How Will Covid-19/Coronavirus Affect my Alternative Investment Portfolio? Part 20: July 11th
Updated: 12 hours ago
U.S.'s anti-virus progress stalls, and flips troublingly into reverse; U.S. versus the world: which country is controlling the virus the best?; Sunbelt and West see unwelcome uptick in deaths; Doomed to forget history and repeat it? U.S. again facing crucial shortages of vital masks and medical equipment; Georgia reopening appears to be crumbling; Another week, another record number of jobs lost; Disney Reopens! "A Whole New World" for happy kids? Or sad science lesson on "The Circle of Life"?; Operation Warp Speed awards $450 million to promising Regeneron antibody cocktail treatment; "Scotty, Increase Speed to Warp Factor 2" -- Operation Warp Speed also awards $1.6 billion for experimental Novavax vaccine; Can the body fight the virus in two ways? And if so, will it complicate testing and treatment?; Remdesivir might help people survive Covid-19; Commercial Real Estate Transactions plummeted 35%; Commercial mortgage-backed delinquencies suddenly soared by record amounts in June; Senior housing occupancy nosedives to Great Recession levels and below; Multifamily operators hanging in there, but also warily eyeing potential upcoming cliff; Update on my portfolio.
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Once again, a lot happened this week that affects investors. This week there was a lot of new information regarding the second virus wave, major investments by Operation Warp Speed, and also crucial data on how different real estate asset classes are holding up. Before jumping in, here's a quick summary of the series so far:
U.S.'s Virus Progress Stalls and Flips Troublingly into Reverse
For the 17th week in a row, the United States battled the coronavirus that causes the Covid-19 disease. By Saturday morning, the death toll had climbed to 136,716 (versus 132,112 last Saturday morning).
In the previous weeks, we've been monitoring the death doubling curve (how long it takes for deaths to double). We watched how this started off at doubling every three days at the beginning of the pandemic to slowing down to a more sustainable doubling every two months.
On the other hand, U.S. progress has stalled at that point for the last five weeks in a row, while many other countries have continued to improve (Canada, European Union, Australia, South Korea, Japan etc.). And if the United States experiences a second wave (see next section), this could matter, because it would give us less health and economic headroom to fight it. So this is an important statistic to continue to monitor. Unfortunately, Johns Hopkins University didn't update this data from last week. So we'll skip it this week and hopefully be able to look at it again, next week.
In the meantime here's the daily death rate:
There's a troubling-looking bump-up starting on June 26. However, as we talked about two weeks ago, this was not caused by an increase in actual deaths. Instead, it's because the CDC updated their statistical methodology on that date. They added more cases, which made it more accurate, but also prevents it from being compared to previous weeks (where the older methodology was being used).
Now that we've gone a full three weeks under the new scheme, it looks like all of the backlog from the change has been cleared out. And so presumably, it's fine to start looking again for emerging trends. What does it show?
Here's a close-up of the death curve, starting with the peak and going to yesterday. The part presumed to be post-backlog is highlighted in yellow:
This shows that the U.S. made no real progress in the last week and half in reducing the death curve. Worse yet, it appears that the country has gone backwards slightly with a small increase.
Looking back on the curve since the peak, there have been several other times where progress also went backwards very briefly before it resumed. So the current increase isn't guaranteed to mean a long-lasting change in trend. And if it ends up being just a temporary blip, that would be welcome news.
On the other hand, none of the older backtracking episodes were quite as large or sustained as the current one. And more importantly, none of the previous incidents were also accompanied by rapid growth of infections (and uptick in deaths) in multiple Sun Belt and Western states (which is happening now). So it could indeed be the first sign of a second wave of deaths.
If that ends up being the case, then significant health and economic challenges and potential dangers loom on the horizon. If deaths escalate and hospitals start to overload, then significant re-lockdowns would be required. This is already starting to happen in certain states as they reverse previous openings.
These kind of reversals could be crippling to many businesses. This is especially true of the small businesses that make up the bulk of the economy. These typically operate on thin profit margins, have small financial reserves, and are unlikely to be able to survive a backtracking very well.
Many economists expect that significant backtracking would reverse some or most of the economic progress made so far. This would be expected to cause extensive long-term damage (permanent for some businesses) and could greatly lengthen the time it takes for the entire economy to recover.
So we will continue to monitor this and see how it looks next week.
U.S. Versus The World: Which Country Is Controlling The Virus the Best?
Meanwhile, how is the U.S. doing versus other countries in controlling the disease?
It's would be unfair to compare countries on raw deaths, because large countries (like the U.S.) would be at a disadvantage. That's because we have more people than do the small countries (like South Korea). So looking only at raw deaths skews the comparison. Instead, we'll look at deaths per million because this puts all countries on a level playing field (regardless of size). How do all the countries stack up? Here's a look at the countries we've been following over the past weeks:
Despite the U.S. spending significantly more money on healthcare than does any other country in the world, and having the most vaunted healthcare system, its death rates continue to be stratospheric compared to many of the countries we've looked at. Taking a closer look:
U.S. deaths are 9.03 times worse than Canada, 34.85 times that of Germany, and more than 244 times worse that of Japan, South Korea and Australia. As discussed previously, all of these countries are using a more aggressive mixture of the Three T's of epidemic control (testing, tracing and treatment) than the U.S.
The one exception is Sweden, which is doing roughly as poorly as the U.S. That country has opted for a lockdown-lite strategy (see part 8). The hope, for many weeks, was that if this worked well, it could provide another workable model for other countries looking to deal with the virus.
Unfortunately, they have been plagued with an exceptionally high death rate (3 to 7 times their Scandinavian neighbors...see part 12). And like the U.S., they now find themselves subject to a travel ban by other countries.
Additionally, their economic experiment so far has failed to deliver, with the country still expected to plunge into a severe recession (their GDP is projected to be -5.6% in 2020, versus -5.9% for the U.S.). This is a bit better than the average -8.1% projected for the Euro Zone, but is not the large benefit many hoped to see for adopting such an unconventional strategy.
In comparison, South Korea's economy is projected to barely shrink at all this year. So this week, the country continues to hold the title of being one of the best in the world for navigating the twin challenges of controlling the virus and protecting their economy.
At the same time, any comparison of countries also has to look at Taiwan as well. As we discussed in part 17, they moved extraordinarily quickly against the virus and have done even better than the amazing story in South Korea.
The reason we have not included Taiwan in the weekly analysis is that it's virtually impossible to get a steady flow of statistics on them. China wants to ultimately take over the Taiwanese democracy and "reunify" it with the rest of the country. So they have strong-armed virtually every country in the world (including the U.S.) into refusing to recognize Taiwan as a separate country. And so, health organizations, like the U.S. Centers For Disease Control (CDC), do not pass along the country's data. This is a huge shame, because the country obviously has important lessons to teach the rest of the world.
So how are they doing? Despite being hit fastest and hardest due to their location (right next to China), they are currently experiencing an unbelievably low death rate of 0.003 deaths per million. This is 813 times better than the United States:
And amazingly, their 2020 GDP is expected to actually grow by 1.52%. At this point, most of the world would look at that as an enviable result.
Sunbelt and West See Unwelcome Uptick in Deaths
For the last two weeks we talked about a second wave of virus infections that have been sweeping the South and West.
This week, the same dynamic expanded to virtually every major region of the country. On Saturday, nine states across the country reported record new single-day infections: South Carolina, Texas, Alaska, Arkansas, North Carolina, Idaho, Wisconsin, Oregon and Hawaii. Six of those states, along with 10 others, saw new seven-day average case highs.
Six states also saw seven-day averages for deaths hit a record high: Arizona, California, Florida, South Carolina, Tennessee and Texas. And average daily deaths were at least 40 percent higher than last week in a third of U.S. states.
Many of the Sunbelt and the West states jumped into this wave sooner, and so are further along than others. For example, never since the beginning of the pandemic have multiple states reported more than 10,000 cases a day. But on Saturday, Texas and Florida helped the country re-attain this unwelcome record (Texas at 10,351 and Florida with 10,260). And on Sunday, Florida shattered the previous one day record for new infections at 15,300 (New York's highest was 11,571 on April 15).
Let's take a look at the three states we were monitoring last week and see how things are evolving. Here's Texas:
and Florida look like:
I'm not going to comment individually on each one like previous weeks, because the story has become pretty much the same for all. All three states had bad weeks, setting record highs for virus infections.
As we talked about in part 18, some had hoped that increased infections would not show up as increasing deaths. That's because the average age of the infected is much younger than it was earlier on in the pandemic in New York City. Additionally, we have better medical treatment and are currently experiencing warmer summer weather (which some believe slows down the disease). And for the last several weeks, this seemed plausible. That's because death rates had plateaued in most states.
However, reports of Covid-19 deaths lag infections by anywhere from 2 to 8 weeks. So it can take quite a bit of time to get an accurate picture of what is actually happening at any time. And last week, we saw some disturbing news. Several states ominously broke out of their plateaus and showed signs of increasing deaths.
This week that trend continued and now all three of the above states are clearly in a second death wave (with higher deaths than they experienced at the peak of the first wave).
If deaths continue to increase, similar in speed to the rising rate of infections and hospitalizations over the past 2 to 8 weeks, it could be very bad news for the economic recovery. So we will continue to monitor this very closely next week.
In the meantime, more reports emerged this week that were eerie echoes of the early pandemic in New York and Italy.
The Florida Agency for Healthcare Administration announced on Tuesday that 52 intensive care units across one third of state counties had reached capacity and would be forced to tap surge capacity. Another 17 hospitals had run out of regular hospital beds. On the same day, Florida Gov. Ron DeSantis claimed the state has "abundant capacity"...
Testing sites across the state are seeing shortages and the wait time for results has grown as long as 10 days. Additionally, some parts of the state claim acute shortages of the antiviral drug remdesivir.
Meanwhile, the Texas Tribune published the news that multiple counties in Texas have reported that morgues are filling up rapidly to capacity. And Nueces County (which contains the city of Corpus Christi) is already full. Multiple counties have rented refrigerated trailers to stack dead bodies in anticipation of the upcoming overflow.
And the chief medical officer of San Antonio's Methodist Hospital posted a video warning young people in their 20's and 30's that they are not immune. A 30-year-old patient had attended a "Covid party" (see part 19) where people intentionally expose themselves to the disease in the hopes of winning a cash prize for being the first one to catch it. This patient caught the virus, was hospitalized and died. Before he died, he said to his nurse, "I think I made a mistake. I thought this was a hoax. But it's not."
Meanwhile, two additional states announced mandatory mask requirements this week: Louisiana and Mississippi.
Gov. Abbott in Texas, who reversed his earlier decision and made mask wearing mandatory has been facing a rebellion from some elements of his political party and members of the general public who will not comply.
He warned this week:
“I made clear that I made this tough decision for one reason: It was our last best effort to slow the spread of covid-19. If we do not slow the spread of covid-19… the next step would have to be a lockdown.”
Doomed to forget history and repeat it? U.S. again facing crucial shortages of vital masks and medical equipment
Meanwhile, numerous medical workers in the Sunbelt and West claimed they had inadequate amounts of masks and other vital equipment (Personal Protective Equipment or PPE) to effectively protect themselves and deal with the escalating crisis.
As an example, doctors at Memorial City Medical Center in Houston have been told to reuse disposable, single-use N95 masks for up to 15 days before they are thrown out.
And a survey of the largest organization of registered nurses in the country (National Nurses United, or NNU) was released this week with some eye-opening results.
85% of nurses across the country have been forced to reuse disposable N-95 masks. The NNU claims that "reusing single-use PPE is a dangerous practice that can increase exposure to nurses, other staff, and to patients."
28% of nurses have been required to reuse a decontaminated respirator with confirmed COVID-19 patients. The NNU claims that "decontamination of respirators has not been shown to be safe or effective, can degrade the respirator so it no longer offers protection, and some methods use chemicals that are toxic to breathe. Employers are increasingly implementing PPE decontamination to save money, endangering nurses’ lives in the process."
27% of nurses working with confirmed COVID-19 patients reported having been exposed without the appropriate PPE and also having worked within 14 days of exposure. This obviously puts both patients and healthcare workers at greater risk.
The American Medical Association reported that shortages of PPE are not limited to hospitals and are now starting to impede other critical areas of medicine. Neurologists, cardiologists and cancer specialists around the country have been unable to reopen, leaving patients without critical care.
Kay Kennel, the chief officer of Lubbock Kids Dental, which serves low-income families in Texas, says:
“We have kids living with grapefruit-sized abscesses for over three months who can’t eat or drink and there’s nothing we can do for them because we can’t get P.P.E."
The clinic claims it has a list of 50 children awaiting emergency surgery.
Meanwhile, supply chain experts say that the U.S. has squandered most of its time since the first phase of the pandemic, that could have been used to improve the situation. Currently, only a handful of American companies make PPE domestically and they say they're operating at maximum capacity.
So the PPE supply chain remains overwhelmingly dependent on overseas manufacturers and fly-by-night middlemen. As a result, it can be difficult to gauge quality and many of the prices have been jacked up by 7x or more.
Others are reporting that the problem is spreading even beyond the medical community, affecting others as well. Randy Bury is President of the Good Samaritan Society, which manages 200 nursing homes. He says they have struggled to protect residents by maintaining proper supplies of hand sanitizers, masks and gowns. "It’s been chaos for us. The supply chain in the United States is not healthy."
Georgia Reopening Appears to Be Crumbling
One of the most important questions for investments (as well as the health of the country) is "what will the shape and speed of the recovery be?" If it's V-shaped and quick, then many investments will be just fine. On the other hand, if it's one of the other shapes (U-shaped, swoosh, etc.), then some or many investments could run into problems. (See part 14 for more information on the possible "recovery shapes" and their ramifications).
To monitor the evolving situation, we've been watching Georgia very closely. It was one of the first states to reopen. So we expected this to make it a useful early indicator of what could be in store for some other parts of the nation.
Back on April 24, Georgia Governor Brian Kemp reopened nail salons, hairdressers, bowling alleys and gyms (as long as they followed state protocols). Then three days later, restaurants and theaters were allowed to reopen. So they've effectively been open for over two months.
How are they doing? Since there's no official government or state data on this, we've been looking at Placer.ai. This is a service which tracks mobile phone usage to different types of businesses to measure foot traffic.
Here are the statistics for the current footfall for Georgia's Covid-19-sensitive industries (versus the same week one year ago):
Apparel: -29.53% (vs -15.73% a week ago)
Dining: -24.17% (vs. -24.47% a week ago)
Fitness: -32.4% (vs. -39.53% a week ago)
Hotels / Casinos: -39.90% (vs. -34.18% a week ago)
Shopping Centers: -32.31% (vs. -22.91% a week ago).
All are at unhealthy, unprofitable-looking levels. And disappointingly, none have shown any substantial, v-shaped improvement from last week. Dining and fitness at least improved incrementally. Casinos have actually gotten a little worse. And apparel and shopping centers have taken dangerous nosedives (and appear to perhaps be experiencing a W-shaped recovery).
Since restaurants are not included in the above, let's also take a closer look at a couple of restaurants. Here is Denny's:
It's stuck at a brutal -53% year on year. Additionally, it's currently worse than it was a month ago when its initial progress first stalled out and reversed.
McDonald's does a lot of takeout, and theoretically should be much less sensitive to Covid-19. How does it look?
It's stuck at a very unprofitable-looking -26% year on year. And improvement appears to have plateaued.
How about Applebee's (which also has a takeout service)?
On one hand, about a month ago, they looked to be almost recovered at -10%. However in the last three weeks, they have backtracked and are now at a very painful-looking -25.5%.
Overall, the recovery for Georgia's Covid-19-sensitive industries continues to look poor. All seem to have either stalled out at unhealthy levels or are reversing course, which is extremely ominous. We will continue to monitor these next week.
The X-factor here is the possibility of Georgia halting or reversing re-openings due to a second wave. How's that looking this week?
On one hand, Georgia's deaths continue to remain mostly in a low plateau (although the end of the week brought a worrisome spike that could indicate the trend is about to change).
On the other hand, infections continue to climb, and for the third week in a row they continue to look like a carbon copy of the positions that Florida, Texas and Arizona were holding a couple of weeks prior. Also, Georgia suffered a brutal chart-busting spike of new infections at the end of the week, which blew away the previous record by leaping almost two times higher.
So we will continue to monitor how they're doing.
Another Week, Another Record Number of Jobs Lost
For the 15th week in a row, the jobless report showed that the country was hammered with more than a million new lost jobs. This week, it was 1.31 million, which was down slightly from the 1.4 million last week. Before the crisis, this amount of job loss would have been unthinkable and record-setting, but now it's becoming repetitive, old hat.
As we've talked about in the past: at this stage of the crisis, the "continuing claims" is an even more useful statistic to look at in this report. That's because jobless claims give us only half of the picture: how many jobs have been lost. The continuing claims number removes the people who have been rehired from this. And so, that tells us how many are unemployed right now.
This week, the continuing claims were 18.1 million, which was down a little from the 19.3 million last week. But it still reflects a huge number of people out of work. And it was also a far cry from the rapid improvement that many had originally hoped we'd be seeing by now.
Unfortunately, there were also additional announcements of significant upcoming business closures and job losses.
Bed Bath and Beyond announced it would be permanently closing 200 of its 955 stores (about 21%) after experiencing a 49% drop in revenue. Even though digital sales jumped 82%, this was not enough to offset the greater losses caused by a 77% plunge in in-store activity.
Harley-Davidson announced it will be cutting 12% of its workforce, or 700 jobs.
Levi Strauss said it will be laying off 700 office jobs (15% of its worldwide corporate workforce). Despite strong online sales, the firm experienced second-quarter revenue dropping to -62% year on year, due to the loss of in-store income.
United Airlines notified 36,000 employees that unless Congress extends additional stimulus, their jobs will be at risk after the end of September (when current federal payroll aid expires).
Additionally, there are signs that a wave of small business layoffs may be to come.
As we've talked about earlier, the Paycheck Protection Program (PPP) is part of the $3 trillion coronavirus aid package, which gave free money (up to $669 billion) to employers to retain employees on their payroll. However, many of the companies say they have now exhausted these funds, and so far Congress has not passed a new bill to add more money to the pot.
For example, the National Federation of Independent Businesses reported that a survey of members found that more than half had fully used up their PPP money. And a whopping 22% say they plan to lay off workers as a result.
“As owners finish using their loan, more are finding that economic conditions are unable to support current staffing levels which were previously supported by the PPP loan,” the industry group said.
Meanwhile, the U.S. economy is primarily driven by consumers. So when a large number of people are out of work or worried about losing jobs, it can kill a recovery. This week, a consumer survey was released by CreditCards.com of 2,332 adults. And disturbingly it showed that a large number of consumers (about 40%) *aren't* planning to spend money at a rate that would allow the economy to return to pre-pandemic levels. Significant numbers are planning to cut back on non-essential expenditures at restaurants, bars, movies, events, gyms, and haircuts.
This is especially disturbing because an American Express survey of small businesses found that 62% of them need to see consumer spending return to pre-Covid levels by the end of 2020 in order to stay in business. So the potential for large-scale disruption is significant.
Another consumer survey of 2,200 adults also came out this week from Morning Consult and Bloomberg. It found that significant numbers (20 to 40%) said they don't feel very safe (or safe at all) visiting malls, big-box stores, liquor stores, grocery stores and small businesses:
This appears to be reflected in U.S. mall footfall data released this week by SafeGraph and Jeffries. It shows that after an initial rebound, progress has faded with a stall-out and then a backup into reverse. The trend is even more pronounced in states like Florida and Texas, which are currently experiencing increasing number of infectiosns:
Disney Reopens! "A Whole New World" for Happy Kids? Or, Sad Science Lesson on "The Circle of Life"?
This week, Disney reopened its Magic Kingdom Park in Orlando, Florida. The firm will be limiting capacity and requiring all guests to wear masks and submit to temperature checks. If one person in a party fails the check, then everyone in that party will be turned around. Officials claim social distancing will be enforced with ground markings showing guests where they can and cannot stand in line. And in-person character visits, parades, fireworks and other activities that create crowds have all been suspended.
How is it expected to go? Shanghai Disney in China may give some clues. That park reopened two months ago on May 11 at 30% capacity, and increased from there. And theme park analysts at Blooloop looked at Chinese mobile phone data and saw that for the first 12 days, visitors were cautious and traffic levels were mostly flat (about 40% versus the same month in 2018). After this, traffic shot up to 60% (presumably after people didn't hear any stories about spreading infections). And currently, foot traffic is almost 90%.
If this data accurately reflects reality, then Disney is probably very happy with this performance. A 10% drop in revenue might be considered a bad recession in more normal times, but in the current circumstances, undoubtedly feels like a huge win.
Will this translate into the same kind of success with the U.S. parks? There are significant differences between the two that make predicting this difficult.
Chinese authorities have put in place a very strict contact tracing system involving mandatory use of an app, and hundreds of thousands of volunteers to provide the manpower to make it work. This has allowed them to locate and root out clusters of new infections very quickly and keep both their infection rates and deaths to a fraction of the U.S.'s.
Nothing similar exists in the U.S., and the virus is running far more rampant. So opinion is divided on how the Disney U.S. experiment will eventually turn out.
Meanwhile, during the first week of Disney's opening, people posted photos and video on social media showing large numbers of guests clearly not following 6-foot social distancing both outdoors...
So, Disney appears to be having issues achieving some of its stated goals. And some analysts question how much Disney can really do to maintain true social distancing in all situations.
On the other hand, even if social distancing is not being practiced, might the mandatory use of masks be enough to prevent super-spreader events from happening?
We've seen some anecdotal evidence that this might be true. In part 19, we discussed how two inevitable-looking super-spreader events (one at a hair salon in Springfield, Missouri, and the other on a Canadian plane flight) were nipped in the bud, thanks to masks.
However, there have been no scientific studies conducted on this, to allow us to know for sure. So intentionally or not, Disney (and their guests) are now performing that experiment. We will see how important these two factors really are, in the weeks and months to come.
At the same time, some health experts are skeptical right out of the gate about Disney's so-called "relaxation zones". These are indoor locations (like restaurants) where masks can be removed and tables will be spaced 10 feet apart.
As we saw in part 12, a documented super spreader event occurred in a Chinese restaurant where one single person infected nine other people. Many were at completely different tables and three were more than 10 feet apart. Additionally, even with a table spaced 10 feet apart from others, some of the seats at that table will be located closer together than that.
Some believe this is a disaster waiting to happen, and that Disney will have to change course.
Currently, Disneyland in Anaheim, California, remains closed due to tighter state regulations.
As always, we will monitor all of this to see how it evolves. Note that if the experiment does go south, the lack of contact tracing in the U.S. will probably make the growth of the virus difficult to detect for at least several weeks. But if contagion does affect enough people, then that should eventually become apparent, even without the tracing.
Operation Warp Speed Awards $450 Million To Promising Regeneron Antibody Cocktail Treatment
As discussed in past weeks, Operation Warp Speed is a U.S. government program to finance rapid development and manufacturing of several promising Covid-19 treatments and vaccines. Previously, it had announced substantial investments in Johnson & Johnson, Merck & Co., Pfizer, Moderna and AstraZeneca.
This week, Regeneron announced it had received a $450 million contract from the program to manufacture 70,000 to 300,000 doses of its experimental antiviral treatment called REGN-COV2.
As we discussed, back in part 11, the drug is a cocktail to synthetically manufacture protein antibodies that prime the human immune system to attack the virus (called a monoclonal antibody treatment). If it works, it could be used to treat people with the disease as well as temporarily protect the healthy from getting it.
The company had previously been awarded $167.5 million in federal funding to get the drug to its current stage. On Monday, the company announced that it successfully passed phase 1 human trials and would be proceeding to a combined phase 2/3. The combined trials are expected to enroll 1,850 subjects who are hospitalized and 1,050 who aren't.)
If the drug passes all human trials, it could be ready as soon as late summer. And production could be ramped up to the target amounts in the fall. The government funding would allow it to be produced at no cost to the U.S. public.
The monoclonal antibody technology is newer, but it's viewed by many immunologists and former regulators as one of the most promising.
The former head of the U.S. Food and Drug Administration, Scott Gottlieb, said, "If I had to place one bet on a drug that could be available by the summer and could have activity and could have a profile that I think could change the contours of the infection, it would be the antibody approaches."
A veteran immunologist at Vanderbilt University Medical Center, James Crowe, says "The odds are very high this will work, especially when you have multiple programs and multiple manufacturers.”
Eli Lilly also has a monoclonal antibody treatment that they expect could yield results by late summer. If successful, they expect a potential emergency authorization by the FDA by early fall.
"Scotty, Increase Speed to Warp Factor 2". Operation Warp Speed Also Awards $1.6 Billion For Experimental Novavax Vaccine
Regeneron was not the only Operation Warp Speed news this week. Novavax announced that it will be receiving up to a gargantuan $1.6 billion from the federal program to support studies and manufacturing of its experimental vaccine: NVX‑CoV2373.
The vaccine contains proteins that look very similar to the distinctive spike protein that the coronavirus uses to infect its host. These are intended to stimulate the human immune system to produce antibodies that would then effectively block an attack from the real thing. The technology is called a "recombinant nanoparticle vaccine". It also uses an adjuvant (a compound that boosts the immune response) to hopefully make it more effective.
Back in May, the company had secured $388 million funding from the Oslo-based Coalition for Epidemic Preparedness Innovations (which was its largest contribution at the time). It began a phase 1 trial on May 26, using a two dose regimen, with results expected to be released to the public later this month. And they expect to start the phase 2 within a couple weeks after that.
The new funding will help the company launch its final phase 3 human study as early as this fall, with as many as 30,000 subjects. And if successful, they would deliver 100 million doses for use in the U.S. between the end of the year and February 2021. This is expected to be enough to vaccinate 50 million people.
So far, the company has not yet pushed a successful vaccine all the way through the development and manufacturing process. Several years ago, its attempt to create a vaccine for a respiratory syncytial virus (RSV) failed in phase 3. However, earlier in 2020, it did announce a successful phase 3 trial for seasonal flu vaccine.
The company manufactures portions of its developmental vaccines in the U.S. and Sweden and recently acquired a manufacturing plant in the Czech Republic.
Can the Body Fight the Virus in Two Ways? And If so, Will It Complicate Testing and Treatment?
Many of the biggest mysteries about the virus concern the role of antibodies. These are proteins that the body produces to fight an invader like a virus. But what percent of people who are infected with Covid-19 actually end up with antibodies? And for how long do they stay in the body? Some viruses produce antibodies that last only a couple of months, others (including some coronaviruses) can last for a couple of years, and others can last longer.
The answers to these questions are crucial, because they greatly affect how we test for the virus (which is how we track it), and also how we try to fight the virus (with treatments and vaccines).
Last week, a Swedish study came out and dropped a potential bombshell. It is not yet peer-reviewed, so the results could end up being corrected or retracted. But, the study looked at 200 people and found that significant numbers of people who had only mild illness or symptoms did not produce antibodies at all. However, it found a strong T-cell response instead. (T-cells are white blood cells that specialize in attacking and killing pathogen cells).
According to Marcus Buggert, who worked on the study and is an assistant professor at the Center for Infectious Medicine at Karolinska Institute, "Our results indicate that roughly twice as many people have developed T-cell immunity compared with those who we can detect antibodies in." Additionally, they found that a surprisingly large number of the blood donors who had given blood in May 2020 had Covid-19-specific T-cells (30%).
If this turns out to be accurate, it might throw a monkey-wrench into a lot of the current testing. Many countries are using antibody blood tests to figure out how many people have been infected. But, if a significant number of people develop only T-cells, it would mean that the tests are missing a lot of recovered cases.
On a possibly positive note, it would also mean that more people have been exposed to the virus then we have realized. And if T-cells protect from future infection, we could be closer to herd immunity than we thought.
However, we don't currently know if those who develop T-cells are protected from future infection or not. In some coronaviruses, like MERS, this is the case, but there have been no studies on Covid-19. If T-cells don't provide that safety, then the fact that more people have T-cells would not be any help in achieving herd immunity or slowing the spread of the disease.
But let's say that the study does turn out to be accurate, and that T-cells do protect from infection. If so, then ironically, what's good health news for the general population would make future testing much more difficult. That's because T-cell tests are currently complicated to perform and can be done only in specialized laboratories. Also, individual T-cell responses can vary widely. All of these things make most experts believe that mass testing of T-cells is impractical at this time.
Marcus Buggert concluded that more research needs to be done before drawing conclusions. "Larger and more longitudinal studies must now be done on both T-cells and antibodies to understand how long-lasting the immunity is and how these different components of COVID-19 immunity are related."
Remdesivir Might Help People Survive Covid-19
As we talked about in part 19, one of the only two scientifically proven treatments we have against Covid-19 is Remdesivir.
Currently, we do know that the drug allows patients who recover to do so faster than without it (11 days instead of 15). The bigger question, however, is whether it helps reduce the chance of dying from the virus. And that's currently unknown.
Also, the company is charging thousands of dollars per patient for a full course of the drug. If it really doesn't reduce the chance of dying, Gillead (the company that produces the drug) may be overcharging by 10+ times more than it's worth. (See part 19).
This week, Gilead released a study that suggests that the drug might indeed be linked to a reduction in mortality rate.
They claimed that patients in the study were 62% less likely to die within 14 days than a group that wasn't part of the trial. However, there was no mention if that extended into actual improved survival or just delay of eventual death. And full results were not released to the scientific community for further study.
So while this is perhaps encouraging, the question of Remdesivir's effectiveness remains.
Commercial Real Estate Transactions Plummeted 35%
As we discussed previously, a lot of the commercial real estate market has ground to a halt. Many sellers are still holding out the hope that they might still somehow get that nice, high, pre-Covid-19 price. And many buyers are unwilling to purchase without a substantial discount. As a result, many deals are failing to get made.
A report came out this week from NAREIT reiterating this trend. It found that in May, total transactions were down 55%. Hotels experience the largest decline at 85%. They were followed by apartment, retail and industrial with declines of 50 to 60%. And office properties experienced the smallest decline at 41%.
Many believe that, at some point, one of 3 things will have to happen to break the impasse. Either:
We will get a relatively quick recovery and sellers will start to get their pre-Covid-19 price demands met.
We will get a slow recovery and sellers will eventually be forced to capitulate to the price discounts demanded by buyers.
We end up with something in the middle where both parties have to compromise.
We'll continue to monitor to see what happens.
Commercial Mortgage-Backed Delinquencies Suddenly Soared By Record Amounts In June
Commercial mortgage-backed securities (CMBS) are financial products that allow investors to derived fixed income from mortgages on commercial properties.
This week, Fitch reported that delinquencies on CMBS's in June soared the most in one month since they started tracking the metric 16 years ago. Delinquency climbed to 3.59% (from 1.46% in May). New delinquencies totaled $10.8 billion in June which raised the total delinquent pool to $17.2 billion.
All major sectors were affected, but hotels, retail and mixed-use were hammered hard. On the other hand office, industrial and multifamily experienced only relatively small increases:
Hotel: 11.49% (from 2% in May)
Retail: 7.86% (from 3.82%)
Mixed use: 4.17% (from 0.95%)
Office: 1.92% (from 1.39%)
Industrial: 0.67% (from 0.28%)
Multifamily: 0.59% (from 0.41%)
Fitch believes this isn't the end of the damage. They are forecasting delinquency rates to soar between 8.25% to 8.75% by the end of the third quarter of 2020.
Senior Housing Occupancy Nosedives To Great Recession Levels And Below
Senior living is an asset class that has sometimes pitched to investors as being recession-proof. The concept is that the country is getting older, and many people will always need the care. However, in practice, the asset class has not always performed up to the hype. And all of the major subclasses experienced drops in the Great Recession.
How's it doing this time around? NIC MAP is a data service that provides senior housing and care data to the industry. And this week, they produced a report showing that again the class is not behaving in a recession-proof way. And, in some cases, the damage already looks significantly worse than the last recession. The study found that in Q2 of 2020, the average occupancy plummeted by a stomach-churning 2.8 percentage points vs. Q1.
Independent living held up better than the other subclasses, but still experienced a drop from 92% to 87.4%. This puts it at very close to the Great Recession trough of 86.5%.
Assisted living did worse, dropping 3.2 percentage points to 82.1%. In comparison, at the worst point of the Great Recession, it was significantly higher at 86%.
Nursing care was hammered the hardest. It plummeted an almost unbelievable seven percentage points from 87% to 80.2%, which is far below the 89% trough of the Great Recession.
Even before the crisis hit, the senior living industry was experiencing negative headwinds. Many markets experienced lots of construction and oversupply. People have been living longer than expected and become more active in retirement. And profit margins were squeezed by unexpected labor shortages, changes in regulations and other economic challenges.
Then the virus pandemic hit. And it has brought new challenges to the industry with supply shortages and spiraling costs for supplies and labor. James Balda, chief executive of the largest senior-living group in the U.S. (Argentum) says that operators' supply costs have doubled and projects' labor costs will rise 20% on average. He also predicts the industry may need to hire 200,000 to 300,000 more people to help with the additional needs from the pandemic. And as a result, the industry could face an extra, unexpected economic cost of $40 billion to $57 billion over the next year.
And unfortunately, the industry did not come into the recession from a position of strength. About 1/5th of homes started off with an occupancy rate below 80%, which is expected to make it very challenging for them to survive.
Beth Mace, chief economist at NIC, predicts that those assisted living and memory care homes that do survive will eventually see recovery of occupancy rates. That's because the coronavirus doesn't eliminate the need for a certain portion of the population to require higher levels of care.
But the fallout from the economy and people’s confidence about the industry could slow future demand for independent senior living below previous projections. This may be especially true for those who were planning to sell their homes or use savings to fund their retirement homes.
Robert Kramer, head of aging advisory with Nexus Insights, predicts: "When it comes to the senior-housing industry and care, there will be a time we see this in the rearview mirror but not a time when we will return to the old normal”
Multifamily Operators Hanging in There, but Also Warily Eyeing Potential Upcoming Cliff
The National Multifamily Housing Council published the June results for large multifamily investments. And they reported that rent skippers increased by 2.3 percentage points in June versus last year (with 77.4% paying partial or full rent). The number of rent payers was also significantly worse than the previous month (3.4 percentage points lower than the 80.8% who had made full or partial payments in July).
However, given the extent of current unemployment, many were just happy that it wasn't a lot worse. The NMHC’s president, Doug Bibby, credited state and federal unemployment assistance benefits for the results so far.
But he warned of a potentially impending cliff dive: “Without an extension or a direct renter assistance program, that NMHC has been calling for since the start of the pandemic, the U.S. could be headed toward historic dislocations of renters and business failures among apartment firms,” Bibby said.
Update on My Investment Strategy
Every week I take a look at the latest developments and data and reevaluate my personal outlook on the possible economic scenarios and my personal investment strategy. This week everything is essentially the same as last week.
Treatment: I believe chances are good we'll have an effective medicine for Covid-19 (i.e. antibody treatment, vaccine, etc.) by fall or winter of this year. And with some luck we could even have more than one. Unfortunately, it's also unlikely it can be manufactured and distributed in large enough quantities to immediately treat everyone who wants and needs it. If that happens then it will not be enough to super-charge the economy right away. And there may be potentially huge quality-of-life difference between the treatment-haves and treatment have-nots. This will be divisive and exacerbate already strong tensions in our society and between rich and poor countries.
Recession? We've already had one quarter of negative growth in Q1 (-4.8%) and Q2 will be record-breakingly bad. So a technical recession (2 consecutive quarters of negative GDP growth) is inevitable.
Shape of the recovery: In part 14, we talked about how the shape of the recovery (V-shaped, U-shaped, swoosh-shaped, W-shaped, L-shaped, combo-shaped etc.) will have a huge effect on the ultimate outcome of many different investments. So far, pretty much everything that's happened has been much worse than the consensus expected. Pretty much no one saw the lock-downs coming back in February. More people have been killed than originally projected. Many more than expected have lost jobs. The stimulus and unemployment aid was enormous but has too many unexpected holes and isn't getting to millions who need it the most. States are starting to reopen but most individuals are still choosing to stay at home anyway. So unfortunately, I don't think a quick, V-shaped recovery is going to happen. I would love to be wrong. I'm getting more and more concerned about a very damaging "W", which could come from a second wave of the virus and a second lock-down. Unfortunately this is looking more and more likely. The one slim hope is that for now it has not shown up very strongly in the death stats. So I'll continue to monitor the data very closely. Currently, I believe we will have a 3 stage combo-shaped recovery that starts off (1) quick as the first "easy" industries and companies come back online (i.e. v-shaped). But (2) this will peter out as the more difficult ones are unable to and a slow swoosh will become apparent. If we get a second lock down then this step (2) will become W-shaped and more painful Then in fall/winter, (3) I believe we will probably see a treatment and/or vaccine. And if we do, then that would be the trigger for the 3rd stage and an accelerated recovery. But this most likely won't be a straight-V up recovery because it will probably take time to ramp up production and delivery to enough Americans to get herd immunity. (And that will depends on which treatment makes it that far...which we don't know at this point). So it will be a slower boost. But we also could get a little lucky (for example, if the successful vaccine treatment is of a newer type that can be scaled up more quickly). If so the 3rd stage boost would be faster. If I'm wrong, and we don't get a treatment or vaccine this year, then the economic damage caused by long-term job loss and wage cuts will most likely be severe and further exacerbate (and slow down) whatever type of recovery we do get. That would probably be ugly for the majority of all investments. So let's hope we don't have to find out how that scenario would play out.
Investments: If the above is roughly correct then it will unfortunately be painful for many individuals and some investors. And some subsectors of alternative investing (like certain real estate classes) will come under heavy stress. Many may fold in the coming months. At the same time, I think there will also be an opportunity to purchase dislocated and distressed assets at very favorable pricing and significant discounts. And I believe that patient, discerning investors may be able to take advantage of once in a decade or once in a generation opportunities.
Strategy: 1) Invest in assets that are corona-virus resistant (and uncorrelated with the business cycle). That includes: - 1a) Music royalties (which can actually do better in lock-downs due to increased streaming). 1b) Life settlements (which actually perform better when people are dying faster and in any event isn't directly tied to the business cycle) 1c) Litigation finance (which performs based on winning or losing cases and also isn't directly tied to the business cycle). 2) Continue to hold cash and be patient for dislocated and distressed opportunities. The worse the economic damage, the more chance there will be for once-in-a-generation or once-in-a-lifetime opportunities.
My opinions and strategy will change if we get some better or worse news on the science side or some of the other X factors. For example, the stimulus bill being debated in Congress is one that could shift things in a more positive direction. And, as I mentioned above, the virus getting out of control again in large areas and forcing large lock-downs a second time, could easily make things worse. In the meantime, that's the review for this week. And I hope you and your loved ones are staying safe and healthy.