Pro Perspectives 4/7/20

April 7, 2020

There is a perception that New York is the canary in the coal mine, as it relates to the virus.

But as we’ve discussed in my notes, it has a better chance of being the turning point for the health crisis. 

Why?  Because it has been a real-world test for what a severe, resource constraining outbreak looks like.  And they have been throwing everything at it.  That includes lockdowns. And that includes experimental treatment options. 

So in a world where scientists have had a lack of evidence to evaluate treatment options for a novel virus.  We’re getting evidence, in real-time. 

If they didn’t like the merits of the various studies in China and Europe (on hydroxychloroquine), or the anecdotal attestations of recovered patients, they now have an 1,100 patient clinical trial running in New York – for more than a week.  Moreover, they have a much larger “anecdotal” pool to evaluate, after the treatment was made an option available for doctors to prescribe around the country.  

With this in mind, we’ve been waiting to hear results on what has become highly politicized drug.  There has been a deafening silence on that reporting.

But the raw data coming out of New York may be giving us the news directly.

Here are two of the most important charts I’ve seen on this virus to date. 

New York daily ICU admissions are down three straight days — into just double digits! And daily intubations are down two straight days, from over 300 to 69.

Do these charts mean there is success in treating patients? If patients are being treated successfully, they don’t require ICU – they don’t require a ventilator.

As we’ve discussed, positive developments on the treatment front would be a major turning point, and provide light at the end of the tunnel for the health crisis and for the economy. 

These will be the key data to watch in the coming days. As for markets, remember just a week ago, a treatment solution wasn’t even on the radar of most market participants.  That has been the potential “positive surprise” we’ve been discussing.  We will see.    

Pro Perspectives 4/6/20

April 6, 2020

Over the past week or so, we've talked about the potential to see a positive surprise (i.e. good news), in a world that has been full of bad news.

As I said, with global central bank and governments all-in, pumping stimulus to keep the economy alive, the outlook boils down to whether expectations will be beat, meet or miss (disappoint) on the health crisis front. 

The expectations bar has been set low.  And we've had a potential positive catalyst looming:  a treatment option.

With that, we've been waiting to hear what the results look like from the (more the a week) period that New York hospitals have been deploying hydroxychloroquine.

This drug was made available by the FDA for 'off label' use almost two weeks ago.  But the Governor banned it's use in the state of New York, outside of hospitals.  He reversed that today, and also admitted that the drug has been "effective" in the hospitals. 

Align that with the improving daily statistics coming out of New York today, and the outlook on the health crisis could be changing. 

As we've discussed, positive developments on the treatment front "would be a major turning point, and provide light at the end of the tunnel for the health crisis and for the economy." 

On that note, as we also discussed last week, "even with a positive development like that, there would be plenty of economic damage to overcome, and loads of government money and Fed liquidity to mop up.  But it would be a launchpad for gold, and asset prices in general (i.e. inflation)."   

Indeed, we're seeing asset prices levitate.  Today stocks were up 7%.  Gold was up nearly 4%.  

And the move in gold looks like it will be accelerating (good bullish technical breaks).  We could be testing the March highs in the days ahead.  And then the next stop would be the 2011 (GFC induced) highs of over $1900.  

Pro Perspectives 4/3/20

April 3, 2020

The $2.2 trillion government relief began today with the launch of the Payroll Protection Program (PPP).  

This is the small business program, for companies under 500 employees, that distributes forgivable loans to cover payroll (to keep jobs intact) and expenses associated with keeping the lights on (mortgages/rent and utilities).

The goal is here to keep businesses intact, so that they can hit the ground running (to the greatest extent possible) when the economy reopens, instead of leaving behind mass business casualties and an economic depression in the wake of the virus.

If you qualify for this aid or any of the aid in the pipeline, regardless of your financial position or business status, you should participate!   The PPP is a simple two page document (here), with instructions (here).
 
The design of this program is to make you whole, to make businesses whole, to make the economy whole (to the greatest extent possible) in the near term — while inflating away the value of everything in the medium-to-long term. 

Participate in the programs/ take the money. On the other side, when inflation runs, you will understand/appreciate why. 

This is "debt monetization" – not just domestically, but globally.  It's the only option, in the face of the abrupt economic stoppage (domestic and global).  It's the devaluation of cash against asset prices.  This makes holding cash the worst place to be. 

Add to that, with the Fed involved in virtually all risk assets now (not broad stocks, nor high yield corporate bonds … yet). They have become the bid in risk assets in the near term, while inflation will become the bid in risk assets in the medium-to-long term.  With this, not only will gold be a preservation of buying power, but stocks, real estate and broad commodities. 

 

Special Invitation:

Last week, money moved out of mutual funds and into cash in the highest amounts on record (the worst place to be).  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). 

Click here to join us. 
 

 

Pro Perspectives 4/2/20

April 2, 2020

We talked about the significance of oil prices this week. 

As we discussed, the Fed has addressed broken financial markets, and ensured stability of the financial system. Congress and the White House have backstopped the American consumer and American businesses.  And there is a discernible game plan launched to fight the healthcare crisis. 

But the broken oil industry has not been addressed.

And with crude oil prices hanging around $20 a barrell, the U.S. shale industry is lined up for bankruptcy. 

 
Indeed, Whiting Petroleum, with more than a quarter of a billion dollars in debt maturing this year, filed bankruptcy yesterday. 
 
That got the wheels turning.  In Trump's press conference late yesterday, he said, after talking to Putin and the MBS, that he expected Russia and Saudi Arabia to "work it out (the dispute on oil production) over the next couple of days."  

This morning, Trump did this …

 

And oil did this …
Now, assuming this agreement between Russia and OPEC were to take place, we have to be concerned about where oil prices will settle, regardless of production cuts, in a world where global demand has been destroyed by outright stoppages in global economies. 

Looking back, the 60% haircut on oil prices driven by Russian/Saudi gamesmanship, was probably accurate given what has happened to the global economy in the aftermath of that initial spat.  That doesn't bode well for the shale industry.  What's next?  Nationalization? 

That said, the future of the entire economy (not just shale) hinges on the timeline to return to normalcy.  What could flip the switch on it?  A viable treatment for COVID-19, that can bridge us to a vaccine, while enabling for the reopening of the economy. 

On that note, the evidence continues to build for favorable outcomes from the use of hydroxychloroquine.  There was another study (randomized clinical trial) out China showing efficacy: "Among patients with COVID-19, the use of HCQ could significantly shorten TTCR and promote the absorption of pneumonia" (link to that study here). 

 
We've yet to hear anything concrete from NY trials (that started last week), and from broader "off label" use by New York hospitals, but the latter could come at anytime.  Again, that would be a major turning point, and provide light at the end of the tunnel for the health crisis and for the economy.    

But even with a positive development like that, there would be plenty of economic damage to overcome, and loads of government money and Fed liquidity to mop up.  But it would be a launchpad for gold, and asset prices in general (i.e. inflation).

 

This Chinese billionaire lost $10 billion this morning on alleged fraud at Luckin Coffee (NASDAQ:LK)

4/2/20

Two months ago a short selling research firm alleged that there was misreporting of financials at the Chinese coffee giant, Luckin Coffee.  The company denied the report as unsubstantiated speculation with malicious intent.

This morning the company reported that it has suspended its COO and several other employees for misconduct related to fabricating transactions. These are precisely the claims that were made two months ago.

The stock was down more than 80% this morning.  

Who was the biggest loser?

It’s the top shareholder and angel investor in Luckin, the Chinese billionaire Lu Zhengyao.

Zhengyao is a serial entrepreneur. He founded the rental car company Car Inc. in 2007 and took it public in 2014 on the Hong Kong Stock Exchange.  His former COO is credited with founding the Starbucks competitor, Luckin Coffee in 2017.  In 2019, the company IPO’d on the Nasdaq. 

Zhengyao was the angel investor behind the company and holds 484 million shares.  At yesterday’s close, that stake was valued at over $12 billion.  At the lows this morning, it was valued at $2.2 billion.  Learn more about the stakes of billionaire investors here. 

 

Pro Perspectives 4/1/20

April 1, 2020

As we enter the month of April, we'll begin seeing data to reflect the abrupt stoppage of the economy. 

It's going to be ugly. 

The big one to kick it off will be the employment report on Friday morning.  That's why stocks started the month lower. 

To be sure, the media will make a big deal about big, record-setting numbers.  Stocks will swing around in the early stages of these data reports. But remember, the losses reflected in the coming data have already been offset by intervention from the Fed, the Treasury and Congress — intervention that replaces more than a quarter of U.S. economic output.  

On that note, there's a big difference between the current situation and the Global Financial Crisis.  During the GFC, we watched the dominoes fall for well more than a year, before we knew how policymakers would respond.  For some time, we didn't know if they would act.  We didn't know what tools they could use.  We didn't know how far they could go.  But when they (and other global policymakers) went all-in, with 'whatever it takes' that has forever changed the landscape.  

With this crisis, there has been (and remains) a big 'unknown' on the human welfare front.  But there has, all along, been an important 'known.'  We knew policymakers would do whatever it takes.  And they responded quickly, and erred on the side of overreacting. That's very positive. That's important perspective, as the ugly economic data rolls in, reflecting an unprecedented stoppage in the economy. 

The most important data and news will continue to be on the health crisis front (not on the backward looking economic data).  And the mitigation efforts continue to look encouraging, as testing has increased, and the daily new cases declined in today's report, for the first time since the testing ramp (24,742 to 22,613).     
 

Pro Perspectives 3/31/20

March 31, 2020

Over the past couple of weeks, the Fed has addressed broken financial markets, and ensured stability of the financial system. Congress and the White House have backstopped the American consumer and American businesses.  And there is a discernible game plan launched to fight the healthcare crisis. 

What hasn't been addressed?  The oil industry. 

While the haymakers were flying at Washington early this month, Russia took the opportunity to land a sucker punch, by refusing work with OPEC to stabilize global oil prices.  OPEC retaliated by opening the spigot on oil production.  Oil prices plunged, as deep and at a faster rate than we saw in the Global Financial Crisis.  

This is a familiar strategy.  OPEC tried this back in 2014, in an attempt to kill off the emerging threat of U.S. energy independence (i.e. to bankrupt the U.S. shale industry by forcing prices well below where they could produce profitably).  To an extent it worked. More than 100 small oil-related companies in the U.S. filed for bankruptcy from 2014-2016.

This time around, Russia is the main culprit.  They know, even with nearly $6 trillion of stimulus ready to deploy, mass bankruptcies would damage the economy and financial system – and at the worst time.  And equally as important, in a time when global relations aren't so good, it creates U.S. weakness/competitive disadvantage in a wartime scenario.   That said, Trump needs to keep these companies up and running.  And bailouts aren't palatable.  

With that, it is reported that Putin has agreed to talks on stabilizing the energy markets. 

This is a game of chicken.  Russia and the Saudis, both highly dependent on oil revenues, have a big price to pay, if it plays out too long.  Back in 2016, the oil producing countries nearly killed their own economies in the process of trying to kill the U.S. shale industry. 

So, in effort to drive oil prices higher, to salvage oil revenues, they had to flip the switch in late 2016, cutting production for the first time since 2008.  And they did so, in a market that was already undersupplied.  And in a world where demand has been underestimated, and growing.  With that, oil bounced aggressively — from $26 in early 2016, to as high as $77 by late 2018. 

This time around, it may be in the global oil market, where we discover where the international players truly stand on this pandemic: together or opportunistically apart.  
 

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). 
 
 

Pro Perspectives 3/27/20

March 27, 2020

As we’ve discussed, here in my daily Pro Perspectives notes, historically major turning points in markets are associated with some sort of intervention.  And markets can turn well before there is clarity on the outcome (the coronavirus, in this case).  

We now have the nuclear bomb of intervention.  Both the Fed and the government are in ‘whatever it takes’ mode.  Government aid has already surpassed $3 trillion, with more to come.  And the Fed expanded it's balance sheet by a trillion dollars in a week, with more to come. 

With that from yesterday's highs to Monday's lows, the S&P 500 had jumped 20%.  But at down 35% (the max drawdown in stocks to this point), we will need a 54% gain to return to the February highs. 

As we end the week, let's take a look at the most important chart of the week, U.S. yields.  

Remember, we talked about this last week, as the most important market in the world. 

As the Fed cut rates to zero and launched QE, money should have moved IN to the Treasury market, pushing market rates on the 10-year government bond down, toward zero.  Instead, rates went into reverse and ran up as high as 1.30%.  That was a flashing emergency signal that there was serious trouble in the bond market.  And that became the battle ground for the Fed. 

But as we discussed, it's a battle that they have the tools to win.  They have the printing press.  They can buy as many Treasuries as they need to, to push yields back down.  And that's what they did.  The Fed fixed the bond market this week, by become a buyer of corporate bonds, municipal bonds and an unlimited buyer of Treasuries.

As you can see in the chart above, the 10-year yield closed today at 68 basis points.  So, financial markets seem to be function properly now. 

Global policymakers have thrown the kitchen sink at the crisis, all vowing to do 'whatever it takes.'  The bottom should be in for stocks, unless there is an uglier negative surprise (on the health crisis front) than anyone, at this stage, could imagine (i.e. another black swan). 

And as discussed yesterday, we have the chance to see a positive surprise on the health crisis front as early as Monday, as we should start hearing reports out of New York on the performance of Hydroxychloroquine, a treatment option for Covid-19 — the use of which began in New York hospitals this past week.  
 

Pro Perspectives 3/26/20

March 26, 2020

Stocks continue to rally as the U.S. government and the Fed have followed through on the promise to do "whatever it takes" to ensure the solvency and liquidity to keep banks, companies, small business and individuals whole, through this economic disruption.

With those actions, the bridge is in place to fill the void (for the most part) in the economy, temporarily.  "Temporary" is the assumption everyone has to make, because the alternative is armageddon-esque.

Among the many scenarios that can make it temporary, the best-case scenario is an effective treatment for the virus.  Even better, a prophylaxis.

On that note, as of Tuesday of this week, the FDA approved the "off-label" use of chloroquine (and hydroxychloroquine) for treatment of Covid-19 — i.e. doctors around the country can now prescribe it.  And as of Tuesday, New York City, the current hot spot of the virus, has been using it, and tracking results in a clinical trial.   

There have been a couple of trials that have made the rounds in the media in recent weeks on Chloroquine, notably one in China and one in France.  Both showed efficacy (but not trials that meet FDA standards).  And there is an "in vitro" study from Chinese researchers in early February that showed the stop of progression of the virus in cells that were already infected, and showed the prevention of infection in pre-virus cells.  

With that, by early next week, maybe Monday, we should start hearing stories coming out of New York about the efficacy of this drug. If we hear success stories, people virus free, it would put a floor under sentiment.  It would establish a viable path to a return to normalcy.  And that would take the worst-case scenario off of the table.  That would be a turning point in this crisis.  

If so, we would have a path to resolution (at least treatment as a bridge until a vaccine comes to market).  And for markets, that would come simultaneously with a tsunami of stimulus. 

 

We will see.  Bottom line:  We should keep an eye out for any reports coming out of New York over the weekend.