Hi all,
Just want to alert everyone to be prepared for a potentially large selloff
and volatility tomorrow and in the days ahead. If you have been following
the news regarding the Corona virus and market's base case assessment of a
V-shaped recovery, you should understand that a lot changed this weekend.
Just offering a couple of my thoughts on the issue:
1) *Global Pandemic* - The rapid spread in Korea, Japan, Italy, Iran, and
other countries means that the probability of this becoming a global
pandemic has become elevated, if not likely. Many densely populated and
vulnerable countries (Indonesia, SE Asia, India, etc.) may be obscuring
infected cases due to lack of testing. Japan may very well end up
postponing the Olympics. Europe will also be confronting a challenging
situation given the amount of tourists in Italy and open borders. The
greatest challenge this virus presents is that it spreads quickly and is
very hard to detect. Thus disruption to transport and normal activity
becomes likely even as governments take the proper and necessary
containment measures.
2) *Demand Side Disruption* - depressed economic activity as people stay
home from due to virus. This is especially problematic if this becomes
global.
3) *Supply Chain Disruption* - supply chain issues will no longer be
limited to China production, but also Korea and Japan (e.g. Samsung factory
lockdown after 1 confirmed infection). Also the interconnectivity of Asia
means risks of infection and supply chain disruption is compounded. This
is without taking into account Europe or countries like Indonesia,
Malaysia, India, Pakistan, which have far less capacity to fight the virus
compared to East Asian and developed countries.
4) *Narrative/Sentiment Adjustment* - V-shaped recovery out of the window,
we are dealing with a protracted crisis. Belief in central bank printing
and debt fueled asset inflation will be tested.
5) *China* - Stabilized enough to resume economic activity. There will be
more infections across the country as activities resumes, and they will
throw drugs (GILD, ABBV, and other treatments) at the problem. But the
healthcare system is unlikely to be overwhelmed like in Wuhan. Essentially
if they don't resume, millions of small businesses will go out of business.
Their hope is that with better treatment, fatality rate will be contained
to around 2009 H1N1 levels.
6) *What to buy?* - GILD, ABBV, [inverse ETFs, VIX etfs, these are risky
and may be priced high already; don't buy unless you fully understand them]
Gold, defensive
My heart hopes the best for the people and economy, but my head says
protracted crisis and a wild week in stocks ahead. Hope everyone the best
and stay healthy.
-Charles
On Wed, Feb 12, 2020 at 11:07 PM cchengbusiness <cchengbusiness@xxxxxxxxx>
wrote:
Yeah the markets have definitely been underestimating the severity of the
outbreak and its impact on the Chinese and global economy, not to mention
lives. I bought some TVIX below 39 today for that exact reason. Doesn't
necessarily mean it's a disastrous scenario, but a lot of institutional
investors are too optimistic and uninformed about epidemiology/China (VIX
below 14). To much to go into, but just throwing a couple of things out
there:
1) There has been a massive under-reporting of cases in Wuhan/Hubei.
Nobody knows the exact number as many are carriers without symptoms, but
the math models of 200k-500k is much more reasonable than the official
figure. Today's spike is just the official figure needing to catch up to
the actual figures.
2) Markets seem assured that this would be a V-shape recovery in China,
partly due to Chinese stimulus. This is hardly guaranteed, they are not
fully discounting the risks.
Now some good news:
3) There has not been rumors of major outbreaks from post-holiday
migration back into the cities. This is the most important element to pay
attention to. Without outbreak outside of Hubei, the situation is
contained. But if this happens, this will get ugly, and stocks will
definitely dive.
4) Though highly infectious, the actual fatality rate is much lower than
2%, maybe around the 2009 H1N1 range. The reported fatality rate is higher
because while there's been a large under-reporting of fatalities, there's
been a far greater under-reporting of infections.
To be clear, this is not advice to sell positions. The probability of
minimized long-term impact is still good. But there are still major risks
that have not been cleared and potential volatility ahead. We probably
won't get a good sense until end of Feb at earliest.
As to why stocks are so high? Simple, all the world's central banks have
been printing money and leveraging like crazy since 2008. Without that, the
economies would crash harder than '08. But it's also hard to bet against
them because their monetary policies essentially inflates away the value of
cash and bonds.
-Charles
On Wed, Feb 12, 2020 at 3:26 PM Chuck Kremer <chuckkremer@xxxxxxxxx>
wrote:
Feels like 2000 to me.
-Chuck
On Feb 12, 2020, at 3:23 PM, Bob T <bobtsgt@xxxxxxxxx> wrote:
I agree that we are seeing some weird times right now. Global virus is
attacking and killing more then SARS did but yet markets continue to go
back up. A company can beat earnings and bring in higher then expected
revenues but yet the stock price takes a hit because they are calling for a
slight slow down in the future year. I for one have been slowly taking
some profits on certain positions, waiting for the chance to buy them
cheaper.
Bobby
*From: *cchengbusiness <cchengbusiness@xxxxxxxxx>
*Sent: *Wednesday, February 12, 2020 9:35 AM
*To: *cincysmi@xxxxxxxxxxxxx
*Subject: *[cincysmi] Re: And Now For A Bearish Note
This is not necessarily a commentary on how much irrational exuberance
there is in the market, but I can think of three potential causes of the
lull in shipping:
1) Currently, the corona virus crisis has had significant impact on
shipping both to and from China. This is also evident in the commodities
trade.
2) Previous the trade war situation between US, China, and to a lesser
degree Europe.
3) China was already in something of an economic slowdown even before
the trade war, which had depressed demand for durable goods (cars, etc.)
and industrial goods (Caterpillar, Siemens, German exports, etc.)
Since China accounts for such a significant portion of international
trade, I imagine it's bound to impact shipping. Now how these situations
resolve itself may offer insight into how the shipping indexes recovers.
Best,
Charles
On Wed, Feb 12, 2020 at 6:12 AM Alan Shrock <alan.shrock@xxxxxxxxx>
wrote:
Both the Baltic Dry Index and the Cass Freight Index have been in a
downward trend for a while.
The Baltic Dry Index is related to shipping activity, while the Cass
Freight Index is related to land-based transportation of goods.
https://tradingeconomics.com/commodity/baltic
https://www.cassinfo.com/freight-audit-payment/cass-transportation-indexes/cass-freight-index
The attached graph shows the disparity in to growth of the Wilshire 5000
index versus Gross Domestic Product.. While the fact that GDP does not
include the value of services might explain some of the disparity in growth
rates, it still points to the fact that the markets have gotten ahead of
the value of goods produced.
Factor in that the Federal Reserve has been pumping tens of billions of
dollars per day into the repo market for months and I see an unsustainable
bubble in the making.
I think that we are seeing some irrational exuberance in the markets.
--
Alan W, Shrock
9513 Colegate Way
West Chester, OH 45011-9419
(513) 497-2634 (Mobile)
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"Are we being good ancestors?" - Jonas Salk
