Introduction – Safety First
This week’s “Public Service Announcement” on COVID-19 is truncated because more and more people are realizing the seriousness of this issue.
The new coronavirus that causes COVID is not “the flu” and is dangerous, especially for the elderly and/or those with pre-existing medical problems.
Asymptomatic people can become infected and spread the virus, so be careful to protect yourself and others even if you feel well.
Please read what you probably already know.
Because of the importance of COVID, I have written a lot about it in detail. But all of the articles focus on investment. This article raises the argument that one of the reasons that little is said about why investors are starting to look beyond the mess of COVID – and it is a mess – is the unsustainability of epidemics, assuming that a period of immunity is acquired when people are infected and recover (I’ll come back to that later).
The concept that immunizing 60% of the population, for example, is generally sufficient to prevent an infectious disease from becoming an epidemic, rather than a more sporadic disease, is relevant to COVID in several states with high levels of new cases. I refer to a recent article that shows that immunity of 40-45% rather than 60% may be sufficient to create effective herd immunity. Please read at least the non-disease-related parts of the article to understand the limitations of this approach.
In addition, it should be noted that even if the number of people immunized against the virus is not sufficient to create true herd immunity, if many are immunized, the rate of virus reproduction will be limited to lower levels than those that existed when the virus first appeared. I think the concept of herd immunity is another factor to consider when we look to the future.
When I think of the VIDOC spikes in several states, I see that they are slowing down or preparing to decline because of herd or near-herd immunity.
Of course, this will not necessarily be easy to achieve.
But here’s the context:
As investors dealing with high-value markets, we are obliged to think about profits, income flows and asset values for many years to come. If, as I suggest, the right thing to do today is to start thinking at a time when VIDOC is not a problem or becomes like the flu – endemic but manageable – it will be important to look appropriately at today’s negative stocks but to think about earnings and valuations in 2022, 2024, etc. when – I postulate – investors will have moved on to other issues and concerns.
While staying safe and helping to protect the most vulnerable in our role as individuals, we as investors must remember that most real problems have a sell-by date in the financial markets; and that date usually precedes the actual resolution of the problem.
This article was written on Friday, July 3, but was revised on July 4. The data is current as of Friday; please keep informed via the links provided and your own data sources if you are interested.
I will begin with the sections on her collective immunity and the reasons why it was granted in New York.
Herd immunity, another potential means of defeating the virus
Why are the actions (SPY) so strong when there is so much bad news? The United States and the global economy were struggling to emerge from a downturn when the virus hit the world economy hard in the first quarter. Today in the U.S., about half the country is pausing or backtracking to reopen the economy as new cases and hospitalizations increase.
Improvements have been seen in the drug treatment of VIDOC, with remdesivir and a steroid (dexamethasone), and some other improvements in hospital care. I am optimistic that by the end of this year, VIDOC antibody therapy, such as Regeneron’s (REGN) or Eli Lilly’s (LLY) antibody therapy, will also be proven effective.
Many efforts are underway to produce vaccines against this virus. Some are likely to be very effective, at least in young and middle-aged people, and hopefully also in the elderly (the age group most vulnerable to IDVOC).
These are the two efforts that have been put forward by the medical community and therefore by the media. Clearly, they are extremely important.
Herd immunity, or near-herd immunity, could be another way to contribute to the victory over VIDOC.
Recently published science Mathematical model reveals the influence of population heterogeneity on herd immunity to SARS-CoV-2. This article by mathematicians focuses on epidemics such as COVID that spread rapidly because, on average, one infected person infects more than one other person (reproductive number greater than 1). The epidemic is therefore expanding.
But if the disease induces immunity in the survivors, less than 100% of the population must ultimately be immunized for the reproduction rate to fall below 1, in which case the epidemic is not out of control as COVID has done.
The traditional definition of herd immunity refers to vaccination, writing :
The definition of classical herd immunity is derived from mathematical models of the impact of vaccination.
They go on to define, as required by convention, a variable called R0 as :
basic reproductive rate, defined as the average number of new infections caused by a typical infected individual in the initial phase of an epidemic in a fully susceptible population..
The authors make many assumptions, and this one is essential:
In our model, we assume that infection with the virus and its subsequent elimination will result in immunity to new infection for an extended period of time.
Can people recovering from VIDOC-19 be re-infected?
The immune response, including duration of immunity, to SARS-CoV-2 infection is not yet understood. It is unlikely that patients with SARS-CoV will be reinfected soon after recovery, but it is not yet known whether similar immune protection will be observed in patients with VIDOC-19.
I accept the authors’ hypothesis as an investor and for the purposes of this article.
Without certainty, I also think it is more likely than the conservative view of the CDC.
The main reason is that, despite my research, I can’t find examples of VIDOC patients who have recovered and re-contracted the disease.
If several such cases were to occur, it would be world news. At this point, the absence of such examples seems convincing to me. It would be better for the CDC to look into this issue.
Now, a little more information on the Science article.
Adjustment of herd immunity calculations for COVID
According to standard formulas, if 60% of a population is vaccinated with 100% efficacy, the R0 of the disease will be less than 1 and an epidemic will not develop.
The assumption behind the 60% figure assumes homogeneity of vaccination and then spread in the population.
However, the spread of VIDOC is not homogeneous.
Instead, depending on the assumptions used, the authors find that perhaps only 43% of the population needs to be immunized against the virus to achieve herd immunity.
There’s a lot of “maybe” in that 43% figure. Some of the potential adjustments that might be appropriate and that are discussed in the article would lead to a figure of less than 43%.
The publication was controversial, as Science notes in an accompanying blog post. Please read the full article. I will focus on one key conclusion, which relates to my analysis. The editors suggest that no
…the country is on the verge of achieving herd immunity.
I’m going to answer that with a “yes… but” Perhaps some degree of herd immunity could explain what happened in New York – which has a larger population than many countries.
New York, New York, is it an immune city?
NYC Health maintains a page of COVID data. It shows that new cases and hospitalizations reach very high levels in March and April, with deaths following the same trajectory with a slight time lag. Since May, the disease has (almost) disappeared. To what extent is this due to confinement and social isolation? I wonder whether herd immunity is already present in New York, given that it is a very busy and densely populated city.
Some data that shows why I question the relevance of this concept:
New York City reports 213,000 confirmed cases.
As I mentioned in last week’s VIDOC article, the CDC estimates that to get the total number of actual cases, not just the diagnosed cases, you have to take the number of confirmed cases and multiply it by 11 “for every reported case, there were actually 10 other infections”).
Taking this into account, the estimated number of cases would exceed 2.3 million.
Of course, that 11X factor might be too low; perhaps it should be, say, 15X for NYC. Clearly, we need hard data.
Based on an estimate of 2.3 million people in New York City, the presumed immunity from VIDOC is close to 30%, which is close enough to 43% to raise the question of proximity immunity.
It can also be assumed that children under 12 years of age are mostly immune to VIDOC and do not spread the disease (perhaps because they have few ACE2 receptors to which the virus binds when it enters cells).
According to the Census Bureau, 21% of New York City’s population is 18 years of age or younger. Should this be factored into the herd immunity model? I think so, without trying to quantify it.
In any case, it is this situation that has caught my attention, because the trends in VIDOC are now frightening in many states.
The following sections detail several Sunbelt states that are experiencing VIDOC spikes. I use total exposure:diagnosed cases ratios well below 11X and examine whether, if newly diagnosed cases remain at current levels, the state is on track to potentially achieve herd immunity to VIDOC in 12-18 months. If this is the case, things would be very bad for what would appear to be “forever” during that time, but then IDVOC could disappear as an investment issue (and partly as a health issue) as more people see the light at the end of this viral tunnel.
I’ll start with my home state:
Florida: The temperature is rising
Florida includes in the total number of cases both PCR tests (much more common) for acute infections and antibody tests for previous infections. The latter is updated weekly; an update is expected soon. For now, I will deflate the average total number of cases appropriately.
Florida shows the total number of cases among state residents on page 2 of the state report, which covers the last two weeks. Over the last 7 days, there has been an average of approximately 7,860 new diagnoses per day, which is a new peak. Subtracting the average antibody count from 1368/day, there are approximately 6500 new acute diagnoses per day.
Since many more tests are being done, rather than multiplying by 11 as suggested by the CDC, I will multiply by 5 to estimate new cases. This is clearly a working estimate and not an accurate estimate; I hope that the calculations made in this way are conservative.
This approach suggests 32,500 actual new cases per day.
If you annualize, you come up with 12,000,000 people who are going to be infected and who, for discussion purposes, are considered immune. Assuming 22 million Floridians, 12 MM represent 56% of the population. Using the CDC’s 11X factor would result in an unlikely exposure rate of 100%.
(Note that to simplify the calculations, I exclude deaths due to COVID infections, population displacements due to state immigration or emigration, and other real-world variables.)
If we were to use the 12MM estimate and extend it to the end of 2021, we would arrive at 18MM.
This without taking into account the presence of some pre-existing immunity, as is the case for young people.
So the high rate of new cases in Florida cannot be maintained unless people start contracting COVID a second time. Either infections will decrease dramatically, or by the end of next year, many Floridians will be immune and herd immunity may have been achieved.
In either case, as an investor, I am increasingly willing to look beyond this crisis – while trying to stay safe as an individual.
Let me now turn to one of our two neighbouring states, Georgia.
It is hot in Georgia too, but COVID deaths are stable for the time being
In addition to the COVID monitoring project, I follow Georgia’s official statistics through a website run by the Atlanta Journal-Constitution.
The number of cases in Georgia is on the rise, with the 7-day average of new cases quadrupling in the last month. Hospitalizations have doubled, and deaths due to COVID have remained stable or even decreased slightly.
The number of cases in Georgia does not include antibody tests, but only tests for acute diseases.
With a current average of nearly 2,400 new cases over 7 days, Georgia, which has nearly half the population of Florida, is just slightly behind in terms of new cases per capita. But it is moving at a pace that could, at least in theory, lead to herd immunity by the end of next year.
In the west:
Texas – also on the road to herd immunity?
New cases and hospitalizations are increasing rapidly, as shown on a website of the Texas Department of Health (see also a related site). Texas has nearly 40% more people than Florida, with about the same number of new cases. For now, mortality trends are also stable in Texas, still at the levels first reached in April.
Texas may be further away from herd immunity next year than Florida or Georgia. A different multiplier may be appropriate for Texas, and using 7X instead of 5X to convert diagnosed cases to actual cases would make up the difference.
In any case, Texas could at least be on track to achieve near-total immunity by the end of next year. This means that current infection rates in that state could be largely unsustainable; the situation could improve dramatically by 2022 and perhaps much sooner.
Arizona – some positive details among the peak
The Arizona Department of Health Services has a top-notch COVID website. Click on a main tab, then click on a sub-tab, scroll down (the data is there but you don’t see it if you don’t scroll down), and you’ll see a lot of detailed data.
According to the “cases per day” tab, the VIDOC problem in Arizona has been slowly accelerating since its first cases 4 months ago. It is now boiling at a rate that suggests herd immunity next year if this rate continues.
but here are some encouraging details that interest me in addition to the unfavourable numbers (Click on the “Hospital COVID-19 Specific Metrics tab” at the bottom right of the above web page).
COVID Intubations (sub-tab)
The number of people on ventilators is stable at about 65/day. This figure was first reached two months ago when the number of new cases of COVID was much lower.
What does this reflect?
Perhaps a combination of :
- milder cases hospitalized
- the availability of better medicines and other treatments
- a greater overall ability to manage severe pneumonia without intubation
- other factors.
I find that surprisingly positive.
Do these data already reflect better approaches to COVID?
Thus, there is an increasing number of patients on ventilators, even though the number of intubations is stable.
This suggests that people are being kept on a ventilator longer.
What percentage of the 489 long-term ventilator cases will survive?
COVID-19 Deaths (new tab)
Deaths due to COVID-19 have been stable or declining; these deaths lag behind hospitalizations. In addition, the number of patients on ventilators suggests that many deaths are pending.
Arizona has the same population as New York City, but reported less than 10% of confirmed deaths in that city.
Arizona finally reaches the coast:
California – a less serious problem
With nearly 5 times the population of New York, California reports only about 1/3 of the total number of deaths by COVID, using only confirmed deaths in New York and ignoring the more than 4,000 probable deaths that occur there.
California has about 5,500 COVID-positive patients in hospital, slightly more than Arizona. The number of deaths due to COVID is stable at about 70 per day.
In California and Arizona, some of the hospitalized patients are U.S. citizens who have resided in Mexico, became ill and returned home to receive quality medical care. I do not know if those kinds of numbers are available.
Outside of Los Angeles County, it seems that the numbers and trends in California are not at a level that would induce near-herd immunity next year. So there is reason for optimism, but there is also reason for optimism that things could get worse in California.
Medical and Media Summary – Part 1 – General Comments
Of the five large states examined, including the big three in terms of population, which account for about 27% of the population of the United States, all are experiencing peaks in COVID cases. These are primarily “first wave” phenomena.
The good news is that hospitals now have sufficient protective fans, equipment and supplies. They have also had time to reorganise their operations and put in place flexible critical care planning. Global information exchange has improved methods of treating and triaging patients. The reorganization probably works well in the real world, otherwise Gilead (GILD) would not spend much more time and money on clinical trial development.
Yet financial media headlines remain negative. For example, Bloomberg News makes the headlines (Friday) with this typically negative verbiage :
U.S. cases rise 2.1%; WHO uncertain about vaccine: Virus Update
US cases increased by 2.1%, in line with yesterday’s increase.
New cases in Florida increased by 5.6%, an average of less than seven days, while daily deaths in Arizona decreased. Infections in New York City increased by 0.2%, a rate that has been stable for nearly a month.
The “Markets” section of Bloomberg’s website is also leading the way with an unduly negative headline :
Equity parity rises as fear of viruses offsets employment data: Data: markets
(Bloomberg) — U.S. stocks have been spared speculation that a second wave of coronavirus cases could jeopardize an economic rebound after the largest contraction on record.
More on this latest stock below.
But I would like to summarize the gist of this article.
Medical Summary – Part 2 – Epidemics are on the move
As noted above, several states are so “hot” for new COVID cases that, using about half the ratio of undiagnosed to diagnosed DIC cases that the CDC currently estimates, these states may well be on track to achieve herd immunity by the end of next year or sooner.
There are many uncertainties in the above statement; the number of new cases could decline.
But what my analysis implies is that either the virus mutates quickly and negatively, or people will begin to be re-infected with COVID; or we will win the war against COVID in a time frame that will allow investors to begin to envision a post-COVID world.
The reasons for optimism are as follows:
- better drugs and other treatments for COVID
- the potential for effective vaccines, including those that protect the elderly
- herd immunity or near-herd immunity may well emerge over the next two years if the bad news about COVID cases in several States does not subside
- the virus could mutate to become less dangerous.
Let’s now turn to some investment considerations based on a more optimistic view:
Beyond VIDOC, towards a better future – and against the tide of the media…
Let’s take the second of the Bloomberg headlines above. A traditional stock wouldn’t focus on negative news from COVID because a strong week ended with another positive day.
Another, more modest way of reporting the same news could have been used:
The stock market is closing on strong jobs; investors are looking beyond the spikes in COVID.
When I see a tilted stock dam, I look up.
I simply think that the public is being fuelled by a regime of new COVIDs that is even worse than the reality – which is bad enough – and is probably reflected in stock prices.
As mentioned, this article was written on Friday and edited by me and submitted on Saturday, so the Bloomberg headlines above are from Friday. On Saturday, its “Markets” section remains bearish, which I appreciate as a long-only investor. The main headline is “A $10 trillion rally depends on profits no one has a clue about”. In fact, no one cares much about the second quarter profits that are about to be released; it’s a recession/depression quarter. What we care about is management. Then, underneath the “Latest News” group of titles is COVID’s usual scary headline, this one called “Fear and Frugality”: Maybe, but that’s almost exactly the kind of headline we saw in 2009, when the markets and the economy started to steadily recover.
This kind of media emphasis on real – but known – negatives could explain why the American Retail Investor Association continues to show a high level of decline. This contrary indicator has been at a high level at least since the end of 2016 (h/t @hmeisler). When declines are high, the SPY tends to rise.
Regarding the fundamentals, I think many people are too pessimistic about the recession. The markets have been signaling the end of the recession/depression for the past 3 months, which usually means that the slowdown ends in July.
Perhaps representative of an enlightened sentiment, I came across this question from Charlie Bilello in a tweet asking readers to vote on when the recession would end. The choices were made:
- December 2020
- January-June 2021
- July-Dec. 2021
- Jan. 2022 or later.
On the other hand, I think the recession is over or will soon be over.
That doesn’t mean that I think the rebound will be a full “V”, but when employment rebounds this strongly, then incomes, spending and output all go in the same direction – upwards. That’s what defines the end of the recession, but it doesn’t mean a return to previous levels of economic activity.
There is no doubt that things are disorderly and uncertain.
But we are investing and trading according to how we see today’s and tomorrow’s scenarios unfolding. We look for the alpha if we have a thesis that involves seeing something important that Mr. Market is missing.
My thesis is that it’s time to move up a gear: I think the world has treated COVID as best it can and investors have begun to focus on the many other trends and issues that drive asset prices.
This brings us to a few briefly updated investment points
First of all, please see my June 28th article for an overview of the market.
The remarks I made in an April 1 article are also relevant, the first time I felt optimistic after leaving the market on February 26. That article was entitled “3 anti-fragile stocks I’m buying and why I’m starting now“.
These stocks were :
All of them have been doing very well since April 1st. The thesis of the AMZN and MZ was largely the lockout and homeworking scenario which accelerates the trends already in place.
Now that I have started to look beyond the COVID era that fuels market movements and media headlines, I left AMZN and ZM, and at the end of last week I started selling MSFT from an IRA (it’s still my #1 stock).
This is just a guess, but I am increasingly willing to consider investments that are not particularly motivated by home-based and contactless investment strategies, as their price has already risen considerably.
Based on the valuation of many high-potential stocks and the many sectors of the old SPY economy that I do not think will return anytime soon, if ever, I am not optimistic about the SPY. But as we saw last week, I think there are many reasonably attractive places to put money with the overwhelming support of the Federal Government and the Federal Reserve. The many upside surprises in the U.S. economic data leads me to await management’s comments on recent business trends with some optimism.
Thank you for reading and sharing your comments.
Submitted Saturday morning.
Thursday’s Closing Data:
312.23 SPY, 0.67% for the Treasury at 10 years.
Disclosure: I/we are long MSFT,GILD,REGN,LLY. I wrote this article myself and it expresses my own opinions. I receive no compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose shares are mentioned in this article.
Additional information: I am not an investment advisor.