coronavirus: fooling around with numbers

Let’s assume that the negative effect of COVID-19 is that publicly-traded companies have not profits for full-year 2020.  I don’t mean no profit growth, I mean no profits at all.  Maybe the situation is worse than that but let’s look at this case first.

Assume company A is growing profits at 8% per year, and will continue to do so for the next decade.  Not a great performance.  Average-y  …but not nothing, either.   The present value of those future earnings is 12.5x what the market assumed this year’s earnings would be.  Excel out this year’s earnings and the PV becomes 11.5x.  That’s a drop of 8%.

Assume company B grows at 20%, a rate that only the elite can sustain over a ten year span.  The PV in this case is 22x.  The loss of this year’s earnings reduces the PV by 4.5%.


A second factor to consider–a crucial one for small business but not so much for firms large enough to be publicly owned–is getting to next year.  The main obstacle is leverage, either financial (generating enough cash to service debt) or operating (needing to run at close to full capacity to pay for expensive infrastructure (think: airlines, cruise ships, frackers, semiconductor fabs)).  The riskiest cases have both.

Let’s pluck numbers out of the air and say the “survival risk” group makes up 5% of the S&P 500 (too high!) and that their value goes to zero (too pessimistic; losing 50% is probably closer to worst case).  That’s a loss of 5% to the index value.


Adding the two together, we get -9.5% – -13%.

In other words, the coronavirus alone doesn’t justify anything near the extent of the stock market plunge.


Two other factors:

–maybe the S&P was toppy before the decline began;  after all, the index gained 30%+ last year, mostly on PE expansion, not earnings growth

–the chilling specter of the administration thwarting medical efforts to contain COVID-19 while spouting insane conspiracy theories.   To some degree the Trump effect (the market dropped by 10% after his bizarre speech the other night) is being countered by state and local authorities and private business taking matters into their own hands.

My conclusion?  Trump + trading bots gone wild will likely continue to cause ups and downs–probably more of the latter–for a while.  For us as individual investors, our main advantage in the stock market is taking a longer view than most.  This is especially true today, I think.  The thing I’m hanging my hat on is that the coronavirus will most likely play itself out as an investment issue with time.


2009 vs today

back then

As a result of what I can only describe as massive industry-wide bank fraud, the world woke up one day to realize that major American and European banks were, in effect, bankrupt.  They were stuffed to the gills with virtually worthless securities that the American financial firms had manufactured and sold among themselves and to the rest of the globe.

The really bad news came not exactly from that but from the essential role banks play in world commerce.  Buyers’ banks routinely issue letters of credit to sellers’ banks, guaranteeing prompt payment for stuff when it’s delivered–including a provision that the issuing bank will cover any amount the buyer is unable to pay.  What good does that do the seller, though, if one or both of the banks go belly up while goods are in transit?  So suppliers stopped shipping.

Large companies, armed with supply chain management systems flashing red signals about inventory buildup–and regretting they’d ignored these signs in 2000–determined not to make the same mistake again.  They shut operations down and laid off tons of workers.

The world economy came to a screeching halt.

Many of the I-say-fraudulent-but-no-bankers-went-to-jail securities were based on highly dubious home mortgage loans the issuing banks had made to collect up-front fees and immediately fobbed off to others (the ultimate “dumb money” was, as usual, EU banks).  Those mortgages promptly blew up when economies shifted into neutral, causing a deep housing/construction crisis.

All in all, this was the worst economic calamity since the Great Depression of the 1930s–worse than 1973-74, when the World Bank had to be called in to rescue the UK; worse than the oil shock of 1978; worse than 24% short-term interest rates of 1982; worse than the internet meltdown of 2000.


COVID-19 is certainly a less calamitous situation economically (meaning, writing as a PM, not as a human being) than any of those listed in the previous paragraph.   In many ways, it’s much more clear-cut, too.  But it has its own complications.

–compared with a cyclical business downturn, it’s probably harder to say how much stocks will fall due to COVID-19 but easier to figure how long a time, my guess: about six months, before economic activity will be on the upswing again

–many veteran equity portfolio managers and securities analysts (particularly on the sell side) have been fired over the past decade.  What we’re left with is bots trading on newsfeeds generated by: writers who have lost their industry sources and presenters on financial shows playing acting roles as financial professionals.  Because of this, other than when trading generated by company financial announcements, it looks to me like daily price moves are not as fact-informed as they used to be.  Resulting large moves and swift reversals driven by machines operating on faulty information make short-term trading more perilous (even) than in the past.  They also make it more difficult to “read” the traditional signs of a market bottom.

–the final complicating factor is the potentially dangerous head-in-the-sand approach of the executive branch to COVID-19.  It’s a scary vibe of incompetence.  Although I have no idea how to quantify this, it must be a factor in the intensity of the current selloff.










an ugly day: coronavirus + oil


In normal times, the world produces about 100 million barrels of oil daily and consumes about the same amount.  Small changes in either supply or demand can cause huge changes in price.  That’s because demand–autos, jet fuel, heating oil…is relatively inflexible (if seasonal).  Supply is also inflexible, because a cartel of suppliers, led by Saudi Arabia has been able to control output levels.  Their goal:  highest price possible without encouraging substitution.

A problem has surfaced, however.  A mild winter + reduced demand from airlines have combined to cause a potential supply overhang.  Negotiations between Saudi Arabia and Russia about production cuts to offset this and keep prices high broke down.  Not only that, but the Saudis have apparently decided to punish Russia (and themselves) by starting to sell large amounts of oil at about $30 a barrel, or $10 a barrel below Friday’s price.


–the consensus view is that Saudi Arabia, radically dependent on oil exports, needs a price of $80+ to balance its budget; Russia, smaller and economically much weaker, needs $40+.  So both are it trouble.  Riyadh’s calculation must be that Moscow will soon feel the pain more quickly and will agree to production cuts

–a $30 price has two bad consequences for oil production companies in the US and elsewhere.  The lower price reduces revenues and profits.  This is an acute problem for some US shale companies, which have borrowed heavily in the junk bond market.  In addition, a standard way of evaluating natural resource companies is to compare the stock price with the per share value of the reserves they hold.  The price fall not only reduces the value of those reserves but also shrinks the amount, since some oil that’s viable at $40 becomes economically unfeasible to drill for at $30.

–if oil companies make up 4% of the S&P 500 and we say that they have lost a third of their value over the weekend, then the S&P should open 1.2% lower because of that.  Add in banks that will be in trouble and maybe that figure drops to down 2%.  Conceptually offsetting that would be the benefit to oil consumers of lower prices.  But that’s a diffuse group that is typically overlooked in a market downdraft   …and in this case prime beneficiaries like transport companies are being hit by coronavirus fears.

–as I’m writing, the S&P 500 is trading down about 5% in the premarket.  So the other 3% must be due to other factors–presumably coronavirus fears.  Those, in turn, break out, I think, into two factors:  the virus itself and the efforts of the Trump administration to prevent disease preparedness, information exchange and treatment.  To my mind, the last is the scariest part.

–if we were to posit no AI involvement in the premarket decline, this would look to me like the start of an old-fashioned selling panic.  In an AI-driven world, however, it’s not clear that that the idea of a cathartic release of pent-up fear setting the emotional stage for the next upswing still holds water.

All in all, for almost everyone a day to turn off the screen and go out in the sunshine.

more on coronavirus and the stock market

In an earlier post, I outlined what I saw then as differences between SARS in 2002 and the new COVID-19 in 2019.


–it appears China has mishandled COVID-19 in the same way it bungled SARS, surpressing information about the disease, allowing it to become more widespread than I might have hoped.  Not a plus, nor a good look for Xi.

–if press reports are correct, the administration in Washington is ignoring the advice of the Center for Disease Control and approaching COVID-19 in the same (hare-brained) way it is dealing with the economy–potentially making a bad situation worse


I think COVID-19 will be in the rear view mirror by July–as SARS was in 2003–but the road to get there will be bumpier than I would have guessed.


–the way the stock market has reacted to the new coronavirus  gives some insight, I think, into the differences between how AI discounts news vs. when human analysts were in charge.

when humans ruled 

Pre-AI, analysts like me would look to past examples of similar situations–in this case, SARS.

Immediate points of difference:  COVID-19 is not a unique occurrence–it’s the latest coronavirus from China but not the first so the fact of a new coronavirus should not be as shocking as the first was.  COVID-19 carriers are contagious before they exhibit symptoms, so quarantine is more difficult–i.e., transmission is harder to stop.  On the other hand, the death rate appears to be significantly lower than from SARS.

Two other factors:  the first half of 2003 was the time of greatest medical risk; generally speaking, the stock market back then rose during that period (because the world was just entering recovery from the popping of the stock market internet bubble in early 2000;  given that we’re in year 11 of recovery from the financial crisis, gains shouldn’t be anywhere top of the list of possibilities).

Obvious investment areas to avoid would be operations physically located in China or with large sales to/in China; anything travel- or vacation-related, like airlines, hotels, cruise ships, amusement parks, tourist destinations.

It’s harder for me to think of areas that would prosper during a time like this, mostly because I’m not a big fan of healthcare stocks.  Arguably anything operating totally outside China and not dependent on inputs from China; highly-automated capital-intensive operations rather than labor-intensive,   Public utility-like stocks.

Portfolio reorientation–becoming defensive and raising cash–would have started in early February.

the AI world

What I find interesting is that the thought process/behavior I just described only started happening, as far as I can see, about a week ago. That’s when news headlines began to emphasize that COVID-19 was spreading to areas outside China.  Put another way, the selloff came maybe three weeks later than it would were traditional investment professionals running the show.  In the in-between time, speculative tech stocks shot up like rockets.  The ensuing selloff has hit those high-fliers at least as badly as stocks that are directly affected.

In sum:

–late reaction

–violent, December 2018-like selloff

–recent outperformers targeted, whether fundamentals affected or not.

what to do

Better said, what I’m doing.

The two questions about every market selloff are:  how long and how far down.  On the first front, it seems likely that COVID-19 will be a continuing topic of concern through the first half.  The second is harder to gauge.  There was a one-month selloff in December 2018 that came out of nowhere and pushed stocks down by about 10%.  Today’s situation is probably worse, but that’s purely a guess.

I’ve found that even professional investors tend to not want to confront the ugliness of falling markets, and tend to do nothing.  However, in a downdraft stocks that have been clunkers don’t go down as much as former outperformers.  Nothing esoteric here.  It’s simply because they haven’t gone up in the first place.

A market like the one we’re in now almost always gives us the chance to get rid of clunkers and reposition into long-term winners at a more favorable relative price than we could in an up market.  My experience is that this is what we all should be doing now.  As I wrote above, my hunch is that we don’t need to be in a big hurry, but there’s no reason (especially in a zero commission world) not to get started.




more on the new coronavirus


SARS emerged in China in November 2002.  Local authorities, later removed from office in disgrace, initially failed to sound an alarm about the new disease, apparently thinking reporting it would reflect badly on them and hoping it would just go away if ignored.

The world first became aware of SARS as a public health threat in February 2003.  The disease was declared under control in July 2003.  By that time there had been 8000+ reported cases and about 800 deaths.  The overwhelming majority of the fatalities were in China.  The elderly and the very young were the age groups hardest hit.

the new virus

As of yesterday, there had been 2700+ cases of the new coronavirus reported and 80+ deaths.

There are four differences I see between the SARS epidemic and this year’s outbreak:

–faster reporting and more aggressive quarantining today (the disease is passed through contact with an infected person’s bodily fluids.  There’s no medicine that works against it, so isolating victims is the only “cure”)

–symptoms emerge on average about ten days after infection, pretty much the same as with SARS.   But unlike the case with SARS, where carriers only became infectious after they showed symptoms, carriers of the new virus appear to be infectious from day one, long before they become visibly ill

–China is a much larger part of the world economy today than it was back then.  While the US has grown by 80% (using conventional GDP) since 2003, China is 12x the size it was then.  So the slowdown in global economic activity that will result from quarantine measures in China today will be greater than it was for SARS.  If SARS is a good indicator–and it’s the only one we have, so it is in a sense our best guide–the current outbreak will be well past the worst by mid-year

–SARS happened just as the world was beginning to recover from the recession caused by the internet bubble collapse of early 2000.  The new virus comes during year 11 of recovery from the downturn caused by the near-collapse of the US banking system from losses that piled up during years of wildly speculative lending and securities trading.  In other words, SARS happened when profits were beginning to boom and stocks really wanted to go up; in contrast, this virus is happening when profits are plateauing and stocks want to go sideways mostly because interest rates are crazy low.

investment thoughts

During the SARS outbreak business travel came to a screeching halt because people feared becoming sick/being quarantined in a foreign country. If it’s correct that the new virus can be passed on even before the carrier shows symptoms, the risk in using public transport is substantially greater.  So too the possibility that one’s home country will temporarily bar returnees from virus-infected areas.

Securities markets in China are currently closed for the New Year holiday.  It isn’t clear that they will reopen on schedule.  In the meantime, China-related selling pressure will likely be redirected to markets like New York.  Alibaba (BABA) shares (which I hold), for example, are down about 6% in pre-market trading.  At some point, assuming as I do that the SARS analogy will be a good indicator, there’ll be a buying opportunity.  For me, it’s not today, although if I weren’t a BABA holder I’d probably buy a little.

It will be interesting to see how AI handles trading today.