Navigating Your Investments Through The Coronavirus

Not wanting to be a "doom and gloom" promoter but things are starting to get very real and hitting very close to home. My daughter is still in self-quarantine (good news no temperature). The entire country of Italy is on lockdown. St. Patrick’s Day parades canceled across Ireland. U.S. corona cases are starting to surge now topping +1,000 infected and multiplying quickly. New York called in the National Guard to create a one-mile "containment zone" around New Rochelle, a suburb of New York City, in an effort to slow the coronavirus outbreak.  Google is telling all of its North American employees to stay home until at least April 10, as the COVID-19 coronavirus spreads. New York auto show postponed for first time since WWII. MGM Resorts temporarily closing Vegas buffets, which include ARIA, Bellagio, MGM Grand, Mandalay Bay, The Mirage, Luxor, and Excalibur starting Sunday. Walmart employee in Kentucky test positive. Sanders and Biden campaigns cancel Ohio rallies. No live audience will be allowed at Democratic debate in Arizona. United Airlines’ U.S. bookings plunge -70%. Dr. Phil & Wendy Williams became the latest shows to announce they would not have live audiences. Seattle is planning to ban crowds of 250 or more. Many U.S. colleges closing in person classes going to virtual campuses only. Financial services firms in the U.S. have also started reporting their first confirmed cases of the virus including Wells Fargo who said it had a confirmed case in San Francisco, Blackrock reported its first confirmed case in New York City, and now Barclay's reporting it's first case on its Manhattan trading floor. I am hearing talk that some big bank and investment firms have already started moving their most important traders and money-managers to undisclosed quarantined locations where they will be able to keep operations running if all shit hits the fan! Remember, many of today's trading companies rely heavily on high-speed computer based trading models. It will be interesting to see how things change once more human emotions and psychology get involved. Time to start thinking outside the box... The smell of serious change is in the air. Below are my additional thoughts, I hope they help challenge your perspective!   

Traders and Investors are staying buckled in and trying to brace for continued whiplash type volatility. The big question is have we bottomed? I'm thinking not... and I'm bracing for more big down days in the mix ahead as we are forced to digest extreme coronavirus headlines and visually see more details and gory carnage that is going to take place in the crude oil space. Keep in mind, not just in crude oil and energy, but across the board this is really our first major "demand" driven setback in over a decade. In other words, this is the first time growth driven companies are going to be forced to make heavy adjustments to falling demand. In some cases, this will be the first time many CEO's and founders of companies that have only been around since 2008 will have ever been faced with major product and services demand cuts. It will be interesting to see how we proceed? I'm concerned... Announcements released yesterday showed the huge concert events like Coachella and StageCoach were canceling and pushing dates back at least six-months. Many other major events like South-by-Southwest have already canceled. As these negative "demand" headlines continue to rollout the market will be forced to make bigger adjustments to earnings forecasts and real forward looking valuations. In other words, earnings and valuations are going to be a massive moving target in the weeks and months to come. Right now Wall Street seems to be thinking we have a couple of rough quarters ahead then we bounce back aggressively. I worry that as we learn about more cancelations and industry fallout Wall Street will start getting more negative a bit further out on the horizon. That's where I will be looking to be a bigger buyer. Yes, I will nibbling on a select few names on the way down but certainly not getting out over the tips of my skis or getting leveraged up. This is absolutely no environment to try and be an investing hero. This is when you simply throw the ball out of bounds to avoid getting sacked in your own end-zone. I'm just guessing, since we are clearly in uncharted waters in regard to corona, but I'm still thinking there will be several large -5% down days and several +3% up days. Again, I will be looking to nibble a bit on the bigger down days. and perhaps lightening the load and readjusting on the up days. I also want to remind everyone, make certain you are considering stocks that will still be "relevant" if we were to dip into a multi year recession. I made the mistake many years ago buying some traditional names that were not as relevant when we came back up for air a couple of years later. Remember, "when the speed of change outside an organization is greater than the speed of change inside an organization there's a very strong chance that business or organization could become irrelevant."  With technology advancing so rapidly, I'm trying to saddle up with companies that are tech leaders inside their respective industry. I also like the companies that can most quickly pivot regardless of valuation and current revenue streams. In other words, I'm not simply looking to buy the most beaten up companies or cheapest valuations and or those with the highest dividends. I want to invest in. companies with strong technology initiatives and leadership teams that are extremely open to "change". I've learned many times these companies aren't generally the ones paying huge dividends but the ones aggressively reinvesting and reinventing their companies rather than paying back huge sums to shareholders. I know I will get arguments about that statement, but I'm just speaking from my own experience and failures from the past. I'm really just wanting to challenge everyones conventional thinking. As Einstein once said, "We can't solve our current problems by using the same thinking we were using when the problem was created."  If we are pulled under water and forced to hold our breath for several. months. or. a couple of years, when the U.S. consumer pops back up on the other side, which we all know we will survive and again prosper, the. question. is what businesses will be most relevant and what businesses will have fallen further out of favor? It's a tough question but certainly something we all need to rack our brains over. On a broad scope, I personally like businesses that are leaders in water, air, agriculture and housing. I feel no matter how advanced technology becomes humans will continue to need all four. There are many great U.S. companies and businesses that will come out of this much stronger and huge leaders in their respective space. I hope I've challenged your thoughts this morning. As I tell my kids and several of my coaches always told me, "stick and move, be quick to go with your gut, and remember the legs feed the wolf". I wish all of our families health and wellbeing during these difficult days.  

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Data on One of the Worst Down Days: Keeping things in perspective, Monday’s -7.6% drop in the S&P 500 is only big enough to enter it into the top 20 worst days in history, at number 19, according to FactSet. It comes nowhere near the -20% fall on October 19, 1987, aka Black Monday. The -2,000 drop in the Dow Jones Industrial Average Monday was most definitely the largest point drop of all time but, in percentage terms, the -7.79% fall ranks as just the 11th biggest in history.

On the Oil Front, Saudi Arabia is intensifying its price war with Russia by pledging to supply 12.3 million barrels of oil a day next month, a massive jump from February's output and +300,000 barrels per day greater than Saudi Arabia's sustained maximum production, meaning they are willing to borrow barrels from stockpiles. Analysts say it's an attempt to flood the market and pressure Russia into reviving the OPEC+ output curbs. Russian Energy Minister Alexander Novak said Moscow could also ramp up production, but added that his country is still open to OPEC+ negotiations. The prospect of renewed talks as well as a possible government bailout for U.S. producers is lending some support currently. The bigger problem here at home is that an extended period of low energy prices could start putting U.S. shale producers out of business which could have ripple effects across other related industries as well as credit markets.

Debt Starting to Become More Worrisome: In general, economists are growing a bit more concerned with the level of business debt in the U.S. economy, especially with what could be rolling defaults from the energy sector. U.S. business debt at the end of 2019 exceeded household debt for the first time since 1991. For the first time in modern history, commercial loans are the largest group of assets held by banks, surpassing mortgage loans, which had been the top holding. A prolonged downturn in stock prices has worrisome implications for highly-leveraged companies that need to service their debt due to the increased risk of defaults or even bankruptcies. Last year, the U.S. Fed warned that business debt issuance was concentrated in the riskiest segments and could result in layoffs if the economy deteriorated.

Washington Debates Steps to Bolster U.S. Economy: As U.S. coronavirus cases rose steadily, the White House and Congress on Tuesday negotiated measures to bolster the U.S. economy and Americans’ paychecks against the outbreak’s impact. A central feature of the administration’s legislative proposal is payroll tax relief, although the extent and duration of the proposal are unclear. White House officials have also said the administration could undertake executive action to help small businesses and workers, including those who do not receive paid sick leave. U.S. Treasury Secretary Steven Mnuchin, who is leading negotiations on behalf of Republican President Donald Trump, met with Democratic House Speaker Nancy Pelosi to discuss a possible deal. Democrats are challenging the Trump administration to tightly target new measures at people directly affected by the coronavirus. Any measure would need to pass the Democratic-controlled House as well as the Republican-controlled Senate before reaching Trump’s desk. Some Senate Republicans said a potential deal could include $300 billion in payroll tax relief that could help people make rent and mortgage payments, or pay medical bills if family members’ work hours are reduced during the outbreak. Read more from Reuters.

Italy's Lockdown Will Impact the Entire Eurozone Economy: Italy, the third largest economy in the eruozone, is the first country to issue a nationwide lockdown in a bid to stop the spread of the deadly coronavirus. Northern Italy, a portion of the country that includes the industrial and financial hubs of Milan, Turin, and the Veneto city of Treviso, already has been slowed to a grind with coronavirus infections raging. Putting the rest of the country in lockdown is expected to throw the economy into recession as it devastates tourism and Italy’s consumer economy, the country's two most reliable engines of growth. The sectors most affected by the lockdown - including transport, art and entertainment, retail, and hotels and restaurants — account for around 23% of Italian GDP. Economists are predicting a GDP decline between -1.5% to -2% for all of 2020. Jack Allen-Reynolds, senior Europe economist at Capital Economics, notes that "This does not take account of the impact on the banking sector ... the spillovers from the impact of the virus on other parts of the eurozone, or the potential supply-chain disruption if the virus really takes off in Germany and other key trade partners." Overall, the country's containment measures are expected to ripple throughout Europe, as the movement of Italian travelers is curbed and manufacturing potentially disrupted. Researchers at Barclays expect the euro area to experience a "short-lived but relatively deep recession" in the first half of this year. (Sources: CNN, Forbes)

Gas Could be in Even Bigger Trouble than Oil: The global oversupply of natural gas is nothing new. A combination of new LNG and pipeline capacity and milder winters in some parts of the world combined to tip the market into oversupply last year that persists to date. However, demand has been worsening thanks to the coronavirus outbreak. As a result, gas prices in Europe, Asia, and the United States are falling. In Europe, the benchmark has lost -27% since the start of the year after already losing close to -50% last year. In the U.S., Henry Hub futures prices are currently below $2 per million British thermal units out to July. According to S&P Global Platts, the rout in global crude oil prices this week is unlikely to show an immediate impact on U.S. associated natural gas production, but if sustained, could keep domestic output flat to modestly lower this year. In a worst-case scenario, sustained oil prices around $30/per barrel could see total U.S. gas production decline modestly through December, falling some -400 to -800 MMcf/d (million cubic feet per day) from its current level around 91.2 Bcf/d (billion cubic feet per day. In the Permian Basin particularly, Platts Analytics also expects gas output to remain more insulated from declines this year. In addition to comparatively lower wellhead breakeven prices, which should keep oil production strong through 2020, Permian producers also currently flare about 500 to 800 MMcf/d – volumes that could be captured to replace other declining production in the unlikely case that oil drilling is curtailed. You can read more from Platts HERE. (Sources: Platts, OilPrice)

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