Investing In The Age Of COVID
Four weeks ago, the stock market was in free-fall and I made the point that “if you aren’t buying stock down here, you’re simply doing it all wrong.” I fortuitously published it on the day that the market bottomed. Looking back at my call to “buy stuff,” the Fed did exactly what I expected by unleashing an alphabet-soup of acronym programs—forcing people to buy stocks. In fact, many of the oversold shares I was buying into the darkest days of March proceeded to bounce dramatically since then. They gave money away and I hope you got some.
As the market has rallied, I’ve had some time to think and put things into perspective. On one hand, “Project Zimbabwe” is in full force. Now that the Federal Reserve has accepted that the US Dollar will be collateral damage in their bailouts, they won’t accept anything less than new highs in the stock market. On the other hand, the global economy has forever changed.
China unleashed a nasty flu on the world. It’s gone mainstream and there’s nothing that we can do to avoid it. We’re all going to get it and most of us are going to be just fine. We can accept that and go on with life (while recommending that those at risk stay quarantined), or we can shut the global economy, cocoon up and wait for the virus to burn itself out. The issue is that the virus won’t burn out because its in every country and will re-emerge almost immediately as soon as people begin to interact. Even if you could eradicate it from any one country, you’d have to ban all trade and travel with every other country to avoid re-transmission. Basically, we’re past the point where quarantines help and we all need to accept that we’ll get this virus. The sooner that happens, the better for everyone.
Unfortunately, politicians want to win elections—not use logic. Therefore, we’re all trapped at home waiting for some germs to die. Depending on who you believe, we’ll be able to emerge from hiding sometime between May and July. The issue is that almost immediately, the virus will make a resurgence—then what? Do we all go back into hiding? Do we go on with life and ignore the virus? What about the impacts to businesses? Would businesses bother to re-open if they think they’ll be closed again in six weeks? Will anyone re-hire workers only to let them go again? What about mandated “social distancing?” Will anyone fly again for years? What about hotels, restaurants and entertainment? Services are the core of our economy. What about the rest of the economy? Is anyone about to buy a new car anytime soon? What about construction? Will anyone need more space at a time when every business is trying to contract? What about the oil sector? There are millions of employees in energy and its supply-chain. What happens to them? Services, manufacturing, construction and energy are the pillars of our economy. Despite the stock market’s overweighting, the FAANG+ isn’t representative of the economy.
I am amazingly lucky that I have so many friends in the global business community. Excluding a few niche sectors like tankers, I cannot think of a friend who’s called me up to say, “Kuppy, things are incredible here!” Instead, they’re calling and crying. No one has a clue what happens next. Many of my friends literally have no revenue—instead, they have a pile of invoices that they’re refusing to pay so that they can conserve their liquidity. They’re looking to cut costs and survive. No one is doing much else because everyone is in disbelief that they shut the global economy over a bad seasonal flu. If global governments were willing to do that, what else are they willing to do? Will they shut it again when COVID-20 shows up? What about when COVID-19 has a resurgence? Why re-hire? Why spend money? Everyone is confused.
I have this sneaking feeling that they open up the economy sometime in a month or so and no one shows up. Consumers are either scared of germs or scared to spend money because they don’t have job security or jobs at all. Everyone I know in finance assumes that we sort of ignore the period from March until June and then by July, we’re back to normal. What if it turns out that there’s a failure to re-start or the government makes it impossible to restart profitably? Just think of the ripple-effects of a restaurant told to have a third as many seats due to “social distancing.” What happens to revenue per foot? What happens to the amount they can pay in rent? What happens to the landlord who’s rent is cut by two-thirds? What about his ability or desire to pay his mortgage if the property is only worth a third as much? There will be ripple-on effects here that no one can predict. This is the first crisis that flooding the market with liquidity won’t solve. Printing money doesn’t cure the flu and new regulations likely make things worse.
I don’t believe anything I’ve said above is particularly revolutionary. They broke the economy to cure a flu that isn’t cured. Now, no one knows what to do financially or epidemiologically. At some point, we’ll come to the right solution, which is herd immunity. Oddly, President Trump may turn out to be one of the great leaders in history, not because he understands biology (he doesn’t) or because he understands an effective way to generate herd immunity while protecting those at risk (details aren’t his strong suit), rather, he’s going to just pull the Band-Aid off and give global leaders the cover to let their people get the flu. Trump has always excelled at pointing out the obvious after the fact and taking credit for it, while ignoring everyone who disagreed along the way. This is his moment to “shine.” Left to chart his own path forward, we’d be over with COVID and back to work in a few weeks. He’s going to wake us all from our collective hypochondria and force us to accept that to go forward as a nation, some of us will not make it to the other side. Along the way, we’re going to have a “holy shit moment” when the virus makes a comeback and an even worse moment as we realize just how much the economy has degraded during the two months that we stayed home.
I bring all of these loose threads up because when I was buying “stuff” four weeks ago, it was a “gimme.” Many of the businesses I was buying were down by almost 80% from recent valuations that had seemed reasonable to me. Furthermore, they had minimal debt with termed-out maturities. I just didn’t see how I could lose money at the valuations I was paying for “stuff.” There was a global margin call and phenomenal businesses were being given away. Once the forced selling ended, most equity indices bounced dramatically—the QQQ is even green on the year!! As a result, I’ve been a net seller for the past few days and have de-grossed my book quite a bit.
Remember March? Remember how frustrating it was to wake up and see the futures down-limit yet again? If there was anything you wanted to sell but couldn’t bring yourself to sell for a loss, now is likely a good time to get a bit lighter. Part of me says that “Project Zimbabwe” continues to send everything with a CUSIP parabolic while the other part of me says that you cannot fix a flu with money printing. These two themes will battle for supremacy over the next few quarters, with “Project Zimbabwe” ultimately victorious, but that doesn’t mean we don’t have a whole lot of volatility along the way. While I think the market is going much higher, this is a decent time to stop, take a deep breath and see what you could do without in case the road higher isn’t linear—even Weimar had some nasty pullbacks along the way. On Monday March 23, I said, “I have the most exposure that I’ve had in years,” now after one of the wildest stock market rallies in history, my exposure is back to neutral. More importantly, I’ve pivoted my exposure strongly into those sectors that benefit from COVID-19 and money printing, namely tankers, natural gas and hard assets.
I never intended this site to be about making broad market calls and I don’t feel I have any particular skill in that regard. I got the sell something and the buy something timing perfectly right and the magnitude of the moves surprised even myself. I assume that the third call, this one where I say to cut back a bit, is the one I regret as asset prices power higher. That’s OK with me. I’m about taking low-risk shots on goal. I am stunned to see the stock market almost at prices that existed before they shut the global economy. While I am hopeful that they can figure out how to re-open the economy, no one knows what happens next. In my mind, we’re priced for perfection, but the economy is still broken. If the market is willing to pay me prices as if everything was perfect and I know it isn’t, why not take some exposure off?
Harris “Kuppy” Kupperman is the founder and chief investment officer at Praetorian Capital, a hedge fund that uses macro themes to select investments. He has been successfully investing in the markets for over two decades. He is also the CEO of Mongolia Growth Group (YAK: Canada and MNGGF: USA). To learn more, visit MongoliaGrowthGroup.com or www.mggproperties.com/en/
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