Weekly Research Briefing: See the Peak

August 24, 2021
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As expected, COVID cases rose sharply over the past two weeks. And if history is any guide, COVID cases should decline significantly as we enter September. This is what we learned and prepared for over a year ago when we studied the ebb and flow of COVID spread. As people feel comfortable, they will go out into the world and socialize while reducing their defenses. Then as COVID cases lift, we will mask up and socially distance causing the new cases to fall. You might remember it being called "The Hammer and the Dance" by one epidemiologist. Of course, now, the COVID waves should be smaller than the past because of the vaccine, which will slow the spread of the virus while also saving thousands of lives in the process. During this recent wave, the scare was significant enough that millions more Americans went to get vaccinated. And yesterday’s news of full FDA approval of Pfizer/BioNTech's Comirnaty (yes, it now has a name) means that millions more will be getting it soon. So, my best guess is that between the recent expansion of the vaccine, mask use and social distancing, we are about to witness a Matterhorn-like descent in new COVID cases. Easy to say, but tough to see the maxed-out healthcare systems in many cities and states.

As a result of the last two weeks of rising COVID cases, returns to offices are being pushed out into the Q4 and even 2022, concerts and conventions are being canceled and travel, leisure and dining out data points are slowing down. Recent retail sales and even housing numbers are showing an unexpected coolness. These slowing datapoints are causing economists to pause some of their strong near-term growth outlooks, but most agree that this should be temporary. If COVID doesn't more negatively affect the supply chains, manufacturers should make their way through this COVID wave. Right now, that looks like a difficult call with the auto plants needing to slow down due to COVID effects on Asian manufacturing and transportation systems. We will need to keep a close eye on these developments the next few weeks.

The big Fed week in Jackson Hole that we have been looking forward to has now been moved online due to the recent virus spike. Probably a good move for the health of the attendees given the unhealthy air that is flowing through Yellowstone this week from the California fires. For Fed watchers, the focus of the week will shift toward Jerome Powell's speech on Friday. Any hints toward the outlook for tapering of asset purchases would be meaningful. But, how will he weigh the recent incredible job strength to the recent concerns over COVID? Get your tumbler of whiskey ready for we shall soon find out.

The markets have been decidedly risk-off in recent weeks as COVID has led some to extrapolate new slowing data trends. While this has benefitted growth and tech stock performances at the expense of cyclical stock moves, I would lean counter trade these recent moves. If we are right in thinking that a peak in COVID is near again, these cyclical stocks and many economically-sensitive commodity prices could put in their own rip higher. I see you crude oil and just wait until the Asian COVID waves also recede. On this slow week, we will be watching some new inflation data and keeping a close eye on the Fed and COVID. It should be another slow week of news as summer begins to wind down and the kids go back to school. Have a great week and everyone do a big rain dance for California.

Not an enjoyable 4th wave peak for the nurses and doctors in impacted hospitals, but the rate of change is slowing...

And hopefully with the number of people getting vaccinated this month, this peak will become forever the second largest one.

U.S. Daily Coronavirus Confirmed Cases

As individual states see their virus transmission rates decline, case numbers will soon follow...

@RenMacLLC: According to data from covidestim, as of August 18, 32 states are seeing an effective virus reproductive rate (Rt) above 1 down from 50 states plus DC at the end of July. When Rt is below 1, virus spread is slowing down. Look for US case growth to start moderating soon.

Case growth will moderate soon

Even some of the most affected early states like Arkansas and Missouri are finally seeing a slowing...

As Pantheon Macroeconomics research noted,  "U.S. Covid Cases Set to Peak Soon; Delta Waves are Brutal but Short"

The Rate of Growth of New Cases is Slowing

And finally, Florida is seeing a week-over-week decline in new cases...

COVID-19 Weekly Situation Report

(FloridaHealth)

Some of the most populated counties in Florida are seeing declines in cases this week...

@carlquintanilla: “FL cases peaking, even as FL students return to school ..” - @fundstrat, who has been early on this.

7D Delta in Daily Cases

But, the current 4th wave was not without an impact as shown in these Restaurant, Travel and Retail figures...

The worsening public health situation is imparting a considerable amount of uncertainty on the outlook. Consumers may pull back from some in-person services amid the spread of the more contagious strain and some may be reluctant to return to work, further delaying the labor market recovery. Overall, the increased uncertainty surrounding the Delta variant supports our view that the Fed will wait to see how the labor market evolves from here prior to removing accommodation.

Dining Out and Travel

(Wells Fargo Economics)

Disney said on their call that while the consumer is still headed to the parks, the group and convention business will see an impact...

“In terms of the impact of the Delta variant, we see strong demand for our parks continuing. And the primary noise that we’re seeing right now are really around group or convention cancellations. In other words, large groups that are coming in relatively short-term. But on the whole, we see really strong demand for our parks. In fact, our park reservations now are above our Q3 attendance levels.”
- Walt Disney (DIS) CEO Bob Chapek

(@_TheTranscript)

Airport security checkpoints seeing a slowing. Some COVID and maybe some seasonal related...

TSA Passenger Throughput

(@bespokeinvest)

Stock prices for most all travel and leisure sectors remain on the defensive...

Relative performance of selected affected industries

(@GoldmanSachs)

Seeing in the news and hearing from friends that hospitals are again being turned into COVID wards makes me think that August and September will remain challenging months for the healthcare sector...

Healthcare companies are monitoring the pace of elective medical procedures, which tend to be more profitable but also more readily canceled or postponed when infections rise. Becton Dickinson and Co., which makes medical supplies from syringes to infusion pumps, told investors on Aug. 5 that its own outlook, for 16.5% revenue growth for the year ending Sept. 30, assumes no broad restrictions on elective procedures from the pandemic.

“However, in the last several weeks, we are seeing some impact from the Covid Delta variant on elective surgeries in certain U.S. states,” Chief Financial Officer Christopher Reidy told investors.

The spread of the Delta strain has raised staffing costs for tenants of Sabra Healthcare REIT Inc., a real-estate investment trust that leases facilities to nursing homes and senior housing operators. So far, its customers haven’t seen significant illness as a result of the Delta variant, executives said, attributing that to high vaccination rates among facility patients and residents, as well as protocols such as requiring staff and residents to wear masks.

At the same time, where tenants have required that staff be vaccinated, costs are rising as they add temporary and then permanent staff to replace those who refuse, Sabra Chief Investment Officer Talya Neco-Hacohen said on an early August call with investors.

(WSJ)

As should be expected, foot traffic in new home models is seeing a recent COVID pause...

@bespokeinvest: Just like last week's University of Michigan Sentiment survey, the NAHB's reading on homebuilder sentiment release this morning was one of the biggest misses versus expectations on record:

NAHB Homebuilder Sentiment vs. Estimates

The Philly Fed Manufacturing survey also saw a pullback, but still in expansion mode...

Philadelphia Fed Manufacturing Index

University of Michigan business survey also looking less rosy...

Business conditions

(@MorganStanley)

The New York Fed's GDP Nowcast stands at 3.48% for 2021:Q3...

The New York Fed Staff Nowcast

(@NewYorkFed)

Goldman Sachs cut its leading growth forecast due to the Delta variant...

Goldman Sachs Growth Forecast

(@GoldmanSachs)

As recent economic data shows some slowing, employers are looking to hire stronger than ever...

@charliebilello: There have never been more Job Openings in the US than there are today: 10 million.

Total US Job Openings

This restaurant would like to work two shifts, but until they find employees, they will only be open for dinner...

Restaurant Help Wanted sign

(Blaine Rollins)

Unemployment insurance is not the only reason that companies are having difficulty hiring workers...

Alabama stopped paying bonus unemployment insurance in June. Meanwhile, these Chick-fil-A stores in the state are needing to close their dining rooms this week because they can't hire anyone. Chick-fil-A is a top restaurant employer with good pay and benefits so if they can't hire, imagine how difficult it is for their competitors. Maybe restaurants and retail jobs are becoming less interesting positions now that the rest of the economy is growing strongly and better paying white and blue collar jobs are becoming available. Expect increased automation and self-service in restaurants and dining rooms in the future. It would not be a bad thing if workers moved up the scale and let the Tesla robots take over the flipping of burgers.

Now, at least two Chick-fil-A locations are closing their dining rooms again due to staffing issues.

Both restaurants are located in Alabama. The Chick-fil-A in McCalla and in Madison posted messages to their respective Facebook pages explaining the situation. The posts both describe a similar situation: While customers are ready to eat in the dining rooms again, there just aren’t enough workers to provide proper service.

The Madison Chick-fil-A wrote that it is currently "in the middle of a job crisis." According to the post, the restaurant is receiving much fewer job applications than it normally does. Even worse, many applicants aren’t even showing up for their interviews...

Meanwhile, the McCalla Chick-fil-A describes a similar situation. As the location prepares for the upcoming fall season, which is busy due to returning students and the holidays, it writes that it cannot schedule enough workers to provide "the excellent service that our guests deserve."

"We are very appreciative, but our team cannot continue at the pace we are at," the post states. "Our team members are exhausted and there is no relief for them in our roster."

It continues, "Our team humbly asks for your patience as we recalibrate. We will be closing our dining room on Monday, August 23rd. This decision was not made lightly, as we made every effort to reopen our dining room on July 20th. We will continue serving our guests in the Drive Thru and Mobile Curbside."

(FoxBusiness)

Morgan Stanley has put together a Jackson Hole crib sheet for you...

Possible taper scenarios

(@MorganStanley)

Ocean shipping costs have gone on another tear higher as COVID waves run through some major Asian sipping ports...

The closure of a terminal at the world’s third-busiest container port is only the latest sign that turmoil in ocean shipping could run into next year, posing a threat to global economic growth as chronic delays and soaring transport costs may leave demand unmet and push up consumer prices.

A coronavirus outbreak led to a partial shutdown at Ningbo-Zhoushan port last week and the resulting suspension of inbound and outbound container ships reduced the port’s capacity by a fifth. It follows another Chinese outbreak in May, which led to a three-week long closure of the Yantian terminal in Shenzhen and created knock-on effects in international shipping.

A relentless surge in shipping prices and persistent bottlenecks at ports around the world have added to the barrage of problems affecting supply chains. These include the semiconductor crunch and the rising price of raw materials, to truck driver shortages as retailers stock up ahead of the peak shopping season...

About 350 containerships capable of carrying almost 2.4m 20ft boxes are waiting off ports globally, according to VesselsValue. The congestion has been getting worse with idle capacity reaching 4.6 per cent of the global fleet, up from 3.5 per cent last month, data from Clarksons Platou Securities shows.

Lars Mikael Jensen, head of global ocean network at Maersk, the world’s largest container shipping group, agreed that the situation had shown no signs of improvement since the Delta variant of Covid emerged.

“It’s not getting any better on aggregate,” he said, adding that maritime transport networks are “still super stretched — it only takes a small thing then you’re back to square one or square one minus.”

Freight rates surge

(FinancialTimes)

Transportation delays and other manufacturing supply chain issues caused Toyota to cut production last week...

Toyota Motor said Thursday it will reduce global production for September by 40% from its previous plan, as the spread of the coronavirus in Southeast Asia adds to supply troubles for Japan's top automaker.

The maker of the Prius hybrid and the RAV4 SUV planned to build nearly 900,000 automobiles for the month, but that number has been reduced to about 500,000. Nikkei reported on the production cuts earlier.

Unlike other automakers, Toyota had been relatively unscathed by the global chip shortage. But other components are starting to run short as Southeast Asian nations, home to key links in the company's supply chain, struggle to contain the coronavirus, forcing Toyota to halt assembly lines at home and abroad.

"The chip shortage is also a problem, but the big impact is from the coronavirus in Vietnam and Malaysia," a spokesperson said.

(NikkeiAsia)

Ford followed with also a hint from Volkswagen that they could join...

Ford Motor Co said Wednesday it will temporarily shutter its Kansas City assembly plant that builds its best-selling F-150 pickup truck due to a semiconductor-related part shortage as a result of the COVID-19 pandemic in Malaysia.

The one-week shutdown will begin Aug. 23, the second largest U.S. automaker said, adding it will also cut a shift on Saturday. The global auto industry has been hit hard by chip shortages that have caused significant production cuts.

(Reuters)

While we were away, the Chinese government did not back down from recent moves against its public companies...

Cover of The Economist

(@TheEconomist)

Investors thought that the actions could be contained on the technology and social media companies...

Technological disruption, once seen as a useful prod for China to catch up with the West, has been recast as a threat to the ruling Communist Party. As a result, Xi Jinping, China’s most powerful leader in decades, is rewriting the rules of business for the world’s second-largest economy...

Beijing has cracked down on China’s private sector, issuing fines and initiating probes meant to force Mr. Ma’s companies, as well as such firms as ride-hailing giant Didi Global Inc. and TikTok owner ByteDance Ltd., to adhere more closely to the state’s interests. The companies, holding troves of capital and user data, had grown too expansive for the government to control.

(WSJ)

But now it looks like the government is expanding its regulation into other industries...

Beijing Regulatory Actions

(@csm_research)

For investors in large companies, there might be a new cost to doing well in China...

Tweet from @nosunkcosts

And out of nowhere, 'China policy' is now a tail risk for global portfolio managers...

Inflation remains the biggest tail risk

(@BankofAmerica)

As investors’ worries about China grow, the direct impact on their financial markets is growing...

If the markets rebound with a decline in COVID, pay close attention to see how these markets bounce. It will be an important tell to see if investors want to step up to buy them.

China HY Bonds

(@BankofAmerica)

Checking in on some key commodity prices...

After falling 75% from its high, is lumber going to try and find a bottom here?

Lumber

Crude oil is at some very important price levels here...

ICE Brent

Equity market optimism has been evaporating with COVID...

@LizAnnSonders: Bears now outnumbering bulls in AAII survey … spread not deeply negative but at lowest since October 2020

US Investor Sentiment

U.S. small cap's also trading at an important level...

@bespokeinvest: The small-cap Russell 2,000 closed below its 200-DMA for the first time in ~11 months last week, ending its 11th longest streak of closes above its 200-DMA on record since 1978.

Russell 2000

Here is that recent cyclical underperformance versus growth...

Cyclicals vs Defensives

Of course, if COVID cases do retreat, and the economy picks up again, you can guess which sector should have the best bounce...

@bespokeinvest: While the large-cap indices are close to record highs, the average stock in the S&P 1500 is 15%+ below its 52-week high, and the average Energy stock is 30% below.

S&P 1500

I couldn't agree more strongly...

Tweet from @SardonicaX

And so, we are watching the U.S. credit markets extremely closely right now...

US Credit Markets

This investment whale is taking his large equity profits and cycling them into private credit and infrastructure...

Canada’s second-largest pension manager is planning to boost investments in private credit and infrastructure after reaping big gains in equities in the first half of the year.

The plan for Caisse de Depot et Placement du Quebec includes adding personnel. “We’re looking to hire in private debt, and the other area where we’ve hired the most is infrastructure, as we actually plan to nearly double this for the next two to three years,” Caisse Chief Executive Officer Charles Emond said Wednesday in an interview...

About two-thirds of its fixed income assets are now in private credit, Emond said, a shift that has included real estate loans and credit for infrastructure projects and businesses.

Pension Pulse

(Bloomberg)

A mind-blowing chart with several long term implications...

US Live Births and Deaths

(YardeniResearch)

With respect to 'The Who', the kids are not alright...

On a median basis, those under 55 years of age today are behind those of four decades ago.

Ratio of mean wealth

(@JPMorganAM)

The horrors of sharing a name with a robot...

I think that my name is safe as long as the tech geeks stick to multiple syllables.

“We don’t usually think about the individuals who are already born when this happens, but the impact on their lives is real as well,” Philip Cohen, a sociologist at the University of Maryland at College Park, told me. Sharing a name with a robot can be tiresome. “‘OMG, Siri like the iPhone,’ should be engraved on my tombstone,” complained Siri Bulusu, a journalist, in a 2016 piece about her name. And name overlaps have led to sitcom-style misunderstandings, like when, as The Wall Street Journal reported, one dad asked his daughter Alexa for some water, and their robot Alexa responded by offering to order a case of Fiji water for $27.

But Amazon’s choice of name has had much darker effects on the lives of some Alexas, particularly the younger ones who get teased at school with an onslaught of commands. Wattenberg observed that the only Alexa that many of today's children know is the virtual one that their family bosses around, so it’s not surprising that some of them go on to belittle classmates with the same name. “Many parents [of Alexas] are changing their kids’ names or using their middle names because it leads to just horrendous bullying,” she told me.

When I asked Amazon if it has considered relinquishing the name Alexa, a company spokesperson did not answer that question but said, “Bullying of any kind is unacceptable, and we condemn it in the strongest possible terms.”

Annual number of babies named Alexa

(TheAtlantic)

Tweet of the Week...

Tweet from @GaryLegum

We will be back next week...

In the meantime, don't worry, things will get much better. Go ahead and make those Q4 travel plans.

Q4 Travel Plans

(Wife's Social Media)


Disclosure

The information presented here is for informational purposes only, and this document is not to be construed as an offer to sell, or the solicitation of an offer to buy, securities. Some investments are not suitable for all investors, and there can be no assurance that any investment strategy will be successful. The hyperlinks included in this message provide direct access to other Internet resources, including Web sites. While we believe this information to be from reliable sources, Hamilton Lane is not responsible for the accuracy or content of information contained in these sites. Although we make every effort to ensure these links are accurate, up to date and relevant, we cannot take responsibility for pages maintained by external providers. The views expressed by these external providers on their own Web pages or on external sites they link to are not necessarily those of Hamilton Lane.

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