once the worst has passed–Instacart

It’s probably not too soon to start imagining what changes there will be in daily life once the coronavirus is under control.

home food delivery

Online ordering through Whole Foods or Amazon has been impossible.  The wait for a Costco delivery slot has been two weeks+   …until yesterday, when suddenly (I hadn’t looked for a while) slots for same-day as well as every day for the next week were available.  Everything I ordered was in stock–delivered three hours later  …another change.

To me this suggests that panic buying has subsided.

Instacart

What really caught my eye is Instacart, which powers many food delivery services.  Not in a way that makes me itching to invest, though.  The markup on the food was 26%, after including a 5% tip.  That’s a lot, I think.  For a family of four that spends $1000 a month on food, Instacart would cost an extra $3000+ a year.  During a pandemic, this is probably not an issue for most people.  But in normal times, this seems pretty steep to me.

I don’t think home delivery will go away.  But it seem to me that potential new competitors have lots of room to undercut Instacart’s markup.  Also, it would seem to me that delivery from centralized warehouses is inherently less costly than hiring someone to shop in a supermarket in your place.

a surprisingly hardy breed

A caveat–two, actually:  I’m not an expert on supermarkets; grocery is, to me, a weird and wacky industry, with greater staying power than I would ever have imagined.  My town, for example, offers only a number of very dated, inefficient food stores.  A national chain has been trying to build a superstore for over twenty years on commercially zoned land it bought from a department store moving to a nearby mall.   Protests by “citizens’ committees” funded by the incumbent grocers have blocked redevelopment, as I understand the situation, despite the deterioration of the neighborhood as small businesses in need of an anchor have left.

The economics of physical grocery stores is also more complex than I would have thought–all mixed up with payments from manufacturers for premium space, the role of house brands, ancillary services like banking or a pharmacy…

Anyway, this is to say that supermarkets may be harder to kill than it seems on the surface (just look at department stores, which have been dying for almost fifty years).

 

opening back up?

The US as a nation is beginning to relax the most severe social distancing measures put in place to make sure a tidal wave of COVID-19-infected people wouldn’t overwhelm the medical care system.

I have no idea what’s going to happen as we recover, but I’m willing to hang my hat on two ideas:

–the key issue is hospital capacity, and

–that reopening will continue, with the throttle being opened or choked back, not by the number of new virus cases, which I think will likely rise, but by the availability of hospital beds.

 

The stock market senses this policy shift and is starting to react.  “Starting” may be a bad word.  The Russell 2000–mid-sized firms with revenues and costs in the US–was down by 40% ytd a month ago.  It has risen by about a third since then, meaning it’s still down by a bit more than 20% ytd.

Banks, hotels, cruise lines, restaurant chains all show similar patterns.

Just as important, secular growth, capital flight tech names, which have been very strong so far this year (MSFT is up by 10%, for example, the ARK Genomics ETF is +20%  (I own both (btw, I really like the ARK people and own several of their ETFs)), are beginning to lose steam.  (This is really a horrible sentence.)

What to do?

This is, of course, mostly an issue of investment philosophy and risk tolerance.  For what it’s worth, I’m very aggressive, have a portfolio I actively manage, where I’m very heavily weighted toward tech.  I’ve begun to shift a tiny bit toward the names that have been crushed by pandemic fears.

So far I’ve bought a Russell 2000 ETF and established a small position in Marriott (MAR).

I’ve thought about the cruise lines, which are the swing for the fences “value” bet, and decided I don’t know enough and don’t want to take the risk.   There should be (I haven’t looked) a ton of very recent information on the SEC EDGAR site about Carnival (CCL) given the company’s recent financing, which should give prospective buyers some comfort.  But at the end of the day I can imagine taking a small-boat river cruise but I’m not a CCL customer.

I also thought about Boeing (BA), but I’m not sure I have any clue about the depth of incompetence and corruption involved in the company’s newest commercial aircraft development.  My experience suggests we’ve only seen the tip of the iceberg.  The counter-argument is that BA has a substantial defense business and that it’s one of only two major aircraft manufacturers in the world.  So it can’t be allowed to fail.  I’m passing, though.

(An aside:  the key to investment success is not to have an opinion about everything;  it’s to know more than most about a few things that you monitor carefully.)

Why MAR?  A simple answer is fewer warts than CCL or BA.  I know something about the company and use its products.  Also, by and large, publicly traded hotel companies don’t own the physical hotels.  They provide branding, property management and reservation system services, in return for taking the lion’s share of profits.  Yes, less upside than with property owner CCL, but also less risk that my ignorance will come into play in a bad way.

Assuming I’m correct about this market shift, is this just a counter-trend rally?  Yes, but…  There may be a quibble about the word “just”;  but this domestic-centric rally could go on for months.

At some point it will be important to have ideas about how the post-pandemic US will be different.  I’m not sure that’s right now, though.  I think it’s better to be trying to figure out which firms will lose their appeal in a post-pandemic world–and use them as a source of funds to play the current rally.

drinking bleach and the S&P

Last Thursday, speaking in his position as President of the United States (ex cathedra, as it were), Donald Trump said that injecting disinfectant into a patient’s body might be a good treatment for coronavirus.  He’s not a doctor, but he has a good mind; implicitly, how hard could it be? He later excused his remarks by saying he was being “sarcastic.”

“Drinking bleach” is an apt metaphor for the Trump presidency, if not for Donald Trump’s career as a whole.  There isn’t the slightest hint that Trump isn’t serious in offering this “advice.”  The message is vintage Trump. It’s pithy; it’s easy to understand.  It’s also loony. And like almost anything Trump is associated with, it’s most damaging to those who trust and support him.

( side notes: even rookie managers know never to use irony on the job, because of the very real risk of being taken literally.  Also, Trump has no clue (consciously, at least) what the word sarcasm means (i.e., “words to wound,” intended to taunt, demean or otherwise injure the addressee).)

This frightening performance comes as domestic coronavirus casualties have exceeded total US deaths from the Vietnam War and are approaching 10x those from Middle East conflicts. The Trump camp is now embarking on a chillingly Stalin-esque attempt to revise history and cast blame for his months-long coronavirus denial on Alex Azar, his Secretary of Health and Human Services.

 

As regular readers will know, my view is that Trump has done a lot to damage the long-term economic prospects of the US–deficit-inducing but useless tax cuts for the ultra-rich, the attack on the Federal Reserve, undermining the domestic auto industry, weaponizing–with the risk of ultimately disenfranchising–the US banking and capital markets systems, halving GDP growth potential by attacks on immigration, pardoning military criminals, punishing loyal officers…

Last Thursday marks a new low, though.  It was like seeing the home team’s ace pitcher taking the mound.  He’s a career minor leaguer with a checkered history.  You fret about his fastball and his control.  But these end up not being issues, because he’s lost so much arm strength that he can’t throw far enough to get the ball to the plate.

 

How can the stock market be going up after this?  Two reasons:

–we saw the man behind the curtain last week, so there probably are no more negative surprises there

–the economy is in the earliest stages of opening up again.  This is not to say COVID-19 is in the rear view mirror.  It’s a judgment that the health care system will be able to manage the level of future infections.  In typical fashion, Wall Street is beginning to sort through the debris of cruise ships, hotels, restaurant chains…to separate potential economic rebound winners from losers.

 

 

 

 

 

 

an ugly day…

…but this sort of stuff happens.

I don’t think today’s decline is about oil or Donald Trump or the pandemic.

The 2020 low (so far) occurred about a month ago.  If we’re going to return to “test” those lows, now would be about the time, based on past occurrences, when the market would flatten out and begin to drop.  This may be the first step down that path.

There is an alternate pattern, which I’ve been thinking about a lot since hearing the double bottom thesis being almost universally accepted.  It’s the somewhat older idea that the market pulls out of a nosedive when policy measures are put in place to address the problem that has been forcing the market down.  There’s an initial anticipatory rally, followed by sideways movement until the market gets hints that corporate earnings are beginning to improve.  That’s when a sustained upward market movement starts.

We’ll have a better idea in the next couple of weeks whether this market is following either of the two patterns.

An aside, sort of:  I read newspapers online from the US, the UK, Germany and Japan every day.  Well, at least the headlines and I catch up on the weekends.  I’ve noticed a significant increase in the number and bluntness of negative press comments about Mr. Trump and those who surround him, on two fronts:  that local leadership may be totally inept, but at least it’s better than Trump; and growing dismay at his white racism and his constant lying.

We’ve already seen the economic damage he is doing to the country reflected in the 15% fall in the Russell 2000 since his inauguration (with the lion’s share of the pain inflicted on his supporters (vintage Trump, in my view)) vs. a 50%+ gain for NASDAQ.  If there were an obvious alternative to Wall Street, I think we would already be seeing multiple contraction as well.

 

If I’m correct, investors like us are facing an unusual conceptual decision:

we’ve already had a short back-from-Chapter 11 rally among domestic firms hurt by the fact of the coronavirus and by the continuing bungling of the Trump administration.  At some point there must be a market move to sell winners in order to pick and choose among this wreckage.  On the other hand, the more Trump we have the more damage to the second group–therefore the shallower and shorter-lived any bounce will be.

Taking a somewhat longer-term view, given that the Democrats have yet to address any of the social issues that caused ordinary citizens in rural America to choose Trump–poor schools, jobs, medical care…–it’s at least thinkable that he will be reelected.  If so, London and Hong Kong may look like better bets than Wall Street.

My instinct at this point is to get ready to buy hotels and maybe restaurants but to wait before acting to see how the overall market will develop over the next couple of weeks, as well as whether the rush to reopen some states will turn into the medical disaster many fear.

 

 

 

oil at $10 a barrel

In my early stock market days, one of my bosses sent me on a tour of commodity-trading centers to get me up to speed on palm oil.  This was so I would understand the plantation stocks in Malaysia.  I mentioned to one head of trading I spoke with that my trip was part of a months-long project.  He looked at me like I was an idiot and slowly (so that even I could understand) explained that commodities were all about gut instinct and decisive action.  He hired good high school athletes, not scholars.   A classic jock vs. nerd confrontation.

This is to say that I’m not a commodities expert.  So maybe you should take my comments about crude oil with a grain of salt.  Anyway,

–crude for May delivery plunged over the weekend to right around $10.  On Friday April 3rd a barrel was going for $28+

–the main reason is that oil production is still miles ahead of oil use and there’s no easy way to store excess crude oil output

–this is an epic low in inflation-adjusted terms.  Saudi crude sold for less than $3 a barrel in dollars of the day in the early 1970s and rose to close to $30 in 1979-80, before plunging to $8 (about $27 in today’s dollars) in the recession that followed

–there would be an arbitrage opportunity if there were storage, since crude for August delivery is trading just under $30

–this is where my not knowing oil trading hurts:  I would have expected that future months would have collapsed in line with the current month.  I read this as traders thinking the May situation is a temporary blip, but I really don’t know

–for many years natural gas has sold at a substantial discount to crude, on a heating value basis.  Today they’re roughly equal.

my stock market take

The oil market is saying this is a temporary blip.  I’m not so sure.  But I don’t know.  And the energy sector is so small that I don’t need to do any more than observe.  So I’m going to sit on my hands.

If it persists, this situation is very bad for third-world countries like Venezuela or Russia that are radically dependent on oil.  It’s also not good for the oil countries of the Middle East, which have similarly one-dimensional economies.  They can likely continue to produce at a profit even at today’s price, but I’d expect that their governments would be forced to begin to liquidate their foreign investments as budget deficits soar.  This could have a negative effect on global stock and bond markets.

The largest effect on the US is a redistribution of wealth away from the big hydrocarbon-producing states to the consuming ones.  In theory, this should be an overall wash.  But since there’s very little discretionary driving going on, I think it’s a mild negative.

The price fall is good for the EU and most of Asia.

The US stock market is flattish, despite the oil price.  Both NASDAQ and the Russell 2000 are up slightly, suggesting that neither industries of the future and small business will be hurt by lower oil.  Even the Dow, which is showing its deep roots in industries of the past, is only down by about a percent.

An addendum (stuff I just found out):  the May crude contract expires tomorrow.  The holder is required to take physical delivery of 1,000 barrels/contract.  The price shows virtually no one wants to do so.  Apparently, it’s not clear whether storage will be available on settlement date.

contract closing:  the May crude oil contract closed today at minus $37+, meaning that the seller had to pay the buyer $37,000 to shoulder the burden of taking delivery of the 1,000 barrels each contract represents.  The buyer gets the oil plus the money.