Your Week In Brief

Locked up Abroad... and at Home. Also, an Ill-prepared Nation Fails a Fatal Dress Rehearsal.

Gregory Bergman
    Mar 13, 2020 2:20 PM  PT
Your Week In Brief
author: Gregory Bergman   

Go West, Not Metro-North,Young Man

New Rochelle, a small town in Westchester County just north of New York City, is on a quasi-quarantine, limiting large gatherings after it emerged as the epicenter of the state's coronavirus outbreak. The state has a planned "containment area" with a one-mile radius centered around a synagogue in New Rochelle believed to connect many of the cases in the cluster, officials said. The National Guard is being deployed to clean schools and deliver food to quarantined residents. New York, along with California and a handful of other states in the U.S., has declared a state of emergency. 

Escape From New York   

So, welcome to Wall Street -- soon to be Wuhan Street. For weeks, analysts have been asking themselves the same question: Is the market panicking on news of the virus, COVID-19, or is the virus news just sparking a selloff based on a weakening economy? That question mattered when the virus was in Wuhan and being contained. It doesn't matter now because the virus is going to cripple what was a solid U.S. economy. (The market today is not the beginning of some lasting "comeback").

Yes, this is still not 2008, despite freakily similar trading activity, with usually safe-haven assets like bonds and gold going up and down with stocks, not trading in opposite directions. But the uncertainty will end even as the recession hits -- and these safe assets will be attractive again as the market slowly recovers. While we are heading into a recession caused by the virus, the banks are well-capitalized. We may enter into a recession as bad as 2008 for the next eight months, but the recovery will be faster. 

Make no mistake, New York City, where I live, will be on lockdown within a month. And while this sounds like panic, when Angela Merkel says in her typically sober Teutonic tone that 70% of Germany will get the virus if they don't act, well, then, it is time to act. In America, experts say one-third of the population will get infected. So, if you are not practicing social distance now, you are at the very least being irresponsible, and at the very worst guilty of manslaughter. Even if you are young and healthy, do you really want to be the conduit for infecting someone who is at greater risk? 

The world is watching, and this country is failing to provide the containment, the testing, and the bold, comprehensive economic relief package we need to deal with economic impact of the virus--a payroll tax cut won't cut it Mr. President. 

Fatality rates are estimated at between 1% and 3%, which means it is not Ebola, but it also not "just like the flu" as overly sanguine morons suggest. When it comes to deaths, we are still talking about World War numbers. But this is really just practice. One day there will be the virus that is as transmissable as this COVID-19, but as deadly as Ebola. It is only a matter of time. Viruses are part and parel of our evolution, and what viruses giveth, they also taketh away. This is the dress rehearsal, and we are failing it on every level. We are the richest country in the history of the world and we can't even get our people a test. 

(Testing stock Quest Diagnostics (NYSE: DGX) is poised to benefit. Also, buy the other company, Roche (OTC: RHHBY), that shared the stage during Trump's afternoon address Friday). 

The Downside of a Faux Dictator in a Real Democracy

You can't bullshit a virus. It doesn't care who you are or what you say or where you live or how much money you have. There is no "deal" to be made. Ironically, Trump has the right authoritarian instincts to meet the coronavirus challenge. Well, he has exactly half of those instincts. Like any authoritarian, he will lie about how many testing kits that are ready to be deployed, or how quickly the virus is spreading, or how deadly it can be, or how close they are to a vaccine -- all to save face. 

That's the bad side of authoritarianism. But there is another side of authoritarianism, a side that China has shown (once it showed the bad side), and that is the side that enables the government to take extreme measures without much, if any, protest. Trump also has this instinct, which he showed he wanted to keep the coronavirus cruise languishing off U.S. ports in perpetuity. 
The sad truth is this is the right instinct, but it is too late for containment now, and, if you think taking the kind of actions in a free society like Italy was hard, in America, where the libertarian streak runs as deep as its rivers run wide, it is even harder.

So, we are left with a wannabe dictator and his lying lackey, Pence, who says the risk of getting the virus is "low" on the same stage as an actual expert who says the opposite. With Trump, we have the worst of both worlds -- a dictator without a dictatorship. Worse, actually, we have someone who needs the unwavering praise a dictator receives, without any interest in actually doing any work. Lock people up? Okay, so long as his supporters like it. But don't bother him with details; he'd rather golf. 

Self-Quarantining is More Enjoyable With an Open Kitchen

The coronavirus will be an interesting (not interesting enough for me to go outside) experiment to see just how many people can work from home, and just how flexible this economy is. We are starting from a strong place economically, especially in housing. This was not a housing crisis but a health crisis compounded by mixed-messaging from both the president and the Fed he complains about. The rate cut wouldn't do anything, just like I said before. The Fed will cut again to what, negative rates? If so, all the more reason to buy housing stocks and ETFs, as mortgage rates drop even lower, and lending remains credible, responsible and non-2007ish. Also, they are not the China supply chain issues on housing stocks -- unless you want to buy a steel house or one made from bamboo (my stepfather once had a steel home business -- don't even get me started). 

Here are some easy ETFs to bet on in American housing. These have rallied a bit but are still down and will keep going down but even at these levels I would buy and hold for 18 to 24 months minimum. 
For these longer-term housing plays, buy:

  • Homebuilders ETF (XHB) 

  • iShares U.S. Home Construction ETF (ITB)

  • Direxion Daily Homebuilders & Supplies Bull 3X Shares (NAIL)

But let me be clear: overall, this is not the time to buy or sell like crazy, but to hold what you have during this unnatural downturn caused by the virus. If you want to play it safe, do not throw out your long-term portfolio. If you do sell off, you will regret it within a year. Average retail investors aren't selling much into this volatile market; this extreme volume is basically big money going back and forth, and up and down on short term plays. In an interview with Yahoo Finance, Vanguard backed this up with some data. 

"During the last week of February and the first week of March, the majority of households trading moved money into equities rather than into fixed income (bonds and cash)," Vanguard's Amy Lash told Yahoo Finance. "More than 7 in 10 households trading moved into equities."

According to Yahoo Finance, Lash said that from Vanguard clients, only 1% are making trades, compared to a typical day's 0.4%. Not much difference. As for people with only retirement, not brokerage, accounts, those have been very hands-off. The average retail investor is looking ahead, playing it safe and holding, which is exactly what they should be doing amid this uncertainty. 

Short Term Buys:

Don't. Just don't. 

Instead, short Expedia (Nasdaq: EXPE) and (Nasdaq:BKNG), travel stocks are the ones that have suffered and will only get worse once abysmal earnings come in.  

Death in Venice

Last week, to contain the coronavirus, the Italian government put Northern Italy on lockdown. Northern Italy has long been the country's economic engine; even Rome hasn't been really much of an economic powerhouse since the Goths sacked the city in 410 AD (except for the Vatican, which tends to do always do well; nothing is more recession-proof than selling guilt and fear of eternal damnation). It would be nice, though, if the Pope could just this once sell a painting or two, easily tacking on a hundred million or so to Italy's now $8.4 billion stimulus package. 

So, last week it was Northern Italy. This week, all of Italy is on lockdown as the number of confirmed cases in the country reached 10,000. Death rates have been even higher in Italy than Wuhan, and with one of the best healthcare systems in the world and one of the highest life expectancies, this might mean the virus has mutated into a stronger strain. Or, these higher death rates might just be the product of Italy's aging population. 
The immune system, unlike a fine Italian wine, doesn't get better with age. To continue this lazy analogy, wine doesn't do well when left out in the blazing heat, and neither does the virus, which is why I have never been more excited to face the always hideously hot and humid NY summer. I hope it hits soon and hits hard. Maybe global warming can save us before it kills us. But we will talk about oil in a bit. 

Airplane Stocks Crash Yet Again 

Stocks affected by Italy's shutdown that will bounce back (within six to eight months) and may be at a bargain now are European airline stocks like Ryanair (Nasdaq: RAYYA) and EasyJet (OTC: ESYJY), both of which have been severely impacted. Milan is a big hub for flights in the European domestic market; these companies are long-term holds, offering a level of service for the price that makes American Airlines look like, well, American Airlines. Which, although Warren Buffet got slammed, (he also got slammed on bank stocks and oil stocks Monday), is also a buy. 

In fact, major airline stocks are all a buy and will go back up within eight to 12 months and significantly pass where they are trading now. Southwest trades at 10X earnings while the others trade at 5X earnings, but Buffet owns a significant portion of SouthWest and there have been rumors that he might buy it outright. But Buffet can be wrong. In fact, Buffet once said this about the airlines: "If a capitalist had been present at Kitty Hawk back in the early 1900s, he would have shot down the Wright Brothers' plane." Considering the fact that their margins suck, and they always need the government to bail them out, his first instinct was right.

But if you do bet on airlines, I would bet on American Airlines. Even though it might fall further, it has fallen by more than half and is now trading at about $13.50 per share. I'd pick this one up and hold. The chances of one of the major U.S. airlines going bust for good in the next six months is very possible. 

So, you can play with air stocks, but I have always said to stay away from cruise stocks. Too volatile. And this time, the stigma is going to stick for much longer than yet another sinking incident. That said, if you really want to play the sea, pick up Norweigan (NYSE: NCLH) -- it's down from nearly $60 per share before the crisis to now around $10 per share as of early Friday. As much as I hate the industry, NCLH is a buy.

Maybe It's Time to Get Off Oil? Just Saying... 

After all, the energy source is destroying the planet, and, if you don't care about that, maybe you care about having to put back on your mask to protect yourself from pollution right after you (likely) survive the coronavirus. Not only that, but as this week has shown our dependence on this fossil fuel can wreak as much havoc on the markets as it can on marine life. 

The U.S. is the biggest oil producer in the world. This is a huge accomplishment economically and geopolitically, as the nation is no longer able to be brought to its knees by OPEC the way it was decades ago. It is also the main reason why American oil-related military adventures have all but ceased. Now, we may have to fight wars again for reasons, at least in part, like stopping fascism or ending slavery or, like in the case of Grenada, just because -- well, what could go wrong?  

It was possible for America to overtake countries like Russia as the world's biggest oil producer due to improvements in drilling technology. Fracking, as it is called, enabled U.S. oil producers to get to the oil that lies in huge deposits in this country deep in layers of shale rock extracting what is called -- wait for it -- shale oil. You know what also enabled companies to do this, especially small and mid-tier ones? Debt. A whole lot of debt. 

That's why when oil prices plummeted Monday, banks that are exposed to a lot of this debt also took a hit. Because while fracking made shale oil possible, it is still more expensive than crude oil, with a breakeven price of $45 or more per barrel range. Heavily indebted, these companies won't be able to service their debt at these low prices, and thus the fear is that they go belly up. 

One such company, Occidental Petroleum Corporation (NYSE: OXY), lost more than 50% of its value on Monday. 

As for the banks, if Goldman and JP Morgan, who helped cause the financial banking crises in 2008, recovered to be better than ever, bank stocks will recover from this and I wouldn't wait too long to buy. Of all bank stocks, I would pick up Wells Fargo (NYSE: WFC), the new CEO Charles W. Scharf did a great job at Visa. The stock will continue to fall like everything today but even at this price, I think Wells Fargo is a good guy long-term buy. 

From Russia With Loathing 

Call it payback for sanctions or the annoyance over losing the dubious honor as the world's biggest oil producer to the U.S. in 2018, whatever it was when Saudi Arabia announced it would call to cut production to mitigate oversupply, Putin made his move. Shocking the market, he broke from OPEC and decided not to cut production. 

This led to an all-out price war between the two countries, precipitating oil prices to drop so far so far that Elon Musk himself almost bought a Hummer. 

But although on the surface there is a fight between Saudi Arabia and Russia for market share, almost every analyst agrees that Putin is really after U.S. shale oil companies -- the more of which he can destroy, the lower oil prices go.

 Will this hurt Russia's already weak economy? Of course. But Putin would bite his nose off to spite America's face any day of the week. As for Saudi Arabia, they cannot win this oil battle with Russia because as oil dependent as Russia's economy is, Saudi Arabia's is twice that. Some analysts think the Saudis and the Russians are actually working together to hurt U.S. shale companies, and that this "oil fight" is just a smokescreen -- pardon the pun.

 Considering our alliance with Saudi Arabia, despite the occasional borderline homoerotic displays of friendship in pictures between American and Saudi Arabian leaders, it is about as solid deep down as the Twin Towers was inflammable, I wouldn't put it past them. But it's all our fault; it is all a product of an oil addiction we just can't kick. 

Looking back 50 years, the oil crisis showed us what high oil prices can do to cripple our economy. Today, low prices, while not damaging to the consumer, theoretically, they could be if credit markets and the banks take a hit as a consequence. Either way, oil has shown us to be as shaky as a trailer home on a fracking fault line (in fairness, while hydraulic fracking -- the injection of wastewater into disposal wells can trigger earthquakes ostensibly by increasing pore pressure and destabilizing fault lines, rarely has fracking itself been identified as the source of tremors). 

This oil crisis will blow over, but the U.S. shale industry will take a hit. We have tried, but even as the biggest producer we will not control the future or the market of oil. We can, however, control the future of solar, wind, and other renewable technology. But that won't be enough. So, let us have the courage to turn the drills off and the nuclear reactor on -- at least until solar and wind become cheaper, or AOC learns to power the world with her mind. 

Note: Even with more nuclear power, and an aggressive move to renewable energy, we are going to need oil for another 50 years (sorry Berrnie Bros)-- clean cars are a lot easier to make than clean sueprsonic jets. One oil company I like is Hess Corproation (Nasdaq: HES), whose diversified portfilio, good capitalization and management, and interesting Guyanese play, make it a good long-term buy. 

What're You Going to Do Now That You've Survived? I'm Gonna (Buy) Disney Stock!

...and Microsoft (Nasdaq: MSTF), which at $144 per share, is a buy. It may go lower but this is a decent value to get in and stay in. 

The safest bet of all the great American companies with a high upside potential, however, is Disney (NYSE: DIS).

The company has become even stronger with its big and successful bet on its streaming service, Disney+. With the parks closed on the coronavirus, the stock is a good enough buy now at $96.50 per share, having fallen from around $140 per share before the selloff.

I am very bullish on Disney, and although the stock may fall further I would pick it up at this price now -- the stock will be back up to $140 levels before long and double the current price by the summer of 2021. So, no rush. 

This, along with the forthcoming quarantine, should give you plenty of time to catch up on "The Mandalorian." After you finish rewatching "Outbreak" and "Contagion," of course. 

NOTE: Stocks chosen as BUYS were mentioned in a live stream as of premarket Friday. 

(The opinions expressed by contributing analysts do not reflect the position of CapitalWatch or its journalists. The analyst has no positions in any stocks mentioned, no plans to initiate any positions within the next 72 hours, and no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)