World "Economy" on Life Support!

Sometime this week, number of confirmed COVID-19 infections would reach one million and number of deaths may touch 50,000. There is no flattening in sight as virus is still spreading exponentially in many countries and big cities like New York. The governments are putting shelter-in-place, 21-day lockdowns type of policies which is crippling economies around the world. At same time governments and central banks are providing trillion(s) $$ fiscal and monetary stimulus so that their economies are kept on life-support during these forced lock-downs. It's difficult choice policy-makers have to make. If you do too much it's a problem (like migrant crisis in India due to forced 21-day lockdown). If you don't go too far, it's a problem (like spread of virus in New York City and New Orleans due to slow actions taken by leaders in those cities and states). If you take the virus lightly the way President Trump took initially, it's irresponsible. In democratic world, one cannot just implement Wuhan type quarantine in New York City. That also means we cannot expect virus spread to come under control in 6-8 weeks the way it has been done in China. And markets are reacting to the events in live by 1000 points move on DOW becoming normal. We all wish that with March month coming to end, this "March Madness" will be over. But based on the predictions by experts (Dr, Fauci predicted that USA could see 200,000 deaths), "Mayhem" is about to come in May!

So as individuals, what should we do?

• Follow the guidelines of local policy-makers of social distancing
• Keep yourself and your family safe and healthy 
• Help the communities as much as you can by donating your time and money
• Stay connected with your friends and extended families using video calls 

As investors, what should we do?

• Stay focused on long-term. World will come out of this eventually. We just don't know how long it will take. Could be few weeks, few months or year!
• Don't speculate and don't try to time the market. Markets can enter bear and bull markets multiple times during this crisis phase
• There are some quality companies which are available at less than their fair valuations. It is excellent opportunity to balance your portfolios if you always wanted to take positions in them.  These are individual choices so have your short-list ready based on your risk profile. Take small but confident positions when you feel comfortable and then stop looking at those. 
• Enjoy and balance the life!

Stay Safe and Healthy!

/Shyam

The New Normal!

Last week the COVID-19 hit home on US shores. Finally US woke up to the upcoming pandemic and   looking at Europe, what could happen. I really have sympathy for Italy that it became worst affected country (after China) and that may be due to all the famous tourist spots. We were in Barcelona at end of Jan and life was going on usual even though 60 million Chinese were quarantined. No one thought world would be at this stage 5 weeks later! And given the speed at which it is spreading, things would get worse before they get better. That brings me to the topic of "The New Normal".
Last week almost all US employees of big tech companies started working from home till further notice. Colleges moved to virtual classes and plans to continue that till end of school year. That means all of spring quarter moving virtual. Even convocations most likely will move to virtual. That would be a big dis-appointment since that's once-in-a-lifetime experience graduates of class of 2020 would be missing out. But given the larger goal of avoiding repeat of 1919 Spanish flu pandemic, it's small sacrifice!

The New Normal is:

• Working from home
• Attending virtual college
• No schools
• No eating out
• No movies
• No sports events to attend
• No social gatherings
• 1000 point moves on DOW on daily basis
• Namaste is new handshake
• Facemask is new fashion accessory
• Toilet paper and sanitizer are the most wanted gifts
• Streaming is the new "Friday movie outing"
• Absolute no complaints on traffic
• Climate improving significantly
• Social distancing is the new motto

The question is how long this new normal would last? While there is lot of pain and sacrifices, some good habits would and should become norm even after world recovers and comes back to normal.

Finally US Government started taking the pandemic threat seriously and started preparing for potential onslaught of COVID cases in US. President, Congress and Fed are all coming together to unleash the power of US financial and monetary policies to give support to US economy. After all this crisis has potential to be similar to dot.com bubble bust, 9/11 and financial crisis combined!

Markets had fastest drop from bull market to bear market (19 days). Even during depression time, it took longer than that. Would all the massive stimulus coming in next few weeks make it the shortest bear market? It depends on earnings season starting in about 4 weeks. It's given that world economy will have recession - would it be shallow or long? That depends on if countries are able to flatten the curve of virus spread and get it under control in next few weeks/months!

It's no more only "China" problem. We are all in this together now. So let's fight the world-war-3 together against the enemy which is invisible and knows no borders! I am confident we will win as humanity had always in many similar crisis.

Stay safe and healthy!

/Shyam

 

March Madness or Spring Forward?

Super Tuesday was really Super with Fed reducing rates by 50 basis points and Biden becoming front-runner. The week ended with clarity on democratic nomination with race between Sanders and Biden with momentum clearly behind Biden. With 3 more contests in March, the race is entering into decisive phase - if Biden wins Michigan and Florida, it would be over for Sanders. That means one of the potential risk of Sanders presidency I mentioned in my blog about "Black Swan" would be over!
That leaves other major risk of Coronovirus spread. We already saw major increase of infections in South Korea, Italy and Iran. All these countries are using various mechanisms of quarantine, cancellation of public gatherings as well as workers staying home to stop the spread. There has been 100+ cases in USA and major companies like Google, Amazon, Facebook, Microsoft and Apple are asking their employees to work from home. They have also cancelled major events avoiding potential spread. These moves are prudent and timely since Chinese style quarantine is impossible (and un-warranted) in USA. Travel related sectors like airlines, cruise companies and even new age taxi companies like Uber/Lyft are taking major hit to their businesses. However now the fear had gone beyond just spread of Coronavirus, it has become a real threat to world economy entering into recession. Let's look at two possibilities how world could react which could have significant consequences.

March Madness:
Governments and companies could over-react to every new case reported by media and take drastic steps of curtailing the movement of humans even for perfectly healthy ones. This itself creates panic among citizens causing hoarding of goods (as seen during rush at Costco), not going out to cafes, games, movies or restaurants. The freeze in commerce could lead to closure of many small to medium businesses causing unemployment to spike leading to downward spiral and recession. Basically this could be real March Madness! (in fact the March Madness NCAA basketball games also could be impacted). All of this fear could lead to markets tumbling by another 10-20%. We already see this fear playing out in treasury markets - 10-year treasury yield falling nearly 50% in 2 weeks. 70 basis point on 10-year treasury is unheard of and never happened.

Spring Forward:
Governments, companies and citizens make informed calls based on facts. They take precautionary and prudent steps but don't cause un-necessary panic. Basically they go on with their usual lives with additional precaution of washing hands multiple times and avoiding contact with really sick people. Also informing authorities and taking steps of self quarentine if symptoms are seen. Yesterday I was at Italian restaurant and was glad to see people coming out and enjoying the evening with family and friends. Spring is near and hopefully warmer temperatures as well as steps taken till now will help in stopping the COVID-19 spread. Media also has responsibility of reporting but not causing panic. This would help economy get its footing and avoid recession.

The week reminded me of exact same week in 2009. In fact coincidently during financial crisis markets reached its bottom on exact day of March 9, 2009. On Monday March 9, 2020, it would be 11 years. It's foolish to even predict if markets are near bottom. However if you believe in long-term, it does not matter (as I wrote on March 15, 2009 Blog "Have Markets reached bottom - don't know and does not matter"). For next few weeks, it depends if world enters into March Madness or look to Spring Forward!

/Shyam

Don't Panic and Stay Calm!

Even though only last week I warned about potential "Black Swan" on the horizon, no one would have predicted that within a week markets would go from all time highs to correct territory in one week. This is the fastest and steepest entry to correction. So it's worth looking at which direction world economy and world markets are heading as new week starts. Here is my take based on some history, market psychology and just some common sense:

The world had seen many pandemics such as SARS (2003), Swine Flu (2009-10), Russian Flu (1977-78), HongKong Flu (1968-69) and one of the most deadly Spanish Flu (1918) The Spanish Flu infected nearly 500 million people and caused over 50 million deaths (more than both world wars combined). Before these pandemics, there used to be plague pandemics. Humanity had always and will always survive. During all these periods, markets go down but every time it had recovered. In 2003 during SARS, markets went down by 15% but six months later they were up by 1% from levels before the spread of flu started. If you believe in this narrative, by end of 2020, markets would again recover and start making new highs.

Starting next week, we will start hearing very bad economic indicators of how world economies are collapsing with sector after sector showing double digit declines. e.g. Macau casino revenues are down by over 80%, travel industry is going to take big hit. Already  Microsoft and Apple have warned that they will not meet current quarter's revenue projections. Each news will be amplified by news channels, newspapers and social networks. Rumors will be spread using popular apps which have multi-billion people reach with intention of causing panic. Spread of Coronavirus will be front and center of every news. It is required so citizens are aware of what's happening as long as it's done in responsible way and not to cause panic. So I would recommend reading but draw your own conclusions. As FDR had said in 1933, "Only Thing We have to Fear is Fear Itself" and things were much much worse in 1933 than now.

Central Banks would come to rescue similar to what they did during 2001 and 2008-09. US Fed will reduce rates by 50 basis points in March meeting or even earlier than that. And when Fed reduces rates, it has major impact on market recovery. The pattern will repeat in March.

And finally US presidential election. Biden's win in South Carolina will jump-start his campaign and give an alternative to establishment voters who want alternative to Sanders on democratic ticket which can provide continuity (in terms of economic policy) rather than revolutionary ideas. Sometimes, motto of "If it ain't broken, don't fix it" works.

Now coming to investment suggestions, I would refer to my 2020 blog for some of the ideas. Most of the suggestions are below the prices I mentioned. So it would be good time to nibble on some of the suggestions like MSFT, AMZN, DIS or sector ETFs like IGV, SMH, XBI and ITA. In addition to these, one may want to take a look at banks and energy which got punished due to fears of recession. ETFs like KBE and XLE would be good way to get exposure to these sectors instead of individual stocks.

As legendary investor Warren Buffet said:

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”

/Shyam