Covid-19

[Wildreamz]

An interesting development has surfaced a few hours ago: https://www.washingtonexaminer.com/news/...-treatment

Gregory Rigano, an adviser to the Stanford University School of Medicine SPARK Translational Research Program, has went on Trump's favourite news channel, to bring this to the attention of the American President.

Expect him to be fully informed by now.

[BrendonA]

 S & P 500 correction in 2008 was -48%. Today is at -29.5. Maybe -35% we're looking at? Doubtful that it'll crash similar to the the financial crisis?

hi BrendonA,
Not sure of the intent of your posting - to get social proof or seek advice for a potential bottom?

In anyways, I think it might not be wise to have any numbers, to which it eventually creates some sort of referencing and hence we fall into the anchoring effect. Example, If we anchor to last purchased prices, there is a good chance we will be catching failing knives with every drop (averaging down). If we anchor to some past lesson learnt, then we could be missing out on good prices.

So actually, i don't have an answer to your question
Generally when i am not wise enough to seek the correct answer, i try to invert and ask myself what NOT to do instead. So by excluding what not to do, i hope i get lucky and closer to the correct action/s to take.

That said, i think one important aspect that we commonly forgot is to ensure that our own circumstances are condusive to stock buying in current environment. This includes ensuring our risk of getting directly affected by Covid-19 is low - (1) personal or closest family infected by Covid-19, (2) losing our job (if one is employed) and (3) enough liquidity to pay the bills to stay in the game (if one is an employer)

You have answered the question more than you think. Very wise advice especially for someone like me who has just started investing. Thank you

[gzbkel]

From the Economist:

Economies can rebound quickly from massive GDP slumps—but not always
History suggests full recovery takes, on average, about five years

Finance and economics
Mar 18th 2020
IT WILL BE some time—years most likely—before the full extent of the economic blow from covid-19 can be estimated with any confidence. As ever more of the global economy enters a prolonged shutdown, it seems increasingly clear that the world is facing a drop in output unprecedented in its breadth and intensity. Some analysts see in the growing economic disruptions and market panic the first stirrings of an economic collapse more serious than the global financial crisis of 2007-09. Joachim Fels, an economist at PIMCO, an investment fund, recently warned that in the absence of sufficiently aggressive action from governments the world could face a market meltdown and ensuing depression. All downturns create discomfort, but the pain of a slump—even a very steep one—depends greatly on how long it lasts. History suggests that rapid rebounds from enormous output losses are possible, but not by any means guaranteed.

Some economies, perhaps those of Singapore or even South Korea, could find a footing by the second half of the year, sufficient to offset some of the production lost during the first half. But the probability that others could experience extreme declines in GDP in 2020—perhaps as large as 10%—grows by the day. Falls of that magnitude are not especially unusual in developing economies, where growth is highly volatile. (To take just one example, there have been ten years since 1980 in which real GDP in Libya has fallen by at least 10%, between which plunges the economy has experienced annual growth spurts of as much as 125%.) In industrialised countries swings of that scale are exceedingly rare. An analysis of data gathered by the World Bank reveals that since 1960, across rich countries, there have been only 13 instances in which an economy experienced an annual decline in GDP of at least 5%, only three cases in which output fell by at least 7% in one year (Finland in 2009, and Greece in 2011 and 2012), and none in which output dropped by more than 10%. In the rich world, clusters of large decreases in GDP appear on the heels of the 1973 oil crisis, during the Asian financial crisis of 1997-98, and as part of the global financial crisis and its aftermath.
[...]
https://www.economist.com/finance-and-ec...not-always

[holymage]

Its gonna be worse than GFC as the deleveraging will be more. Now is just initial reaction to the virus news. Later will go lower when numbers are out for March to June quarters and we start seeing a wave of business bankruptcy.

While it is hard to say whether it will be worse than 2008, I don't think this is the bottom yet. 

Valuations for US general markets are still expensive imo, and bubble companies like Wework/Tesla have yet to go bankrupt. Given the record amount of corporate debt and lack of liquidity in the markets, we should be expecting that. And when that happens, we could see more movement in stock prices. Not sure if the Fed bail out helps but I am not going to bet on that.

So many investors are trying to average down, thinking a 30% drop is a bargain. The unfortunate thing is, averaging down from a very expensive valuation to a expensive valuation company, is still overpaying, and while that may be "okay" in a euphoric bull market, it doesn't seem to be a wise choice in a bear market.

There may be some cheap stocks emerging (oil and gas for instance), but definitely not among the FANNG, SAAS type of stock.

[Wildreamz]

@Holymage My portfolio is mainly FAANG and SaaS type stock, lol. I also own Tesla. Interesting perspective, because I disagree with much of them.

1. High valuation ("bubble companies") doesn't cause bankruptcy. In fact high valuation reduces the risk of bankruptcy because it's easier for the company to raise cash by selling equity (which Tesla did at $7-800) exactly a month ago. That said, a sharp downturn in the economy, and prolonged forced social distancing policy might bankrupt them, so Tesla is indeed facing some headwinds.

2. I don't see FAANG as very high valuation in general (Google now has trailing PE of 22, growing at high teens), with very strong balance sheet and cash position. Forced social distancing is actually a tailwind as internet traffic exploded the past few weeks around the world (which is cancelled out by a downturn in the economy in general). They are some of the safest bets in the face of this crisis.

Just my 2c 

[holymage]

@Holymage My portfolio is mainly FAANG and SaaS type stock, lol. I also own Tesla. Interesting perspective, because I disagree with much of them.

1. High valuation ("bubble companies") doesn't cause bankruptcy. In fact high valuation reduces the risk of bankruptcy because it's easier for the company to raise cash by selling equity (which Tesla did at $7-800) exactly a month ago. That said, a sharp downturn in the economy, and prolonged forced social distancing policy might bankrupt them, so Tesla is indeed facing some headwinds.

2. I don't see FAANG as very high valuation in general (Google now has trailing PE of 22, growing at high teens), with very strong balance sheet and cash position. Forced social distancing is actually a tailwind as internet traffic exploded the past few weeks around the world (which is cancelled out by a downturn in the economy in general). They are some of the safest bets in the face of this crisis.

Just my 2c 

Wildreamz,

Obviously high valuation doesn't cause bankruptcies. The bubble companies which I meant, are those that have cash flow issues and/or flaw business model, but are artificially propped up by low interest rates and investors euphoria (zombie companies). Another company came to mind, Blue Apron. The window for raising capital has already been closed for weeks, and all assets classes have been selling off for cash, even including traditional safe havens like gold and US Treasuries. Do you seriously think that Tesla is able to raise capital now? You must be kidding me.

US corporations are in record debt, and due to quarantines and a fear of being infected, there is a steep drop to the flow of money. With revenue freezed, expenses to be maintained, do you still think companies have sufficient cash flow to survive, much less heavily indebted companies. There is a reason why the Russell 2000 dropped 40% compared to the 30% drop in S&P. Unemployment claims has already started rising in various states.

Google has a strong balance sheet for sure. No dispute about that. But Google and Facebook are predominantly in the advertisement industry, with majority of market share. Do you think businesses that are suffering amid declining consumer demand, will still advertise? Would you continue to advertise if you own a small business and is bleeding cash? This is different from 2008 when Google has a tiny share of the advertising space. Your thinking is a typical, and simple extrapolation and assuming revenue will keep growing in a linear manner, and there will never be a recession. 
More likely than not, Google's earnings will shrink in the impending recession (if we are not already in one), your "low/moderate" PE of 22 will just grow larger as earnings drop. Maybe the PE will decrease, as the share price falls faster. Same applies for the other FAANG.

Just my 2c.
When the time comes, I will definitely revisit this post again, let's see what comes to reality 

PS: Tesla raising capital, either indicates that Elon Musk is a great capital allocator or Tesla has serious cash flow issues. I am betting on the latter.

Good luck.

[weijian]

I took a very small sample size to compare between 3 groups - VICOM+NETLINK TRUST (defensive) vs STI ETF (benchmark) vs SATS (direct impacted by Covid-19) and looked at their last 3 month's performance. The comparison was simply done by plotting these stocks on a yahoo finance graph overlaying all these 3 groups together.

Jan:
- Things were fine for all 3 groups at the start.
- Towards the end of Jan, "direct impacted" started to drop noticeably as news of Covid-19 became mainstream, which eventually resulted in Hubei lockdown.

Feb:
- As the month went on, "benchmark" and "direct impacted" dropped, with the latter dropping much more.
- The "defensives" actually rose in price by ~10%.

March:
- Our "benchmark" started to drop further, while "direct impacted" accelerated its drop.
- In the 1st week of March, the "defensives" held up pretty well. But in the last 10days or so, the "defensives" gave up their 10% gains in Feb and further dropped to end at ~-10% in last 3 months.
- In the same last 3 months, the "benchmark" has dropped by ~25%, while the "direct impacted" by ~37%.

The movement of the "defensives" in the last 10days or so, seems to suggest some sort of contagion on-going OR certain money moving away. People are actually selling what they can sell, ie the defensives. This certainly brings me back to some of the contagion that we experienced back in GFC2008. It does remains to be seen how far this sort of "contagion" can go but the old adage "in a crisis, all correlations go to one" come true again.

[thinknotleft]

The movement of the "defensives" in the last 10days or so, seems to suggest some sort of contagion on-going OR certain money moving away. People are actually selling what they can sell, ie the defensives. This certainly brings me back to some of the contagion that we experienced back in GFC2008. It does remains to be seen how far this sort of "contagion" can go but the old adage "in a crisis, all correlations go to one" come true again.

There seems to be capitulation in the markets in the last 2-3 days. Capitulation is usually seen in market crashes like GFC 2008.

Was thinking that it could be due to funds selling out to raise cash urgently for various reasons (to cover their margin, to mend their losses elsewhere etc). And traders shorting the market further. 

Heard an online podcast that it is surprising that we have not seen any funds going down yet. I was thinking that yes, we have not heard any hedge funds going down. But we have seen Italy nationalising their airline. There are also news reports that some airlines will go bust without bailout.

[AQ.]

The movement of the "defensives" in the last 10days or so, seems to suggest some sort of contagion on-going OR certain money moving away. People are actually selling what they can sell, ie the defensives. This certainly brings me back to some of the contagion that we experienced back in GFC2008. It does remains to be seen how far this sort of "contagion" can go but the old adage "in a crisis, all correlations go to one" come true again.

The butterfly is fluttering again, but this time it's the juxtaposition of COVID+Oil crash.

The spread from health+economic to financial was exacerbated by the ME SWFs redeeming from funds 10d ago. The oil crash means revenue fall which means they needed to raise USD to cover budget. 

So bios of USD needed to be cashed out by funds, which means sell anything liquid all at the same time. 

Oil fall =>Shale bankruptcy + economic recession => Corp defaults means corporate bond seizure which feeds into credit.

So the good ol' combi of Libor-OIS+FX basis+credit starts to blow up again. As usual all those leveraged plays short convexity started to get forced out on margin calls. 

There are more fluttering going on currently:

1. Fiscal stimulus (so far >2% global GDP) funded by CB printing prob means massive fiat offsetting credit contraction. Gold will prob go up more as all other ccys need something to debase against.
2. Post the COVID epsiode, Trump election will be affected and its implications.
3. I had thought US-China trade war might get better initially but fat hopes now that US admin is insisting on the "China-virus" rhetoric. If Trump is reelected, i think Trade war prob deepens even more.

so the waves are still fluttering and this whole episode will be a good read 2yrs from now.

But then again by then just like 2020 was a repeat of 2008, 20XX will be a repeat of 2013 taper tantrum when CB need to normalise and 20YY will be a repeat of 2018 when markets force CB to stop leading to a climax after which 20ZZ will be a repeat of 2020.

[Wildreamz]

@Holymage I disagree that Tesla has a flawed business model, and is bleeding cash. Not before the crisis that is. In fact, they have been profitable for 4 of the last 6 quarters; while sustaining a healthy gross margin and growth rate (while their competitors have both falling). Which is why it was up so much early this year.

That said, the longer the crisis drags on, the more likely it might take them down, as they could not manufacture now. That's not an intrinsic fault in their business model, just an unfortunate black swan event while they are in the most vulnerable state (growth and investment stage). If they can weather the storm, they will probably be in a much better shape than their competitors once this is over.

Broadly speaking, regardless if they are FAAMNG, I think the top 5% of corporate America who are not wildly leveraged, with good balance sheet, will be hit economically, no question about that. But they will survive, and enjoy a resurgence once pent-up demand return. In fact, due to the collapse of some of their largest and smallest competitors, there will be consolidation (e.g. M&A) in the market, and once again, the net benefit will go disproportionately to the top 1-5%. The market knows this, and this is probably why their valuation is not hit as hard as the broader market at large.