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A Little Less Bearish

Following up on my intention from mid-week, I took off some of my index shorts on Friday.  I also covered my oil stock shorts and some of my tech one’s.  I’m keeping the airlines.  Because the market fell so far (I did not expect the S&P to get all the way back to the mid-2,800s!), I decided to cut my short exposure by more than I had anticipated.  I now hold less than half the index shorts that I did.  I took the first of some small longs – in very large cap names – Google, Abbott Labs and MasterCard.

Mostly, I’m less bearish because the market has come down a lot.  But a couple of other things are playing into my thinking as well.

For one, as the market continues to decline a coordinated effort from the central banks seems more likely.  While I’m not sure that a whole bunch of money is really going to solve anything, I’m inclined to think that the market will go up on such an intervention, at least for a while.

Second, there seems to be a path out of this mess and that is important.  The thing the market really hates is uncertainty.  And while uncertainty about the coronavirus still abounds, we aren’t flying completely blind here.

First, China appears to have provided everyone else with a template for how to get through this.  Cases in China seem to be declining (if you believe their statistics that is – in itself is a reason to be cautious).

Now, in North America we can’t be as draconian as the Chinese, but we can shut down schools, stop gatherings, and businesses can close for a period in areas where the virus takes hold.  The experience of China suggests that seems to work.

Additionally, there is a vaccine in development and maybe it isn’t as far away as it appeared a few weeks ago.  It might only be a few weeks from being developed, which could mean as little as 3-6 months until it is available.

You put these things together and you can see how globally, we could get through this in maybe 6 months. You can envision a path to the other side.

While that path is not good for the global economy, the stock market always looks past the immediate bad things and asks what happens next – and you can see how what happens next doesn’t necessarily have to be all dark and grim.

This may not be a path to immediate new highs for the market, but I also don’t know if it is a path to a full-on 1987 or 2008 style panic.   I wasn’t around for 1987 but I was for 2008 and the collapse didn’t happen until the credit markets actually seized up, at which point no one saw a path out of it.  There was a real fear that things just wouldn’t come back – that there was no path out.

Contrast that with the beginning of September 2008, which was like 3 weeks before the world went completely on tilt – the market was down less than 10% and holding up okay-ish.  Maybe if the Fed had bailed out Lehman (and everyone else subsequently), we wouldn’t have had 2008 at all?

My point is that the market doesn’t collapse on the possibility that something bad might happen.  It teeters on that.  It collapses once that possibility becomes inevitable and especially when it doesn’t see a way out of that bad event.

I just don’t know if that is what we have here.

So those are the positives that cause me to be a little more bullish, to take off some shorts, and to buy some Google (Google!  Me – buying Google – Hah!).

The negatives that keep me from really diving in here, apart from the obvious uncertainty about the virus itself, is that I’m a little wary about what happens to the global economy as parts of it potentially shut down for a period.

Once we are through to the other side of this, will it just bounce back?  I know that is the consensus.  I’ve read a ton of brokerage reports and they are all like – one quarter or two quarters of drop and then everything bounces back to normal.

The assumption implicit in that prediction is that the economy works like a machine.  You can turn it off and on and it effectively goes back to behaving the same as it was.

I’ve never been entirely convinced of that.  I’m more of the Jane Jacobs school of thought that the economy is like a complex ecosystem.  And ecosystems don’t behave mechanically.  They are less predictable.

I mean, again using 2008 as an analogy, we turned the economy off for a month (maybe two?) and it seems like it took years for it to completely bounce back.

This is different of course but I’m still a little concerned that while the virus will pass, the ripple effects on the economy won’t pass as quickly.  That after the initial exuberance of containment, the aftershock of having shut so much down for months will have a lasting impact on businesses.

But I don’t know, I’m really not sure about this.  It is different; it’s likely not going to shut things down in the same way that a credit crisis or even a business cycle shuts it down.  I’m just a little wary, and why I’m still positioning myself more out of the market than in.

The other thing I did, and I’m not really sure this was a good idea, is I bought back a portion of the gold stocks I had sold.  I bought some Gran Colombia and some Wesdome.

I don’t know if I should have done this.  Gold is so bizarre.  You just never know.  Also, consider the following:

  1. India and China make up the bulk of jewelry demand and the virus may make that take a hit – it already has to be hitting China and it seems inevitable that India gets hit with this virus at some point and I don’t see the same sort of containment strategies working there – it could be a real disaster in a place like India
  2. Gold stops doing well if things really deteriorate.  Everything is rosy in gold as long as everyone still believes that its all going to be ok when central banks step in.  We saw a bit of this on Friday.  I learned in 2008 that if the shit really hits the fan gold is going to tank with everything else for a while.  It will be the first thing to come back, but you’d be better off out until that liquidity crunch ends.  I don’t know if this virus panic gets to that point, maybe not, but it gives me pause.

On the other hand, I mean holy crap – Gran Colombia and Wesdome were down ~15% on the day when I bought them (!!) and gold is still well above where it was at even the beginning the year.  They are making a lot of money – Gran Colombia is trading at like less than 2x EBITDA and probably less than 4x free cash flow at these gold prices (I haven’t worked through the free cash flow numbers at $1,600 gold so don’t quote me on that, but its in that ballpark).

But it is gold, so expect the unexpected.  I might be backtracking on those purchases.  I’m staying nimble.  My underlying framework is that I don’t know much at all.


6 Comments Post a comment
  1. Agree that the restart is going to be weird and more complicated than people think; ripple effects are going to take a while to identify in integrated supply chains, and currency effects are gonna be wild.

    I sort of think it’s the opposite of 2008, in that then physical systems were unaffected–you could fly wherever you wanted–but metasystems were completely seized, because nobody was willing to be anybody’s counterparty. The latter, of course, bled into the former.

    Here the physical systems are frozen, but the metasystems are “okay.” Everyone is assuming there’ll be stimulus, coordinated action, etc., and that everyone will work together in due course to start things up again. But if the formulation is flipped (and it’s not like I’ve thought at depth or length about any of this), then disruptions in the physical systems–which will manifest themselves PARTICULARLY as they start up again (because static friction is higher than kinetic, to continue the metaphor)–will bleed up into the metasystems.

    No idea what that’ll look like. The most obvious thought is that counterparty risk/mistrust will heighten. But what if scarcity of certain halted goods begets not substitution (of goods or supply chains) but actual demand destruction? Or what if a stimulus truly fails to stimulate?

    I dunno!

    February 29, 2020
    • Those are very good points. It just gets very complicated if a work stoppage lasts for any length.

      You can certainly imagine how it bleeds the other way. Companies that depend on inventory turning over at a certain rate to make their financing schemes manageable (like auto-dealer floor-plans), companies that need cash flow churning at a certain level to pay their employees, companies that have a lot of debt and need a level of cash flow to meet those obligations and like you said companies that depend on other companies for their inputs and inventory.

      It is not clear at all to me how a quarantine and shutdown would play out if its more than a couple weeks.

      Don’t want to be long, but also don’t want to be too short.

      March 1, 2020
  2. ijw z #

    This is a good account of the Spanish Flu:

    “In Goldsboro, North Carolina, Dan Tonkel recalled, “We were actually almost afraid to breathe…You were afraid even to go out…The fear was so great people were actually afraid to leave their homes…afraid to talk to one another.” In Washington, D.C., William Sardo said, “It kept people apart…You had no school life, you had no church life, you had nothing…It completely destroyed all family and community life…The terrifying aspect was when each day dawned you didn’t know whether you would be there when the sun set that day.”

    An internal American Red Cross report concluded, “A fear and panic of the influenza, akin to the terror of the Middle Ages regarding the Black Plague, [has] been prevalent in many parts of the country.”

    Fear emptied places of employment, emptied cities. Shipbuilding workers throughout the Northeast were told they were as important to the war effort as soldiers at the front. Yet at the L.H. Shattuck Co. only 54 percent of its workers showed up; at the George A. Gilchrist yard only 45 percent did; at Freeport Shipbuilding only 43 percent; at Groton Iron Works, 41 percent.

    Fear emptied the streets, too. A medical student working in an emergency hospital in Philadelphia, one of the nation’s largest cities, encountered so few cars on the road he took to counting them. One night, driving the 12 miles home, he saw not a single car. “The life of the city had almost stopped,” he said.”

    This killed 50-100 million world wide, and was more deadly than the current virus. It killed younger people at a really high rate, and people would often die within a day or two.

    It had a negative economic effects, but not as bad as you would think.

    Seems like negative economic effects only kicked in with a lag:

    Problem is that WW1 distorted the picture here.

    February 29, 2020
  3. ijw z #

    I cannot get over the fact that it is contained in China. It had room to spread for 1-2 weeks there completely undisturbed. While everyone was travelling all over the country. And they really seem to have it contained there for over a month now, with a net decline in cases. I don’t think that could be faked.

    Anyway here is more info I found so far:

    And someone who gets my point across more eloquently:

    March 1, 2020
    • ijw z #

      The way this is being handled by the US is a total disaster.

      -Having to pay for your own quarantine
      -No testing available (see number of people being tested here: )
      -Authorities heavily downplaying it
      -And a work culture that promotes coming to work sick (with too little safety nets).

      On the upside, the US is more disconnected and sprawled out.

      Another observation, it barely seems to spread in countries with warm weather. There is not a single country with summer weather right now, that has a large number of cases (Most of Iran actually has a moderate climate with similar temps as in Europe). So warm weather definitely has a big impact on it.

      And from looking at the large sample sizes being randomly tested (Korea, Diamond Princess and China outside Wuhan) Mortality rate is most likely between 0.3-1%. Probably somewhere in the middle of that. So 3-10x more deadly than a severe flu outbreak.

      Tempted to go in some airlines. They seem too heavily discounted at this point? SAVE is trading 4x 2019 earnings. Might even play this with some leaps?

      March 3, 2020

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