Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

THE DAILY EDGE: 29 SEPTEMBER 2020

History and science suggest the second winter with coronavirus is likely to be worse than the first. The pathogen is more entrenched and most respiratory viruses circulate primarily in the winter months. (Bloomberg)

Wave Three?

This is from Bespoke:

“By early October the first fall outbreaks and the memory of those in the spring had already suggested that the virus attacked in a cycle; it took roughly six weeks from the appearance of the first cases for the epidemic to peak and then abate in civilian areas, and from three to four weeks in a military camp with its highly concentrated population. After the epidemic abated, cases still occurred intermittently, but not in the huge numbers that overwhelmed all services.” – John M. Barry, The Great Influenza: The Story of the Deadliest Pandemic in History

(..) The first wave of the COVID outbreak, which was centered in the northeast, began on 2/24 when the US started to average at least one new confirmed COVID case per day.  That wave peaked 46 days later on April 10th.  Over the next 48 days, the number of cases gradually drifted lower through the end of May.  On 5/28, the decline in cases reached a low, but then started rising again as the second wave of the outbreak flared up in the sunbelt.

During the second wave of the outbreak, the number of cases quickly increased to new highs before peaking on July 22nd, a period spanning 55 days.  As case counts across the sunbelt surged, states in the northeast continued to see cases but not to nearly the same degree as they did during the first wave.  From 7/22 through 9/12 (52 days), the second wave of the outbreak started to ebb, but ever since then, we’ve started to see a renewed uptick in cases.  This time, however, the states most affected by this third wave of the outbreak have been concentrated in the midwest, while case counts in the states impacted by the first two waves are nowhere near their prior peaks.

What’s also notable about the first two waves of the outbreak is that all of the legs higher and lower have spanned a period of between 46 and 55 days or six to eight weeks.  That’s similar to the ‘roughly six weeks’ that each wave lasted during the 1918 pandemic.  Given the fact that the second wave saw more cases than the first wave, does that mean the third wave will see a higher number of cases than the second?  Not necessarily.  Anything can happen but with the states being hit hardest by COVID now collectively having smaller populations and less geographic density than the areas hit hardest in the first two waves, the likelihood of larger caseloads would seem less likely.

Hospitalizations and deaths follow similar trends with a lag:

8_US Cross Curves (8)

Bespoke continues:

Taking the seven-day average case counts from notable states around the country further illustrates the similarities between now and 1918.  States like New York, Arizona, Florida, and California all appear to be past the peaks of the epidemic in their regions, and while case counts haven’t disappeared, new reported cases have been much less frequent and continuous than they were at their peaks.  Meanwhile, states in the midwest, like Missouri, which were previously spared by much of the new case burden, are only just now hitting the peaks of their outbreaks. How the COVID-19 pandemic progresses from here through the winter months is impossible for anyone to predict, but the fact that the current outbreak has been following similar patterns to the way the 1918 pandemic played out provides some degree of encouragement.

Let’s hope. But this ain’t totally obvious just yet.

This chart isolates the Midwest where cases now average 12k/day, nearly 30% of the U.S. total and hospitalizations exceed 6.6k/d (22%):

MIDWEST8_US Cross Curves (10)

But even excluding the Midwest, U.S. cases and hospitalizations seem on the verge of another flare up:

U.S. EX MIDWEST8_US Cross Curves (9)

Covid Exit Strategy is a group of public health and crisis experts with former experience working at the White House, Department of Health and Human Services, and on the Ebola epidemic in West Africa. “We are a non-partisan group, having worked across multiple administrations. We built this site to track each state’s progress towards stopping the spread of COVID-19.” Great set of charts.

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Canada's Covid-19 Case Curve Steepens

  • Germany’s Angela Merkel will recommend limiting private meetings and public gatherings to reverse a recent spike, reports said.
  • In Moscow, all schools were ordered to close for two weeks from Oct. 5.
Study finds 9 in 10 coronavirus patients experience side effects after recovery

Nine out of 10 patients who tested positive for the coronavirus reported at least one side effect of the disease following their recovery, according to a new online study of more than 900 people by the Korea Disease Control and Prevention Agency.

Researchers say more than 90 percent of patients reported side effects frequently associated with the disease, including loss of taste and smell, fatigue and psychological issues.

Fatigue was the most common reported side effect, with more than 26 percent of patients experiencing extreme tiredness, followed by difficulty in concentration, according to researchers behind the survey. (…)

An estimated 300,000 people in Britain have reported symptoms lasting more than a month, and 60,000 people reported symptoms for more than three months, according to the Covid Symptom Study app. (…)

  • “If we focus just on the death rate, eventually everyone is going to say this is no big deal,” [Colin Furness, an infection control epidemiologist at the University of Toronto] said. “We should reframe our understanding of Covid as vascular disease that causes widespread brain damage in the population.”

Barely two in 10 Americans would take a first-generation coronavirus vaccine if President Trump alone told them it was safe — one of several new measures of his sinking credibility in the latest wave of the Axios-Ipsos Coronavirus Index.

Manhattan Offices Are Nearly Empty, Threatening New York City’s Recovery

Office vacancies spike in Toronto, Vancouver as pandemic fuels work-from-home migration

Democrats Unveil $2.2 Trillion Pandemic Relief Bill House Democrats released a new coronavirus relief package that would restore $600 weekly jobless benefits, a last-ditch effort to revive stalled talks with the White House. Any legislation would face immediate hurdles in the GOP-led Senate, where many Republicans have resisted a large new round of deficit spending and expressed more confidence that the economy is recovering, after a sharp slump earlier this year.
TECHNICALS WATCH

Yesterday’s market strength was broad as small caps rose 2.8%. Lowry’s Research’s Buying Power rose 5 while Selling Pressure dropped 5.

SPAC ATTACK

It was just a question of time: Easterly Alternatives is seeking to raise $100 million for a fund that will invest exclusively in up to 15 special purpose acquisition companies, according to documents reviewed by Bloomberg. A Spac Spac.

Inside the JPMorgan Trading Desk the U.S. Called a Crime Ring The U.S. says the precious metals desk at JPMorgan was a racketeering operation. Now the bank is poised to pay a record penalty for spoofing. Here’s a look behind eight years of alleged conspiracy

EIGHT years! But what’s a $1B fine when you are worth $400B? (answer: 0.25%). And what about all the other institutions/individuals that benefitted?

Just one more in a long, long list (libor, mortgage, bonds, FX) involving an also long, long depressing list (WFC, Deutsche Bank, Barclays, RBS, City, etc…)

Also depressing:

David Kotok, CEO at Cumberland Advisors: “We enter the fourth quarter waiting for well-tested COVID vaccines and safe, proven treatments, and we hold our breath for a peaceful and uncontested election outcome.”

In the USA?!

Only 41% of Republicans would commit…unnamed (76)

THE DAILY EDGE: 28 SEPTEMBER 2020

Study suggests few Americans have Covid-19 antibodies Survey of dialysis patients indicates majority may not have an immune response despite high infection numbers

The FT summed up The Lancet’s article writing that “fewer than 10 per cent of Americans have antibodies that could protect them from developing Covid-19. (…) Higher rates of antibodies were found in the north-east, with New York state, the early epicentre of the virus in the US, having by far the most, at 21.5 per cent of the population. The west was the region with the lowest rates, between 3.6 and 4.9 per cent. (…) The proportion required for herd immunity can range between 50 and 90 per cent, depending on the disease, according to Johns Hopkins.”

The Lancet’s article is here. There is also a comment piece by two researchers at Imperial College:

(…) By testing the remainder plasma of 28 503 randomly selected patients receiving dialysis in the USA, they were able to test an unbiased sample of an important patient group across the entire country.

Importantly, Anand and colleagues chose a good test for their survey. The Siemens lab-based spike-protein-receptor-binding domain total antibody chemi­lu­minescence assay adopted by the authors was the best-performing platform in the largest external appraisal of commercial assays to date, in terms of both sensitivity and specificity. Their choice negates the need for major adjustment of the raw data to obtain reliable prevalence estimates.

The authors standardised data by age, sex, region, and race and ethnicity to provide the first nationally representative estimates of SARS-CoV-2 seroprevalence in the US dialysis and US adult popu­lations, with samples taken in July, 2020. Using anonymised demographic data, residence, postal codes, census data, and publicly available COVID-19 burden and community mobility data, the authors provide estimates for differences in seroprevalence by neighbourhood, race and ethnicity, poverty, population density, and mobility restriction.

The findings are striking. 2292 dialysis participants had SARS-CoV-2 antibodies, comprising 970 (42·3%) women and 1322 (57·7%) men, the majority of whom (1765 [77·0%]) were aged 45–79 years. This translated to a seroprevalence of 8·0% (95% CI 7·7–8·4) in the sample, rising to 9·3% (8·8–9·9) when standardised to the US adult population. There was a remarkable variation in seroprevalence by state in the sampled participants, with early pandemic hotspots such as New York (33·6%, 95% CI 31·7–35·6), Louisiana (17·6%, 10·8–28·7), and Illinois (17·5%, 15·2–20·2) recording substantially higher seroprevalence than their respective neighbouring states of Pennsylvania (6·4%, 4·7–8·8), Arkansas (1·9%, 1·0–3·5), and Missouri (1·9%, 0·9–3·8).

By comparing sample seroprevalence data from July, 2020, with Johns Hopkins University estimates of cumulative PCR-diagnosed cases as of June 15, 2020, the authors estimate just 9·2% (95% CI 8·7–9·8) of seropositive cases were diagnosed. Given antibodies take days rather than weeks to appear, this might under­estimate the true proportion of patients diagnosed by swab testing. However, this finding still points to a high number of people with the virus never being tested. In the absence of clinical data, it is not clear whether this is because of asymptomatic infection or difficulty accessing testing, or other reasons.

The study also estimated substantially higher seroprev­alence in residents of predominantly Hispanic (11·3%, 95% CI 9·8–12·9), non-Hispanic Black (13·9%, 12·1–16·0), and Hispanic and Black (16·3%, 14·3–18·5) neighbourhoods compared with predominantly non-Hispanic white neighbourhoods (4·8%, 4·1–5·5), when standardised to the US adult population. This alarming discrepancy is in keeping with trends identified in the largest survey from Europe and demands urgent attention.

  • The beginning of the autumn surge or wave in COVID-19 spans the Northern Hemisphere. Note how poorly prepared we are, comparatively speaking, in the United States. (Cumberland Advisors)

The beginning of the autumn surge or wave in COVID-19 spans the Northern Hemisphere

  • The coronavirus situation worsened over the last two weeks. Spread of the virus accelerated nationwide and is now spreading the fastest since early August. The “superforecasters” in the Good Judgment Project now see a 53% probability that 25 million doses of an FDA-approved vaccine will be available by March 2021 (vs. 69% two weeks ago) and a 91% probability by September 2021 (vs. 93%). (Goldman Sachs)
U.S. Durable-Goods Orders Rise for Fourth Straight Month

New orders for durable goods—products designed to last at least three years—rose 0.4% in August compared with July, the Commerce Department said Friday. The August increase was at a slower pace than earlier in the summer, when orders rebounded following a collapse in demand from early in the pandemic.

A closely watched proxy for business investment—new orders for nondefense capital goods excluding aircraft—also rose last month, increasing by 1.8%.

Orders for computers, communications equipment and machinery all rose solidly in August, helping drive the overall gain. (…) Weakness in motor-vehicle, commercial-aircraft and defense orders weighed on overall gains. (…)

This is more than a catch up from the spring, but still slower than the Dec. 2018-June 2019 0.8% monthly average gain:

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Auto CalculatedRisk informs us that, according to Wards Intelligence, U.S. September vehicle sales are expected to decline 5.2% YoY to 16.2 million SAAR. “This would put sales in 2020, through September, down about 18% compared to the same period in 2019.”

Inflation Is Already Here—For the Stuff You Actually Want to Buy Prices are rising for things people need in the pandemic, even if the overall inflation number remains subdued.

The gap between everyday experience and the yearly inflation rate of 1.3% in August is massive. The price of the stuff we’re buying is rising much faster, while the stuff we’re no longer buying has been falling, but still counts for the figures. (…)

The cost of food at home, where so many of us have been spending our time, was up 4.6% in August compared with a year earlier, the biggest rise in almost a decade. In deserted workplace and school cafeterias, food is 3% cheaper. (…)

Few home workers need a new suit or dress (down 17%), makeup (down 3%), hotel room (down 13%) or air ticket (down 23%). In vogue: sitting at home in your pajamas (men’s nightwear is up 4%), cycling (bikes up 6%), reading for pleasure (books up 4%, newspapers up 5%) and making things (sewing machines and fabric up 9%, cameras up 4%). Medical care is in demand (up 5%), while higher education is much less attractive (tuition fees up 1.3%, the lowest since data started in the late 1970s). (…)

TECHNICALS WATCH

Lowry’s Research’s Buying Power and Selling Pressure measures threaten to cross putting SP in the dominant position. In spite of rising markets Friday, BP declined and SP rose. The gap between them is now 4 points. It was 19 the week before, 46 at the Sep. 2 high and 87 at its recent widest gap in early June. Selling Pressure remains subdued while Buying Power has been steadily declining since mid-June even as most equity averages look technically oversold by some measures.

Now that Big Mo is out of the way, the hope is that TINA and FOMO will continue to keep sellers quiet until something (?) gets buyers enthusiastic again.

Keep in mind that broad averages such as the Value Line Geometric Index (-10.0%) and the NYSE (-12.0%) remain below their pre-pandemic highs and are still displaying descending 200-day moving averages. The same can be said of the equal-weigh SPY (-10.6%).

Fewer people seem to care about TINA and FOMO anymore. U.S. equity funds lost $25.8 billion in assets during the week ended Sept. 23, the third-largest weekly outflow on record. And

Funds in Refinitiv Lipper’s Science & Technology (tech sector) classification (including both mutual funds and ETFs) suffered net outflows of $1.3 billion for the fund-flows week ended Wednesday, September 23. This was the tech sector fund group’s fifth largest one-week net outflow in its history (Refinitiv Lipper began tracking fund flows data in 1992). As could be expected from this peer group, its performance (both from a fund flows and total return perspective) has mirrored that of the technology-heavy NASDAQ Composite Index. (…)

After its record-setting net inflows since the end of Q1, tech sector funds have now suffered net negative flows in three of the last five weeks and their performance has trended down as well, retreating 6.6% over the same time frame. Since its recent high on September 2, the NASDAQ Composite has now entered correction territory, losing 11.5% of its value in the 15 trading sessions since then. (…)

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And last Friday, a strong day, the Invesco QQQ Trust Series 1 ETF, which tracks the Nasdaq 100 Index with $128 billion in assets, had a $3.5 billion outflow, the largest one-day loss since October 2000. 

IPO Market Parties Like It’s 1999 Even in the midst of a recession, investors are pouring money into newly public companies at levels on par with the dot-com era

(…) Bankers, lawyers and executives say that if the frenetic pace keeps up, 2020 will eclipse the tech-boom years of 1999 and 2000, when investors feverishly pumped money into burgeoning internet stocks before they crashed to Earth. (…)

This year, more than 80% of the money raised by initial public offerings falls into three buckets: healthcare, technology and newly popular blank-check companies—shell firms whose only purpose is to acquire a private target and take it public. That is the most concentrated the IPO market has been since 2007, according to Dealogic, when new listings of banks and lending institutions flooded the market before the financial crisis.

More than 235 companies have joined the U.S. public markets this year, on track for the most since 439 companies went public in 2000, according to Dealogic. (…)

Public investors are also rewarding high-growth companies with big valuations they are unlikely to fetch in the private markets—a change from a few years ago. Companies are now trying to hit a sweet spot, going public after they’ve had a chance to mature a bit but before their strong growth trajectory has slowed. (…)

Blank-check companies [SPACs] have exploded this year as an alternative to the traditional IPO, accounting for more than 40% of the money raised in IPOs this year. That compares to an average of 9% over the previous 10 years, according to Dealogic. (…)

The chart below from SPAC Research is as of September 11, 2020. One week later, 95 has grown to 104 with 48 more filed but pending.

Amount Raised in IPOs ($billions) Number of IPOs

What is a SPAC?

  • A SPAC is a company, with no initial assets or operations, that raises capital through an initial public offering (“IPO”). The IPO proceeds are held in a trust for up to a defined period of time (typically 18 to 24 months) for the purpose of acquiring a private business, known as the “De-SPAC Transaction”.

  • Unlike in the case of the typical private fund, retail investors can invest in a SPAC IPO and there is no private placement restriction on advertising the SPAC IPO. SPAC units are traded on the secondary market.
  • SPAC investors have limited downside exposure given that investors are entitled to vote to approve or disapprove the De-SPAC Transaction. If the transaction is not approved, 100% of the trust proceeds, plus accrued interest, are returned to the investors, and investors have the right to redeem their own shares for cash at the time of the De-SPAC Transaction.
  • In addition, current SPAC structures provide holders of Class A Shares with the right to redeem their common shares for trust proceeds, regardless of whether they vote to approve the business combination, allowing these investors to preserve the potential upside of their warrants in the event the De-SPAC Transaction is successful. Certain SPACs restrict the portion of Class A Shares that a particular holder is permitted to convert to cash (e.g., at 10% of a person’s Class A Shares).
  • Private operating companies can use a SPAC to become a public company without going through the traditional IPO process since the SPAC is already publicly listed and typically meets the requirements for trading on the relevant stock exchange. This process results in a much quicker time frame and can reduce market pricing exposure since the terms are negotiated and agreed with the SPAC.
  • SPAC sponsors are compensated similarly to a private fund sponsor in that they receive a “promote” for sponsoring the SPAC; however, in the case of a SPAC, the sponsor typically receives 20% of the shares of the SPAC for a nominal investment [B shares].
  • Class B Shares are generally not redeemable prior to the De-SPAC Transaction, are not entitled to vote for the De-SPAC Transaction or to extend the initial time period required to consummate a De-SPAC Transaction, and do not have the right to participate in the trust proceeds. The SPAC sponsor also typically receives founder warrants in exchange for its payment of the underwriting discount and may receive restricted Class A Shares. Generally speaking, all of the securities owned by the SPAC sponsor are subject to various contractual and legal trading restrictions for certain periods of time.
  • However, there are several conflicts of interest and fiduciary duty issues that investors should consider. The economic rights of the SPAC sponsor and the holders of Class A Shares are not necessarily aligned. The SPAC sponsor has the potential upside of the promote, while the Class B Shares and founder warrants will become worthless if there is not a successful De-SPAC Transaction. Therefore, the SPAC sponsor may be incentivized to try and consummate a less than favorable De-SPAC Transaction rather than see the trust proceeds returned to the holders of Class A Shares, irrespective of the prospects of the post-business combination public company. Conversely, holders of Class A Shares may seek to block a De-SPAC Transaction or win concessions from the SPAC sponsor in exchange for their vote to approve the De-SPAC Transaction and/or agreement not to redeem their Class A Shares. (Seward & Kissel LLP)

There are currently 175 active SPACs valued at $55 billion, 40 of which have completed an Initial Business Combination (IBC) and only 2 liquidated SPACs.

Some 3,500 U.S. companies sue over Trump-imposed Chinese tariffs

About 3,500 U.S. companies, including Tesla Inc TSLA.O, Ford Motor Co F.N, Target Corp TGT.N, Walgreen Co WBA.O and Home Depot HD.N have sued the Trump administration in the last two weeks over the imposition of tariffs on more than $300 billion (£235.35 billion) in Chinese-made goods. (…)

On Sept. 15, the World Trade Organization found the United States breached global trading rules by imposing multibillion-dollar tariffs in Trump’s trade war with China.

The Trump administration says tariffs on Chinese goods were justified because China was stealing intellectual property and forcing U.S. companies to transfer technology for access to China’s markets.