7DDelta Turns Negative, Energy Poised For Turnaround

We want to revisit the progress of Israel in its battle with COVID-19. That nation now has vaccinated 62% of its population. And even with mutations being present in Israel, they have seen a drastic reduction in COVID-19 cases. The latest 7D average is a mere 26 cases per 1mm residents when it was 952 only 3 months ago. As we said before, COVID-19 looks to have been largely obliterated from Israel.

The takeaway for me is that Israel’s experience does strongly argue for the effectiveness of vaccines. That nation solely relied upon Pfizer for its vaccinations. North Dakota and South Dakota have a better “daily cases per 1mm” vs. Israel at this same point and could be “obliterated by June.” Tireless Ken and his team overlaid Israel’s case results compared to North and South Dakota.

Those two states have among the highest vaccination rates in the US and also the highest overall combined infections + vaccinations. And as our clients know we have looked at ND and SD as templates for the rest of the US. SD has 42% vaccine penetration so far and ND has 37%. SD daily cases are 227 per 1mm, while Israel was 803 at the same point. ND is well below Israel at the same point as well, as you can see when we overlay.

The 7D delta in daily cases has turned negative in the past few days. After surging to +16k on Tuesday it has since retreated and as far as we know this is an organic drop. Hence, if this persists, we could see the case trend resume its downtrend. US hospitalizations are rolling over and US deaths also seem to be rolling over.

Michigan is now leading states in the largest decrease in cases from 7 days ago at -1,516. Louisiana had the most new daily cases, but it was only 349. Vaccinations seem to be working and hopefully these positive trends resume. The 7D moving average for shots/cases is about 50 to 1 and this impressive figure is likely to surge even further in coming weeks.

In total, about 125 million Americans have received at least 1 dose of vaccine. This is a good pace and as we noted previously, implies 50% of the population by May.

STRATEGY: Epicenter stocks endured a month-long sell-off, but oil is arguing an upside breakout is ahead, Energy secular bull market could be forming.

Over the past month Epicenter stocks have underperformed the broader market, evident in the chart below. Economic momentum remains strong and the increase in EPS estimates steadily over the past few weeks shows the Street is still in the process of raising their forecast and outlook. There seems to be a few reasons that even in the midst of this ‘beat and raise’ environment that Epicenter and Cyclicals are still struggling.

Some investors think that the good news is already baked in, and thus, Growth stocks should lead. We would counter that Epicenter/Cyclicals are projected to have 2022 EBIT >50% to 100% above 2019 levels. However, the stocks are only at their 2019 levels. The lull in interest rates rising, reason some investors, should cause Growth to continue leading. We would counter that interest rates are falling partially due to crowded positioning for the higher rate (aka “buy the rumor, sell the news” but the bottom line is this; higher growth (which is forecast by pretty much everyone) necessarily means higher rates. Finally, some investors posit that cyclicals are mere ‘rentals’ and that Growth stocks are the mightiest of the equity asset-class. Part of this is likely simply because many managers are comfortable with Growth and it’s made them rich. Paradigm changes are scary and one of Wall Street’s main weapons, historical data, is of relatively limited use compared to more normal times.

Perhaps the most important thing to consider is that cyclicals have the capacity for positive surprise. To me, it seems like most investors are more comfortable buying Growth/FANG after the recent pullback. So again, we see consensus being overweight Growth, and underweight Epicenter. While the future is uncertain, we remain confident being on the other side of the consensus is the right call here.

We believe we might be able to discern something about the path of Epicenter based on oil prices. WTI is currently $63 and if it goes to $70-$80 by summer what groups would lead? Based on the tight linkage between oil and Energy stocks we know they would do VERY well and likely lead the market. If oil rises meaningfully, you can expect Epicenter to follow suit.

If oil strengthens to $80 this summer, XLE’s implied level would be $71, which is roughly 45% upside. The linkage between WTI and XLE is very close. In fact, they have moved in tandem for the most part. In other words, if the WTI prices do indeed strengthen, we could see a significant rise in Energy equities. Energy seems to be a very good buy here.

Let’s look at the bigger picture. When you zoom out you see that Energy stocks might be finally ending a 12-year bear market in place since 2008. The current bear market is the worst ever for the sector, and secular bull markets in Energy typically have an average length of 9 yrs. If Energy is indeed bottoming, as you can see from our analysis the implied upside is 322% over the 9 yr. average which is 30% CAGR per year outperformance vs. S&P 500. As we’ve said supply/demand dynamics are good.

Figure: Way forward ➜ What changes after COVID-19
Per FSInsight

Figure: FSInsight Portfolio Strategy Summary – Relative to S&P 500
** Performance is calculated since strategy introduction, 1/10/2019