Description

I want to use this thread to post a few stock specific ideas I think will be the best way to play the very likely market recovery. I plan to largely post those in the messages thread - first I wanted to lay out the macro thesis which is the ultimate driver here - I have a few ideas I think are great levered ways to play a market bounce, but first want to make the case for why I think this will happen.

The first question is how did we all miss this? I think the answer is quite simple - most of us are trained to think Chinese data is fake so we heavily discount all inforamation out of China - so hearing that China was quarantining 10's of millions of people fell on deaf ears. Everyone also assumed the government would act with some basic competence (bad assumption), and they let the problem spiral to the level requiring massive intervention to stave off the extreme bear case (will discuss this more later).

To recap - where are we today - we are in the sharpest economic decline ever seen in US history - never before has the economy dropped off so sharply, so suddenly. I think this is akin to a consumer confidence crisis - it's essentially the consumer version of the 2008 financial crisis. Many service, leisure, travel, and other consumption businesses are seeing an unheard of drop-off in business - opentable data suggests down 50% for some restaurants, others are reporting drops of 90% or more. Data shared on twitter recently suggests the largest uptick in layoffs since 9/11 - likely to get worse. I would liken to what we are experiencing to a National 9/11 - it seems likely we see a similar amount of deaths in the US until this hopefully gets under control (I don't say that lightly and pray for a better outcome, but as investors we have to go with the data).

Watching how Trump has handled this crisis has been pretty confounding and frustrating - but there are a number of reasons to be positive:

1) thanks to the clever state vs. national separation design (thanks Founders) - governors and local governnments have wide latitude to institute draconian quarantine like measures to help stem the spread - this has been put into place in every major area of the US - see the move by NY/CT/NJ today.

2) Trump, despite initially being in denial - has finally accepted the gravity of the problem - the more the market goes down, the more it forces him to act - today I saw arguably the first ever maturity Trump has shown - he said the market will take care of itself and he just has to fix the corona issues. He seems to be finally heeding the calls of scientific / medical advisers - it seems very likely Trump will enact additional extreme measures to help contain the spread. Watch the news coverage from today - even CNN who hates Trump admitted he had a dramatic shift in tone - today he started taking the crisis seriously - very late sure and maybe he's a terrible president - but nontheless with massive action it's not too late to save this one

3) The US has the best innnovation engine and research universities in the world - we will build more tests, faster tests, innovate on treatment and containment options, etc.

4) we are benefitting from the knowledge and learnings of Italy and China with regard to treatment and containment - likely the case fatality rate and virality can be contained somewhat vs current base rate estimates as we are essentially gen 2 of treatment / containment

5) the federal government will do the biggest bazooka ever seen - they have no choice - if they don't half of businesses will be bankrupt - with clever actions like the Fed backing corporate debt / loans, providing needed cash assistance to workers/consumers - saving our critical transportation / lodging industries - the government can prevent a depressionary spiral before it happens - the underlying economy is sound, we just need the crisis to abate and to kickstart spending again

6) this is essentially a national consumer solvency issue - but if everyone agrees to let everyone stay afloat, there will be no run on the banks per se - if your landlord agrees to give you a pass, your local grocer gives you a break - if Americans band together we can avoid catastrophe here

7) to paraphrase Buffett, for 244 years betting on America has been a wise bet; I expect that to continue

Now that we've discussed the reasons for optimism, let's discuss how to know when things will turn:

1) over the next 1-2 weeks, I think the panic selling will likely continue - the main variable to track is the second derivative of cases - the growth rate - as long as this is constant or roughly constant - the selling will not abate - doesn't matter what the fed or anyone else does - I believe the epicenter of the crisis will be on the East Coast and LA most likely, and think the numbers coming out of NYC in particular will be particularly frightening.

2) the other major issues is the load on the healthcare system - if you do some quick math, many states like NY could become overwhelmed with patients needing serious care - that's holding the facilities constant - we can fix this by aggressively building temporary facilities and importing / manufacturing additonal medical devices - we are blessed with tons of vacant retail tombstones that can be repurposed into testing facilities / treatment facilities / etc.

3) the key will be to watch when this turns - right now the limiting factor on the number of reported cases is the ability to test and confirm them - as the massive efforts underway to contain the spread start to work, the second derivative of cases will start to turn - I expect this to coincide with around the bottom of the market

Where can I be wrong? I think the only way this analysis proves wrong is essentially an end of world type scenario - which would certainly be unfortunate, but if it plays out I doubt stocks long or short will matter much. Also, this is the crux of why I think the second derivative of reported cases starting to go down will lead to markets bottoming - the market right now is ascribing a nonzero chance to the extreme bear case of the world ending - because sadly it is a legitimate possibility right now given how negligent our government has been - but the more aggressive action we take, the more the market can discount this case asymptotically to zero. If you told me 3 months ago that Trump was ordering a national quarantine - I'd guess markets would be down who knows how many points - but now I think the market would easily rally 5-10% on that news - similar to when tarp was approved - also corona has already shut down the economy anyway - so quarantining now has essentially no economic cost - our marginal cost is now zero and there would likely be almost no public opposition - given almost everyone now appreciates the severity of the problem - celebrities coming face to face with corona and all sports being cancelled have done wonders to raise public awareness - the obstacle has become the way in many ways...

Catalyst

flatten the curve!