Panic Journal – “It ain’t over ’til it’s over”
In May this year, I had (prematurely) ended my Panic Journal series with the following, slightly too optimistic conclusion:
As mentioned above, despite some remaining risks, the peak of the Pandemic seems to be behind us.
Looking ahead however, I do think that it is risky to think that now all problems will fall away and we will have a multi year super boom that will lead to yet another big general stock market party.
I don’t predict a crash either, as the Pandemic has clearly shown me that I know a lot less about (current) markets than I thought. So the best thing to do is to continue trying to learn what is going on and not trying to make decisions based solely on experiences from the past.
Now, seven months later, many of us are (again) sitting in their home offices and facing the 4th wave plus potentially a more dangerous variant of the Virus.
Again, vacation plans have been killed and the discussion for or against vaccination resembles religious wars in medieval times. Time for the “Panic Journal” again. As before, don’t expect any actionable advise here, this posts are more like a self therapy.
As I have been wrong many times about the Virus and the pandemic in the past, I will not try to make any predictions and the data around the new variant is yet too sketchy.
Among the many opinions, I do weigh some much higher than others. One of these voices is clearly Ugur Sahin, the CEO of BioNTech. Although he might talk his book to a certain extent, I tend to think that his “Don’t panic” approach seems to be the right one, although he changed his stance slightly with regards to Omikron and now thinks that they might need to adjust the vaccine. But overall, the vaccines seem to work at least in a way to avoid serious hospitalizations which in my opinion is clearly the main goal. It would have been great that infections could have been avoided as well, but that seems to be almost as difficult as with influenza.
As society has adapted to living with the virus to some extent, things don’t seem to be that bad, but again this could change quickly. especially in countries with low vaccination rates.
The big wild card for me with regard to Covid-19 is clearly China. They have been pursuing Zero Covid policy and relied on their own, rather weak vaccines. Negotiations with BioNTech went nowhere and buying directly from American companies like Moderna ist most likely politically impossible. The Chinese Government in my opinion seems to like the status quo because a closed China makes it easier to contain potentially unhappy inhabitants and with the latest move on Didi, China clearly tries to roll back the integration with the Western World to a certain extent.
However this clearly leaves China vulnerable to outbreaks and shutdowns because of the more dangerous and transmissible Omikron variant. We have also seen what effects a partial or even wider closing of the Chinese economy will have for the rest of the world, so this is clearly a major risk going forward.
Beside Covid-19, it seems to become a very challenging environment for owners of Chinese shares, among them Charlie Munger. I have always been very sceptical on Chinese stocks in general and still think that they are maybe good to trade but not really long term investments. For a long term investment, a company should be domiciled in a Country that respects property rights and has strong independent institutions. China has none of them.
On the other hand, I have been skeptical on China since more than 15 years and everytime they somehow managed to come out well. So maybe I should stop worrying and start buying Alibaba instead 😉
Last Year’s Covid winners
A lot of last year’s “Covid lottery winners” like Peloton, online furniture companies, food delivery companies etc. are not doing well. In my opinion this could have two reasons: First, the expectations that lock downs will mostly be short or not necessary. And secondly, my personal opinion is that the first lockdown triggered a lot of one-off purchases that won’t be repeated just one year later. if you have a Peloton bike already, you will not just buy a second one if the next lock down comes etc., the same with larger ticket furniture, home renovations etc.
Also a lot of SaaS companies will not see yet another push to digital and maybe 2021 comps will be quite hard to beast.
The interesting question is: Are there potentially new winners ? I don’t know, but we will see.
Stock market in general
Overall, the stock market is holding up well, mostly with only single digit declines in the indices against their ATH (so far). Most indices are up double digits YTD still. So this was not even what one would normally call a “correction”.
However a lot of “hot stocks” have lost -50% or more from their peaks. I think for some investors, these stocks might already look like “good value” right now. If history tells us one thing, then it is the following: when a stock loses that much in such an environment then it is most likely not a good long term investment but rather the opposite.
Everyone knows how cheap Amazon etc. looked after the Dotcom crash, but most of the “hot names” back then disappeared. Who remembers TheGlobe.com ? Noone, despite the record 600% “IPO po” on its first day, this company, as many others disappeared within a year or so. one thing is sure: Among these many IPOs and SPACs of last year, there are many “TheGlobe.com” like companies.
Maybe some of these stocks could be good short term trades, but even this requires a lot of luck. So my recommendation would be: Don’t touch these “fallen angels” (and please spare me recommendations).
I have not given up my hopes yet, but maybe investors realize that TAM/EV or P/S are not really helpful indicators in order to determine if a company is a good investment or not. At some point in time real profits have to be made consistently.
What’s different this time
I think the main difference to the initial Covid-19 shock is the current high level of inflation. As I am not a Macro guy, I will not speculate if it is permanent or not and where it comes from. However, in my opinion it will limit the ability of Governments to a certain extent to dole out huge relief packages to everyone and her/his grandmother, in order not to further increase inflationary pressures.
On the other hand, oil prices already declined by -20% or so, so maybe inflationary pressure will ease sooner than expected. A side remark: For those claiming that “ESG” has been pushing the Oil price up: Gotcha !!!
Late last year, I was convinced that Tourism stocks were the biggest “no brainers” out there. Somehow the market didn’t see it this way and now it is clear that I had significantly underestimated mutation risks and the requirement for booster shots.
This clearly will be a problem for the tourism industry and countries that depend on tourism. I think it is no coincidence that the Turkish Lira is imploding and the Turkish economy maybe with it. I think also South East Asia (Thailand, Malaysia etc.) could be negatively affected.
Overall, it will be really interesting to see, if and how tourism will come back. Don’t bet on a lot of Chinese tourists in 2022 either. The same goes for business travel. I actually did my first business trip a few days ago and I found it overall not very enjoyable.
For me this is again a good lesson that if you think everyone else is wrong in the stock market on a very specific topic, most likely they are not.
Some companies have benefited from rather unforeseen developments. Rental car companies (Sixt !!) for instance benefited from a shortage in new cars which drove up both, residual values as well as rental rates despite tourism not going back to where it was pre crisis.
Traditional car makers, especially the luxury brands also see an interesting effect: Due to the current chip shortage, they focus on the upper band of their offerings and surprise surprise, are finding out that selling less cars but more expensive ones increases margins and overall profits. Maybe BMW and Mercedes should do a job rotation with management from LVMH.
One big question mark for me is, if the continued massive inflow into Startups and Tech companies will continue. The whole “ecosystem” more and more seems to depend on people expecting the same return as the last 5-10 years which in my opinion will be very difficult to achieve. The same goes for Private Equity.
SPACs have been a great way to exit a lot of shitty companies and I am really skeptical if the appetite for SPACs and other hot IPOs will remain as big as it was the last 12-18 months.
As mentioned two months ago, the time of the easy money in Tech seems to be over for now.
Despite the flash crash over the weekend, it looks like that Crypto is here to stay. More and more people are getting into it, even on an institutional level. Even Ritholz and friends have launched a Crypto ETF this week and they are clearly not Crypto bros.. No one really knows where this is going, but it seems to be going somewhere. So far, money laundering is clearly the clearest use case but I guess there will be others. If the current dominating Crypto currencies will be the long term winners is clearly a different question. I think traditional stock investors should at least try to understand what is going on instead of only saying: This is a fraud.
My main concern these days is mainly the radicalization of a certain percentage of the population. It started with immigrants, not its anti-vaccination. Clearly this has been catalyzed by Social Media which allows people to live in theri Echo chamber. If this pandemic is over, I am wondering what will be the next target. I don’t think these people will relax and do nothing
Overall, it doesn’t look that bad at the moment. Clearly there are some significant risks, but there always are these risks. That’s why there is a risk premium for stocks to be earned.
The best “hedge” in my opinion against these is still a reasonably diversified portfolio (across sectors) of reasonably valued companies with strong and flexible management and strong balance sheets in order to be able to withstand any longer term crisis situation and the ability to exploit opportunities.
My expectation for the coming months is that investors will have a harder time to earn their risk premium but that is something I have been expecting for some time now.
Therefore it is important to prepare oneself mentally for the worst, but hope for the best.
Of course i do need to link to the song from Lenny kravitz with the same title of this post: