Pro Perspectives 3/30/20

March 30, 2020

As we end the month of March, April is expected to be the worst of the health crisis. 

As for the economy, the backstops are in place to hold us over for about three months.  The economy was on path to hit about $22 trillion of output this year.  If we combine the $2.2 trillion relief package from Capitol Hill with the Fed’s liquidity injections, guarantees and lending power, the sum of intervention is said to be north of $6 trillion.  That replaces more than a quarter of economic output.  

With that, stocks have bounced aggressively, and will likely find a level shortly where volatility subsides, and a (relative) holding pattern will commence.

Then it boils down to whether expectations will be beat, meet or missed (disappointed) on the health crisis front.   On that note, we talked on Friday about the potential for a positive surprise to come this week.

This week we should start hearing stories coming out of New York about the efficacy of hydroxychloroquine – a treatment option for Covid-19

Tragically, this has become highly politicized since Trump mentioned it, which means half of the country has immediately dismissed it. 

Let’s look at the facts:  It’s an FDA approved drug for the treatment of Malaria. The FDA authorized “off label” use for it last Tuesday, enabling doctors to treat coronavirus patients with it.  There is an “in vitro” study from Chinese researchers in early February that showed the stop of progression of coronavirus in cells that were already infected, and showed the prevention of infection in pre-virus cells.  And there are small studies from both China and France showing efficacy.  Additionally, we have heard along the way from China, South Korea and Europe of success stories.  And we are hearing more and more success stories in U.S. hospitalized patients. 

So, New York will be the litmus test, as they are running an 1,100 patient clinical trial, and they are more broadly administering it as a treatment as of last week.  From the studies, the treatment period, from inception to virus free, was between four and six days.  So we should be hearing soon, at least “anecdotal” evidence from the NY cases.  Again, this “treatment” scenario has not been a focus for markets.  We could get a positive surprise.  

Now, while stocks have bounced aggressively, with nuclear-level global policy intervention, we haven’t seen the inflation bets bubble up just yet.  We will likely need some signal from the health crisis, that a light at the end of the tunnel exists (i.e. a viable path to normalcy).  

Until then, gold remains contained in the mid $1600s, under the highs of the year.  Copper prices remain weak.  And oil prices traded to new 18-year lows today. 

Trump was due to have a call today with Putin today, in attempt to bring Russia and OPEC to the table to reverse the oil price collapse.  

This comes as we've nearly matched the plunge in oil prices from the Global Financial Crisis – but it’s taken just half the time.
Special Invitation:
In the past week, money moved out of mutual funds and into cash in the highest amounts on record.  Meanwhile, billionaire Bill Ackman was putting over $2 billion to work.  Legendary value investor, Bill Miller, was buying.  He called it one of the top five buying opportunities of his lifetime.  The best investor of all-time, billionaire Carl Icahn, was adding to two stocks we own in my Billionaire's Portfolio.  And one of the big investors we followed into a beaten down airline, has added more to his stake. In addition, he was setting up a new $3 billion fund, just to load up on the hardest hit stocks in this crisis.

With this last anecdote in mind, most people that are willing to buy stocks in this environment, tend to feel more comfortable buying big cap brands/ industry leaders at a discount (Amex, Coca Cola, Goldman Sachs, Walmart). 

But the best investors are on the hunt for companies they are confident can survive, but are the most beaten down. That's the formula for huge returns.  In our Billionaire's Portfolio, we have a perfect list that meets that criteria — transformed companies that have been thrown out with the bathwater.  

With this portfolio, we should expect to do multiples of what broader stocks do on the rebound, just as we did in 2016 (bouncing more than 40 percentage points from the lows that year, and finishing almost three times better than the S&P 500 on the year).