Second wave fears

Last weeks we did see that the markets did go up and up nearly every day. As long as there was not too bad news, the markets did go up. Lots of investors used the dip in March to get extra equity exposure. Economies were slowly reopening and that gave confidence.

Large downtick

As I wrote last week, the market seemed to get too greedy. And when everyone is greedy, you have to be careful. We saw this on Thursday. The stock market made a strong retreat (-6% on a single day!) based on fears for a second wave. It has been clear that a second wave is quite a possibilty. There is quite some uncertainty about how the second wave would look like. Investors might soon start jumping from calling victory over the first wave towards fearing the uncertainty of the second wave.

Signals for second waves

It is good to keep an eye on new outbreaks of the Corona virus to understand how likely large second waves are. Some countries are doing really well at the moment. For example the Netherlands has the virus under control. When the Netherlands loosened on their Corona measures, there was no uptick at all in Corona cases (besides upticks caused by more testing). Shopping centres and the beaches were busy at times, but the virus did not come back yet. In Europe the situation is quite well under control. With that we saw the EuroStoxx move up much more than the S&P in the last weeks.  

Infections in some states in the US went up quite a bit. The following link gives you a good overview of where infections are rising quickly in the US:

https://www.nytimes.com/interactive/2020/us/coronavirus-us-cases.html

You can see that in quite some Southern and Western areas/states, the amount of infections is rising quickly. This came after reopening significant parts of the economy.

Another important thing to watch is if the BLM protests in the US will have a strong effect on the outbreak of the virus. So far it seems not be the case, but the protests are still going on and one needs to wait around two weeks to see the impact.

Meanwhile over the weekend new infections appeared in Beijing, China. Parts of Bejing are being put in lockdown again after 45 new infections appeared on Friday. The origin was a food market. Some imported salmon seems to be the cause of the new outbreak. It is a small outbreak and China understands how to handle it. But it shows that the dangers of travel and import/export are very realistic. 55 days went by without any infections in Beijing. It is going to be interesting to see how well the virus will be contained in the upcoming days.

economic damage has limits

When the Corona outbreak started, each country in the end did what it needed to do to stop the virus from spreading. And each country was able to do that. Most economies were doing fine before the crisis and it could hold its breath for a while. But the economy has its limits. A country cannot be too long in a lockdown without damaging the economy severely. A very damaged economy will bring a lot of deaths too. Lots of unemployment leads to poverty and even much more suicides. Poverty leads to bad hygiene and psychological problems. Politicians will take this into account. Hopefully there will soon be a vaccine, otherwise there have to be made very difficult choices. If the economy cannot take it anymore, do you still lock down the country or do you hope for the best and use quite a loose Corona policy?
The difference with the first wave is that we are now much more experienced with how to deal with the virus and with a lockdown. We know more about the virus and how it spreads.

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Greed is back

After the market crash that we experienced in March, markets did recover in the weeks/months after but the upticks of the last weeks do remind me of greedy investors. Investors that do not want to miss the train. People are getting greedy and that is normally a sign of a (local) high in the markets. The index and some stocks are heavily overbought. The S&P is only trading around 5% from the all time high and that just in the middle or at the end of the Corona outbreak crisis. The S&P is close to break even for the year. It does not make much sense.

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Irrational investors

Investors and analysts were at the beginning of the year thinking that the S&P was expensive and that it was time for a healthy correction. The Corona crisis was not a healthy correction but a crash. The outbreak seems under control but that does not mean at all that there is little damage done. Quite some companies have lost reasonable amounts of their revenues and supply chains are often messed up with part of the chains being damaged. There is no vaccine or effective treatment yet and because of that the economy can not run for the full 100% in the upcoming months. The general opinion is that there will be a rapid recovery but most forget to price in the risks that the economy is facing.

No bankruptcies yet

So far there have not been that many bankruptcies, which makes sense. Most companies, in the low interest rate environment, can survive a couple of months with lower revenues and low interest rate expenses. Though, slowly they are burning cash. Weak companies or companies with low margins will start to feel the massive pain after 6-9 months of lower revenues. Then they will get into liquidity problems. When the first major company will start getting into these problems there will be a chain reaction that will send the stock market lower again.

Markets getting mispriced

Make no mistake, I am not saying this is going to happen. But the risk of this has to be priced in in the markets. It might well have a 30% chance of happening. A 30% chance of a downtick of maybe 30% in the Index. That would mean pricing in a 9% lower index level for that scenario. In the most likely case we do see the economy recovering and we do not see major financial problems for most companies. Still, without the crisis, the economy and the job market would have been much stronger. The economy is an ill patient that slowly recovers but cannot run a marathon yet anywhere soon. In my honest opinion, investors are missing this point. Lots of (small) investors do not want to miss out on the rally and see no alternative to make money. Which is the same as the situation during the Bitcoin mania.

Greed is back

Greed is back. Greed is Good. For the ones that go against it. As Warren Buffett always says: “ Be fearful when others are greedy and greedy when others are fearful”

Why did we tick up so much on Friday?

On Friday the US came with their monthly job report which was much better than expected. It put more energy in the upticks and people seem very convinced that the economy will quickly recover.

Massive returns on outperformers

Some companies/sectors did outperform over the last weeks. Those were mainly financials, energy companies, insurers and (commercial) real estate companies. There were some really nice opportunities in the last weeks. Beaten down sticks that barely did recover. This paid off very nicely in the last week. Some stocks increased as much as between 50% and 100%. Currently there are still some hidden gems like this and for the ones that want to read about them: click below and go for a free trial if you have some money to invest.

Worldwide not under control

Markets have been behaving calmly in the last week(s). Countries do slowly reopen and things are going as planned. Meanwhile the rate of infections in most countries is going down. There are some outliers though and looking from a worldwide perspective the Corona virus is far from over and even not yet under control.

Netherlands doing fine

In the Netherlands the situation seems quite in control. Let’s have a look at the daily amount of infections.

Very promising. The Netherlands is reopening most of their economy slowly and step by step. From tomorrow onwards café’s and restaurants open their doors again. Under strict regulations and all according to the 1.5m society. It is going to be interesting to see if we get a small rebound in the amount of cases or not. To be continued.
Most countries are currently showing a similar graph as above. But not all.
The US is somewhat struggling still:

Problems in non Western countries

Most problems are currently arising in countries that were a bit lagging with the outbreaks like India, Brazil, Egypt, South-Africa, Peru et cetera.
Brazil:

Egypt:

India:

So in Western countries the virus seems getting under control, but it is clear that worldwide there are still regions having quickly increasing amount of infections. This will put some pressure on the worldwide economy and will slow down the speed with with international travel can go back to normal. Only a vaccine or effective treatment can bring some quicker help here.

Worldwide the virus is far from over

Worldwide we are still seeing very high number of new daily cases everyday, as you can see below. While we have seen global stock indices recover a fair bit, the danger is not far away.
Worlwide daily infections:

S&P:

Volatility should remain elevated and we can still see hefty reactions in stocks when things would go worse in Western countries again. I think the first time that a Western country has to make a step back towards a lockdown will be a possible trigger for a large sell-off again.

Stock pickers market

Till then, this stock market is a market for stock pickers. Some stocks have done really well while others have done really badly. Some stocks are currently better not to own, while some other stocks that got punished very severely offer very interesting potentials. In April I advised a couple of stocks that were highly undervalued and doubled in value in less than a month. For more insights have a look at the link below:


Calmness

Volatility in the market has been coming off as countries are looking forward and ahead of the crisis. Reopenings of economies are coming up. Restrictions are becoming more relaxed and the fear of a very strong Covid-19 death spike is slowly going away.

The next challenge

The next challenge are the reopenings themselves. The reopenings are a positive on itself but it is also important to focus on the behavior of the Covid-19 during the reopening. And that is quite a bit of a black box. Is a second wave coming? No-one knows. Can we go one step forward every week/month? Or is it a long fight with one step back now and then as well?

Problems yet to come?

Also, so far not many companies have been getting into severe problems yet. They are still surviving but for how long? Revenue levels are not going to be back at pre-crisis levels soon. Companies with a lot of debt or already in longer term trends of declining revenue streams might be hit hard even if the economy is partly or nearly fully open again.

Shell throwing in the towel

That it is not a quick recovery when economies open is confirmed for example by the fact that Shell decreased the dividend heavily. It was the last thing that Shell ever wanted to do. It means, as they said as well, that they expect the corona crisis to have long-term effects on the oil markets. They do not expect a quick recovery. Most people have bought Shell for the dividend. Shell never lowered the dividends since WOII. What a stock! Never sell Shell is what people thought. In the current oil business it is important for companies to decrease spending, focus on the cash flow and survive the oil crisis. The ones that survive will come out stronger. Oil is still needed for a very long time and is expected to peak somewhere around 2035. Normal demand, without the Covid effect, is expected to increase year over year.

Importance of a stock list

As an investor it is quite important to have a list of stocks on your radar to potentially buy in case of reopenings of the economies and a market recovery. Some stocks are still close to the year lows and are heavily affected by the Covid-19. Though, if things turn, these are also the stocks that do have an immense amount of potential as long as they are not overloaded with debt. To read more about these kind of stocks, you can have a look below.

Markets hope for Reopenings

Markets have stabilizied in the last weeks. The S&P posted two weeks of gains and the focus is going a bit away from the Coronavirus outbreak towards the Corona virus effects on the economy. Economic data in the upcoming weeks will give indications of how severe the crisis is going to be.
The Corona virus outbreak is slowing down, and the next question is how do countries partly reopen the economy and when? Do restaurants open soon again and what kind of measures will be taken. Can companies that depend on on-site sales stay alive even if the economy only partly reopens under strict circumstances?

Earnings season

The upcoming week is a very important weak for the market to start getting a feeling for the pain that the Corona virus has brought to companies in Q1. In March most of the pain started so we get some insight. Nearly a fifth of all S&P companies will have their earnings released this week. Next week I will look back and explain what information we have gotten so far. Even more importantly than just releasing the Q1 numbers is the guidance for the rest of the year and which measures do have to be taken. Companies might stop share buybacks, suspend dividends, reduce CAPEX or even do need to attract additional cash.
Last week the financial markets have been trusting the words of Donald Trump. He is trying to reopen the economy sooner than most expect according to him. Next to that there have been rumours that companies are getting close to a vaccine or an effective treatment for Corona. Gilead is believed to have found an existing medicine that might work well on patients that suffer from the Corona virus. Maybe it is true, maybe not. Already since February I have read many claims of people that companies had found some kind of effective treatment. So far these were mainly rumours and were more signals of hope than of facts. Even if there is a treatment or a vaccine, it probably still takes many months before large amounts of people do get access to them.

Do people dare?

Even when the economy would reopen rather quickly, would this exactly bring production and earnings quickly back to pre-Corona levels? Probably not. People will stay careful and the government will probably have strict measures that will stay in place for months/years to come. Just looking at Wuhan, China, shows that even when people are free to Dine Out again, they still do not. Restaurants and cafes are open but are quite empty. People rather want to be safe than sorry. People do not go out and prefer cooking at home. In Europe we might be different, but still I do not expect full restaurants anywhere soon. People probably do not want that and the government neither. At least till there is a vaccine available.
Nevertheless, some stocks will move up quickly and behave in a very bullish way when more information will come up in the upcoming weeks about partly reopening the economy. Why? They will start having revenues and can avoid getting into financially trouble. Quite some stocks are currently priced for bankruptcy and this can change very quickly. To keep on top of these companies, check below:

Just a Bounce?

In the last week stocks have done well. What is the reason for it? And is this going to be a long rally from here? Or just a bounce?

Reason for the upticks

Say the economy would be a patient. Let’s say the patient would get very ill, for example getting cancer or Alzheimer. Stock markets do not like uncertainty and would panic very hard while the patient (read:economy) is very ill and the future path is very uncertain. Then at some point the patient dies (read: recession is there). This would be the worst-case scenario. But somehow, the market does get the certainty of the state of the patient (economy) and can start looking forward again.

For diseases like Covid-19, the day that the most people get infected is probably close to the low of the markets. Currently, the amount of new infections has been stabilizing worldwide and gives the markets some freedom to start looking again ahead of the disease. This is a bit what is happening now. Markets start focusing again on signals that economies/countries might start partly reopening again in the upcoming weeks/months. For example, in the US they are currently assessing if they can start sport events without public in May or June.

Long rally from here?

That is not per se a likely scenario, it is one of the possible scenarios. It could also easily be a bounce that we are experiencing now. After which the markets decline again. It is all depending on:

  • How long does it take to get the Covid-19 completely under control?
  • The trade off that countries make between saving lives and saving the economy?
    • At what stage do they (partly) re-open the country again?
    • Do they come with extra stimulus every week? Or do they have to let a lot of companies go bankrupt?
    • Do some politicians think more about their elections and try to save every single life instead of doing what’s best for the country as a whole?
  • How severe the recession will be and how well the financial system can cope with that.

The recession still has to come and economical figures in the upcoming months will give indications how severe and long the recession will take. The current situation is very exceptional and no-one or only few people do have a good idea how the economical landscape will look like in a few months and years.

Every crisis brings long-term benefits

People and countries learn from difficult times. It is easy to live in a world when things are going well, but when things are difficult people do need to get creative. A lot of people in a lot of jobs are currently finding out that working remotely from home is not that bad and can actually work very well. I expect that in the future, lots of more people and companies will offer people to work from home more and more compared to the situation before Covid-19. This can have enormous benefits. Less hours do get lost in travel (less traffic jams), people working more efficiently and last but not least the environment benefits as well.

US epicenter & Dividends

The US is becoming the epicenter of the Covid-19 outbreak. Trump has been downplaying the virus in the beginning and currently has to come back on that. He is becoming more and more unbelievable with the minute. Slowly he is risking his re-election. His impulsiveness can become very costly. An example is him saying last week that with the Eastern weekend all shops should reopen again. How can he say that when the outbreak of Covid-19 in the US is in the early or middle phases and can still take months to be solved??. He should not try to make promises and he should take the disease more seriously. He also made a joke of himself a couple of weeks back saying that Wall Street would be thrilled with the FED cutting rates, after which the market tanked over 5%. In the past he came away with all his impulsive speeches as the economy was doing well and unemployment was very low. He always did measure his success with the success of the economy. He can do that now again, but then he has to admit that he failed. He won’t do that.

Source: https://www.worldometers.info/coronavirus/
No dividends in 2020

As expected, companies are having a rough 2020. Lots of companies will not make profit and should not pay dividends this year. Companies are being helped a bit by pension funds and large institutions asking them to skip the dividend. This makes it easier for all of them to skip it. Normally it is a big deal for a company to disappoint the shareholders, but now the shareholders will understand it. Nearly all banks will suspend their dividends and share buybacks and I also expect a lot of other companies that are hit by Covid-19 and are paying significant (read: over 4-5% dividend) to skip the dividend this year. Also, the ECB has asked banks to skip the dividend till at least the 1st of October of this year, to strengthen the balance sheet in these difficult times.

US Jobs Report

Interesting to watch this week is the job report from the US. The report will be published on Friday and will show how many jobs were lost in April. The expectation is 300k jobs have been lost in March, but the big declines still have to come in April onwards. Also, there are expectations that the unemployment will rise from 3.5% before the crisis towards double digits during this year! These are important possible developments for the stock market. But the most important for the current week is to see if the US, and primarily NYC, get the disease somewhat under control. If not, more severe measures need to be taken and the stock market has significant room on the downside. High volatility is expected to remain and it will be another exciting week!

60+ Lockdown

Currently there is no stopping of COVID-19 and it is escalating in Europe. There are a lot of people who take the measures seriously and do live according to the ‘social rules’ that governments have come up with. But large numbers of people do not. This is a concern and not helping getting out of the crisis. That is the disadvantage of all having stubborn own opinions. Like we all know better how our favorite football team should play, we all are our own virologists. The virus started in December 2019 in China and for a long time it was mainly a ‘Chinese’ virus. China has the virus under control. In Europe numbers do increase rapidly and the situation in hospitals, especially in Italy, is getting very worrying.

Source: https://www.worldometers.info/coronavirus/

Governments are trying to limit the economic damage and do come up with large stimulus packages to compensate company losses and to avoid massive layoffs. Lockdowns can be effective to stop the virus from spreading, but they cannot take forever. The economy can take it for a couple of weeks, maybe 1 or 2 months? But at some point the economic damage is getting too large. Public health comes first. A complete economical disaster will also hurt public health. People are losing jobs, get stressed out, suicide numbers go up, welfare goes down drastically for large groups, et cetera.

Whats next?

The problem for the financial markets is that no one exactly knows what scenarios are likely in the upcoming months. If the virus does not get under control, do countries keep extending lockdowns? Or do they just at some point get out of lockdowns and come up with more creative solutions, in which restaurants and shops can be opened again? And does anybody have a good idea how far we are away from infection peaks? There are no clear answers and the market does not know how to price itself.

60+ lockdown

At some point we might have to accept that we do not have full control over the virus. But the economy needs to keep running somehow. People need to have money to buy bread. The government can only help the people for so long. One thing we know for sure: people above 60 years old are most at risk. Quite a large part of 60+ individuals does not work anymore and not having them in the workforce is not a severe problem. An idea could be to force a 60+ lockdown (and maybe also other people in risk categories). These people cannot leave their homes. Food needs to be delivered to the door, no one should enter their homes. And if necessary for assistance, nurses should be checked on temperature before they come in contact with the 60+ individuals.

Back to normal

With a 60+ lockdow, life can go a bit further back to normal again. People should still work from home if possible. But shops, restaurants, cinemas, et cetera can go open again under certain (strict) rules. Quite some young (healthy) people will get infected but only a small part needs to get to the hospital. Slowly the country builds up group immunity, with not too many mortalities. This is a situation that is acceptable to be in for longer time, like a year. Probably till there is a vaccine. And maybe the virus does go away in summer and everything can go fully back to normal. Countries need to go to more creative solutions instead of going for drastic lockdowns which are panic reactions. Panic reactions are fine for a short time, but not a permanent solution.

Long Toilet Paper

People started panic buying. Not stocks but toilet paper, which is obviously more important to survive. The irrational thing is that people are so scared to get infected, but they all run to the supermarkets. The density of people in the supermarket is so high. It seems people find it more important to buy toilet paper and pasta than to not get infected. People follow what others did in other countries. They were panic buying so it also happens in the Netherlands. It also does not help that prime minister Rutte said not to start ‘hamsteren’ (read: panic buying). It is like publicity. Bad publicitiy is also publicity. Saying the word ‘hamsteren’ is what people hear.

Europe is the new Wuhan

Europe is the new epicenter of the Corona virus pandemic. Which is not so great as Europe is everything but a unity. Every country decides what they want to do themselves. And they are all having different opinions and ways of dealing with stuff. There is no good coordination between countries and everyone tries to save its own ship. Most of Europe is closing its schools, the Netherlands leave them open (just heard they close them as well, but you get the idea). Governments are just trying stuff out, instead of following the examples that are set by China and for example Taiwan. They should consult with those guys and decide on what to do. Ofcourse, China is different than Europe. In China there are cameras to check if you leave the house or not. If you do, you are in problems. In Europe, such things are unthinkable. Current extreme privacy policies are also not helping tackling the problems. Europe is too liberal to follow Chinese disease dealing standards, but still we can learn from them.
A benefit of this all is that the CO2 and nitrogen emissions are going down massively, so that we can pollute the earth further in the next years to compensate (that is a joke).

People went long toilet paper, selling stocks

The stock exchange has been pricing in most of the current trouble regarding the Corona disease. Last week stocks sold off heavily with most indices falling around 20% in one week, after Italy put the country on a lock down. More countries are following now and that was where all the panic was about. The upcoming week will be volatile again. On Friday we saw a huge rally on Wall Street, based on Trump declaring a state of emergency and freeing up $50bln in additional funding. In the end he did not say that much actually, but the stocks moved up hard with the S&P gaining as much as 9%, where at 17:30 the AEX was still unch and the S&P was up a couple of %.

What about tomorrow?

For Monday I expect a retreat back down with the S&P opening down 3-5% and the AEX opening unch. The weekend did not bring much relief and wordwide cases are still rising more day after day. Not in a panicky way but they are steadily increasing day to day. Add to that that governments have restricted traveling further and for example Spain has followed Italy in locking down the country. If these measures show any virus slowing down in the next days/weeks, I expect the stock indices to have bottomed.

Quite some stocks are oversold and are punished severely. Some of them do offer great risk/rewards.

Volatility remains & OPEC disaster

Volatility is staying in the markets for now. Last week we saw an initial rebound in the stock market on Monday, after which we saw a decline in most of the rest of the week. The FED tried to soften the market volatility a bit by cutting the federal fund rates by 50bps to a range of 1-1.25%. The FED tries to stay ahead of economic disruptions caused by the Corona virus. Markets initially bounced quite quickly, but went back down. The FED cannot do much to stop the Corona virus from spreading. It is not the case that investors are losing faith in the economy. They are worried about the virus and the FED cannot significantly change those worries. More central banks are expected to cut rates. Though, the only thing that will really help on the short/medium term are indications that the Corona virus is getting contained and that no new outbreaks are being expected. For now, the outbreaks in Italy, South-Korea and Iran are not yet under control.

Italy taking strong measures

To stop the Corona virus spreading further, Italy has taking some strong measures. Italy is locking down much of Country’s North. Around 16 million people are in quarantaine till at least April 3rd.
In the mean time investors are waiting for the time that daily new infection cases do go down. Below you can see an overview of the new daily cases of the Corona virus (red bars). Over half of the daily cases are currently coming from Italy and Iran. In China the virus seems very well contained.

Source: https://gisanddata.maps.arcgis.com/
Opec disaster

As the Corona virus has been wiping out a significant amount of demand for oil on the short/medium term, the oil price has been crashing. 2020 started with an oil price around $60 and currently we are close to $40. On Friday the oil price went down nearly 10% as Russia did not want to agree to the OPEC production cut. With this, Russia is breaking a long-lasting good relationship with Saudi Arabia and OPEC. Yesterday, Saudi Arabia hit back and announced massive discounts on their crude oil prices for sales to Asia ($4-$6) and to the US ($6). With this, Saudi Arabia is starting a price war on oil which does not benefit anyone. It is possibly a way to try to get Russia back to the negotiation table for oil production cuts. But I do not think Russia likes this behavior at all and will not blink too quickly. Oil prices will open dramatically lower on Monday (probably somewhere between -10% and -15%) and will possibly see heavy pressure in the upcoming weeks.