14 more states see rising cases —> wave 4 underway
There are now 30 states with rising cases, a significant uptick since our last update on 11/15.
- previously was 16 states when we updated this analysis 3 days ago
- 14 more states are now seeing a rise in cases: CT, DE, MA, AR, NJ, MD, RI, KY, PA, OK, TN, MO, SD, UT
Wave 4 is underway and this is not surprising this is our base case. We also expect this surge to peak below wave 3 peak of 300,000 cases per day.
Israel saw cases collapse when booster penetration hit 33%
This delta wave 4 surge in the US will have an expiration date. This is the reason for markets not to lose their heads. This surge is happening in northern states and not where wave 3 was fiercest.
And Israel is a template for how the booster efforts contain the surge. As shown below, when penetration of boosters hit 33%, cases utterly collapsed in Israel.
- so there is an end date
Delta is basically 100% of cases globallyIt is all about delta. A recent study by WHO looking at nearly 800,000 cases in the past 60 days found that the delta variant was 99.7% of all cases. It does appear that few people are simultaneously infected with multiple variants of COVID. Thus, the dominant strain is delta. And once this ebbs, the global surge should similarly slow. But we should be aware of the risk of a new variant that can reignite another wave of cases.
White House calls for FTC probe into high gasoline prices… but the issue is there is a shortage of oil
President Biden called for an FTC probe into oil and gas companies alleging their “anti-consumer” behavior has driven higher gas prices. The rationale is these producers have cut costs and thus cannot justify higher prices.
- the higher gasoline prices stem from higher oil prices
- higher oil prices are a result of a shortage of oil supply
For nearly everybody, it is hard for someone to believe higher gasoline prices are due to anti-consumer behavior of oil and gas companies.
…the Strategic Petroleum Reserve, SPR, holds 606 million barrels (highest level was 727 million), or 30 days of US oil demand
There are some who think releasing the SPR could cure high oil prices. But the SPR holds 606 million barrels. That might sound like a lot:
- US consumes 20 million barrels per day
- SPR holds 606 million barrels
- SPR holds about 1 months worth of oil
Even releasing the entire SPR would only have a temporary effect. There is just not enough oil in the SPR to cure high oil prices. Moreover, this is only temporary.
Oil prices have fallen since this announcement, with WTI at $79. And while it is down 5%, this is hardly a massive sell-off and in my view, this reflects the reality that this problem is difficult to solve by launching an FTC probe. This is hurting oilfield services stocks, but this seems to me to be a case of the White House shooting the messenger:
- it’s like blaming the pizza delivery guy for an expensive pizza
OSHA suspends enforcement of vaccine mandate
OSHA, the Occupational Safety Health Administration, is suspending enforcement of the White House vaccine mandate. The US Court of Appeals Fifth Circuit already upheld a stay on the mandate — therefore, OSHA is simply complying with the court.
- several healthcare experts including Dr Gottlieb suggested this mandate is probably adding to economic confusion
- vaccine mandates have already led to shortages in public safety workers
- with a COVID-19 antiviral pill coming, these mandates are becoming less central
STRATEGY: White House is keeping the market on “the cliff edge” this week
Equites have been volatile this week. Part of this is technical, as our Head of Technical Strategy, sees strong probabilities that equities made a local high this week. That is, a short term pullback/pause and a subsequent rally. Thus, our everything YE rally view is intact.
That said, the White House has taken several steps this week that have unnerved markets:
- the fate of Fed Chair Powell is still being decided by the White House (his term is up in Feb 2022)
- White House calls on FTC to launch on oil and gas industry for anti-consumer behavior
These are hardly pro-capitalist actions and thus, it should be no surprise that markets are somewhat rattled.
If the Fed chair is replaced, we believe this is a negative for stocks in the short term. Longer term, we think a new Fed chair is not a negative for markets, at least not until the next emergency. Why in the short term?
- financial markets are comfortable with Fed Chair Powell
- bond markets will “test” the new Fed Chair
- bond market liquidity is already weakened into December, due to inventory and balance sheet issues for banks
- replacing Fed chair speaks poorly of the turmoil in Washington
- Fed chair replacement is due to the squabbles over stimulus bills
- and is a concession to Democratic progressives
All in all, I see this as a short-term negative.
Similarly, we think the White House actions with FTC will only have a limited impact on Energy equities. Investors do not like event risk, so they are naturally going to be reacting to the news.
- but the higher prices are due to the shortage in oil
- thus, until there is greater production
- oil prices are high
- raising production in the US means raising energy capex
- White House firing barbs at the oil and gas industry risks diminished capex
- Capital markets don’t want to fund an industry under attack by the White House
- these actions could backfire high in 2022, with a bigger surge in oil prices
- due to growing shortage of production
So, we would be buyers of Energy stocks on this pullback.
3Q21 EPS trends show energy is the strongest
Below are the 11 sectors of S&P 500 and commensurate EPS trends. The global economy is one year into an economic expansion.
- we are fully 5 quarters into the expansion
- so we would expect analyst EPS forecasts to have already caught up to underlying trajectory
- but companies are still surprising to the upside
- strongest positive revisions are Energy and Financials with 23% and 16% respectively
- positive revisions means positive surprise
- this signals energy and financials still remain attractive for risk/reward
SECTORS: Leadership still Cyclicals/Early-cycle aka Epicenter
Relative sector performance is shown below and as we can see, 5 sectors are showing a 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 -0.45%
- Small-caps IWM -0.03%
- Epicenter XLI -0.02% XLF -0.12% XLB -0.10% RCD
- Crypto equities BITO 2.31% GBTC 2.36% BITW
Into 2022…
- Industrials
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
