Curb Your Enthusiasm

While we have made tremendous strides fighting the coronavirus, we want to temper some of that enthusiasm as it relates to the markets as we have a long way to go until things are settled. Clearly it is good news that growth in the number of new cases of the coronavirus is cresting which will permit some states and countries to open. We believe that the pace of the recovery will be slow until we have a therapeutic, antivirals, contact tracing, more testing including antibody tests and eventually a vaccine. While we finally can see light at the end of the tunnel, we will not see a semblance of how things were until 2022.
The financial markets are fighting a tug of war between global economic weakness and tremendous liquidity to the tune of over $7 trillion having been created so far by all the monetary authorities and governments around the world. We find it amusing to listen to the pundits who constantly remain one step behind getting bearish as markets decline and bullish when the tape is rising.
We are in a unique economic environment where we see only a handful of fundamental winners over the next few years.  These companies are benefitting directly and indirectly from the new normal where we spend more time in our homes utilizing smart devices to access services heretofore done in person. We would continue to avoid all companies needing government assistant who are in financial trouble due to the drop off in demand as a result of the coronavirus. We do not see demand for most of these companies returning to levels achieved just a few months ago until 2022 therefore profitability and balance sheets will remain challenged and at risk. Many may not even make it. We see the market tiering further over time giving higher than historic valuations to the winners in the new normal while avoiding the losers.
More than ever this is a market of stocks rather than a stock market. Active management is the only way to invest in the new normal as passive money managers will hold many of the losers that need to be avoided at all costs. It will be interesting to hear what Warren Buffett says tomorrow at Berkshire Hathaway’s online Annual Meeting. While he is the ultimate active manager, he has sung the virtues of passive investing for years.
The global number of coronavirus cases as of Friday hit 3.28 million with 234,000 deaths while the number of cases in the U.S now exceeds 1.1 million with over 63,800 deaths.  While the rate of gain has crested, we remain concerned that countries and states are opening too soon as we do not have enough testing nor is there a therapeutic available so we can feel safe. We get how hard it is for politicians to risk of opening too soon. They have to weigh economic, social and emotional impact of not opening vs. the risk of the virus continuing to flourish and possibly resulting in death. Personally, my biggest concern is an acceleration of cases as we open, which, of course, would cause another lockdown. As we open slowly, we need to maintain strict social distancing and making the wearing masks mandatory for several more weeks.
We heard last week that Gilead’s Covid-19 treatment Remdesivir showed encouraging results from a key U.S trial. Patients who received the drug recovered in 11 days, on average, while those taking a placebo took 15 days. Both Drs. Fauci and Hahn, after reviewing the data, said that this could be a game changer and are supporting emergency authorization by the FDA to permit its use. There was also some positive news on a vaccine from Moderna and Oxford University/Astra Zeneca. Bill Gates, who is investing heavily in this area, went out on a limb predicting a vaccine possibly as soon as in 9 months but certainly within 18 months. There are over 100 drug companies working on therapeutics, testing and vaccines. All good stuff!
It appears that monetary authorities have unlimited capacity to provide liquidity to the financial markets. We heard last week from the Fed, BOJ, Bank of England, and the ECB that each will buy unlimited amounts of bonds in response to the coronavirus. Again, all this liquidity will not create demand which really is the only way out of the global recession/depression. We will need as Fed Chairman Powell and ECB President Lagarde both said major fiscal spending programs to boost demand while also providing money to individuals/companies to make it to the other side. We expect our government to implement Phase 4 and 5 programs as needed to supplement individual incomes and provide money to small/medium size businesses to stay afloat rather than filing bankruptcy.
Bonds spreads continue to narrow which shows that monetary policy has provided enough liquidity to assuage market concerns. The bond market is operating very efficiently permitting companies to raise money up to 100 basis points better than expected. Boeing’s 25 billion offerings were oversubscribed by 3-4 to 1. U.S high-grade bond issuance continues to set new records each week.  All good news!
We focus on long term profitable investing with a 12- to 24-month time frame. The market environment remains favorable as the Fed is providing so much excess liquidity not needed by the real economy such that it is pushing investors further out on the risk curve. We always maintain cash reserves knowing that the market could have a correction at any time providing opportunities to add to our portfolios at lower prices. We believe that the U.S economy will be bottoming out shortly which is good news even though we think the recovery will be an elongated U.
Not all stocks are equal. Corporations have never faced an environment like this so it is important to listen to earnings calls so you can differentiate the winners from the losers. Especially in today’s environment, you need to focus on management, strategies, and financial strength. Avoid at all cost companies with demand and financial problems as it will last well into 2021 at a minimum.
We continue to focus on the winners in the new normal. Our list includes companies whose business models are mostly tied to the web/internet/data centers where usage has gone through the roof. Our positive view on these companies was supported by their first quarter earnings reports and conference calls which demonstrated all their favorable short- and long-term strengths. The best is yet to come for each of them. The Democrats are proposing an $80 billion-dollar bill to promote broadband expansion and buying smart devices for all that cannot afford them. 5 G will play a major role as the next generation for cellular technology. If you can, listen to the Qualcomm conference call. We also added a financial and an industrial. Both are best in class and will gain market share/profitability as we move through the other side.
We do not own bonds, the dollar nor private equity funds.
Finally, we would hope that all countries work together investigating the origin of the coronavirus rather than doing it individually.
Our weekly webinar will be held on Monday May 4th at 8:30 am EST. You can join the webinar by typing into your browser or dialing +14086380968 or +16465588656.
Remember to review all the facts; pause, reflect and consider mindset shifts; turn off your cable news; do independent research listening to the earnings calls and…
Invest Accordingly!
Bill Ehrman
Paix et Prospérité LLC

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