COVID-19 UPDATE: 7D delta in daily cases slowing for 8 consecutive days (really 10 days) = tentatively good sign. Market volatility likely to ...

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Members Area       First Word     COVID-19 UPDATE: 7D delta in daily cases slowing for ~8 consec

       First Word

COVID-19 UPDATE: 7D delta in daily cases
slowing for ~8 consecutive days (really 10
days) = tentatively good sign. Market
volatility likely to plunge 2021-2023 = history
says Epicenter leads by 3,200bp
December 14, 2020

               Tom Lee
               HEAD OF RESEARCH

Click HERE to access the FSInsight COVID-19 Daily Chartbook.

__________________________________________

Our 2021 Year Ahead Outlook will be released Thursday, December 17th at 3:00 PM EST

Joining us for a webinar, which will include the Fundstrat Macro Team. The following
topics will be discussed:

• Overall macro and strategy outlook 2021
• Economic outlook, what can we reasonably expect for GDP growth?
• Where are we in this investment cycle and what themes will dominate?

• We discuss key policy risks and upsides
• New investment themes
• Full EPS and sector outlook

Don’t miss it!!!!

You must register in advance.
Register here to attend –> REGISTRATION LINK

Should you have any questions, please do not hesitate to contact us at (212) 293-7140
or email inquiry@fsinsight.com.

__________________________________________

STRATEGY: If history a guide, market volatility set to drop sharply 2021-2023
COVID-19 case growth continues to rise as the US in the midst of Wave 3, but the rate
of change, or 7D delta is slowing. For the last ~8 days, consecutively, we are seeing
this 7D delta shrink. It was:

+75,122 10 days ago,
+58,746 8 days ago,
+16,186 5 days ago,
+4,855 latest

So you can see the trend — the 7D delta is slowing. And even CA, which has seen a
tragic surge in daily cases, seems to be flattening. So on the one level, it looks like
Wave 3 is losing its momentum. However, we are still in the midst of the holiday
season, with friends and family gatherings, so it still remains possible for daily cases to
see a renewed surge.

Source: COVID-19 Tracking and Fundstrat

Tune into our 2021 Outlook this coming Thursday
We are publishing our 2021 outlook this coming Thursday (12/17/2020). We will be
providing a comprehensive look at the framework we are using for 2021. So there is a
lot to be discussed, and we hope you can tune in.
– Webinar details are at the top of this note

But don’t expect us to make huge changes to our views, either.

2020 VIX averaged 29.5, the 3rd highest in history… periods of high volatility are followed
by 3-year plunges in VIX
We have been providing constant and real-time updates to our market thesis and
views. But there are a few broader topics we will expand upon. One of them is the
expected trend in market volatility, with the VIX as a good proxy. We have been
looking at a spot VIX

But the VIX spot is not necessarily the most important measure of volatility. We tend to
look at the VIX futures curve (aka term structure) and historically, the VIX term structure
is in contango (positively sloping) and since 2005, this is indeed the normal shape:

– But in 2020 average (solid blue line), you can see it is in backwardation
– the “current” curve is positively sloping, but still very high vs the 15-year average

If market volatility is falling (VIX), then we expect investors to buy “volatile companies”In
other words, we expect the VIX and the VIX futures curve to see sharp declines in 2021,
and probably through 2023. This should result in a pretty dramatic change in investor
market preference. Here us out:

– When market volatility is high, investors seek “low volatility stocks” to provide market
ballast
– When market volatility is low, investor seek “high volatility stocks” to enhance beta

In other words…
– When VIX high, investors OW Growth (low vol)
– When VIX low, investors OW Epicenter (aka Cyclicals aka Value)

Since 2004, whenever VIX 4M-1M averages

– when in the 10th decile of 4M-1M VIX, which is -0.4 or lower, Epicenter trounces
Growth over the next 12M
– Current 12M avg is -1.1

In other words, if volatility is set to decline in 2021, which is our base case and also
suggested by history, then we should see continued strong outperformance of
Epicenter stocks. We also see fundamental reasons to OW Epicenter:

– higher leverage of economic recovery
– stronger margin recovery (see the note from last week)
– lower valuations
– outperforms is inflation risk rises

Epicenter Trifecta list
Below is our current “Trifecta” epicenter stock list. These are the stocks which were hit
the hardest by the pandemic and have the greatest operating leverage to a re-
opening. And we like the earnings upside in these stocks, because of the massive cost
reset. The stocks are based on positive views coming from the trifecta of: (i) Quant

(tireless Ken), (ii) Global Portfolio Strategy (Brian Rauscher, aka Rocky) and (iii) Technicals
(Rob Sluymer).

Source: Fundstrat, Bloomberg

ADDENDUM: We are attaching the stock lists for our 3 portfolios:
We get several requests to give the updated list for our stock portfolios.   We are
including the links here:

– Granny Shots –>       core stocks, based on 6 thematic/tactical portfolios
– Trifecta epicenter –> based on the convergence of Quant (tireless Ken), Rauscher
(Global strategy), Sluymer (Technicals)
– Biden vs Trump –> based on correlation to either candidate odds

Granny Shots:
Full stock list here –> Click here
Tickers: AAPL, AMZN, AXP, BF.B, CSCO, EBAY, GOOG, GRMN, GWW, INTC, KLAC, LEN,
LOW, MNST, MSFT, MXIM, NVDA, OMC, PM, PYPL, QCOM, TSLA, XLNX

Trifecta Epicenter (*):
Full stock list here –> Click here
Tickers: AN, GM, F, HOG, GRMN, LEG, TPX, PHM, TOL, NWL, HAS, MAT, PII, MGM, HLT, MAR,
NCLH, RCL, WH, WYND, SIX, DRI, SBUX, FL, GPS, LB, CRI, VFC, GPC, BBY, FITB, WTFC,
ASB, BOH, FHN, FNB, PB, PBCT, RF, STL, TFC, WBS, PNFP, SBNY, NYCB, MTG, AGNC, EVR,
IBKR, VIRT, BK, STT, SYF, BHF, AGCO, OC, ACM, WAB, EMR, GNRC, NVT, CSL, GE, MMM,
IEX, PNR, CFX, DOV, MIDD, SNA, XYL, FLS, DAL, JBLU, LUV, MIC, KEX, UNP, JBHT, R, UBER,
UHAL, HP, NOV, SLB, EOG, PXD, HFC, MPC, PSX, XEC, LYB, EXP, MLM, CF, MOS, ESI, NEU,
NUE, RS, SON, STOR, HIW, CPT, UDR, KIM, NNN, VNO, JBGS, RYN

Biden White House vs. Trump White House:
Full stock list here –> Click here

(*) Please note that the stocks rated OW on this list meet the requirements of our
investment theme as of the publication date. We do not monitor this list day by day. A
stock taken off this list means it no longer meets our investment criteria, but not
necessarily that it is neutral rated or should be sold. Please consult your financial advisor
to discuss your risk tolerance and other factors that characterize your unique investment
profile.

POINT 1: Daily cases 181,931, +4,855 vs 7D ago.            Wave 3 7D delta slowing ~8
consecutive days
The latest COVID-19 daily cases came in at 181,931, up +4,855 vs 7D ago.

– Daily case growth, measured as 7D delta, seems to be slowing
– For ~8 days now, the 7D delta is flattening
– Now it is +4,855
– But we are still in the holiday season, so the threat of renewed spread is high

Source: COVID-19 Tracking Project and Fundstrat

7D delta at +4,855…Wave 3 momentum still slowing
Again, the daily change vs 7D ago, in our view, is the leading indicator as it is what
influences the 7D moving average.

– the 7D delta is falling for ~8 consecutive days now
– but we are still in a period of distortion from post-Thanksgiving
– plus, we are still in the holiday season, so renewed spread is a risk
– this week will provide a much clearer picture

Source: COVID-19 Tracking and Fundstrat

CA remains the state with the highest daily count in cases and also the biggest 7D
jump in cases. But COVID-19 is pretty bad everywhere.

Source: COVID-19 Tracking and Fundstrat

Is CA finally peaking? Hopefully….

Source: COVID-19 Tracking and Fundstrat

POINT 2: NIH study is another study further supporting the use of Olumiant (Baricitinib)
There is another study supporting the use of Olumiant (Baricitinib) for treating COVID-
19 patients. You may recall the FDA issued an EAU for Olumiant after a UK/European
study supported its use as an effective treatment. And what makes Baricitinib, an
arthritis drug, even more interesting is that it was identified by a UK AI computer,
BenevolentAI, as a potentially useful treatment. Below is an excerpt of our commentary
about this drug back in mid-November.

Source: Fundstrat commentary from 11/16/2020

The latest study was by the NIH and studied patients treated with Olumiant alongside
Remdesivir.

Source: NY Times

The study results were published Friday 12/11/2020.      And this study involved 1,033
patients. The patients, in all cases, were given Remdesivir. So this study was a look at
whether adding Baricitinib would improve outcomes:

– 515 received the combination

– 518 received Remdesivir only

The results were promising for those with the combination treatment:

                  Combo     Control
– Time to recovery 7          8 days
– Mortality          5.1%      7.8%
– Serious events   16.0%    21.0%

https://www.nejm.org/doi/full/10.1056/NEJMoa2031994

So the study authors concluded at Olumiant + Remdesivir was superior to Remdesivir
alone.

https://www.nejm.org/doi/full/10.1056/NEJMoa2031994

I am not sure how many doses of Olumiant are needed to be effective. This drug,
considered a specialty drug, is expensive. From the Eli Lilly website, here is the pricing
info:

– 30-day supply of 2mg tablets is $2,265

Source: Eli Lilly

POINT 3: Wave 3 –> At the point where ICU scarcity leads to higher mortality
While we are tentatively hopeful, the reality remains that many communities are
reaching capacity at hospitals, and more importantly, at ICU beds. The NY Times has
a good database that shows the available capacity. Take a look at the map below
and we can see the “red” are communities with limited bed capacity.

– The red is widespread, not just in certain states
– literally, every state has some communities reaching the capacity of hospital
beds/ICU

Source: NY Times

The table below lists the ‘high population’ areas at >100% capacity of ICU. Topping the
list is Albuquerque, NM. Reaching 100% of ICU capacity is a function of both the
capacity of the community and a function of the prevalence of COVID-19.

– Albuquerque has 43 cases per 100k (same as 430 per 1mm), compared to 30 per 100k
US overall.
– Baton Rouge, on the other hand, seems to have limited healthcare capacity as
cases are 17 per 100k (30k US overall) but they are at 109% of ICU capacity

Source: NY Times

But the tragedy of March/April seen in the NY tristate area is now playing out in other
parts of the US. Cities are running out of capacity. In fact, the Los Angeles Times had
a few stories like this over the weekend.

– Central Valley hospitals (Fresno) are at capacity now
– CA has implemented strict lockdowns, but there seems to be growing resistance to

these lockdowns

Source: Los Angeles Times

And even Santa Clara is beginning door to door testing, in an attempt to slow the
spread. Santa Clara has a high Latino population (55%) and as we have written about
in many previous commentaries, Latinos seem to be disproportionately impacted by
COVID-19.   Door to door testing, however, is a big step, but not surprising, given
policymakers there need to take some action.

Source: Los Angeles Times

             Tom Lee
             HEAD OF RESEARCH

Disclosures (show)