Year: 2021

Timing has never been my best investor quality. Traveling in CA, particularly where internet access and speed is very limited (yes, in CA!) this week is ample proof. Omicron has changed our plans so will be back to normal venues this weekend. Some important stuff meanwhile.

Omicron Update: Dec 2

Omicron was confirmed in San Francisco, California yesterday [Wednesday]. (…)

Omicron arrived before Thanksgiving. Last year Thanksgiving was a series of mini superspreader events across the country. The timing of Omicron’s arrival could additionally springboard us into a Winter surge.

Because this was a travel case, this isn’t necessarily the “proof” we need to say Omicron is spreading in our community. But we can certainly assume it by now. (…)

We’re still waiting on lab data to evaluate, at the micro-level, how Omicron’s mutations influence transmissibility, immunity effectiveness, and disease severity. There are rumors of lab data but nothing has been shared publicly. It’s coming soon. Unfortunately, it takes time for cells to grow in a lab. Once we have enough growth, then Omicron will be tested against our antibody protection. I’m particularly interested in if, and how, 3 mRNA doses compares to 2 doses.

It’s incredibly important to marry lab data with epidemiological data. What happens in the lab (a highly controlled environment) can be different from what happens in the “real world” (environment and genetics). Integrating both sources gives us a “true” picture.

Thankfully (or not), we’re getting more and more data in the real world.

Cases continue to exponentially increase in Gauteng (black line)—the Omicron epicenter. There were 6,168 new cases today with the 7-day average up 424%. The doubling time is every 3.5-5 days. This is compared to a doubling time of 11 days in the beginning on the Delta wave. Test positivity rate is also increasing (9% to 15% in two days), which means that this increase is not just because Gauteng is testing more. This thing is spreading.

Twitter: Ridhwaan Sulliman

With this preliminary data, we can start measuring the reproductive number or contagiousness of Omicron: How many people will catch the disease from a single infected person?

There are two types of reproductive numbers: R(0) and R(t)

• R(0) is the spread of disease if nothing was in it’s way: No vaccine or infection-induced immunity, no screening, no quarantining, etc. For Delta, the R(0) is ~6.

• R(t) is the “effective” transmissibility: the actual transmission rate right now on the ground. This takes into account things that slow transmission like immunity, human behavior, etc. We want R(t) to be less than 1, which would represent a decrease in spread.

Through mathematical models, we can calculate these numbers. Three separate science groups have done this (here, here, here) and all came to roughly the same conclusion: In Gauteng, the R(t) was 0.8 (during the tail end of Delta) and is now 2.33 (during Omicron). This means in the same environment that Delta faded away, Omicron found traction by 3-fold. In other words, there seems to be in less in the way (like reduced immunity protection or easier/faster access into cells) for Omicron than for Delta. We’ll get confirmation from the lab studies. (…)

Tom Wenseleers (a biostatistician) plotted the number of tests sequenced by variant over time in South Africa. What he found was the number of sequenced tests identifying Delta dramatically decreased (purple line), while the number of sequenced tests identifying Omicron dramatically increased (red line). This is another angle showing that Omicron is outcompeting Delta—Omicron is highly transmissible.

I’m a little less confident in this data because South Africa didn’t have much Delta in the first place—they were at very low transmission when Omicron was introduced. It will be interesting to see what happens when Omicron gains traction somewhere with very high rates of Delta (like the United States). (…)

Bottom Line: Omicron is in the United States and we’re not surprised. As more epidemiological data accrues, transmissibility of Omicron is not looking good. Stay vigilant and do your part to reduce infection and spread.

NOVEMBER PMIs

Extracts from Markit’s PMIs released Wednesday, with links to full pdf.

USA: PMI drops to 11-month low amid softer demand conditionsand material shortages

(…) Longer lead times, supplier shortages and higher energy prices meanwhile pushed the rate of cost inflation to a fresh series high. Although firms still sought to pass on greater costs to clients, the pace of increase in prices charged slowed to the softest in three months amid signs of push-back to higher prices from customers.

The seasonally adjusted IHS Markit US Manufacturing Purchasing Managers’ Index™ (PMI™) posted 58.3 in November, down fractionally from 58.4 in October and lower than the earlier release ‘flash’ estimate of 59.1. The latest reading was the lowest since December 2020. Although remaining well above the 50.0 neutral level, the PMI was boosted in particular by the further near-record lengthening of supplier lead times and increased inventory building. While normally considered positive developments associated with an expanding manufacturing economy, the lengthening of lead times reflected an ongoing supply shock and inventory building often reflected concerns over the future supply situation.

Although US manufacturers indicated a stronger rate of increase in production during November amid reports of a sustained rise in new orders, the pace of growth was the second-slowest since September 2020. Companies continued to state that the upturn was held back by material shortages.

New sales growth continued to significantly outpace production growth, though slowed to an eleven-month low. A number of companies suggested that strong client demand and efforts at customers to stockpile drove the increase. That said, some firms noted that material shortages and supplier delays led customers to place orders elsewhere. New export orders, meanwhile, rose marginally. (…)

Severe supplier delays and shortages led to the sharpest rise in input costs on record (since May 2007). Firms noted that higher prices for metals, chemicals and plastics, alongside greater freight and transportation costs drove inflation.

Manufacturers raised their selling prices markedly in November as higher costs were passed through to clients. Despite a faster rise in input prices, the rate of charge inflation eased to a three-month low.

Concurrently, vendor performance deteriorated to one of the greatest extents on record. To protect against future shortages, delays and supplier price hikes firms increased their input buying sharply and pre-production inventories rose at the fastest pace for three months. Nonetheless, challenges replenishing stocks of finished goods led to the sharpest fall in post-production inventories since May 2020.

Finally, expectations regarding the outlook for output over the coming year improved to a three-month high. Optimism was often linked to hopes of supply chain issues easing in coming months, and in some cases greater confidence stemmed from investment in technology to prevent future bottlenecks.

The ISM:

At the margin, signs of slowing demand: only 13 of 18 industries reported growth last month (16 in October, 17 in September). Two sectors contracted (printing and primary metals). From respondents:

• “All input costs are going up considerably, across the board.” [Food, Beverage & Tobacco Products]
  

• “While steel plate and hot-rolled coil pricing seems to be approaching a plateau, the biggest challenge we have at the moment is finding qualified workers.” [Fabricated Metal Products]
  

• “We are still seeing shortages with various metals. Plastic resins seem to be slowly improving. Electronic component lead times are still moving out.” [Electrical Equipment, Appliances & Components]
  

• “Business is strong but meeting customer demand is difficult due to a shortage of raw materials and labor.” [Furniture & Related Products]
  

• “In the first nine months of the year, business conditions were off the charts, and sales by far outpaced capacity. This has put backlog at record levels and, surprisingly, customers have been willing to wait, albeit reluctantly. However, there seems to be a flattening: Sales remain strong but are not growing at the same month-over-month pace from the previous six to nine months.” [Machinery]
  

• “We are experiencing significant supply chain disruptions, which are resulting in historically long lead times to get product to our customers. Commodity-based inflationary pressures are widespread, and traditional means of addressing these pressures are not effective due to unprecedented demand.” [Miscellaneous Manufacturing]
  

• “We are starting to catch a break in plastic resins, with (November) prices lower in both ethylene and propylene-based resins. Starting to notice improvement in availability/lead time as well.” [Plastics & Rubber Products]

In Canada,

Latest PMI® data continued to reveal a robust expansion in Canada’s manufacturing sector. Output growth accelerated while new orders rose at a solid pace. Firms continued to engage in advance ordering to protect against shortages, but transportation bottlenecks led to another marked lengthening in lead times. Consequently, backlogs of work rose at a survey record pace.

Rising demand and higher transportation fares led to a sharp increase in costs. The favourable demand environment allowed firms to partly pass on higher expenses, however.

(…) manufacturers sought to build their safety stocks during November, with the latest rise in pre­production inventories the joint second-steepest in the series history.

Robust demand for raw materials, along with higher transportation, fuel and energy costs led to a marked rate of input cost inflation. Survey respondents commented on difficulties sourcing semiconductor chips and higher prices for steel, rubber, aluminium and electrical components. Firms opted to pass on part of the burden to customers by raising their selling charges. The rate of output price inflation moderated but was the fourth-steepest in the series history. (…)

Eurozone: Manufacturing growth broadly stabilises during November as factories battle with harsh supply headwinds

(…) Data split by the three broad market groups showed further growth slowdowns at intermediate and investment goods makers, while consumer goods producers recorded an accelerated expansion.

Monitored euro area constituents continued to record strong-to-sharp rates of expansion in their manufacturing sectors during November. Italy was the clear stand-out performer, with growth here accelerating to a survey high, surpassing the previous peak set May and the improvements seen in other nations. Greece meanwhile registered one of its fastest expansions on record, despite a fractional easing. Elsewhere growth rates tended to slow compared with those seen earlier in 2021.

Eurozone manufacturing production rose solidly during November, according to the latest survey data. The rate of increase picked up from October – but was the second-weakest in the current 17-month growth sequence.

A similar trend was observed in manufacturers’ new order inflows during November, where despite the rate of growth quickening, it was still subdued relative to those seen earlier in 2021. Anecdotal data suggested that weaker improvements in demand were reflective of some normalisation from exceptional growth previously, although others attributed softer new order intakes to supply-related issues and in some cases, increased prices.

However, new business continued to increase at a rate that was comfortably above its long-run average. This contributed to another steep rise in the level of work outstanding at eurozone manufacturers in November, and also underpinned a strong boost in staffing numbers. (…)

Nevertheless, both purchases and stocks of inputs increased at sharper rates during November. Notably, pre-production inventories were accumulated to the quickest degree since data were first collected in June 1997.

The survey-record increase in stocks came amid another substantial month-on-month rise in costs which was the third-strongest in the series history. To alleviate pressures on margins, output prices were raised to the greatest extent since this series began in November 2002.

My take: A growing part of manufacturing demand seems to be due to hoarding to mitigate shortages and price increases. Cost pass-ons are showing signs of being less easy to fully implement. Rising inventories, slowing real demand and margin squeeze. To watch carefully, most investors, analysts and even execs have no experience with inflation.

OMG: The latest (through Nov. 27)  Chase card spending tracker cratered around Thanksgiving (this is a 7d m.a.):

It could be just a blip but recent income and inflation data suggest caution on the economy’s main growth engine.

BTW: Inflation Causing Hardship for 45% of U.S. Households 

As the peak of holiday shopping approaches and winter temperatures drive up heating costs across the U.S., 45% of American households report that recent price increases are causing their family some degree of financial hardship. Ten percent describe it as severe hardship affecting their standard of living, while another 35% say the hardship is moderate.

The heating season is just beginning and rent increases are growing in number and magnitude.

OPEC, Russia Agree to Keep Boosting Oil Output, Jolting Prices OPEC+ had considered pausing production rises as Omicron fueled concerns about demand and the U.S. released stockpiles

The Organization of the Petroleum Exporting Countries and allied producers led by Russia—which together call themselves OPEC+—said they would raise their collective production by another 400,000 barrels a day in January. The group agreed earlier this year to boost output in such increments each month until production reaches pre-pandemic levels. (…)

Outside analysts have questioned whether the group can pump as much as it says it will. With production in Russia and many African countries participating in the pact reaching peak levels, the group may only be able to increase output by about 250,000 barrels a day, said Christyan Malek, head of oil-and-gas research at JPMorgan. Most of that will come from OPEC producers in the Persian Gulf, he said. Still, he said, the move “shows OPEC+’s confidence that the impact of Omicron will be short lived.”

Note: I am in California this week. Time zone, family matters and limited equipment could have an impact on the frequency, quantity and, perhaps, quality of my blogging.

TECHNICALS WATCH

Small caps provided much impetus early in the month, only to gradually lose it over the following 8 trading days, before collapsing nearly 4% on Friday.  Large caps held their new high ground in mid-November until Omicron brought them back to their trend line, like during much of the year. Another Buy-the-Dip opportunity?

My favorite technical analysis firm notes that the rather positive backdrop established in previous weeks remains in place but suggests caution until broadly strong demand (i.e. small caps) returns.

But this new variant will dominate investors’ attention for a few weeks. Here’s a condensate of the best article I have read on Omicron so far (full article: Omicron Update: Nov 27):

• WHO declared B.1.1.529 a Variant of Concern (VOC) and named it Omicron. (…) VOC is a more severe classification than “Variant of Interest” but less severe than “Variant of High Consequence”. After working with South African health officials, WHO had enough evidence to say Omicron is more transmissible and had enough key changes on the spike protein that were concerning.
• There were two flights from South Africa that landed in Amsterdam late last night [Friday]. Upon arrival, all 600 passengers were tested on the tarmac and 61 tests came back positive. A 10% prevalence rate on a flight is unbelievably high. Like defies imagination (as Bergstrom said). Especially given all passengers were negative before take off. With these positive cases we need to know a few things:

• Were these people connected in some way before the flight (like in a tour or same hotel room)?

• What was the vaccination rate (type, timing, boosted)?

• What are the symptoms?

• And, of course, were these caused by Omicron?

• We still have no scientific updates on Omicron’s impact on immunity escape or transmissibility. If you’re hearing anything right now (even if it’s the British PM) it’s purely speculation. Hypotheses are important to discuss, but not the solid evidence we need. Getting answers takes time because good science takes time. I give it a week or two until the evidence starts rolling in.
• We’re seeing a lot of cases but not a lot of severe disease. Yesterday, Dr. Rudo Mathivha, head of the ICU at an Omicron epicenter hospital said that among their patients: “About 65% are not vaccinated and most of the rest are only half-vaccinated”. This is incredibly encouraging news. This may be a sign that our vaccines continue to protect against severe disease and death. I cannot stress enough, though, that this is preliminary evidence. We need to know a few more things:

1. Is this because of a small sample size? Maybe Omicron just hasn’t spread enough in South Africa to see hospitalizations rise.

2. Is this because of lag time? Population-level hospitalization trends lag cases trends by 3-4 weeks.

3. Is this because of the population? Populations will respond differently to infections. What may be happening in South Africa may not be representative of what will happen elsewhere.

In her previous note, Dr. Jetelina noted:

• We know that B.1.1.529 is not a “Delta plus” variant.
• B.1.1.529 is likely highly contagious.
• The rate in which these cases are spreading are far higher than any previous variant. Disease modeling scientist Weiland estimated that B.1.1.529 is 500% more transmissible than the original Wuhan virus. (Delta was 70% more transmissible).
• We can detect B.1.1.529 on a PCR test. This typically isn’t the case. This is amazing news because it means we can track this virus much easier and much quicker around the world.
• We caught this virus incredibly early.
• If we need another vaccine, we can do this incredibly quickly. Thanks to the new biotechnology, mRNA vaccines are really easy to alter. Once the minor change is made, only 2 dozen people need to enroll in a trial to make sure the updated vaccine works. Then it can be distributed to arms. Because the change is small, an updated vaccine doesn’t need Phase III trials and/or regularity approval. So, this whole process should take a max of 6 weeks.

Moderna Says New Vaccine for Omicron May Be Ready in Early 2022

WHO warns of ‘very high’ risk from new Omicron coronavirus variant Japan moves to ban foreign visitors to limit spread of heavily mutated strain

EARNINGS WATCH

Overvalued equity markets can remain overvalued for quite some time, justifying the use of technical analysis as another risk management tool. The extraordinarily strong liquidity infused by governments and central banks is generally still there looking for returns.

But the fundamental environment has changed: inflation is up sharply, profit margins are under attack and overall profits may be peaking. But are they?

From Refinitiv/IBES

Through Nov. 26, 486 companies in the S&P 500 Index have reported earnings for Q3 2021. Of these companies, 80.9% reported earnings above analyst expectations and 14.6% reported earnings below analyst expectations. In a typical quarter (since 1994), 66% of companies beat estimates and 20% miss estimates. Over the past four quarters, 85% of companies beat the estimates and 12% missed estimates.

In aggregate, companies are reporting earnings that are 10.2% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.0% and the average surprise factor over the prior four quarters of 18.3%.

Of these companies, 76.5% reported revenue above analyst expectations and 23.5% reported revenue below analyst expectations. In a typical quarter (since 2002), 61% of companies beat estimates and 39% miss estimates. Over the past four quarters, 79% of companies beat the estimates and 21% missed estimates.

In aggregate, companies are reporting revenues that are 2.9% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.2% and the average surprise factor over the prior four quarters of 4.1%.

The estimated earnings growth rate for the S&P 500 for 21Q3 is 42.4%. If the energy sector is excluded, the growth rate declines to 34.1%. The estimated revenue growth rate for the S&P 500 for 21Q3 is 16.9%. If the energy sector is excluded, the growth rate declines to 13.6%.

The estimated earnings growth rate for the S&P 500 for 21Q4 is 21.6%. If the energy sector is excluded, the growth rate declines to 13.9%.

Analysts keep revising up for Q4…

…increasing their earnings growth estimates for Q1 and Q2’22 to +7.3% (from +5.8% on Oct. 1) and to +4.8% (+3.6%)…

…even though more companies are warning negatively:

There is still no valuation support, any way one looks at it. All liquidity and technicals.

Half of this year’s big IPOs are trading below listing price High-profile flotations from Deliveroo to Paytm have flopped despite robust stock markets

German Inflation Surges to 6% as ECB Insists Spike Will Pass While the central bank predicts price pressures will retreat in coming months, it said inflation could remain well above 3% for a longer period of time.

Earlier on Monday, Spain reported a rate of 5.6% that was bolstered by more expensive food. Prices in Belgium jumped 5.6%. Data for the euro area due Tuesday are set to show a 4.5% gain. (…)

Employees of Germany’s federal states won a 2.8% raise and a tax-free one-time payment of 1,300 euros ($1,467.1) on Monday, in a deal that will ultimately cover nearly 3.5 million people. Meanwhile, Olaf Scholz’s new government is planning to lift the country’s minimum wage to 12 euros toward the end of next year.

OPEC Weighs Shift in Oil Policy After Crude Release Saudis, Russia consider pausing planned production increases after U.S., others release crude to push prices lower

(…) The U.S.-led crude release of up to 70 million barrels threatens to further scramble the supply-demand balance.

To compensate for the new supply, Riyadh and Moscow are now considering a pause of the group’s monthly collective increase, OPEC delegates said. The U.A.E., a powerful OPEC member that has clashed with Saudi Arabia over OPEC policy in the past, and Kuwait are resisting a pause, according to the delegates.

Saudi Arabia sees the released crude as potentially swelling global supply and threatening to reduce prices, according to people familiar with the country’s thinking.