The DJIA tried to rally and got up a full 450 points…before falling 600 points from that level and is now down 150 points as I write this. Even as I’d been so cautious and defensive and I’d warned repeatedly about how the market should not be looking past the Novel Coronavirus (the virus formerly known as COVID-19, formerly known as the Wuhan Virus), I’m, like you, worried about how this epidemic is creating havoc on people’s lives, economies and markets. Let’s look back at what I’d written while the markets were at all-time highs and I was warning that this novel coronavirus was going to have a bigger impact than the market was pricing in and let’s update the analysis and see what conclusions, if any, we can come up with.
I’ve clearly been worried about the virus for a while, as you can see in some of the select titles of my recent posts:
Just last Friday, right before the markets Corona-Crashed, I wrote: “Nobody on the panel seemed to be very concerned about COVID-19 and the potential longer-term market/economic ramifications that might come from it. Which makes me more concerned about those potential ramifications, of course — since it’s pretty clear that most of the market is not pricing in much concern yet. I’m not saying I think the coronavirus epidemic is going to unravel the Chinese economy and markets long-term, but it is certainly a bigger risk today than it was two months ago even as most asset prices and stocks have rallied in the meantime.”
It’s amazing how quickly things can change in the market’s perception of a crisis and its potential impact. Has anything terribly unpredictable with this virus happened since I wrote that 120 hours (five days) ago? Not really, but the markets are now as worried about the real economic impact from this virus as I had been throughout February. Are you more worried today than you were last Friday? Should we be?
In a longer piece focused on the markets and the economy, written on (*checks date. Doubles checks. Thinks, “this can’t be right, it seems like forever ago that I wrote this”*) February 12 (just two weeks ago?!):
“Long story short, I end up wondering if this is about as good as it can get for US stocks here.
When I was in Abu Dhabi and I saw the extreme extravagance and wealth and resorts being built, I wondered if it was sustainable after oil boom ends in coming years. I thought the same thing this weekend when I was in Las Vegas and I saw all the preparations that had been made for what they thought would be a huge onslaught of people for the Chinese New Year and instead saw cancellation after cancellation due to the coronavirus.
Realize too that a short-term economic collapse in China — one that could get so serious along with the bumbling handling of the coronavirus epidemic from the Chinese government — could actually result in regime change. Long-term a change from the quasi-Communist one party system into something else might be bullish for the world. But it might not be. We don’t know and I sure didn’t consider a near-term regime change in China even a remote possibility four weeks ago. Now I do.
So here’s the upshot of this analysis as it pertains to our portfolios.
For most of you at home, being a little more defensive here than normal probably means just trimming some of your longs, maybe letting go of one or two stocks that you’ve been holding onto but have been considering selling. If Tesla is 10% of your portfolio at the bottom last summer and is now 30% or more of your portfolio, then sure, why not trim some and buy yourself a second house or something else that you’ll enjoy and will hold value. If you’re so inclined, you can also short a little more of the index ETFs such as DIA, SMH, IWM and SPY.
For more aggressive traders, there are probably some terrific short opportunities in individual names and/or China-dependent markets. Maybe Australia or South Korea or Thailand, each of which have China as their largest economic trading partner. Maybe there’s a trade to be had betting against the Yuan? Recall that China spends big money and energy trying to manage their currency. I’m not sure they can sustain that if things really go south.”
Cody back in real-time. I am obviously pretty upset at myself for not having gotten more aggressive in some of the China-dependent market short ideas more quickly, but you also don’t want to make a bunch of bets on these kinds of short-term market moves willy-nilly and I wasn’t quite done with my homework when those markets started crashing over the weekend. The problem with trying to bet against those China-dependent markets now is that much of the move has already happened and the premiums on the puts and other derivative bets have skyrocketed, making it much more expensive and less attractive from a risk/reward perspective now than it was (*doubles checks date, just five days ago?!) five days ago.
I’ve been covering a little bit of my index shorts and even putting a little bit of money to work on the long side, as noted in Trade Alerts. I’m doing a little more of the same today, covering some more of the index short hedges, maybe 10% or so of each, still keeping most of the hedges in place.
And on February 3, in another long piece about the markets and economy that focused fully on the coronavirus, I wrote:
“The markets today are acting like: ‘What coronavirus?’ as the major indices bounce about 1%. Let’s focus on coronavirus, especially since the market isn’t focusing on it today.
First of all, every night for the past week or so, my daughter Lyncoln has been praying for everybody affected by this terrible epidemic and so do I.
But my job is analyze the economy and the markets and to try to invest accordingly, so let’s the economic and potential market ramifications of this disease’s break out.
There’s been a few hundred people who have been confirmed to have died from the Wuhan coronavirus. There are about 20,000 confirmed cases. Since it seems some people might have or have had coronavirus but haven’t gotten terribly sick with symptoms, there are probably what, maybe 10x or more, as many cases as the confirmed number? Which means that this disease is probably not very deadly as of now. But it also means that there are more people contracting coronavirus everyday by a larger factor than reported and that it’s probably getting worse right now.
So I’m not sure I’m ready to panic about the global health implications from the Wuhan coronavirus just yet. But neither would I say it’s nothing we should worry about.
It’s the economic ramifications that we should definitely should worry about. Because right or wrong, all the economic losses of travel, spending, meetings that comes from all the China-related economic activity that’s ground to a halt are real.
The markets usually try to look past near-term disruptions, but I’m not sure it will this time in part because we don’t know how long these near-term disruptions from the lockdown in and out of China will last. But more to the point, China’s not in a strong economic and political positioning to handle even a short-term economic downturn if it’s sharp enough. Moreover, all those global companies, especially US-based, that have been trying to figure out new supply chain alternatives to buying from China, have more motivation than ever to get their supply chains moved. This isn’t the first and it probably won’t be the last time that the world has to deal with new, scary diseases that were borne out of China. And it’s not a terribly bad business decision to try to avoid the next one by having alternative supply chains in as many ways as possible.
Is it possible that, regardless of the long-term economic impact from the Wuhan coronavirus, the current communist regime in China under Xi becomes liable for turnover? People in China and outside of China are angry at the regime there for not having done something earlier to stop these live/dead exotic animal markets where these diseases are developing. People in China are angry and are not accustomed to being widely discriminated in the way they probably are the world over right now as people fear interacting with Chinese-speakers even in the melting pot subways of NYC.
These are real political and economic potential Black Swans from this Wuhan coronavirus combined with the US-China Trade War and the economic slowdown in the EU.
The question for us as investors is whether or not the markets will look past all of this. Or if the increased risks of a global pandemic, a China recession and political change at the top of the world’s second largest economy are real enough to impact asset prices.
I continue to prefer caution over aggression right now. I’ve raised cash, added hedges and cut some positions in the past couple weeks.
This way I am ready for either more rally with room to trim more or I am ready for a pullback with room to nibble more and cover some hedges. It’s not like I think the US itself is about to turn into a recession or that the markets are headed for a crash (two things that don’t always happen at the same time, of course). But it’s like last year when I was looking at TSLA at $230 or QCOM at $55 or TSM at $30 etc, and I was pounding the table on those and other names to buy.
If you haven’t trimmed or hedged or raised much cash yet, you still have a chance. It’s always better to sell when you can and not when you have to.”
Cody back in real-time. I bolded those parts above today when I was writing this analysis because those things in bold that I’d written more than two weeks ago are now the exact headlines we’re seeing on CNBC, WSJ and everywhere today. We were way ahead of the curve on this analysis and now that the headlines and the markets have caught up with our prior analysis, the real question is, of course, what’s next? I’m certainly not going to pretend I’m can again predict what the headlines will be saying a month from now, but we can outline the potential headlines a month from now:
- The Novel Coronavirus epidemic has turned into a pandemic and has gotten as bad as everybody expected it to two weeks ago when the markets finally panicked and the WHO and CDC and others who issued warnings about economic impacts and school closings and changes to our daily lives were correct.
- 1A. Stocks are down in bear market territory reflecting this worsening crisis.
- 2A. Stocks have been steady for a month after a wild start to 2020.
- 3A. Stocks are up despite the economic and real-life havoc.
- The Novel Coronavirus epidemic has subsided and been contained and the factories in China are back up and running and people are scrambling to catch up with backlogs which has lead to double ordering because people don’t want to ever not have enough supplies to get through a crisis like this again and so on.
- 1A. Stocks are down in bear market territory despite this boom.
- 2A. Stocks have been steady for a month after a wild start to 2020.
- 3A. Stocks are up because things are rocking again.
Given the above scenarios, what’s the best way to trade this market right now? Probably to stick to our guns, to stick to our analysis. To stick with the best, most Revolutionary companies on the planet and to nibble on some more of them while people are panicking over headlines that we were preparing for ahead of the curve. To be cool. Feet to fire, I’d expect the market to be higher this time next month, but we don’t have to try to game that other than using some of the swings to our advantages as best as we can along the way.
I leave you with this thought, something that I often go back to:
“Oh, and of course, before I go, let’s remember what I often remind us: It usually works out for the US. To be perfectly clear — I am still far from turning outright bearish. I just want to have follow our strategies for this Bubble-Blowing Bull Market Rally on Steroids (TM).”
Also, Lobo’s pretty sure everything’s gonna be all right (see pic):