How Will Covid-19/Coronavirus Affect my Alternative Investment Portfolio? Part 22: July 25th
Updated: 11 hours ago
U.S. definitively enters second death wave; Key Sunbelt states may have hit a turning point in beating back the second infection wave; Georgia reopening continues to be all fizzle and no sizzle; No relief on unemployment as economy is pummeled yet again; Yelp reports stunning 55% of temporary virus business closures are already permanent; Virus causes chain-reaction wipeout for U.S. film industry; Former "bottom of the class" European Union, now schooling the U.S. on economic recovery; U.S. apartment/housing investors and renters warily eye upcoming financial cliff; Next round of government stimulus hits unexpected roadblock; Are U.S. workers living high-on-the-hog from overly generous unemployment benefits?; Swedish study suggests T-cells may be more important than antibodies in fighting Covid-19; Operation Warp Speed swards $1.95 billion more to Pfizer for vaccine; Update on my portfolio.
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This week was a little bit lighter than usual on news. Most of the information centered around the second virus wave, the upcoming financial cliff and Operation Warp Speed.
Before jumping in, here's a quick summary of the series so far:
U.S. Definitively Enters Second Death Wave
For the 19th week in a row, the United States battled the coronavirus called SARS-CoV-2, which causes the Covid-19 disease. By Saturday morning, the death toll had climbed to 148,860 (versus 142,080 last Saturday morning).
In the past, we've typically looked at the death doubling data first, to see how the country changed over the last week. But, for the third week in a row, the Johns Hopkins data is not available. So I'm dropping this part of the weekly analysis and will be replacing it with other information.
Instead, let's look at the daily death rate. Here's what it looks like this week:
Unfortunately, that's not an encouraging graph. After cresting about 120 days ago, the death rate bottomed out 32 days ago. Since then, deaths have moved in the wrong direction and increased. And this week continued the upward trend from last week and clearly confirms that the U.S. is now in a second virus death wave.
(Note, the small surge between day 104 and 110 was not an actual increase. It was caused by a statistical aberration when the CDC changed its accounting methodology and then worked through the small backlog).
If this second wave continues, then economists and analysts widely agree it would eventually destroy all hope of a quick, V-shaped recovery. The recovery would then follow one of the other shapes (W-shaped, swoosh, etc.) which would be slower and more painful. (See part 14 for more information on the possible "recovery shapes" and their ramifications for investors).
So we'll continue to monitor this closely.
How are other countries looking?
As we discussed in part six, South Korea uses an aggressive mixture of the Three T's of epidemic control (testing, tracing and treatment). And through most of the epidemic, it has been one of the world leaders in both minimizing deaths (one of the lowest per million) and also minimizing economic damage (growth is projected to barely shrink there this year, versus -5.9% for the U.S.).
This week, South Korea made progress fighting back the numbers that they consider to be their "second wave":
However, the tiny size of this wave would be considered too minuscule to even be noticed in the vast majority of countries. And, just as was the case last week, the South Korean economy continues to remain predominantly open for business.
Meanwhile, Sweden has opted for a lockdown-lite strategy (see part 8). The hope has been that if this works well, it might provide another workable model for other countries looking to deal with the virus.
Previously, their progress has been uneven. After appearing to beat down the virus several times they also backtracked as well. Then, for three weeks, they endured an oscillating holding pattern which went dramatically up and down several times but, ultimately, went nowhere. The country appeared to be stuck in a rut, with Anders Tegnell (the architect of the country's strategy) apologizing for the excessively high death rate (3 to 7 times their Scandinavian neighbors) and a record low number of Swedish people approving of the strategy.
However, on Tuesday, Tegnell announced that things had suddenly improved "in a way that I think few of us would have thought a few weeks ago". And here's what it looks like as of this morning:
Clearly, things are improving rapidly and moving in the right direction. So this was very encouraging to finally see.
On the other hand, the country is still not out of the woods on the health front. The country has many unique advantages against the virus that others don't enjoy, including an extremely large number of people who live alone and without children (40%). Despite this and their recent progress, their death rate this week still remains extraordinarily high compared to other countries. Here they are, compared on a deaths per million basis (which puts all countries on the same playing field regardless of size):
So, while they are now doing better than the U.S., they are still suffering nine times as many deaths as Australia, 11.5x more than Canada, 26x more than Germany and 208x+ worse than South Korea. Overall, these aren't great results.
And the country still continues to suffer an economic challenge because, so far, lockdown lite hasn't improved the state of the economy much. The country is 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.
On the other hand, if they continue to push down the death curve, then we might see that they improve in both of the other lagging areas, as well. So we will continue to monitor them and see.
Key Sunbelt States May Have Hit A Turning Point In Beating Back The Second Infection Wave
Over the last four weeks, we've talked about how a second wave of virus infections has swept the South and the West. And two weeks ago, that dynamic started spreading to other areas of the country.
At the same time, we talked about how many states also enacted rollbacks of previous reopenings. And after a CDC announcement, last week, that mask wearing could bring the epidemic under control in eight weeks or less, additional states enacted mandatory mask rules. By the end of the week, more than 50% of states had a mask mandate.
How are things looking this week?
Here is Texas:
...and South Carolina:
On one hand, the escalating deaths continue to be alarming.
On the other hand, all three of these states appear to have hit an important inflection point, because the number of infections have stopped increasing and are falling. This is the first encouraging news we've seen in over a month and is very welcome.
How about Arizona?
The state also appears to have hit a similar turning point on infections. And even more promising, deaths appear to have plateaued.
On the other hand, some of the states, which didn't look as bad last week, look a little bit worse this time. Here is Georgia:
Last week, there was some slim hope that Georgia would not have to endure a second wave of deaths, because they had slightly risen from their trough, but appeared to have plateaued. Unfortunately, this week showed that the plateau was only temporary, and now they are clearly in their second death wave.
Here is California:
Like the other states we've looked at, California is still seeing rising deaths. But, they do appear to be have slowed down much more than the others. And while new infections are also rising, these appear to be slowing down as well.
We'll continue to monitor and see how these look next week.
Georgia Reopening Continues to Be All Fizzle and No Sizzle
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 about four 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). And to see the trend, here are the same stats from one, two and three weeks ago.
Apparel: -31.72 (versus -29.59%,-29.53%,-15.73% the past three weeks)
Dining: -20.92% (versus -24.91%, -24.17%, -24.47% the past three weeks)
Fitness: -38.24% (versus -37.78%, -32.4% and -39.53% the past three weeks)
Hotels / Casinos: -33.16% (versus -30.14%, -39.90% and -34.18% the past three weeks)
Shopping Centers: -20.07% (versus -26.39%, -32.31% and -22.91% the past three weeks).
Dining was the only category which improved slightly (about four percentage points). All of the other categories deteriorated. And all industries remain at what appears to be grossly unprofitable and unsustainable levels. If this is an accurate reflection of the economy, then it is not in good shape, and not experiencing a quick, V-shaped recovery.
As we saw in the previous section, Georgia is currently experiencing a second wave surge in Covid-19 infections and deaths. So this probably explains at least some of the backtracking in the data.
We will continue to monitor Georgia and see how things go next week.
No Relief on Unemployment as Economy is Pummeled Yet Again.
For the 17th week in a row, the Thursday unemployment report showed the U.S. was hammered by previously unheard-of levels of new unemployment. This week, an additional 1.42 million people reported they were out of work.
However, there was something different with the trend that we haven't seen for a very long time. Since March, the numbers have improved every week. But this is the first week that the numbers actually got worse. In comparison, last week, only 1.3 million people lost jobs and it was 1.31 million the week before.
If this trend were to continue, it would mean business struggles were increasing and would be potentially devastating to the chances for a quick V-shaped recovery. However, this is only one week's worth of data, so it's too soon to say if this is an inflection point or not. So we'll continue to monitor it.
Meanwhile, 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 at 17.1 million. This was barely improved from 17.3 million last week (and 18.1 million the previous week). So those expecting a rapid V-shaped rehiring surge were again disappointed. On the other hand, at least the numbers are still dropping, rather than backtracking. Again, we'll see if this continues or changes in the following weeks.
Meanwhile, Ascena, the owner of household name-brand retail stores like Ann Taylor, Ann Taylor Loft, Catherines and Justice announced it's filing bankruptcy. This will involve closing 1,100 stores, which is more than half of its current total. Even before the pandemic hit, the stores were struggling. And then Covid-19 clobbered sales by a brutal 36% and dealt a decisive knock-out punch.
On Thursday, the U.S. Census Bureau released a relatively new report called the "Weekly Household Pulse Survey". This showed that 6.7 million Americans lost jobs between mid-June and mid-July, with the majority of that (4.1 million) coming between the first and second week of July. If this is fairly accurate, this drop coincided with the timing of the second wave of coronavirus infections in the Sunbelt and West.
On Tuesday, Kronos, a software and services company that tracks timeclock punches, produced a report showing how worker shifts are doing. It showed that these increased by an anemic 0.7% in July versus a fairly weak 1.9% in June. If this is representative of the wider economy, it suggests that the recovery is plateauing at a point far below what would be needed to return to full strength.
Yelp Reports Stunning 55% Of Temporary Virus Business Closures Are Already Permanent
On Thursday, Yelp released a report with some shocking news. The company has found that 55%+ of businesses that had listed themselves as "temporarily closed" at the beginning of the pandemic, are already permanently out of business. (More than 72,000 businesses out of 132,580 total).
Restaurants were hit the hardest, followed by retail and beauty, bars and fitness centers. Yelp says that many retailers tried to adjust by shifting to curbside pickup and online ordering. But these were not able to be profitable enough to survive. (See "Why Your Favorite Restaurant May Not Survive the Pandemic" in part 21.)
The top three states for business losses were California, Texas and Florida:
All three states are currently suffering a second virus wave.
Virus Causes Chain-Reaction Wipeout For U.S. Film Industry
The U.S. film and TV industry supports 2.1 million jobs and 400,000 local businesses. It normally generates about $104 billion a year in economic activity, which is about 0.6% of GDP. Jobs in the industry have been generally well-paying, with the average salary being 42% higher than the national average.
In response to theater closings, the industry has pushed back the releases of many early 2020 films to later in the year. And many people had been holding out hope that this would result in a strong recovery then.
This week, that aspiration crumbled as studio after studio announced they're pushing back new movie releases into mid to late 2021.
On Thursday, Paramount Studios announced that it will delay its two biggest films for 2020: "A Quiet Place Part II" (a horror sequel) and "Top Gun: Maverick" (Tom Cruise sequel) until the spring and summer of 2021 (respectively). "A Quiet Place" had already been previously pushed back to September of this year, when the pandemic first hit.
Disney's big 2020 film, Mulan (an animated adventure), had also already been pushed back twice, from its initial March 27 2020 release. This week, Disney again pushed it back and designated the release date as "unset". They also announced that Ridley Scott's "The Last Duel" (a knight drama) will be moved back from initially opening on Christmas of this year to October 15, 2021.
Warner Bros. announced that, for the third time, the opening of Christopher Nolan's much-anticipated "Tenet" (a thriller starring John David Washington and Robert Pattinson) will also be delayed. They also declined to set a new release date this time.
The ripple effects of the virus aren't limited just to 2020's releases. The movie, Avatar, which was scheduled to be released in December 17, 2021, has been pushed back a whole year to December 16, 2022 (also pushing back the third film from December 2023 to 2024).
Academy award-winning director James Cameron explained, "What most of you likely don't know is that the pandemic is still preventing us from being allowed to recommence most of our virtual production work on stage in Los Angeles. That work is just as critical to the films as the live-action work."
Disney also announced that all three upcoming Star Wars films (initially set for December 2022, 2023 and 2027) have been moved back a year as well.
Some film studios are now considering the once heretical idea of releasing movies to countries outside of the United States first. This would allow them to take advantage of theater patrons returning to screens earlier in Europe and Asia, where the virus is under better control. As an example, movie theaters in the Chinese capital city of Beijing partially reopened on Friday.
Meanwhile, in the U.S., 2020 is shaping up to be a year that film-makers completely write off.
Former "Bottom of the Class" European Union, Now Schooling The U.S. on Economic Recovery
The European Union's economy has traditionally played the role of the "weaker little brother" to that of the U.S. for many years. And since 1992, the U.S. has outperformed the E.U. almost every year (all except eight). Even in 2009, during the Great Recession, when the U.S. took a painful -2.5% hit, the Euro Zone took even more of a wallop at -4.5%.
And when the pandemic initially moved out of Asia, it looked like history would repeat itself. Europe had the bad luck to get hit first, got caught off guard and was forced to lockdown the hardest. So unsurprisingly, it paid an economic price. This week, a consensus of economists estimated that the entire Euro area economy shrunk about 12% in the three months to June. In comparison, the U.S. economy shrunk only about 10% in the same time.
However, high-frequency data is now showing something remarkable. Not only has the E.U. bounced back to match the U.S.'s economic recovery -- it has now accelerated beyond it.
In comparison to most of Europe, the U.S.'s data is showing a recovery that's plateauing and petering out. In the last week, the U.S. has performed similarly to the non-EU countries that have been notable European laggards: the U.K. and Sweden.
This week, purchasing manager index reports for the month of July came back for the E.U. and the U.S., and also showed a similar dynamic. The E.U. index surprised analysts by jumping up higher than forecasted, while the U.S. numbers disappointed, lower than expected. Especially notable in the U.S. report was that U.S. services took a significant hit, as services make up a much larger part of the economy than manufacturing.
The chief economist at J.P. Morgan, Bruce Kasman, explained the divergence like this:
“Having been hit hardest, it’s pretty impressive that we think that Europe will recover more fully. They’ve broken that link -- the mobility numbers are going up without a resurgence of the virus, thanks to better contract tracing, mask-wearing and social distancing measures."
The latest virus infection data this week from Bloomberg and Johns Hopkins shows how much more successful the E.U. has been than the U.S. in controlling the spread
As a result, J.P. Morgan is now forecasting the European Union to rebound to a snappy 6.2% economic growth in 2021, versus 2.8% for the United States.
Goldman Sachs has come to similar conclusions and commented: "It’s pretty rare that the Euro area would outgrow the U.S. over a horizon of one to two years.”
On top of this, the E.U. recently approved their historic $860 billion stimulus which is expected to extend its momentum. Perhaps as a result, European Union equities (measured by the Euro Stoxx 50 Index) have taken off and returned more than twice that of the United States market (S&P 500) since May:
Although the U.S. has clearly fallen behind, it does not necessarily have to stay that way. It's possible the E.U. could experience its own second wave. And many believe that if the U.S. can get its second wave under control and successfully pass adequate stimulus, its own recovery could return to growth mode.
U.S. Apartment/Housing Investors and Renters Warily Eye Upcoming Financial Cliff
Way back in March, when the pandemic first hit the U.S., multi-family (apartment) landlords nervously held their collective breaths. Would tenant rent checks come in or not? Real estate isn't a high-margin business and is often operated using significant leverage. So, if a large number of tenants can't pay, many could face default and loss of their entire investment.
Fortunately, as we've discussed in past weeks, this mostly didn't happen. Collections were down, but nothing as bad as what you'd typically expect from such record levels of unemployment. And this was because the vast majority of the unemployed were still able to pay rent -- for two reasons:
1) The CARES stimulus payments, which gave $1,200 of free money to each U.S. citizen (making under a certain amount of money) and $500 per child (under 17).(See part 7).
2) The U.S. government allocated $260 billion to increase unemployment insurance by an additional $600 per week, on top of the typical state unemployment which runs $200-$550 per week. (See part 5.)
These two things allowed many people without jobs to continue making their payments and stay in their homes. And this kept landlords relatively happy as well.
However, as we saw in previous weeks, neither program was perfect. For example, millions still have not received stimulus payments, because they're not set up on direct deposit and the U.S. Treasury (operating under antiquated and out of date systems and processes) can't print more than a small number of physical checks per month. And millions more reported being unable to obtain any unemployment due to overloaded state unemployment websites and offices.
So these people have been protected by the third part of the coronavirus stimulus laws: prohibitions against evictions. For example, renters living in properties backed with government mortgages could not be evicted for several months. And many state and local governments also passed temporary bans on evictions.
However, many of these protections are expiring now (or will expire soon). The eviction moratorium on government-backed mortgages expires today, July 25. The Freddie Mac and Fannie Mae eviction moratorium ends August 31. And many state and local moratoriums have already expired or will be expiring shortly. As a result, advisory firm Stout Risius Ross estimates that as many as 12 million renters may be served with eviction notices in the next four months. If this happens, the effect on investors will be dramatic as well.
Already, there are signs of stress fractures withi the status quo. As we discussed last week, Apartment List published a report showing that one in three renters failed to make a full payment in the first week of July. And in cities like Houston and New York, more than 1/5th said they have "no confidence" in their ability to pay next month.
On top of this, there are two more looming issues. First, the stimulus payment was a one-time payout and many of the checks are exhausted. An second, the $600 per week unemployment supplement also expires this week.
So altogether, many renters (and their landlords) are now facing a potentially catastrophic financial cliff.
Due to the seriousness of the situation, many expected that the government would have put out a new stimulus package by now, to help. But so far, that has not come together. (See next section for more).
Next Round of Government Stimulus Hits Unexpected Roadblock
Back in May, the political party that controls one legislative chamber passed a $3.5 trillion stimulus bill. Among other things, this bill topped up the unemployment benefit fund to extend it to January 2021 and also funded an additional stimulus payment of $1,200/person.
However, as we talked about at the time, this was quickly rejected by the leader of the other party in the opposite chamber. He expressed reservations with the price tag and its effect on the national debt. And he said he wanted to "pause" a few months to see if the stimulus package might not be necessary.
Since then, pressure from deteriorating economic data, as well as calls from the President for more stimulus, seemed to change the dynamics of the situation. And this week, the balking party appeared to have centered on the idea of a $1 trillion stimulus package.
However, major stumbling blocks remain. To the surprise of many analysts, the party was not able to come to internal agreement on key issues of the bill, like the unemployment extension. (See next section: "Are U.S. Workers Taking Advantage Of Overly Generous Unemployment?"). And so it failed to produce a bill this week. As a result, it's possible that at least some people may experience a lapse in unemployment benefits.
If and when that chamber does pass a bill, it will still need to then negotiate with the opposite party for that bill to have a chance to become law. Some analysts have pointed out that this is an election year and more stimulus generally helps incumbents. So this view predicts a new law will pass soon enough to result in relative financial contentment (or at least, prevention of financial ruin) by November. Others noted the many years of political dysfunction and inaction in Washington and were more apprehensive. We'll continue to monitor and see what happens.
What happens if a new law can't be passed? Mary Cunningham of the real estate research firm, Urban Institute, says “This has been an important part of the safety net. If Congress doesn’t do anything, I think we are in for a dark fall and winter.”
John Pawlowski, a senior analyst at another real estate research firm, Green Street Advisors, projects that landlords would lose a staggering $22 billion of rent over the next four months.
So all eyes will be on Washington this upcoming week.
Are U.S. Workers Living High on the Hog from Overly Generous Unemployment Benefits?
One of the biggest sticking points with the stimulus bill is the fact that the $600 unemployment benefit causes a significant number of people (perhaps as many as 75%) to receive more money on the dole than they did while working.
And so, many senators have been greatly concerned that this is unnecessarily expensive, and a disincentive for these people to return to work. And thus, many believe the unemployment benefits themselves are slowing down the economic recovery, and don't want to extend them.
Others point out that wages are only a part of the total compensation that most Americans receive, and a significant amount comes from healthcare and retirement benefits. So for the typical worker, it would make little economic sense to turn down the higher-paying lifetime of wages plus benefits, just to be able to cash a couple of unemployment checks. And the gamble would make even less sense, considering that the worker turning down the job would also have no employment at the end of the "run" and would be facing a potentially life-ruining financial disaster.
What does the data show? If workers are staying home to watch Netflix and eat Godiva chocolates instead of looking for jobs, then bosses should be struggling to fill positions and labor market vacancy should be high.
However, April vacancies were the lowest since 2014 and they've continued to stay at depressed levels. This appears to be inconsistent with the "lazy worker" theory.
HomeBase is a company that provides scheduling tools to businesses and tracks small-sized hospitality and retail firms. It found that applicants per job actually doubled in early April, rather than decreasing. Again this is inconsistent with the theory of too many lazy workers.
Normally, economists love to squabble about virtually every issue. But in a recent poll on this topic, they were astonishingly unanimous. A whopping 100% of economists, surveyed by the University of Chicago, agreed that "employment growth is currently constrained more by firms' lack of interest in hiring than people's willingness to work at prevailing wages". Still, this issue remains a political sticking-point for many legislators. So in theory, the simplest-sounding workaround to satisfy all would be to customize the unemployment benefit, so that it would always end up totaling just 100% of the person's former wages. And this is what some have called for.
However, others have claimed that this elegant solution would fail in practice, because the job of calculating the amount would fall to the states. And their antiquated and overloaded unemployment systems were not even able to keep up with paying a simple, fixed $600 from the last stimulus payment. Asking them to customize it would be asking for a bureaucratic nightmare of delays that would undercut the purpose of the bill and cause a huge voter backlash.
So all of these issues have contributed to putting the future of the stimulus bill into doubt. Still, all parties also face high pressure to come to an agreement. So we will continue to monitor and see what happens.
Swedish Study Suggest T-Cells May Be More Important Than Antibodies In Fighting Covid-19
One of the biggest mysteries about Covid-19 is the role of immunity. Do people who are infected with the virus tend to produce antibodies or T-cells reliably? If so, how long until they show up? Do these protect a person from being reinfected again? And how long does that immunity last? All of these questions have important policy implications. And to date, we don't have any definitive answers to most of them.
Last week, a study of 90 patients by Kings College of London found that Covid-19 antibodies are not produced consistently by everyone that catches the disease. For example, antibody responses ranged from a low measurement of 98 to as high of 32,000. And they also found that unlike other coronaviruses, Covid-19 antibodies don't seem to hang around for long. After three months, only 17% of those infected had antibodies in high enough amounts that were deemed "potent". If accurate this means that antibody testing may not be the best way to determine who truly has been infected.
This week, researchers from Sweden's Center for Infectious Medicine weighed in with more information. They released a study of two hundred Covid-19 patients which hasn't yet been peer-reviewed. But, they found that twice as many Covid-19 patients developed a T/cell immunity response versus antibodies.
The authors acknowledge that the test wasn't large enough to be conclusive. But if these results end up being accurate, it suggests that perhaps two thirds of those who have been infected aren't being catalogued by antibody tests.
To put it in context: on July 1, the CDC put out a report on antibody tests showing antibodies had been found in 5% of Connecticut citizens and in 7% of New York citizens (states with the two highest infection rates from the first wave). So if the study is accurate, then the true infection rates might be closer to 15% and 21%.
Unfortunately, there's a big hitch with T-cell testing technology. Right now, this testing can only be done in highly controlled laboratory situations and is not expected to be deployable into the "real world" anytime soon. So researchers may be forced to stick with antibody tests and then try to extrapolate from there.
The Swedish report also found some other potentially tantalizing information. They also analyzed family members who were exposed to the patient but who tested negative for the disease. Interestingly, these family members also had increased levels of those same T-cells. This could indicate that their negative test results were false, but we don't know the accuracy of the tests that were used. Assuming the tests were accurate, it could raise the possibility that people who are simply exposed to the virus, who don't become infected, could gain some sort of protection themselves.
Operation Warp Speed Awards $1.95 Billion More To Pfizer For Vaccine Candidate
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 (up to $456 million), Moderna (up to $500 million), the AstraZeneca/Oxford partnership (up to $1.2 billion), Regeneron (up to $450 million), Novavax ($1.6 billion), CDMO Emergent BioSolutions ($628 million for manufacturing space), Sanofi (up to $30 million), Merck & Co. and the Pfizer/BioNTech partnership.
This week, the U.S. agreed to pay Pfizer and its partner BioNTech up to $1.95 billion for 100 million doses of their radical new vaccine candidate (if it passes stage III human trials). In part 19, we looked at the pros and cons of this candidate drug (BNT162b1) and the new mRNA technology that the drug attempts to use to generate an immune response.
If Pfizer's vaccine candidate ultimately passes trials, the doses would be provided for free to certain U.S. citizens. The current regimen requires two doses and there are about 328.2 million people in the country. So this would cover about 1/6th of the current population.
No criteria have yet been established on how this selection process would work. Some public health experts believe it might first be distributed to frontline healthcare workers, first responders and essential workers like grocery, pharmacy, food supply and mass transit. Others believe it might be distributed via the same apparatus that's now used to provide seasonal flu vaccines to children.
Pfizer currently has three U.S. plants it can use to manufacture the drug domestically and others in Europe to manufacture for that market. They claim that if the drug is successful, they could ramp up to more than 1.3 billion doses by the end of 2021.
While pricing wasn't explicitly specified in the announcement, analysts noted that the vaccine was effectively priced at $19.50 per dose (and calculated about $39 for two doses). And they noted that this is in line with what the private sector pays for flu shots.
This $20 per dose pricing is expected to set a ceiling for mRNA vaccine pricing in the future. Other drugmakers (like Moderna) are viewed as unlikely to be able to charge more unless they can also deliver a product that's more effective, has fewer side effects and/or needs fewer doses.
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 the second wave of the virus and a second lock-down. Unfortunately this is looking more and more likely. My slim hope is that as of this week, some of the worst hit second wave states are seeing improvement in infections. So if this can be maintained and the rate of spread brought under control and the US government also passes a generous stimulus law, then the worst effects of the second wave could be mitigated. 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.
How Will Covid-19/Coronavirus Affect my Alternative Investment Portfolio? Part 23: August 1st
U.S.'s second wave of deaths accelerates to more than one per minute; Some states make progress fighting second infection wave, others show ominous hints of letting up too soon; Georgia economy remains stuck in a coma; Economy battered by more record unemployment as progress goes into reverse for second week in a row; Financial cliff update: Congress and executive branch can't close the deal; Study suggests more than 20%+ of people who have covid-19 are incorrectly told by tests that they don't; Study finds more than 20%+ of people who have covid-19 are incorrectly told by tests that they don't; U.S.'s hapless testing strategy may be getting a much needed booster shot; Why an effective vaccine may be -- not the end of the pandemic story, but -- only the beginning of a new chapter; Study finds infected children under five host 10x - 100x more corona-virus particles than adults and may be much more highly infectious; CDC releases study of Georgia YMCA summer camp that was overrun with corona-virus and infected 260 in about a week; Teachers union will strike if adequate school safety measures are not put in place for reopenings; New Johnson & Johnson Vaccine Protects Monkeys From Covid-19 with a Single Shot; Operation Warp Speed awards $2.1 billion more for vaccine from Sanofi and GlaxoSmithKline; Update on my portfolio. Part 23: August 1st weekly update (and latest update on my personal strategy)