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.

The Virus

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.

China

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 !!!

Tourism

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.

Other observations:

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.

Crypto:

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.

Concerns:

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

Summary:

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.

Add on:

Of course i do need to link to the song from Lenny kravitz with the same title of this post:

16 comments

  • I totally agree with you re China (no democracy (lastly demonstrated in Hong Kong), no rule of law, doubtful accounting, fishy VIE structures etc.).
    Re Alibaba I never quite understood why Charlie Munger (most probably the best thinker in investing) is playing to the pied piper´s flute; could it be he might be influenced too much in this case by Li Lu (most probably one ot the world´s top investors in his own right) who himself might be biased by his roots. Alibaba´s RoEs have been on a steady decline (although cash generation still seems to be outstanding). I am surprised they have not instead invested in Tencent which appears to produce far better RoEs than Alibaba (but still has the same issues mentioned above).

    On the other hand, who am I compared with these luminaries who might see aspects that I am not smart enough to consider.

    • Good comment. What I don’t get is the following: Munger missed out on Apple; Microsoft, Google, Amazon, Facebook, Shopify etc. And then he places a big bet on Alibaba ? This looks like some kind of late-stage FOMO. But as you said correctly: Who am I to judge on this?

      • I guess re Microsoft he did not do it due to Buffett´s and his close relationship with Gates (on the board of Berkshire from 2004 to 2020); Amazon is a special case: I have never had the guts to take the plunge, either (it is hard for me to value a business with “scale economies shared” as Nick Sleep calls it); Apple has been in Buffett´s portfolio since Q1 2016 (and very profitable for Berkshire since); Google has too many sidekicks which the founders play around with; Shopify has only been really profitable since the beginning of 2021; Facebook I do not have a hypothesis.

  • I made the same mistake with tourism. I originally thought this would all be over much sooner. I agree with your sentiment that things are going to get tougher.

  • The way of thought reg. spending turning to luxury (from stuff for a cozyx home where one spends more time) I also have the perception that luxury befits already. L’Occitane & Oriental Watch at ATH, though special players with China focus and other factors. Hermes’ & LVMH’s charts look the same, as does Ferrari. But who knows, high expectations can always be exceeded, i guess …

  • Great posting. nice thought-food.

    Just some ideas and responses:
    “A lot of last year’s “Covid lottery winners” like Peloton, online furniture companies, food delivery companies etc. are not doing well.”
    I agree about stuff to cozy up your flat, house and garden. As last year many people spent more time at home they invested more money to equip, renew and cosy them up. But there are limits how many (new) furniture a flat can endure. So this year I have the feeling that there is like no more interest in shopping that kind of stuff.
    BUT: What about the stuff that always goes well with people, that all the time had enough money to cosy up their houses? What do they buy with already filled houses? How about luxury, like art and jewellery? I suppose that these segments still work well. And as it is much more difficult to visit the “Temples of Luxury” I still set bets for a very good season for online luxury shops. Real luxury, not the “bling bling” stuff.

    Tourism:
    Last summer I did not feel like as there vaccines were still scarce, there were many unvaccinated people with the wish to get vaccinated, and evenin the summer there was a good chance of quarantaine for returning by plane from any random country.
    So better stay closer home, make holidays in car driving distances than airplane distances, visit friends etc. And I know of many friends who did the same. The beaches on Baltic See were quite full.

    This time is different. It feels like “With vaccinces and boosters we got the best weapons against the virus we could find, so fuck the covidiots and dont care if they populate hospitals after loosing russian roulette. Covidiots are loosers, nothing new under the earth”.
    Still angry about closed christmas markets, I feel myself making dreams about travelling further abroad next summer, even with plane. I am vaccinated and boostered and I am ready to wear masks when required. But thats enough, especially for the summer with good chances to stay outside, catch lots of sun and continue living.
    Regarding christmas presents I also think of travel goodies, rented holiday flats or stuff like that, what I never did before. Like “Booking now it might be cheaper than closer to the summer”.
    If I am not alone I can imagine that the car scarciness of last summer wmay be repeated next summer in other segments of tourism that suffered the last 20 months, hence reduced capacity and will be overrun by demand next summer. Much more than last summer.

    So I think again about placing new “good summertime”-tourism bets for my “opportunity-segment”. I was quite satisfied with my tourism-bets last winter as Sixt was among the main stakes. But I need to change horses this time, and I am still very uncertain.

    Crypto: Strange people doing strange things.
    As I don’t understand them I stay away and don`t really care. Not my circle of competence, no FOMO at all.
    There fits the old poker wisdom: “If you dont know who in the room is the golden goose to be slaughtered suppose you are.”
    This would happen to me with crypto-trading. I dont understand enough of the logic behind to recognize the real red flags of the game. So the whole game better stays a red flag for me.

    PS: Thanks again for the forum!

    • Thanks for the comment. Indeed good points, the luxury stocks seem to incorporate some of that spending already.

      Vacation: Interestingly, i feel the same. Especially I want to stay again in a nice hotel instead of an apartment where i have to do everything by myself…..I stay with Sixt for the time being, but I am also looking for alternatives.

  • TOMASZ ARTUR MIELNICZUK

    Hey great article as always… travel might be dead for a while again… Traveling in long distance flights are disaster, why ??
    Sitting or sleeping in facemask for most of the time, WTF, I prefer staying at home and sleeeping without it!!! As you might see airports are quite different this time.. What I mean by that, is; I’ve never seen such empty Frankfurt Am Main airport (Fraport; FRA) and not only

  • One of the items I am now concerned is about the amount of nonsense greedy investors in the market, playing by ‘esotheric’ financial credos/believes… and sometimes being successful (leading to retro feedback looping effects). They are significantly driving the market…. (to nowhere?) and yet distorting it. How can I stay comfortable in the market with so much financial nonsense? Feels like swimming across the PacificTrashVortex… Below a sample

  • I really liked your framework on energy transition which got me thinking if we are or not in the first innings of “decentralization finance transition” with regards all the potential applications of crypto… check how a16z (Anderssen Horowitz) thinks about it.

    Maybe pandemic, current high level of monetary easing, inflation, etc could be further catalysts for a next stage towards DeFi (if viable at all).

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