Panic Journal – Season 2: “Taking Stock”

Two and a half months after the end of “Panic Journal Season 1”, it seems that “Season 2” is about to start (or has started already in some areas like Madrid or Israel, or never ended as in the US)

Time to summarize what from my point of view has changed or been confirmed since season 1:

Positives:
+ Vaccine efforts are well on the way. AstraZeneca, despite a short interruption still seems to be a forerunner and end of 2020 seems to be realistic for a functional vaccine to be available
+ although the US had many days with more than 1000 deaths a day, overall the ratio of deaths to reported infections seems to go down in most parts of the world

+ current outbreaks (see below) seem to be contained by local actions (Mask wearing etc.) and the risk of a general big second lock down seems to be low. So no need to stock up on toilet paper again….
+ Many businesses have shown quite some flexibility in running in a pandemic environment. Most companies that went bankrupt so far were on the brink of bankruptcy anyway
+ Governments have acted fast with mostly pretty efficient stimulus packages that benefited this time ordinary peopel as compared to the GFC
+ even previously unthinkable topics as common debt for the post-Brexit EU suddenly seem to be possible in the near future
+ working from home for many companies seems to be no problem at all
+ supply chains have held up well and there were few real shortages of anything

Negatives:
– despite the hype, the highly awaited warning apps are not a game changer. Good old contact tracing by phone is still the most efficient countermeasure (apart from testing, distancing, masks and fresh air
– even light holiday travel has spread the virus again in Europe, in other parts of the world, especially the US numbers never really went down
– despite the obvious improvements in treating sick people, a surprising large number of people still question why the initial lock down was necessary
– we saw quite some cases of “under reported” infections such as in Mallorca (which got only fixed coincidently when German vacations were over). Just yesterday, Turkey (what a surprise) admitted to fudging infection numbers by only including positively tested people with symptoms. I am willing to bet that Austrian skiing regions will be “Corona free” when the first snow is falling…..
– infections are on the rise in many countries with, at the time of writing, Israel actually preparing for a 3 week lock down, other hot spots are Madrid and the UK (again). Even my hometown Munich crossed temporarily the threshold last week with mandatory mask wearing in public. And Winter didn’t even begun…
– “normal life” will most likely only return by the end of 2021 as Dr. Fauci nicely explains here
– it’s really interesting how stupid some (local) policy makers are, latest example is Florida
– in many countries (for instance Germany), bankruptcies have been only delayed via temporary changes in law. In some sectors (tourism, restaurants etc.) these will hit for sure in 2021
– The UK still thinks they can afford to play games with BREXIT

Further observations:

Quick reopening

One general remark/observation from my side: Some pundits/politicians belief that if you only open up everything and even prohibit masks, everything will be Ok in short time. However they forget one important point: You cannot force these people out on the streets who are scared of the virus. To the contrary, I think those who are vulnerable and actually care about their health will be even more scared. So yes, you might go back to 60-70% sooner, but the full recovery will only happen when the scared people go out again and this will last longer if openings are done prematurely and they feel unsafe. But who cares about next year anyway these days ?

Super fast track approval of vaccines

Certain people think the faster vaccines are approved, the quicker and easier Covid-19 will disappear. Again i think people are overseeing some issues. First, there is unfortunately a growing (and loud) group of people who are “anti vaccine” in any case. Such politically enforced shorter deadlines will give them all the tailwinds they ever dreamed of. Once vaccination starts I bet that these groups will spread miss-information like crazy via social networks and try to scare away people from getting their shots. The vaccination process will be anything but smooth and could take a lot longer than many people think, even in rich countries.

(No so) Easy Dancing

My initial estimate from June of a relatively “easy dance” and a strong rebound in 2021 seems to have been clearly premature. Yes, 2021 will be better than 2020 but we will most likely not go back to 2019 numbers in aggregate, and some industries might even do worse.

Donald Trump tests positive / US elections

This is a new development that just happened during writing this post. My first reaction was: “This must be a stunt”. However this shows how distrust has grown to a level that no one seems to believe anything these days. 

With regard to the election, I do not think that the result will change much with regard to the stock market. In German there is a saying: “Politische Börsen haben kurze Beine” which means that politically driven stock market moves are mostly not relevant in the long run. 

Markets:

In the directly hit sectors like airlines and hotels, people have begun to realize that this will not be a V shaped recovery and 2021 will not be like 2019. Stocks like Lufthansa, TUI  or hotel groups now trade lower than during the “panic” in March. Maybe Warren Buffett made a mistake buying US Airlines, but selling out rather early now seems to have been a smarter move.

Just yesterday, for instance Rolls Royce announced a deeply discounted rights issue which is something that is clearly the last resort before declaring bankruptcy. I guess we will see more travel/entertainment/restaurant ect. stocks doing this going forward.

Some changes like zero interest rates in the US will have long term impacts such as making banks and insurance companies a lot less profitable. Again Warren Buffett seems to have seen this early by selling one of his biggest und longest holdings Wells Fargo at a rather “cheap” valuation.

I am still puzzled that short term profiting business like big home improvement stores went up by so much as they have a natural disadvantage vs. their E-Commerce only competitors and even if Covid-19 will be an issue 2021, people won’t paint their house again or build a second swimming pool.

There are a lot of sectors (Office real estate, retail, travel  etc.) where the future is anything but clear and it looks more and more that just surviving 2020 will not be enough.

The biggest open question for me (still) is if and how this episode will change the permanent behavior of people with regard to living, restaurants, travelling etc. The longer all this goes, the deeper the potential changes.

One of the biggest risks for an analyst would be to look at his/her own behavior and then extrapolate from there to everyone else. I think what we are seeing at the moment is a bifurcation between people who want to (or need to) go back to the old way and people who can afford to change their way of living permanently.

For myself for instance I think that 1-2 days of work from home will be the new normal for many years to come but for someone working at a super market, this is not an option.

One very interesting area is clearly the whole energy sector. With regard to Decarbonisation, I have the feeling that some tipping point has been reached here. So just buying “cheap” oil stocks and hoping for a recovery might not be such a brilliant idea.

Portfolio to do’s:

How all this plays out needs to be seen. Personally, I do not hink that this is the time for big bets in the portfolio, but honestly I have been thinking like that for the last 7-8 years. I will also need to reassess how vulnerable some of my more exposed portfolio companies are to another weak tourist year 2021. Especially my Richemont and Sixt purchases assumed a faster recovery.  Some of the sales (Handelsbanken, Coface) look better now. Some of the “buy and sell” transactions (Mutui !!, Disney) look super stupid.

Stay safe !!!

 

14 comments

  • TOMASZ ARTUR MARCIN MIELNICZUK

    hey it’s great to hear your views on COVID-19 and investment thesis, but I perceive COVID as a diesease which doesn’t appear to be so very deadly… If you look at statistics, even more people dying due to malaria, or flue….Taking into consideration, the case of Sweden which didn’t use lockdown as a great tool in order to combat COVID-19… They belive more in herd immunity… Be honest if you eat healthy and stay safe and fit, you won’t die…
    Investing this time is quite tough… There are plenty of undervalued companies such as Gazprom which is still profitable, besides oil and gas prices…

    • I would recommend that you have a look at actual statistics instead of you “perception”. Covid-19 is roughly 10x more deadly than the flu, including recent progresses in treatment. Plus the many cases with long term negative effects.

      Boris Johnson seemed to have learned his lesson, let’s see how this works out with DT.

      • Comment edited as I don’t want to turn this into a Covid-19 discussion blog. For those who believe it is a hoax and only a harmless illness, there are enough Groups on Facebook etc. Please go there.

        • Comment edited. Please troll another blog / forum. Next comment will juet be deleted.

          Thank you for your understanding.

      • One mistake I made is not to link to a source of my claim. See for instance here:

        https://www.swp.de/panorama/corona-grippe-tote-vergleich-welt-deutschland-usa-infektionsterblichkeit-sterblichkeit-drosten-studie-ndr-podcast-coronavirus-update-51938780.html

        For the US, mortality once you are infected with Covid-19 is 19x higher than the flu (Grippe), not 10x how I initially wrote.

        • “The proportion of deceased persons among all laboratory-confirmed COVID-19 cases is currently less than 1%.” (Drosten)
          Compared to: “Since the 40th week of 2019, a total of 188,119 laboratory-confirmed influenza cases have been reported according IfSG (transmitted to the RKI). In 16% of cases patients were hospitalized. Since the 40th week of 2019, a total of 547 deaths with influenza virus infection were reported” [0.3%]. https://influenza.rki.de/Wochenberichte/2019_2020/2020-39.pdf
          So in Germany it’s at least 3x more deadly than flu, but both have a high amount of unreported cases.

          According to the German Heinsberg study, the COVID-19 mortality rate is around 0.37%. Since many infected people do not have detectable antibodies after a few weeks, the real rate is probably lower.
          This study was about the first wave and, as you say, there are “obvious improvements in treating sick people” as dexamethasone, anticoagulant drugs, and in the near future maybe antibodies. The rapid approval of remdesivir is, in my view, a cause for concern because of the known side effects.

          I think the “panic” in the general public will settle after winter.

        • Thanks for the comments, at least with some links 😉

          Re Influenza: I am not sure how representative the weeks are that are mentioned in the report that have linked to, but there the rate of positives among the tested person was 20% or ~90x the positive rate of Covid-19. As in the beginning, when only few tests were conducted for Covid-19 and the observed mortality rate was a lot higher (10% in China for instance), I assume that a lot of influenza cases didn’t get detected.

          Second point: One study like the Heinsberg study is clearly not representative, therefore the Meta study that Drosten references is much more valuable. The best documented case, the Diamond Princess for instance had a mortality rate of 1,8% but I guess the cruise ship passengers were older than on avergae:
          https://onlinelibrary.wiley.com/doi/full/10.1002/jgf2.326

          I think the Heinsberg study was also not representative as there were few or no retirrment homes effected which was lucky.

          So the more studies the better.

  • Approvals after shortened vaccine development are a high-risk gamble, and manufacturers know this.
    “The U.S. system shifts liability for vaccines fully to the government and shields drugmakers because widespread inoculation against disease is considered a benefit to society. […] The supply agreement the EU reached earlier in August on the potential COVID-19 vaccine developed by AstraZeneca and the University of Oxford offers only partial liability coverage. ‘The contract foresees that liabilities and financial costs are shared among the parties,’ the Belgian medicines agency said”.
    https://de.reuters.com/article/health-coronavirus-eu-vaccines/limited-legal-protection-for-covid-vaccine-makers-hampers-eu-deals-idINL8N2FR5Z4

  • Richemont might be more dependent on China (including local tourism within China), rather than global travel. I don’t think any of the big luxury cos define break down their sales by “country of origin” (of their buyers), they usually breakdown by where the goods were sold.

  • For the oil players: oil stock may be cheap following oversupply… yet the oil must still be transported and MLP paid for its services. Midstream Ltd Partnerships, may still be a good play. Only problem is the collateral risk that the main Oil companies get squeezed / bankrupt and stop operating, for which little oil would be transported and MLP would get screwed too…

  • Gongrats to Madrid for being the global champion in Covid. And in fascism.

    • Well, one thing I can say is that in Spain we have horrible politicians in general. Very narrow and short term decisions looking mainly to favor their own party. BUT (yes it is a big but) the most dangerous among all are exactly the ones that are right now in power. It is all recorded, how they have sought unbelievable alliances just to reach where they are, how they have changed their discourse 180 degrees from one day to the other, how they hide information or even how they deny that they said what they said a few weeks or months back (it is recorded). For me it is un-be-lie-va-ble.

      memyselfandi007 very nice reading indeed. Interesting insights on your view about the situation. Thank you.

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