THE DAILY EDGE: 29 NOVEMBER 2021

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.