All Hands On Deck | Seeking Alpha
Trillions of dollars have been committed by governments, monetary bodies, corporations and individuals to combat the sharp drop in economic activity caused by the spreading coronavirus. The world may never be the same as mindset shifts will impact our ordinary lives for years to come. All the monetary support will go to just provide liquidity to offset drops in demand and income to hopefully maintain the status quo until the virus crests and we can slowly, region by region, return to our “new normal” lives. We will get through the virus, but the real question is what the other side will look like. Life will not be the same.
While we still believe that the stock market will be much higher six months from now, not all companies/stocks will perform. Don’t worry about the bottom, focus on buying great companies that are financially strong, have winning long term business strategies and are selling well beneath intrinsic value. Remember, program trading takes no prisoners. For instance, our portfolios were virtually flat at 3:45 pm on Friday but closed down around 2.5% 15 minutes later due to sell programs. Ridiculous! We continue to focus on companies whose business models are tied to the internet and/or benefit from increased usage of the internet. We also are investing in 5G technology, healthcare and a few consumer non-durables.
We expect to see a sharp increase in the number of coronavirus cases, which now exceeds 100,000, in the U.S. over the next few weeks as testing expands exponentially. Abbott (NYSE:ABT) has just introduced a 5-minute test for use everywhere. Deaths, which are approaching 2000, will increase too mostly in people over 65 and those with preconditions. We are confident that there will be a therapeutic by the summer and a vaccine on the market by the first quarter of 2021. The incremental number of the coronavirus cases is still most likely to crest within the next 4-6 weeks and then decline into the summer. We would like governors in all states to order a total shutdown to limit the spread of the virus and bring this to an end as soon as possible. That would really be great news!
The U.S economy will slowly recover beginning in the third quarter if the coronavirus peaks as we expect it to over the next 4-6 weeks. We do not look for a quick snapback as many believe as it will be a rolling recovery by region so it will take time for demand to increase in a meaningful way especially in those industries most penalized by the virus. Avoid investing in any company in financial distress due to the coronavirus. Many are raising debt and/or taking federal assistance. Before investing in any of these companies, understand what it will cost, the impact on their balance sheet/cash flow and whether any equity is given up to the government.
For instance, Carnival Cruise (NYSE:CCL) is attempting to raise an additional $7 billion in debt ($10 billion already on balance sheet) against a $10 billion equity valuation. Then there are the airlines that will receive nearly $50 billion in grants and loans. What will the total cost be to them and how much equity will they have to give up? So be careful if you want to bottom fish in companies in financial distress due to the coronavirus.
Let’s look at the aggressive actions taken by governments, monetary bodies, corporations and individuals to stabilize the markets and provide enough liquidity to carry us to the other side of the valley:
- The Fed went all in last Monday pledging to buy as much government backed debt to bolster the markets for housing and Treasury bonds as needed. It also announced plans to buy corporate and mortgage bonds, including the riskiest investment grade debt and support small businesses too. Powell mentioned Thursday that the Fed has much more ammunition to stabilize and liquify all markets. The Senate advanced $454 billion to the Fed that will be leveraged to over $4.5 trillion in additional loans. Spread narrowed throughout the week and the dollar weakened which signaled success at stabilizing the markets, at least for now.
- The ECB announced an $833 billion-dollar purchase program
- Germany announced a $160 billion program to fund social benefits and direct aid to virus hit companies. England, France, Italy, Spain, India, Japan and all other countries afflicted by the coronavirus are providing several hundred billion dollars of support too.
- Congress passed a $2.0 trillion coronavirus aid package: approx. $560 billion for individuals, $153.5 billion for public health; $340 billion for state and local governments; $377 billion for small businesses; $500 billion for big corporations. The monies will stabilize the economy but not increase demand. We expect a Phase 4 or 5 bill if needed plus a stimulus program to boost demand once the virus peaks.
- The G-20 nations, 80% of the industrialized world, pledged $5 trillion in total to offset the negative impact to growth and income from the coronavirus.
- Corporations, foundations and individuals have pledged billions in the fight against the impact of the coronavirus too. Google pledged one billion alone.
None of this money will stimulate demand. The only answer for growth to resume is for the spread of the coronavirus to peak, treatment drugs to be found, and vaccines to be developed to prevent another epidemic next year. It may take months to fully gear up once we get an all clear. But the market will anticipate all of this far before it happens.
We are focusing on the other side of the valley. We firmly believe that there will be changes in mindsets that will affect our daily lives for years to come. Doing more at home will forever be the big game changer. Use of the internet at home will continue to accelerate for social media, shopping, education, business, entertainment, conferencing, healthcare, legal and many other services for years to come. We will also need many more smart devices, increased internet bandwidth with security protection and expansion of the cloud. The advent of 5G will be a big game changer, too.
We continue to avoid any company with potential financial risk. We are concerned about the energy space with oil pushing down toward $20 dollar/barrel as there has been demand destruction totaling approximately 15 million barrels/day or roughly 15% of global demand. We will continue to avoid any economic sensitive stocks including industrials, capital goods, commodities, financials, transportation, entertainment and box retailers until we get a better perspective of the shape of the recovery and the financial impact of the coronavirus on these companies.
We remain very confident that the stock market will soar once the number of coronavirus cases peak which we expect to happen again over the next 4-6 weeks. While all boats may lift initially, we are focusing on the long-term winners as they will significantly outperform over the next year and beyond. Also be aware that there will be a huge rebalancing next week into months end increasing stocks and reducing bonds. Finally, we were pleased to see a huge increase in insider buying last week.
We hope that everyone does their part in limiting the spread of the coronavirus. Be careful and stay safe. Remember to review all the facts; pause, reflect and consider mindset shifts; do not listen to cable news; look at your asset mix with risk controls; do independent research and… Invest Accordingly!
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.