How Will Covid-19/Coronavirus Affect my Alternative Investment Portfolio? Part 25: August 15th
Updated: Feb 8
Second U.S. death wave shows hints of plateauing; Mixed progress on second infection wave as some states beat it back while others appear to be losing control; Georgia's economic recovery continues to look very hobbled; Number of newly jobless finally drops below 1 million for a week, but snail pace recovery leaves little reason to celebrate; Consumer sentiment stuck at pandemic lows; The silent small business massacre; Economic recovery in most advanced economies stalls with U.S. near the bottom; Financial cliff update: another week goes by with no relief; Shocking one-third of American renters say they will miss their August payment without help; Stock market soars and comes within whisker of record high. "Mission complete" or "sucker's rally"?; Wearing a neck gaiter may be worse than no mask at all; Operation Warp Speed awards up to $1.5 billion to Moderna for Covid-19 vaccine candidate; Update on my portfolio.
(Usual disclaimer: I'm just an investor expressing my personal opinion and not a registered financial advisor, attorney or accountant. Consult your own financial professionals before making any financial decisions. Code of Ethics: I / we do not accept any money from any sponsor or platform for anything, including postings, reviews, referring investors, affiliate leads or advertising. Nor do we negotiate special terms for ourselves in the club above what we negotiate for the benefit of members.).
This week, a lot of the important developments centered around the second virus wave, the economic effects of the pandemic and latest vaccine and treatment related investments by Operation Warp Speed.
By the way, this is one article in a multi-part series that has been published weekly since the pandemic began back in March 2020. The series started with three introductory articles on the virus, effect on the economy and alternative investment classes. And then it moved on to weekly updates on the latest and greatest developments (along with weekly updates on my evolving personal portfolio strategy). You can see the links to every article in the series here.
Second U.S. Death Wave Shows Hints of Plateauing
For the 22nd 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 172,132 (versus 164,144 last Saturday morning).
In the previous four weeks, the death rate had stopped its previous improvement and had reversed into a troubling second wave. On the other hand, we saw last week that new infections have started to fade off. This gave hope that perhaps the second wave might be starting to come under control.
What happened this week? Here's how the death curve looked:
Note, the European CDC's chart places the "United States" caption on top of the U.S.'s graph line, which makes it difficult to read the graph. So let's remove that obstacle by zooming in from the start of the second wave to today.
(Another note: what looks like a temporary surge between days 104 and 110 is actually just a statistical aberration that resulted when the CDC changed its accounting methodology and then worked through the backlog caused by that change. So we are ignoring that).
The zoomed-in graph shows that deaths plateaued this week and there was also a tiny drop at the end of the week. If that trend continues, then it's possible we may have hit the crest of the second wave this week, and will see improvements soon. If so, that would be a good thing and we'll continue to monitor.
How are leading indicators looking? Virus infections tend to lead deaths anywhere from 2 to 8 weeks (depending on how long it takes someone to die and how long it takes their particular location to report the information). These case numbers are not completely reliable due to testing labs' difficulties in many parts of the country with getting results back on time. But they can still provide a clue of what might be happening later with deaths. Here's what they showed this week:
...and again, zooming closer:
The results here look a little mixed. On one hand, there was a slight drop this week, from what turned out to be a plateau last week. So that was good to see. On the other hand, the trend at the end of the week is actually up. If this were to continue, than this could be a sign of an unwanted third wave.
Still, the data is noisy and insufficient to allow us to be certain of a new trend. So we'll watch this next week.
If we are unable to beat down the second wave and/or this turns into a third wave, the overwhelming consensus of economists is that this would sabotage hopes of a quick, V-shaped recovery. Instead, the recovery would assume a different shape (W-shaped, U-shaped, etc.) which would be slower, involve more damage to health and economy, and potentially cause problems for some or many consumers, businesses and investments. (See part 14 for more information on the possible "recovery shapes" and their ramifications).
World round up
How did other countries do this week?
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 (their economy is now mostly open and growth is projected to barely shrink this year, while in comparison, the U.S. still has significant closures and is projected to take a -5.9% hit to GDP).
This week, South Korea looked like this:
This week, South Korea beat down their second wave to almost nothing. And it should be pointed out that the tiny size of their "second wave" would be too minuscule to even count as a wave in the majority of countries, which are dealing with much more severe viral spread. And this week, the South Korean economy continued to remain predominantly open for business.
Meanwhile, Sweden has opted for a lockdown-lite strategy (see part 8). While they've enacted some lockdown measures (shut down grade schools, prohibited gatherings larger than 50, instructed elderly people to stay home and young people to work remotely, enacting social distancing rules at restaurants, etc.), they never went into the full-on lockdown seen in many other countries.
The hope has been that if this worked well, it might provide another workable model for other countries looking to deal with the virus. Here's how they look this week:
They had a mixed week. Early in the week, they looked like they had continued to beat down their death curve. But then later in the week, they rebounded and lost all of the progress that they had made earlier.
Still, their data has been especially noisy in the past, so it's too early to say that this is a start of a new trend. We'll continue to watch.
Sweden's road to reach this point has been bumpy. The country enjoys a number of unique advantages in fighting the virus that most countries don't have, including an extremely large number of people who live alone, are young and have no children. Despite this, their death rate has been many times worse than other Scandinavian countries (with similar demographics) and other countries in general (who lack these advantages). However, they have hoped that if they continue to push down their death curve, they eventually might be able to make up this deficit.
How did cumulative deaths look this week? To see, we need to look at deaths per million. Unlike raw deaths, this puts countries of different sizes on an equal playing field. Here's how they did:
Unfortunately, Sweden is still looking far worse with a stratospheric number of 572.62 deaths per million, compared to other countries with much lower numbers. And this is because its pandemic ran at an uncontrolled, high rate for a long time. Currently, they have experienced about 10x more deaths than the most similar countries (which are Scandinavia's Finland and Norway). And they have done about 100x worse than South Korea.
Many health experts believe we are likely will get an effective vaccine or treatment later this year. If so, then there may not be enough time for Sweden to ever catch up. On the other hand, if the pandemic is still running at full speed in 2021, and/or if other countries stumble while they don't, then the Swedish model may still prove itself.
The other big issue for Sweden to overcome is that lockdown lite has thus far been a failure in its main goal: protecting its economy. 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.
But again, if they can sustain their progress on the virus, then their economic outlook could improve as well. For now, it still looks like they've suffered the worst of both worlds (more damage to the economy and to public health than others). We'll continue to watch and see.
Mixed Progress on Second Infection Wave As Some States Beat It Back While Others Appear to Be Losing Control
Over the last six weeks, we watched as the second wave of virus infections swept the Sun Belt and then spread to other areas of the country. In response, many states put in place virus control measures, including reinstatements of key portions of lockdowns and rules mandating the wearing of masks (in more than 50% of states). How did these conflicting factors play out this week?
Let's start with the good news. Arizona, South Carolina and North Carolina all showed marked improvement on both deaths and infections and continued to beat down their second wave.
On the other hand, Florida had a mixed week:
Infections continued to drop, which looked good on the surface. But as we discussed last week, Florida had shut down many of its testing centers due to a tropical storm. And since it takes five days or more to get back test results in Florida, this artificially depressed last week's data. So next week, we will get a better bead on true infections.
The troubling part of the above chart is that deaths have started rising from their last low point about three weeks ago. Hospitalizations, as well.
This week, Florida made the news for shattering its previous record for weekly hospitalizations, with 3,355 people. Dr. Sadiya Khan, an epidemiologist and assistant professor of preventive medicine at Northwestern University's Feinberg School of Medicine, said:
“These are devastating numbers. In Florida, there has been this ongoing controversy about the severity of the coronavirus crisis...[and] politicization of the issue of wearing masks... Now we’re seeing the results.”
How about Texas?
This is also looking problematic. Infections have dropped, which on the surface looks good. But as we discussed last week, the state has an antiquated and overloaded tallying system that hasn't been able to include all results -- as many as tens of thousands of results -- from antigen tests. (See part 24). So these infection numbers are probably artificially depressed.
And more problematic, deaths appear to have plateaued and are rising slightly. And this week, they set a new high, which is a potentially troubling sign.
This week, Dr. Natasha Kathuria, a Texas ER doctor who works at six different facilities said hospitals are buckling under the strain and care is suffering across the board.
"It's really important to really present the whole picture of how our healthcare system is doing, and it's not doing well. We know how to manage infectious diseases when they are manageable, but when they are no longer manageable — meaning our hospital systems and our healthcare system gets overrun and overburdened with the disease — everybody suffers. And it's not just, 'We've got a lot of COVID-19, and everyone's dying of COVID-19. Patients with cancer are not getting their cancer surgery. People are dying of avoidable, preventable causes of death. [But we're] just doing the basics, just trying to keep people alive as long as we can. We really need to ramp up rapid testing, and I'm not talking about these tests that come back in like seven to 10 days that don't really do much for prevention of spreading this virus on a large scale."
This week, the city of El Paso, Texas, came under criticism after announcing on two different days that they had discovered hundreds of positive cases that were not properly included in the official statistics. The city blamed a contractor hired by the state of Texas called Honu. As a result, the local newspaper, El Paso Matters, announced it considered the city's data to be unreliable and suspended its previous weekly analysis.
Let's take a look at a new state that we haven't investigated before: Kansas. This week, it made the news because people are waiting as long as 14 days in Kansas City to get test results back. To put that into perspective, health experts say that any wait of over 2 to 3 days makes testing useless for both monitoring and controlling the disease.
How does Kansas look?
Even with a case count that is probably artificially depressed due to the testing problems, they experienced a rise this week, and appear to be troublingly close to a new high. This could be a bad sign for deaths in the next 2 to 8 weeks. (It generally takes about 2 to 8 weeks for an infected person to show up as a reported death in statistics, due to differing lengths of time to die, and the delays in recording the death in different areas of the country and depending on the manner of death).
Death numbers have been noisy and, this week, went up significantly before a small drop. It's hard to say where this trend is headed based on the information so far.. So we'll continue to monitor.
How about Georgia?
While Georgia made some slight progress on infections at the end of the week, overall these numbers appear to have plateaued and are roughly back to the same spot where they were about two weeks ago.
Deaths spiked up dramatically this week to a new high, which looks troubling.
Georgia was one of the first states to reopen and was late to shut down. This week, the White House coronavirus tax force warned that Georgia continues to see "widespread and expanding community viral spread" and that current policies are not enough to curtail it. They also "strongly recommended" a mask mandate, which has been staunchly resisted by Gov. Brian Kemp.
Dr. Harry Heiman, a professor at Georgia State University's School of Public Health, said:
"Georgia is very much the poster child for what happens when leadership take a hands-off approach to managing a pandemic."
Georgia's Economic Recovery Continues to Look Very Hobbled
One of the most important questions for investments (as well as for 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 almost four months.
How are they doing? Since there's no official government or state data on this, we've previously looked at Placer.ai. This is a service which tracks mobile phone usage to different types of businesses to measure foot traffic.
For four weeks, we tracked Georgia's Covid-19-sensitive industries (foot traffic this week versus the same week one year ago). But last week, we couldn't do this, because the site had not updated its data. And again this week, it's the same.
So we're going to drop that, and instead look at individual businesses in Georgia in four industries: apparel, fitness, dining, and hotels.
For apparel, we'll look at Kohl's. Back in June, it had staged a miracle come-back and year-on-year foot traffic was virtually the same as a year ago. But since then, progress backtracked. How's it looking this week?
The year-on-year foot traffic at Kohl's has improved from last week, but is still a very unhealthy and unprofitable-looking -25.92%.
For fitness, we'll look at Anytime Fitness. They give customers a key to the facility so they don't need the usual large staff of a traditional gym. And we've seen that this has translated into much better performance during this pandemic than a gym like LA Fitness. How did they look this week?
Like Kohl's, Anytime Fitness had done better in June, but since then, their progress is going in the wrong direction. This week, they appear to have continued to stall out, performing slightly worse than last week at -19% year-on-year foot traffic.
For dining, let's take a look at Denny's. They're not known for takeout and so far have done worse than companies like McDonald's, which are. How did they do?
This week, they made remarkable progress and improved dramatically from -33% to -11%. If this continues, then they could be moving into profitable territory.
How about hotels? Here's Holiday Inn Express:
This week, they backtracked to an extremely painful -28% year-on-year foot traffic.
So how's it looking overall? On one hand, Denny's showed remarkable improvement, and if that continues, then they might even return to profitability. On the other hand, most of the other businesses look horribly unprofitable. And the overall recovery of Georgia's Covid-19-sensitive businesses looks very hobbled and weak.
Number of Newly Jobless Finally Drops below 1 Million for a Week, but Snail-Paced Recovery Leaves Little Reason to Celebrate
Before the pandemic hit, the U.S. economy had never experienced a week in which one million people suddenly lost jobs. But, since the pandemic hit, it's been hammered for 19 weeks that way, with no let up.
This week, there was a notable reprieve. The Thursday, the jobs report showed that only 963,000 Americans lost jobs in the last week. So, the country squeaked in under the 1 million mark for the first time. This was also a slight improvement from the 1.19 million last week:
Unfortunately, this kind of snail-paced improvement is unlikely to allow a quick economic recovery anytime in the near future.
Michelle Meyer, head of U.S. economics at Bank of America Corp., said:
"The direction is encouraging, but the level is still high, which means there’s more work to be done. We’re five months after the initial shock in March, and claims at 963,000 are still very much in recessionary territory.”
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, continuing claims were 15.5 million, slightly improved from the 16.9 million last week (and the 17 million prior). So at least this number moved in the right direction. On the other hand, the extent of the damage is still devastating. Currently, there are more Americans needing benefits now than at the worst point of the Great Recession. And for another week, those hoping for the type of quick improvement that would support a quick recovery went away disappointed.
Meanwhile, Warner Media announced that on this upcoming Monday it will lay off at least 800 employees at Warner Bros. and HBO.
Consumer Sentiment Stuck At Pandemic Lows
Consumer spending drives the majority of the U.S. GDP, so consumer moods can have a disproportionate effect on the economy. And on Friday, the University of Michigan released its monthly consumer sentiment survey with data through August 12.
It found that consumer sentiment was still depressed in August, and virtually unchanged since the pandemic low back in April.
Additionally, the five-year economic outlook ticked up slightly, but was still at the lowest level since 2014.
Also on Friday, the U.S. Commerce Department released the monthly retail spending report. This kind of spending makes up about one-third of consumer spending (the other two-thirds are from services). And in a welcome breath of fresh air, the report was a good one. While it was weaker than expected, it still showed a rebound to pre-pandemic levels:
So here at long-last, was an economic indicator that has actually experienced a V-shaped recovery.
However, a deeper look into the data shows that the recovery has not been evenly shared. Most of the gains came disproportionately from online sales and grocery stores, which are industries that had not suffered much from the pandemic to start with. But, covid-19-sensitive industries like restaurants and bars are continuing to be significantly depressed:
Stephen Gallagher, chief U.S. economist at Societe Generale SA, said, "Where we’re buying from is a bit different, but we’re actually at some pretty strong numbers now. [But] travel, eating out, sporting events, a lot of entertainment events -- all that is going to be struggling for quite some time."
Still, the boost in retail spending was welcome. And it helped boost overall U.S. consumer spending as well (although still well short of pre-pandemic levels):
At the same time, many analysts expressed skepticism that consumers would be able to continue this high volume of spending in future months, without help. To this point, the high levels of unemployment have been offset by record amounts of government stimulus and support ($600 unemployment benefits, stimulus checks of $1200 and moratoriums on evictions and foreclosures). And this has allowed unemployed consumers to continue to spend freely. But unemployment benefits expired this month along with many of the moratoriums, and the stimulus checks were a one-time deal. So many consumers face a potential financial cliff.
Ryan Sweet, head of monetary policy research at Moody’s Analytics, warned: "It’s going to be a much harder slog ahead. States have paused or rolled back some of their reopening, the secondary effects of the recession are beginning to kick in and more business bankruptcies will weigh on employment. One concern for both the job market and the broader economy is the lack of urgency in passing another round of fiscal stimulus. The economy needs more fiscal stimulus.”
Whether that fiscal stimulus will happen, continues to be uncertain. More about this in the section below on the financial cliff.
The Silent Small Business Massacre
When a large company goes bankrupt, they make headlines and a lot of noise. But it's a different story with a small company. Most of them have no debt and thus no need for bankruptcy court so they just close unnoticed. This can make the damage difficult to see using traditional economic measures.
The chief economist for the National Federation of Independent Business, William Dunkelberg, explains: "All you need to do is call the utilities and tell them to turn them off and close your door. Nevertheless, closures are going to be well above normal because we’re in a disastrous economic situation".
As an example, the American Bankruptcy Institute said that 800 small businesses filed Chapter 11 bankruptcy from mid-February to July 31. But, Yelp, the online business review directory, revealed this week that, from March 1 to July 25, 80,000 small businesses actually closed permanently. And 60,000 were local businesses (defined as firms with fewer than five locations).
According to the Small Business Association, small businesses (defined as companies with fewer than 500 employees) account for 44% of U.S. economic activity and employ almost half of American workers. So, even though the individual closures of these businesses may go unnoticed by many, their collective failures may end up becoming a substantial problem for the economy.
And unfortunately, the small business problems aren't likely to disappear overnight. Of the businesses that remain open, 58% said they are worried about permanently closing (according to the July U.S. Chamber of Commerce survey, which also came out this week).
Economic Recovery In Most Advanced Economies Stalls With U.S. Near The Bottom
This week, Bloomberg released its latest economic report on the global recovery. To do this, they studied and compiled high-frequency data like credit card use, travel and location information. And they found that the recovery has stalled in most of the major advanced economies significantly below pre-crisis levels.
E.U. countries (Germany, France, Italy) along with Norway and Japan are in the top tier at about 70 to 80%. Pulling up the rear are the U.K., U.S., Canada and Spain, which are all between 60% and 70% of their pre-pandemic levels.
Economists widely agreed that a stall-out at these levels is unlikely to facilitate a quick, V-shaped recovery.
Financial Cliff Update: Another Week Goes by with No Relief
As we discussed in past weeks, much of the country is teetering on the edge of a very uncomfortable financial cliff. And if it isn't resolved, there could be significant pain coming up for consumers, businesses and investors in virtually every alternative investment asset class (especially real estate and private equity).
Why does the cliff exist? Well, so far, the economy has taken unprecedented amounts of damage through record-setting unemployment. And normally, this would already have resulted in widespread pain across the economy. But, while there has been substantial damage in specific sectors (like hotels, travel, etc.) this hasn't spread widely yet (for example, into apartments, office, self storage, mobile home parks, business loans, etc.).
That's because, as part of the $3 trillion Covid-19 stimulus package, unemployed workers were receiving an extra $600 per week. Additionally, many citizens got free stimulus checks of $1200 per person (and $500 per child). Also, governments at the federal, state, and local levels have passed moratoriums on evictions and foreclosures to keep unemployed people housed in their homes. None of these programs was perfect, and we talked in past weeks about how snafus caused millions to be unable to get deserved and needed aid. But still, these programs have contained untold amounts of damage.
Now, however, the problem is that the $600 unemployment payments expired two weeks ago, the stimulus payments were a one-time event, and many of the moratoriums have expired. The original thought was that the pandemic would be long gone by now. But obviously, we now realize, that was overly optimistic. And, if the government doesn't pass new stimulus, many consumers will fall down a painful economic cliff. And if they do, they are expected to drag down businesses and investors along with them.
So all eyes have been on Washington for the last several weeks to pass a new stimulus law. But last week, the two political parties were too far apart to come to an agreement.
Previously, one political party (let's call them "Party A") had passed a $3.5 trillion stimulus bill in May. Then the other political party (let's call them "Party B") had objections regarding the large size of the aid package and some other components. Despite this, Party B was unable to get enough agreement amongst its own members to pass a competing bill. So it had been negotiating with the White House and Party A to try to bridge the differences and get a law passed with bipartisan support.
But this has been difficult because the two parties are far apart on several issues.
Size: Party A agreed to come down from $3.5 trillion to $2 trillion. But Party B said its members would not accept any price tag above $1 trillion.
$600 unemployment benefits: Party A extended these at $600 but Party B felt they were too generous and wanted something based on past salary (which is difficult for antiquated state systems to accomplish).
Aid to plug states' revenue gaps caused by pandemic: Party A's bill gave $915 billion and Party B's offered only $150 billion.
So last Sunday, the President passed several executive orders to address this unilaterally. The constitutionality of them has been questioned because the President generally does not have the ability to spend money without congressional approval. As a reminder, the orders included:
Provide $400 per week in unemployment with 75% coming from the federal government and 25% from the states. However, this week several states balked, saying they do not have the funds to pay for this. Additionally, the order diverted federal funds from the Disaster Relief Fund, which is expected to run out in about a month. So even if it is not challenged in court, analysts widely agreed that this was unlikely to be a long-term solution.
Delay payroll taxes from September 1 to December 31. However, the President did not have the authority to actually eliminate the taxes, which puts employers potentially on the hook if employees don't pay it back. As such, it was widely agreed that this would be unlikely to make any significant difference.
Extended eviction and foreclosure moratoriums for buildings with federal backed mortgages. Analysts pointed out that this order did not actually explicitly do this, but asked certain people to examine the possibility of doing it. As such the effectiveness is not yet known.
Suspend student loan payments until December 31. These were already suspended under current law, but were set to expire on September 30. So this could not be expected to make any substantial difference for at least a month and a half.
As a result, the executive orders are not expected to provide an adequate solution to address the financial cliff.
So what happened this week?
Unfortunately little to no progress was made.
On Wednesday, Party A in the White House spoke by phone, but did not move to in-person meetings. Afterwards, each party issued statements on why the other party was unable to budge.
On Thursday, Party A and party B exchanged accusations of blame, before the Senate adjourned for the weekend. Additionally, the White House suggested that the deal may not happen.
Some analysts believe that the September exhaustion of funding for the executive order for $400/$300 unemployment benefits will provide the necessary motivation for both parties to come together, since it is an election year and many voters are experiencing financial pain.
We will continue to monitor and see.
Shocking One-Third Of American Renters Say They Will Miss Their August Payment Without Help
Meanwhile, the Census Bureau reported this week that a stunning 27% of adults in the U.S. missed their rent or mortgage payment in July. And a shocking 34% of renters said they have no confidence in making an August rent payment without additional government stimulus.
The survey found the deepest uncertainty in the South. For example, in Texas, 39% of renters said they were uncertain they would be able to pay the rent (or certain they could not pay) and in Oklahoma it was 43%:
People of different races experience the uncertainty differently. Only 14% of white renters were unable to pay last month's rent versus 20% of Latino renters and 31% of black renters.
And while certain investment asset classes like multifamily have so far largely weathered the Covid-19 storm, cracks appear to be showing up in the dike:
LeaseLock released a report showing that tenants and class-C buildings were only able to pay 54% of total rents in June by the middle of the month. And in July, this figure slipped even worse to 37%:
This reflects how lockdowns have disproportionately squeezed lower and middle income renters, which are the ones most likely to live in class C housing. Many of these renters had service jobs that were severely cut back by social distancing rules.
In comparison, Equity Rental, an owner of luxury towers in Los Angeles, New York and San Francisco, collected 97% of rents in the second-quarter, and was on similar course for July. Its tenants are primarily office-based professionals who were fully employed during the lockdown and worked from home.
However, many analysts warned that even these may not prove to be immune. Without additional stimulus, consumer spending is expected to deteriorate, and that would end up translating into job losses even at the top end.
Stock Market Soars and Comes Within Whisker of Record High. "Mission Complete" or "Sucker's Rally"?
Meanwhile, the stock market continued to soar this week. And on Friday, the S&P 500 closed at 3,372.85, which was within a whisker of fully recovering to the previous high of 3,373.23 on February 20 (before the pandemic hit).
While studies have shown that public market moves are difficult to explain, that didn't stop every pundit from taking a stab at trying.
Some claimed this week was proof that the economy is experiencing a quick, V-shaped recovery and the pandemic will soon be behind us. Others claimed the market is looking several months ahead into the future and anticipating a virus-free economy in mid-to-late 2021. Others said it simply showed irrational exuberance from high levels of participation by bored, amateur investors sitting in their homes with little else to do. (See more about RobinHood app investors in part 16: "The Stock Market's Triumph of Optimism over Experience" ).
Whatever the reason, the recovery in the stock market has been remarkably narrow. As an example, the S&P 500 index is made up of 500 different companies. Yet the majority of its recovery has occurred in only five stocks: Facebook, Apple, Microsoft, Amazon and Alphabet (FAMAA). Together, these have surged to 138% of their January 1 value. And their overweighted influence on the index has caused the S&P to surge as well.
If just those five stocks were removed, the index would be about 10% lower than the year start and about 15% lower than the peak in February (i.e. clearly in a bear market):
Meanwhile, history has shown that many times, investors and outside analysts are much worse at predicting the future of a company than the bosses that run them. What are the CEO's thinking right now?
The Conference Board, a research group, surveyed hundreds of American bosses anonymously. And they found that a startling 77% or so of these bosses said that they did not expect to achieve pre-pandemic levels of revenue by the end of 2020. A little over 50% thought revenues would be restored sometime during 2021. And distressingly, a little over 20% felt that they would not see a recovery until 2022.
Wearing A Neck Gaiter May Be Worse Than No Mask At All
As we talked about in past weeks, health experts believe that one of the primary ways the virus spreads is through droplets that are expelled by an infected person during speech. And wearing masks is believed to be an effective, low cost way to interrupt this transmission and break the cycle.
However, the general public wears many different types of masks. And no one had really studied which do and don't work the best.
This week, a group of scientists addressed that issue. They posted their study in "Science Advances" and it describes how they analyzed the effect of 14 different masks on particle spread using a laser beam apparatus.
Unsurprisingly, the study found that a fitted N95 mask (which is typically used by health workers) was the most effective. They found "no droplets at all" were emitted.
They also found that the vast majority of common cotton cloth masks (typically worn by the general public) were very effective in reducing transmission. Several of these performed about as well as healthcare worker surgical masks (which came in second place to N95's).
However, there were some notable exceptions.
Neck-gaiters (also called neck fleece) which are popular with runners for their lightweight fabric were actually found to be worse than wearing no mask at all. They are typically made of a polyester spandex material. And not only was this material unable to prevent the spread of droplets, but it actually increased the number of smaller, longer-lasting droplets that are more likely to hang in the air. The researchers believe that this dynamic is a result of the porous fabric.
Martin Fischer, who is a chemist and physicist and part-authored the study, said:
"It’s not the case that any mask is better than nothing. There are some masks that actually hurt rather than do good. These neck gaiters are extremely common in a lot of places because they’re very convenient to wear. But the exact reason why they’re so convenient, which is that they don’t restrict air, is the reason why they’re not doing much of a job helping people. If you can see through it when you put it up to a light and you can blow through it easily, it probably is not protecting anybody.”
N95 masks with exhalation valves also failed to measure up. “Those relief valves are fantastic if what you want to do is protect yourself from the outside world because air doesn’t come in through them. [But] if what you’re trying to do in this pandemic is protect the outside world from you, it completely defeats the purpose.”
“The broad take-home picture [is] that masks do work in cutting down transmission and that some masks that you can easily get are better than others. [This] potentially has value in protecting everybody and getting us out of this awful situation.”
Operation Warp Speed Awards Up To $1.5 Billion To Moderna For Covid 19 Vaccine Candidate
In previous weeks, we've talked in detail about how Moderna's mRNA vaccine candidate works and how it's now in final stage III human trials.
This week, the U.S. government announced that if phase 3 human tests go well, it will award up to $1.5 billion to the company for 100 million doses of the vaccine. This is in addition to the $955 million already awarded to take the company through testing, manufacturing and distribution. The latest agreement comes out to be roughly $15 per dose or $30 for a two-dose regimen.
The U.S. government awarded the money via Operation Warp Speed. This is a program that intends to dramatically accelerate the testing, manufacturing and ultimate delivery of an effective vaccine or treatment. In addition to Moderna's ($2.4 billion) investment, it's also awarded money to Johnson & Johnson (up to $1.456 billion), 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 (previously up to $30 million), Merck & Co. and the Pfizer/BioNTech partnership ($1.95 billion).
Then on Friday, Operation Warp Speed made another announcement. The program will be awarding up to $300 million to McKesson Corp. to distribute vaccines and the supplies needed to administer them. The company had won similar contracts in the past such as for distributing the H1N1 vaccine during 2009-2010 H1N1 pandemic.
Top U.S. administration officials, including National Institute of Allergy and Infectious Diseases Director, Anthony Fauci, cautioned that even if any of the vaccines are successful, they are not expected to be given to everyone right out of the gate. Instead, priority would be given to high-risk groups. As a result, Fauci said that most Americans would not be expected to receive a vaccine until well into 2021.
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 I've made some small updates and changes but fundamentally it's 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 and third waves of the virus. 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 deaths and infections. So if this can be maintained, a 3rd wave avoided from school openings and the US government also passes a generous stimulus law, then the worst effects of the additional waves could be mitigated. That's a lot of "if's"...so we'll see. And I'll continue to monitor the data very closely. Currently, I still 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 (or third) 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. So the boost will be slower and smaller at first. Also if the first generation medicines are significantly less effective than 100% (which many health experts believe will be the case), the boost will be even smaller. (All of this will depends on which treatment makes it that far...which we don't know at this point). 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 or is more effective). 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 sub-sectors 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.
1) No new investments in real estate or any asset classes that are correlated with the unemployment or the business cycle until there is more clarity about the unknowns concerning the virus and the upcoming financial cliff.
2) Invest in assets that are corona-virus resistant (and uncorrelated with the business cycle). That includes:
2a) Music royalties (which can actually do better in lock-downs due to increased streaming).
2b) Life settlements (which actually perform better when people are dying faster and in any event isn't directly tied to the business cycle)
2c) Litigation finance (which performs based on winning or losing cases and also isn't directly tied to the business cycle).
3) 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 or third time, could easily make things worse.