the nation is seeking to replenish its equipment.
With each passing day, Ukraine is experiencing further losses of critical equipment.
The number of casualties is 132 on 3/17, and a total of 2,032 have been reported to the UN.
The flow of migrations out of Ukraine had been steady at about 100,000 to 200,000 per day. And a total of 3.1 million have fled so far.
– 56% are entering into Poland
– curiously, 5% or 170k or so, have entered Russia
If one is wondering about reported losses of equipment, we are citing statistics provided by the opposing ministry officials.
– est. 112 Ukraine planes lost
– est. 1,379 tanks lost
– this seems like a lot of equipment
Russian losses are higher
– est. 14,000 Russian soldiers killed
– est. 444 tanks
– est. 86 aircraft
– est. 1,279 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 -0.78% GBTC -0.97% BITW -2.01%
– Energy
– FAANG FNGS 1.35% QQQ 1.15%
Combined, it can be shorted to BEEF.
PS: Homebuilders (Oct – Apr aka Golden 6 months) XHB 1.29%
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 -0.43% AMZN 3.74% NFLX 1.11% GOOG 0.88%
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 32,223, down -1,990 vs 7D ago…
Current Trends — COVID-19 cases:
Daily cases 32,223 vs 34,213 7D ago, down -1,990
- 7D positivity rate 3.7% vs 3.7% 7D ago
- Hospitalized patients 19,554, down -23% vs 7D ago
- Daily deaths 1,162, down -10% vs 7D ago
The latest COVID-19 daily cases came in at 32,223, down -1,990 from 7D ago. The 7D delta in daily cases remains negative, but has reduced to only -1,990 vs 7D ago. On the one hand, this decrease is understandable given the daily cases has fallen below 30,000 (7D avg). On the other hand, we do see the case declines in some states start to slow and the case trend in some states even start to tick up. Therefore, the case trend in the next few weeks bear watching.
7D delta in daily cases turned negative…
After being positive for one day (slightly), 7D delta turned negative again – it once again showed the overall COVID condition in the US continues to improve and the one-day spike in 7D delta was just due to some data fluctuation in a few states.
At the state level, Ohio and Oklahoma have seen the largest 7D increase in daily cases. The “case rises” in both states are due to their schedule change on case reporting. Daily cases in NY, PA, CO, and MA are also higher compared to 7D ago. Although the absolute levels of increase are not very significant, the case trends in these states are worth watching. As CDC variant tracker shows, the share of the Omicron sublineage BA.2 (more transmissible and a “stealth” version of Omicron variant) is gradually rising in the US. Could there be a renewed nationwide wave? or maybe a local/regional outbreak? We are not sure yet. The next few weeks are key to watch.
All US states are seeing decline in daily cases now… 49 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
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 0.2 million this past week vs 0.3 million last week
– overall, 29.4% received booster doses, 65.1% fully vaccinated, 76.4% 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 258,262 doses administered, as reported on Thursday. The vaccination pace continues to fall and now is the lowest level since the mass rollout of COVID-19 vaccines. This is also understandable that less people are seeking vaccination given the improvement in overall COVID situations as well as the new antiviral pills. But as the cases start to tick up in some part of the country, the vaccination trend bears watching.
This is the state by state data below, showing information for individuals with one dose, two doses, and booster dose.
In total, 557 million vaccine doses have been administered across the country. Specifically, 254 million Americans (76% of US population) have received at least 1 dose of the vaccine. 216 million Americans (65% of US population) are fully vaccinated. And 98 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.
