David Fuller and Eoin Treacy's Comment of the Day
Category - General

    More Derating as Revision Breadth Rolls

    Thanks to a subscriber for this report by Mike Wilson for Morgan Stanley which may be of interest. Here is a section:

    To summarize, we have characterized the current economic situation as the transition from early to mid cycle, the time of the expansion where we are past the peak rate of change and therefore maximum monetary accommodation. With the NBER recently declaring the end to the COVID-19 recession as far back as May 2020, our timing of this mid cycle transition starting back in March seems spot on. Years associated with prior mid cycle transitions include1994,2004, and 2011. In all cases, US equity markets were characterized by the following features: Falling P/E, narrowing leadership, a skew towards quality and a 10-20% correction in the major indices.

    This year has been no different, but looks incomplete in our view. More specifically, there has been an extreme narrowing in leadership and shift towards quality; and while we have seen a de-rating in equity valuations, it's been more modest than prior mid cycle transitions which has allowed the major averages absent of a 10%+ correction, at least so far. We think the primary missing ingredient for that correction is Fed's slower than normal withdrawal of monetary accommodation given how much progress has already been made. This delay in removing accommodation has kept long term interest rates much lower than the economic fundamentals would suggest. Given the very high quality nature of the S&P 500 and Nasdaq 100, these indices have remained very resilient even as the average stock has fared quite poorly since March. For example 44% of the Russell 2000 small cap index has experienced a 20%+ drawdown this year.

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    Virus Flares in Wuhan as Delta Challenges China's Defenses

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    It’s the biggest challenge to China’s strategy since the virus was first detected in Wuhan, the central Chinese city that saw the world’s first lethal outbreak. The country’s strict anti-virus measures, which include mass testing as soon as a case appears, aggressive contact tracing, widespread use of quarantines and targeted lockdowns, have crushed more than 30 previous flareups over the past year.

    The arrival of the more infectious delta variant, however, is testing even that approach. The new strain may be exploiting an easing off in masking and social distancing in some places, since much of the country has been Covid-free for months. That, along with increased travel for summer vacation, created an environment where delta could gain a foothold.

    China reported 99 infections on Monday, including 44 who tested positive but have no symptoms. Later in the day, seven more people were found to be infected in Wuhan, plus another in Beijing. By number of cases, it’s the biggest outbreak since a flareup in Hebei province in northern China in January, when
    2,000 people were infected.

    The broad spread is even more concerning, given the rise of cases in the highly protected capital and in Wuhan, whose virus- free status has been a source of pride in China. The seven new cases there are the first since China brought its original wave under control by locking down the city of some 11 million and
    the surrounding Hubei province.

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    Crypto Game Axie Infinity Has Generated $84.9M in One Month

    This article from Decrypt.co may be of interest to subscribers. Here is a section:

    Axie Infinity is tapping into the growing play-to-earn trend, which essentially means making money to play games. But instead of high-fidelity esports tournaments and multi-million-dollar Twitch live streams, the economics of Axie is built into the game. 

    Each Axie, for example, is worth real money. Same for the AXS token and the Smooth Love Potion (SLP) token, which you also need to breed more Axies. Essentially, every in-game earnable can be resold for cash, and all you need to do to pick up said earnables is simply play the game. 

    The money earned is sometimes enough to pay the bills too, with many players in the Philippines effectively able to make a living wage from playing the game. And as the protocol’s mounting treasury shows, these same players are also keeping Axie Infinity afloat during this summer’s bearish crypto slump. 

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    Lucid Motors kicks off market debut with EV factory expansion plans

    This article from Techcrunch.com may be of interest to subscribers. Here is a section:

    The company is also planning on bringing more of the component production in-house, including major pieces such as the body panel stampings, the spokesman added. These parts were being handled by an external supplier.

    The Casa Grande City Council approved the plans to expand the nearly 1 million-square-foot space in March. The first phase of the factory, which cost around $700 million to construct, went up in a record 12 months after breaking ground. Lucid has said that it wants to expand production capacity from around 30,000 vehicles per year to up to 400,000.

    Lucid has had a long, sometimes tenuous road to the public market. The company first set its sights on bringing an electric sedan to production as early as 2018, but it quickly hit funding challenges that pushed this timeline further and further back. Lucid received major funding in 2018 with a $1 billion investment from Saudi Arabia’s sovereign wealth fund, which continued to be its largest shareholder throughout Lucid’s merger with special purpose acquisition company Churchill Capital IV Corp.

    That merger hit a bit of a hiccup last week when the company failed to garner a sufficient number of votes on a key proposal — likely due to the rise of retail traders and malfunctioning spam filters, executives said in an investor call.

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    Exxon and Chevron Profits Rebound to Pre-Pandemic Levels

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    Exxon Mobil Corp. and Chevron Corp. swung to their biggest profits since pre-pandemic days amid surging demand and prices for plastics and energy.

    Exxon reported $4.69 billion in profit, the best quarter since late 2019, as its chemical division turned in a record performance. Chevron’s $3.1 billion second-quarter net income was its strongest showing since the start of 2020 and prompted the driller to revive share buybacks that were suspended more than a year ago.

    The companies’ combined cash flow from operations approached $17 billion, signaling an across-the-broad recovery after the dark days of 2020 that saw the titans of American oil incur massive financial losses.

    Chevron’s share repurchases will begin during the current quarter and range between $2 billion and $3 billion a year, around half the amount it devoted to the program before it was suspended in early 2020. Chevron’s move followed similar steps by Royal Dutch Shell Plc, TotalEnergies SE and Eni SpA, all of which have reinstated buybacks this week.

    “It says we’re confident in the future,” Chief Financial Officer Pierre Breber said in an interview. The level of buybacks was chosen because “it really is a range that allows us to also continue to pay down debt.”

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    Why COVID cases are now falling in the UK - and what could happen next

    This article from the Conversation.com may be of interest to subscribers. Here is a section:

    This lack of long-term protection against infection means that herd immunity is probably impossible and that the virus will become endemic and continue to circulate in human populations. If this happens and the disease then stabilises, such that case numbers are constant across the population, neither increasing nor decreasing, it will have reached what’s called an “endemic equilibrium”.

    So is this what we’re now witnessing? Possibly. One of the basic models of how infectious disease cases change over time is called an SIR model, which looks at how many people are susceptible to a disease, infectious with it or have recovered from it (and so are immune) at any one time.

    With this model, cases increase rapidly at the start of an epidemic as lots of people are susceptible, become infected, and go on to infect other susceptible people. But as infections mount, over time fewer people are susceptible and more have recovered. The rate of growth therefore decelerates, the epidemic reaches its peak, and then case numbers decline to an endemic equilibrium point, where they remain roughly stable.

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