361 Capital Market Commentary | November 16th, 2020

Summer will be here before you know it and with the new vaccine announcements, it is looking increasing likely that this is when life will return to normal. Currently, the bad news is that all the COVID-19 datapoints are moving in the wrong direction. More Americans are becoming infected, hospitalized and dying because of COVID. The current increase will make more people aware and afraid of the virus, and their increased caution will cause a future decline in the spread. This is happening in Europe now and will happen in the U.S. after Thanksgiving.

But the good news is that all the vaccine datapoints are headed in the right direction. Pfizer last week and Moderna this week—and not just little successes, but major 90%+ efficacy success. There will be many more big wins, but now it is time to manufacture and distribute. The financial markets know this and are looking forward to these vaccines pushing out into the world and ending COVID-19 as we know it. New equity buying with all those massive cash reserves was highly significant last week. Credit spreads are collapsing as fixed income investors push out on the risk curve. Dollars leaving U.S. treasuries is leading to a continued rise in interest rates. And within equities, money is finally leaving the safe haven of large cap growth stocks and deploying into small caps, value and cyclical stocks. Finally.

The pent-up demand to get out of the house, travel and spend in 2021 will be ginormous. Investors are also quickly positioning to take advantage of the bottom in these depressed travel and leisure valuations. Some names have quickly recovered, like Disney which is now +80% from its March low and less than 5% from its all-time high. Which kid (or adult) is not going to want to go to Disneyland this summer after spending hours and days watching “Frozen 2” or “The Mandalorian”? So up, up and away we go. Enjoy the market rip into the end of the year as the vaccine news sparks more hope of a better 2021. Volatility surrounding the U.S. government should continue to decline as Biden picks his incoming cabinet and Congress returns to Washington to get a few important things done during the lame duck session.

Have a great Thanksgiving. No gambling with Grandma. Stay put and enjoy your Cornish game hen-sized turkey this year. Next year’s Thanksgiving will be one of the best ones ever. Promise.

Go Lab Geeks…

The world’s governments hoped for a minimum 50% efficacy in a successful COVID vaccine. Let’s hope these very positive surprises continue.

Moderna Inc. said its Covid-19 vaccine was 94.5% effective in a preliminary analysis of a large late-stage clinical trial, another sign that a fast-paced hunt by scientists and pharmaceutical companies is paying off with potent new tools that could help control a worsening pandemic.

The highly positive readout comes just a week after a similar shot developed by Pfizer Inc. and BioNTech SE was found to be more than 90% effective in an interim analysis. Both shots rely on a technology called messenger RNA that has never been used to build an approved vaccine. Soon, millions of people around the world could be spared from illness by the breakthroughs.

A first analysis of data from more than 30,000 volunteers showed Moderna’s vaccine prevented virtually all symptomatic cases of Covid-19, the disease caused by the coronavirus, the company said in a statement on Monday.


The Pfizer and Moderna vaccine efficacy is so high that even Novak Djokovic should jump the net to get in line for a shot…

@carlquintanilla: DEUTSCHE: “It’s easy to see why there is so much excitement over Pfizer’s news … the early Pfizer number puts effectiveness up there with that seen for Chickenpox, Mumps, Polio and Whooping Cough. Clearly a long way to go but very encouraging.”

Effectiveness of vaccines

If you want to learn more about the mRNA technology that has launched these new vaccines, here is a good piece…

The stumbling block, as Karikó’s many grant rejections pointed out, was that injecting synthetic mRNA typically led to that vexing immune response; the body sensed a chemical intruder, and went to war. The solution, Karikó and Weissman discovered, was the biological equivalent of swapping out a tire.

Every strand of mRNA is made up of four molecular building blocks called nucleosides. But in its altered, synthetic form, one of those building blocks, like a misaligned wheel on a car, was throwing everything off by signaling the immune system. So Karikó and Weissman simply subbed it out for a slightly tweaked version, creating a hybrid mRNA that could sneak its way into cells without alerting the body’s defenses.

“That was a key discovery,” said Norbert Pardi, an assistant professor of medicine at Penn and frequent collaborator. “Karikó and Weissman figured out that if you incorporate modified nucleosides into mRNA, you can kill two birds with one stone.”


A perfect cover this week by The Economist…

The Economist


And with the vaccines, Morgan Stanley shifts into a higher gear on risk…

Morgan Stanley strategists said an expected “V-shaped” economic recovery, greater clarity on Covid-19 vaccines and continued policy support offer a favorable environment for stocks and credit next year.

In an outlook for 2021, a team including Andrew Sheets recommended investors overweight equities and corporate bonds against cash and government debt, and sell the U.S. dollar. Volatility is set to decline, and investors should be “patient” in commodity markets, the strategists said.

“This global recovery is sustainable, synchronous and supported by policy, following much of the ‘normal’ post-recession playbook,” they wrote. “Keep the faith, trust the recovery.”


J.P. Morgan also…

JPMorgan Chase & Co. strategists have increased their exposure to global stocks and backed away further from sovereign bonds, calling this week’s positive vaccine news a “game changer” for markets.

The vaccine breakthrough will allow investors to look past the resurgence in coronavirus cases toward the end of pandemic and the broader reopening of the global economy, according to a team including Marko Kolanovic. Bolstering JPMorgan’s bullish view was a positive third quarter earnings season and benign U.S. election outcome, it added.

“We expect equities to continue to rally, and bonds to sell off,” the strategists wrote Thursday. “We retain a pro-risk allocation in our model portfolio given the easing of major market risks, still moderate investor positioning, strong growth rebound, and robust policy support.”

The JPMorgan team boosted its equity overweight to 10% from 8% and raised the government bond underweight to minus 12% from minus 11%, according to the note. It also reduced an overweight position in corporate bonds.


And Goldman Sachs takes up its price targets for U.S. stocks…

S&P 500 index: We lift our year-end 2020 target to 3700 (+4%) consistent with our previously published fair value estimate of the market under a divided Congress scenario. Our prior target was 3600. We forecast S&P 500 will climb by 16% to 4300 at year-end 2021 and gain 7% to reach 4600 by the end of 2022. The market is actually less dependent on the performance of a few mega-cap stocks than many investors perceive.

(Goldman Sachs)

Path of the S&P 500 through 2022

Vaccines = A path to normalization…

The vaccine announcement by PFE provided evidence that a path to normalization exists, which should serve as a catalyst for Value stock outperformance. In fact, on the day the company announced its preliminary phase 3 results, our long/short, sector-neutral Value factor experienced its largest single-day increase in the factor’s history since 1980 (+541 bp). Likewise, Russell 1000 Value outperformed Growth by 600 bp.

(Goldman Sachs)

Valuation dispersion has widened dramatically this year

Value stocks love beating COVID…

The news of an imminent and effective COVID-19 vaccine on Monday triggered the strongest one-day rotation to Value since 2008. The 6.4% return in Value (S&P 500 L/S, quintiles based, sector normalized, equal weighted) on Monday was the most extreme one-day gain since at least mid-1980s (+10.0σ relative to history).


Most Extreme Single Day Rallies in Value L/S

So investors are fired up about U.S. equities…

Tweet from @SoberLook

And they are using billions in cash to buy stocks at a record pace…

Flows: all-time record $44.5bn inflow to equities (Chart 4), $10.2bn into bonds, $0.8bn into gold, $17.8bn out of cash.

Largest week ever of global equity inflows

Big buying is shown amongst the many upward thrust indicators. Here is one that has a great track record…

@RenMacLLC: Here’s the “deGraaf Thrust indicator”…..from the patriarch: Note Monday was only the 10th time in history this has spiked above 70%, the last one was June ’20 and Jan ’19

S&P 500 Index

The buying of value stocks hasn’t been limited to the U.S. as Japan is now touching 30-year highs…

@JLyonsFundMgmt: Japanese Stocks Hitting 3-Decade Highs

Japanese Stocks Hitting 3-Decade Highs

Consumer facing businesses that make it to 2021 are going to be very, very busy…

“We remain firmly of the view that the post-vaccine economy will be characterized by a massive consumer boom. It will be financed by a combination of stimulus payments and savings generated by months—it will be a year, at least by the time herd immunity is reached—of enforced cutbacks in spending on discretionary services. The scale of households’ cash build since the pandemic began is mind-boggling, with savings account balances at commercial banks and thrifts rising by a total of almost $2T in just eight months”


Savings Deposits at a Record High

In the near term, consumers seem to be focused on spending their cash on buying a house. And prices are jumping…

Sixty-five percent of metros – 117 areas out of 181 – witnessed double-digit price growth from one year ago. In comparison, only 15 metro areas recorded double-digit increases in 2020’s second quarter. The biggest gainers in the third quarter were Bridgeport, Conn. (27.3%); Crestview, Fla. (27.1%); Pittsfield, Mass. (26.9%); Kingston, N.Y. (21.5%); Atlantic City, N.J. (21.5%); Boise, Idaho (20.6%); Wilmington, N.C. (20.6%); Barnstable, Mass. (19.4%); Memphis, Tenn. (19.1%); and Youngstown, Ohio (19.1%).

The nation’s median existing single-family home price climbed 12.0% on a year-over-year basis, to $313,500. All four major regions saw double-digit year-over-year price gains, led by the West (13.7%), but followed closely by the Northeast (13.3%), the South (11.4%), and the Midwest (11.1%). At this rate, home prices were growing four times as fast as median family income, which was 2.9%.

“In light of the pandemic, prices jumped in a number of metros that contain larger properties and open space – where families could find extra rooms, including areas for an at-home office,” said Yun.


Southwest Airlines decides that the best COVID-era defense is to play offense…

The pandemic is forcing many airlines to defend their turf. Southwest is using it to invade.

Even as air travel languished in this fall, Southwest Airlines Co. executives fanned out to cities from Palm Springs, Calif., to Sarasota, Fla., to scope out potential new markets. The airline is adding four more cities to its network this year and announced plans for another six in 2021. And it’s looking for more. It hasn’t added airports this quickly since integrating with AirTran Holdings, which it bought in 2011.

“It sounds risky to go open a bunch of new cities, but the alternative is worse,” says Andrew Watterson, Southwest’s chief commercial officer. “You could wait til Covid is over. But that’s far too long.”

Through its history, Southwest has leapt at opportunities to encroach on rivals’ territory when they were struggling. If successful this time, it would be a prime example how some U.S. companies, taking advantage of the carnage around them, can come out of crises stronger.


Current COVID trends will negatively impact the upcoming two months of data so be prepared…

@TheStalwart: This, from JPM, isn’t good. Just one attempt to measure things, but things definitely not going in the right direction economically.

Job tracker based on alternative data

If we can hammer down the COVID spread for the next two weeks, maybe we can dance into the holiday spending season and send this chart into positive territory…

Tweet from @carlquintanilla

Not sure what it will take to turn men’s apparel figures positive when dressing up now equals any colored jeans…


Could the MMR vaccine help prevent COVID? If so, another easily deployed game changer…

3 characteristics of COVID-19: 1) international variation; 2) age-related mortality; and 3) sequence homology between the fusion proteins of SARS-CoV-2 and measles and mumps viruses, and sequence homology between the Macro domains of SARS-CoV-2 and the rubella virus, suggest the Measles-Mumps-Rubella (MMR) vaccine may mitigate COVID-19 spread and severity.


We owe the doctors and nurses something significant once we are past COVID…

Emergency rooms are starting to fill again with COVID-19 patients. Utah, where Nathan Hatton is a pulmonary specialist at the University of Utah Hospital, is currently reporting 2,500 confirmed cases a day, roughly four times its summer peak. Hatton says that his intensive-care unit is housing twice as many patients as it normally does. His shifts usually last 12 to 24 hours, but can stretch to 36. “There are times I’ll come in in the morning, see patients, work that night, work all the next day, and then go home,” he told me. I asked him how many such shifts he has had to do. “Too many,” he said.

Hospitals have put their pandemic plans into action, adding more beds and creating makeshift COVID-19 wards. But in the hardest-hit areas, there are simply not enough doctors, nurses, and other specialists to staff those beds. Some health-care workers told me that COVID-19 patients are the sickest people they’ve ever cared for: They require twice as much attention as a typical intensive-care-unit patient, for three times the normal length of stay. “It was doable over the summer, but now it’s just too much,” says Whitney Neville, a nurse based in Iowa. “Last Monday we had 25 patients waiting in the emergency department. They had been admitted but there was no one to take care of them.” I asked her how much slack the system has left. “There is none,” she said.

The entire state of Iowa is now out of staffed beds, Eli Perencevich, an infectious-disease doctor at the University of Iowa, told me. Worse is coming. Iowa is accumulating more than 3,600 confirmed cases every day; relative to its population, that’s more than twice the rate Arizona experienced during its summer peak, “when their system was near collapse,” Perencevich said. With only lax policies in place, those cases will continue to rise. Hospitalizations lag behind cases by about two weeks; by Thanksgiving, today’s soaring cases will be overwhelming hospitals that already cannot cope. “The wave hasn’t even crashed down on us yet,” Perencevich said. “It keeps rising and rising, and we’re all running on fear. The health-care system in Iowa is going to collapse, no question.”

In the imminent future, patients will start to die because there simply aren’t enough people to care for them. Doctors and nurses will burn out. The most precious resource the U.S. health-care system has in the struggle against COVID-19 isn’t some miracle drug. It’s the expertise of its health-care workers—and they are exhausted.


This year’s Thanksgiving would at least make Andy Warhol proud…

Tweet from @WalterDeemer

Might as well put an Irish flag in the Oval Office…

Joe Biden will continue to add to the Irish ancestry that has occupied the White House

US Presidents with Irish Ancestry

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