Market Thinking

making sense of the narrative

Dropping back to support.

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The US markets last week sold off into the close as they began to worry about the long awaited (and dreaded) second wave of the virus, coming straight back to the long term support line at around 3000 on the S&P500.  Likely Asia and Europe will follow suit this week, especially as China has a shortened week due to public holidays. We note that while well down from the spike in March, implied volatility as recorded by the Vix remains elevated (34.7) and daily realised volatility has also been picking up suggesting some choppy trading as we approach not only the end of month, but also the end of the quarter. Remarkably it has been one of the best quarters ever for Wall Street and as such we suspect that some of the noise traders will be packing up for the summer vacation (possibly to go back to playing in Oil and Gold) and it remains to be seen if the Asset Allocators will continue to buy equities on the dips, something we have been seeing and continue to expect.

As ever with noise markets, it is useful for medium term investors to try and retain a little perspective and a key point about this second wave phenomenon is the extent to which it produces not just more infections, but more hospitalisations and ultimately more deaths. In some senses, more positive tests can be a result of more tests overall. That has certainly been the case in Sweden for example and in the US. The key figure to watch is ICU admissions.

So far, total ‘with-Covid’ deaths in England & Wales with no co-morbidity are equivalent to a single normal day’s deaths.

Second it is useful to look at some of the statistics in a broader context. These graphs from the UK for example are particularly useful and provide some welcome context. They come from a data scientist called Christopher Bowyer and are available weekly at one of a number of independent blog collectives, where lots of different alternative sources are gathered together. The first chart shows NHS England data for deaths ‘with’ rather than ‘from’ Covid and separates those with no underlying pre-conditions.  That is a total of 1,350 people of which 78% were over 60. Indeed of the total deaths, 95.2% have a pre-existing condition and remember that this is deaths with Covid present, not necessarily as the cause of death, For context this total for the whole period of deaths where Covid-19 was present, but where there were no other co-morbidities is less than the ‘normal’ number of deaths in England and Wales in a single day.

Chart 1: 95% of deaths with Covid in E+W had a pre-existing condition


The link has many more graphs, but we think this second one is also interesting for context. The total for England and Wales shows deaths by location, and the top three items of the stacked bar chart, are 1) Home Covid deaths in royal blue 2) Hospital Covid deaths in red and 3) Care Home Covid Deaths in green. Click on the source link in the graph to enlarge. These three are now down to around 15% of the total deaths compared to around 40% back in week 16. 

Chart 2: UK Deaths with Covid in all locations now 15% of total. Weekly deaths now close to ‘normal’


The total is now close to the five year moving average of deaths which is around 10,000 a week in England and Wales (shown as a green dotted line). In fact, deaths in hospital are now below their five year average. We should also not lose sight of the changes in medical protocols now that we know (some) more about the virus, in particular the role of steroids and anti-coagulant drugs in treatment. Many of the earlier hospital deaths in England and Wales are believed in hindsight to have occurred because of the over-use of ventilators. 

Also on the Virus, a highly intriguing story from the University of Barcelona, where researchers were able to detect the presence of the virus in samples of waste water collected in the city. This is particularly important for early detection of a resumption of the virus given the very high proportion of asymptomatic cases. Intriguingly, the process discovered cases in frozen waste water dating back to early January – 41 days before the first official case was announced which encouraged them to look back further. Astonishingly, while all other samples were negative, one, from 12 March 2019 showed positive traces of SARS CoV-2. Perhaps it is a rogue data point, but researchers everywhere are following up and there are now suggestions of traces being found in Italy dating from November 2019. This is developing.

In the Energy Sector, we should look as the G as well as the E in ESG

Elsewhere, we note from the FT this Monday morning that Chesapeake Energy has filed for bankruptcy. As one of the pioneers of the Shale gas ‘revolution’ this is hugely symbolic, but it should be noted that this is really all part of a process of restructuring its debts. At its peak the company had a market Cap of $35bn, now down to $116m on Friday before a $600m rights issue on its exit from bankruptcy effectively dilutes those existing shareholders to nothing. Fortunately for the management, as the FT again reported last week, they just awarded themselves $25m of retention bonuses. Doug Lawler, the CEO has apparently received more than $110m over the last seven years. How much of that was stock based compensation – and how much he managed to cash in as the share price fell 99% is not clear, but as with the airlines’ CEOs, it does highlight the disconnect between pay and performance and other aspects of Corporate governance. It would be good to think that going forward, Institutional investors (and regulators) are going to pay more attention to the G and not just the E in ESG

Model Portfolio Update

Due to the long post on Friday, Paging Michael Lewis, we have left the Model Portfolio update until today, with a bigger review in the monthly coming up on Friday. For the week 18th to 24th June (Thursday to Wednesday) we saw another choppy and volatile week. Overall the 70:30 Model Portfolio was down 1,17% for the period, but this was less than half the drop of 2.8% experienced by the benchmark index. The worst day was the 24th, when both Model and Benchmark fell almost 2% on bad news around Covid and some slight shortfall on US high Frequency data, which is consistent with our view that the noise traders are starting to move on. On the best day, the Model Portfolio was up 0.8%, ahead of the benchmark. Generally though it has stayed ahead of benchmark mostly by being more resilient on the downside.

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