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Monday
SKIP TUESDAY
Wednesday
SKIP THURSDAY
SKIP FRIDAY <— Good Friday
STRATEGY: Less bad is good
Portions of Episodic inflation are peaking…
I want to harken back to a phrase Tom Luddy, former Vice Chair of JPMorgan Asset Management, frequently repeats: “less bad is good” (when looking at trends). In other words, when inflation trends become “less bad” investors are likely to view this as a positive inflection.
Yesterday’s CPI report is an example of this. The CPI Core (ex-food and energy) was +0.3% month over month, improving over Feb’s +0.5% and the best reading since September 2021.
- the rate of change is slowing
- for reasons we discuss below, this 1st of 3 waves of episodic inflation is peaking
…Used car prices are rolling over now
The latest March Manheim Used Vehicle Index was published last week. The actual price level peaked in December and has been down 3 consecutive months. And this is slowing down the YoY growth rate of used car prices (down to a more “modest” +25%.)
- the immense supply chain crunch/chip shortage triggered a record rise in used and new car prices
- what might surprise investors is “used cars” alone accounted for +1.40% of the rise in CPI
- prior to 2020, “used cars” was essentially zero percent contributor to CPI
- “new cars” was another +0.40%
- so combined autos represented nearly 2.0% of CPI growth in 2021
I don’t think many pundits are aware of this. But without cars, CPI would have been 2.0% lower, so instead of 5-6%, it is really 3%-4% in 2021. And thus, a rolling over of car prices, as supply chains/chip shortages normalize, means a major “episodic” driver of CPI is diminishing. Recall, even Michael Feroli, JPMorgan’s Chief Economist, posited that used car prices could actually roundtrip to pre-2019 levels. (If he is correct, autos would SUBTRACT -2.0% in CPI in 2023… that is “deflation” not inflation.)
…Used cars could have -0.7% lower CPI impact by May, amplifying “less bad = good”
Our data science team, led by tireless Ken, also modeled the relationship between Manheim used car prices and “used car CPI” and the model is shown below:
- Manheim (grey) leads CPI (blue) used cars by two months
- Manheim is “advanced” 2 months
- if model is correct, “used car CPI” will fall -0.7% YoY
- This is a material downshift and amplifies the case that this episodic driver of inflation peaking
…while the trend in inflation is higher (3%-ish), episodic factors pushing it higher near term
We have illustrated this idea of “episodic” inflation as explained by Brian Rauscher, Head of Global Portfolio Strategy. There are successive waves of inflation driven by various factors:
- supply chain shortages, phase i
- revenge spend, second order effects, phase ii
- commodity surge, now parabolic due to Russia-Ukraine war, phase iii
This explains, in part, why inflation curve is in backwardation (see lines).
- inflation expected, using market-based measures
- sees higher inflation in the next 12 months
- cooling sharply thereafter
…others drivers of “goods inflation” rolling over as well
There are a few other charts I want to highlight showing how goods inflation, phase i, is probably peaking
- Freight rates -30% from Shanghai to major global cities (thanks John Spallanzani, shared by @Cquintanilla)
- Backlog of ships from LA/LB port is down to pre-September 2021 levels
- Cass Freight index (US goods) is negative YoY and leads CPI by 6 months
You get the picture. There are many signs that substantial portions of “goods inflation” has apexed.
STRATEGY: Tax day is 4/18 and given strong 2021 gains, means some selling pressure lifts…Earnings season starts next week…
Next week is when we see several key turning points in the market, which generally point to a positive risk/reward for stocks.
- April 18th is tax day. And our work shows that raising funds for “capital gains” is worse in year when S&P 500 gains were strong
- Mark Newton, Fundstrat’s Head of Technical Strategy, also notes that near-term outlook is positive for stocks (original publication)
- Lastly, we believe 1Q2022 EPS season will show that companies margins are still expanding = positive
Stocks usually fall in the week before Tax day when markets are strong for the tax year
In 2021, the S&P 500 was up 27%, which as shown below, ranges as one of the strongest years since WWII (decile 2):
- since WWII, when markets are strong in a tax year
- stocks do poorly into Tax day
- Tax day is 4/18 in 2022
- Win-ratio is low
- Why? Investors need to pay capital gains
- They could be funding this via selling equities
- Hence, stocks would be under pressure this week
- This could turn next week, which is also when earning season starts
Newton, Head of Technical Strategy, sees a bounce next week..
Mark Newton, Head of Technical Strategy at Fundstrat, see stocks positive risk/reward into next week. His rationale is explained below (original publication). But it is a combination of:
- DeMark buy signals
- Seasonals
- Cycle composite
And if you have not followed Newton’s work, I would strongly recommend doing so.
Earnings expectations falling = upside risk
1Q2022 earnings start next week. And as shown below, EPS expectations have fallen about 2% since the start of the year. This is not entirely surprising and reflects the fact that incoming data has not been positive. There are headwinds from supply chain tightness, labor shortages, commodity surges, etc.
But we see room for EBIT margin expansion as 5 of 11 sectors will have below median margins…
We see many of our clients say margins have peaked as they point to the following chart below. This shows EBIT margins for S&P 500 are at an all-time high:
- this is misleading
- sector contribution to EBIT has changed
- many sectors still have below 20-year median margins
…5 of 11 sectors still have below 20-year median margins
We have shown the distribution of EBIT margins for each of the 11 sectors. The range of the margin levels is shown below, and the orange dot represents the current:
- 5 sectors are at all-time high margins
- Technology, Communications Services, REITs, Financials and Basic Materials
- But 5 sectors still have below average margins
- Healthcare, Staples, Industrials, Consumer Discretionary and Energy
- Energy should see a tremendous surge in margins given oil is >$100
- Yet, Energy EBIT margins are 11.3% vs 16% peaks seen in 2008
In short, we see upside to margins, driven by these 5 sectors.
…NYC seeing a surge in COVID-19… but few healthcare impacts
COVID-19 cases are on the rise again. And in these 6 states we have been tracking, you can see the percepible surge.
China cases similarly surging…
Similarly, cases continue to surge in China. The latest figures are shown below:
- China is 35 days into its surge
- Zero case policy is being tested
STRATEGY: We lean “bullish” into 2Q2022, but warn of jagged next few months… Stick with BEEF
To recap on equity strategy, we are leaning bullish into 2Q2022.
– this is in context to a challenging 1H2022
– so jagged next 3 months
– but > 88% probability that bottom for 2022 is in
Broadly, our existing sector strategy of BEEF remains valid. Even in war. Even with inflation. In fact, the last few weeks are strengthening the case for our “BEEF” strategy. That is, BEEF is
– Bitcoin + Bitcoin Equities BITO GBTC BITW
– Energy
– FAANG FNGS QQQ
Combined, it can be shorted to BEEF.
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 AMZN NFLX GOOG
All in all, one wants to be Overweight BEEF
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31 Granny Shot Ideas: We performed our quarterly rebalance on 4/5. Full stock list here –> Click here _____________________________
POINT 1: Total COVID-19 cases 207,245 over past 7D (avg 29,606 per day), up +24,143 (+3,449 per day) vs same period 7D ago…
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Current Trends — COVID-19 cases (past 7 days vs. 7 days prior):
– Total new cases 207,245 vs 183,102 7D prior, up +24,143
– Avg daily cases 29,606 vs 26,157 7D prior, up +3,449
– 7D positivity rate 5.3% vs 4.0% 7D prior
– Hospitalized patients 11,634, down -3.7% vs 7D ago
– 7D Avg daily deaths 462, down -13% vs 7D ago
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Over the past 7 days, a total of 207,245 new cases (avg 29,606 per day) were reported in the US, up +24,143 (avg up +3,449 per day) compared to the same period 7 days prior. The 7D delta in daily cases has been positive in 12 of past 14 days. The only two “negative” days were because California did not report. So, essentially, 7D delta in daily cases has been positive for the past two weeks. As it suggests, daily cases in US are rising, but rate of rise remains slow and stable. At state level, while more than half of US states reported a higher weekly case figure vs. 7D ago, most of them are seeing modest increase in case counts. The states with the most new cases are still the ones we flagged in previous notes – NY, NJ, CT, RI, MA, and IL. But in terms of absolute cases, current case levels in these 6 states are just a fraction of the Omicron peak in mid-January. Hence, the we are not too worried about the COVID situation at this moment. But the future is uncertain and we could have a better view on the COVID trend in a few weeks. Especially, as more BA.2 related cases are reported, we could have a better sense of the severity of this sub-variant (so far, the data still suggest the sub-variant does not seem to cause severe illness)
7D delta in daily cases has been essentially positive for past 2 weeks. But the absolute level remains low…
The 7D delta in daily cases has been positive in 12 of past 14 days. The only two “negative” days were because California did not report. So, essentially, 7D delta in daily cases has been positive for the past two weeks. As it suggests, daily cases in US are rising, but rate of rise remains slow and stable.
While more than half of US states are seeing higher case count on a weekly basis, only 6 states (NY, NJ, CT, RI, MA, IL) have shown clear trends of cases rising.
*** 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 mortality and current hospitalization are still falling, while positivity rate is now ticking up…
Below we show the aggregate number of patients hospitalized due to COVID, daily mortality associated with COVID, and the daily positivity rate for COVID
– Current hospitalization is currently at all-time low since the pandemic. But the speed of decline has slowed. Admittedly, the BA.2 case rise did cause the hospitalization figures in some states (i.e. NY, CT) to rise. But more importantly, current hospitalization is at the lowest level since the pandemic. Unless COVID-19 100% disappears, there still should be some level of COVID-19 related hospitalizations. And in terms of absolute numbers of hospitalization, current level is just a fraction of the peak level at ~160,000 in Mid-January.
– Daily Mortality is still falling, rapidly. As we learned from previous wave, mortality trend tends to have a 3-4 week lag compared to case trend. So, it is worth watching whether the mortality trend will start to reverse. But it seems the BA.2 sub-variant does not cause severe illness so far.
– the absolute level of positivity rate is distorted at some degree, as more states reduced their frequency of reporting and some states stopped reporting number of tests performed. But based on the data we could obtain, the trend of positivity rate is ticking up. It corresponds the recent rise in COVID cases. But similar to the case trend, the rise is still mild.
POINT 2: VACCINE: vaccination pace has slowed recently… likely due to the improvement in COVID situation
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Current Trends — Vaccinations:
– avg 0.5 million this past week vs 0.4 million last week
– overall, 30.2% received booster doses, 65.6% fully vaccinated, 76.9% 1-dose+ received
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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 586,131 doses administered, as reported on Tuesday. The vaccination pace has started to pick up over the last few weeks.
This is the state by state data below, showing information for individuals with one dose, two doses, and booster dose.
In total, 563 million vaccine doses have been administered across the country. Specifically, 255 million Americans (76% of US population) have received at least 1 dose of the vaccine. 217 million Americans (66% of US population) are fully vaccinated. And 100 million Americans (31% 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
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.
CASES
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. 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.
HOSPITALIZATION
DEATHS
