Meditations on Investing Under Quarantine for a World Still Unknown
Published on Linkedin PPGV website 4.13.2020
I compose tonight from a small desk in a cottage in Berkeley where I am under self-quarantine for another 6 days due to exposure to Covid19 while in New York one week ago. Even more so than when I wrote early last month, I travelled through empty airports, on empty planes and stayed in all-but-empty hotels. Like just about everyone I know, I am wrestling with interpreting the changes to the American landscape and the international community on the social and economic level that are as profound as any in my lifetime. But the return of market volatility has already increased opportunities for investors, not diminished them. And with all this in mind, I believe it is worth attempting to think through what might be reasonable to expect for the next twelve to thirty-six months from investments.
On the somewhat positive side, it appears that the pandemic’s curve of new infection in the US is beginning to hint at flattening and I think we stand a good chance of coming in at the low end of expectations given by the administration of 100,000 to 250,000 lives lost. My back-of-the- boarding- pass estimate now expects for the initial wave of mortality in the US (through August) to be somewhere between 70 to 100K. This is nothing to celebrate. We are still talking about a loss of life greater than the US suffered during twelve years in Vietnam. Like Vietnam, there is no way for anyone, no less this administration, to claim victory.
My week in NY brought me face-to-face with the human toll this is putting American’s families through—starting with my own. On March 30th my mother, approaching her 87th birthday in June, was rushed to Long Island Jewish Hospital in New Hyde Park with high fever and Covid 19. Alice is one tough lady and I am pleased to say that she survived the short trip to hell and back but not without a terrible struggle and lasting impact to her lungs. She was discharged late last week and is at home resting. Unfortunately, while I was in transit to NY my 92-year-old father was already facing a pneumonia and other health issues that would also lead him to the emergency room of LIJ before I had unpacked my bags or been in NY for a full day. He is now recovering at a rehabilitation facility near home in Queens. NY Hospitals today are like military bases—locked down tight with armed police standing watch as ambulance after ambulance disgorge those suffering from the virus day and night. No family may enter buildings. Staff inside are rushed off their feet and hopes for loved-ones outside in the parking lots on their cell phones of learning the condition of those inside are up against communication networks full-to the-point of failure. With cases now exceeding half a million, there are literally millions of family members facing these challenges. New York is our Wuhan.
The economy has been hit with a body blow not seen in 90 years. The 16.8 million human beings that have filed for unemployment on our shores translates to a rate of about 13.5% currently, and I expect that to rise by more than 3% before the next monthly reckoning of the rate is posted. Of course, that will not be the high—looks like we will break 20% before this contagion passes. It is unreasonable to expect the majority of workers to be back at their jobs in short order without a vaccine, universally-available (rapid) testing, and a proven therapies on offer. I know first-hand how little the hospital system has today, in short: Plaquenil and an array of antibiotics to battle the chest infections that come with the virus, oh, almost forgot, and prayer. That’s it, and the serious scientists inside the best hospitals, unlike the orange- faced clown on TV, will tell you they are very, very uncertain about Plaquenil’s efficacy. For all the shouting to produce the darn things, most estimates indicate that at least two-thirds of Covid19 patients who are put on ventilators will not survive. So, if you are lucky enough to be healthy today, best to focus on social distancing as a survival strategy because ventilators are more of a Hail Mary pass than dependable ground game.
While the $2 trillion already committed by congress to soften the blow has some hope of deflecting the punch, the US should still expect to get hit hard in the economy’s solar plexus. Fed head Powell, while early to the party with his cuts to interest rates, has used up much of his available ammo. He has taken to Bernanke’s playbook of spraying liquidity on the financial system like flame retardant and while it will surely help money-center banks, insurers, and i- banks, don’t count on it reaching small business quickly enough. Already on my isolated drives and bicycle rides through NY and NoCal I can see that many of the stores that closed their doors in March will not be opening them. The Paycheck Protection Program may help more established small businesses with solid prospects and good relationships with their banks but, small business that were already struggling are now all but toast. Many storefronts that were active a month ago are already boarded-up and ‘for rent’ signs have been placed in the window. Among the vast ranks of the homeless in Oakland, I see new faces in the last 30 days who, though marginally better turned-out than those who have been in this desperate condition for years, are on the street not by choice. My heart goes out to them. I was encouraged two weeks ago to hear that a restaurant group that our family office has backed had been approved for SBA funding. But, when it came time to process the paperwork, those charged with that responsibility at government agencies would not accept the electronic signatures, like DocuSign, which have become standard in the private sector. This stupidity will add days of delays in processing claims and for some businesses that will be time that they don’t have. Also, it should be said, the speed that most lenders move in the best of times is glacial. If you imagine that institutions like tone-deaf Wells Fargo, recently infamous for cheating its clients and blaming its staff, is going to step up to those in need—think again.
Most large business will survive and it is worth looking at the listed market first before I turn to the private equity market in my next piece. First thought: watch your timing. After last week’s gains some are already proclaiming an end to the bear market. Unlikely. According to a Merrill Lynch report quoted in the WSJ on April 8th, “bear markets that are accompanied by a recession tend to be more pro-longed and last about 11 months.... The US stock market has never reached its bottom in less than 6 months after falling more than 30% and facing a recession.” I am going to bet that ML is correct in this case. And if Minneapolis Fed Governor Neel Kashkari is even half right about 18 months of rolling shut-downs until a vaccine is ready, it will be a really great recession, and maybe more.
That said I think there are parts of the market that are beginning to look attractive, while other parts will not be back to 2019 form for years. Since the tenor of my remarks has been pretty somber, let’s talk about what I am inclined to put funds into. While I think drug stocks will come through this in good shape, and a reasonable case can be made for shares of Pfizer based on valuation, I would not chase Gilead based on Remdisivir alone. I have added Teva to the portfolio, I am convinced that the entire system of drug manufacturing and sourcing is set to change and Teva’s efficiency and quality will help it to come out of this mess a winner. That said, like all the buys I suggest, it could also make a new low first so squeeze the trigger ever so slowly. Likewise, I believe that the current vulnerability of the labor force to disease will only serve to accelerate manufacturing automation. With that in mind, businesses like Japan’s Fanuc, which is now at less than half its high, seems worthy of consideration. I thought of investing in Siemens as well, but their business is broader in range and far less focused than Fanuc. I also believe that the global manufacturing and supply chain, so impacted by this crisis, will be more important than ever. With that in mind, companies like Singapore-based Flex seem worthy of consideration.
I think the travel and leisure industries, which are down, but not-likely out for the long run. After the crisis, and a little time for healing, it is just possible that the businesses of Expedia, Marriott, Cheesecake Factory, and Delta Airlines will be return in better shape than before the current misery. After all, how many of us are not dying for a return to life as normal and who isn’t excited about the pleasures of a good meal served by someone other than your blood relatives.
Of course, there are many businesses that won’t be back. WeWork is a model that doesn’t work-- especially now that CBRE’s Hana makes that model available to every landlord in the world almost risk free. Hoping that Uber and Lyft will return to past glory? Think again. Nothing good is coming their way and competitors have virtually no barrier to entry. I don’t think any of these companies will qualify as essential or deserving of a bailout. Likewise, the big automakers are in a world of hurt—though they are likely to be considered probably too-big-to- fail. Internal combustion fanatic Dan Neil this weekend penned a piece is in the weekend Journal titled: Do Temporarily Clear Skies Presage Our EV Future? Ford is already showing signs of stress and the dividend has been pulled. But the problems for the auto sector are much deeper and reflect the reality that registrations were already high and heading down on our way into this crisis. By the time we are heading out of this crisis most buyers will expect their cars to go 400 miles on a charge and produce next to no tail pipe emissions; little wonder Tesla remains the stock of the future in the group.
Of course, I own many of the names I mention above but, it is worth repeating that it doesn’t necessarily mean I think we have seen the lows yet. So, I strongly suggest that you be patient. Buy when others are panicking. Take advantage of brokers who no longer charge even a penny to process a trade ticket and break up your trades into four and five tranches. We are in completely uncharted territory with this virus. I will also wager that developed Asia, which has weathered the impact of Covid19 with greater resilience and better government-led execution than the US, will outperform our market for several years. According to Statista’s data, at the end of February 2020, the US represented greater than 54% of global stock market capitalization—but as of calendar year 2019 we were less than 25% of the planet’s GDP. Expect governments and economies with more rapid and effect responses to the pandemic to rise in value relative to valuations here at home: Korea, Taiwan, Singapore...and probably Japan. So, while this piece represents an attempt to start the process of thinking of what is around the blind curve ahead, so much of the future of economies and markets is still reassuringly still unknown. Just don’t get silly and think the volatility is all behind us—that is peace of mind that the administration, congress, and the Fed won’t be able to buy for all those trillions.
Stephen in the Elmwood District, Berkeley, CA
Late at Night 4.12.2020