A Quick Read of 2020 Coronavirus¶
YZ and I resisted writing a review for 2019. 2019 is a good year for many people. We were fortunate last year to make some right calls in the semiconductor sector. Since the very beginning of this year, the bigger puzzle for us was how a liquidity crisis could be triggered. It is apparent that the Fed will continue to pump money as needed, the banking system was in a healthy state with reasonable cushion, and just enough bear that holding enough money to buy at every dip. It has to be something we cannot think of at that time.
It may not be obvious when everything is high and liquidity is abundant, but a sharp drop in stock market in itself can cause a liquidity crisis. It is a typical bank run scenario. With the right condition, the coronavirus situation may just be enough to trigger the mild recession many bears are looking for.
The best scenario: in April or May, there will be at least one effective treatment protocol in place. With all available information at the moment, we believe this is the most likely outcome.
The worst scenario: the virus keeps mutating, has a longer dormant period and would be more lethal (approaching 4% mortality rate or above). There is not too much we can do in this scenario other than “embrace the impact!”.
The mild scenario: the vaccine will be developed and reach the market anywhere from November to May next year. There will be a few million infected cases in the United States, and the death will approach anywhere from 50K to 200K world-wide. This is NOT a lot. Traffic accident-caused deaths world-wide are about a million or more per year. This is the scenario we are going to prepare for.
In the beginning of February, YZ and I discussed intensely about the potential supply-side shock, for which we believed is going to recover starting by the end of February in China. While that started to happen, we realized the impact would be mainly on the demand side as the virus spread. Self quarantine and the accompanied damping in demand would be the new norm in coming months. Luckily, by our estimation, it will be only about 10% to 20% drop in the United States, nothing as crazy as China’s 95% drop (of new car purchase in February). The demand side shock will carry over to the holiday season.
Last week’s correction technically turned the market from bull to bear. But given the first few mis-steps by the United States, there will still be another 10% down to go for S&P 500. Timing the market at large would be unwise at this point, as it becomes more volatile. Recognizing names that will be impacted (to sell) is relatively easy: airlines, ride-sharing and tourism will be hit in the first wave; luxury purchases, advertisements and consumer electronics will be hit the second wave (when money is tight for people); staples will be hit the third wave. However, forming a strategy in the down market is not so simple. We have to come back to scenario analysis to guide our strategies.
If the Fed does everything correctly, the Coronavirus situation will not have lasting impact on the economy. Much of current movements in the market are due to uncertainty. Once the market recognizes the situation will be contained, given the abundance of money, it will forgive a few quarters of negative growth. For the mild scenario, we are heading towards a technically mild recession.
While we believed in the entertainment business in a recession, there are too many one-hit-wonders in such a market. We will keep an eye on Netflix, Apple (as a service company with Music and TV+), and Disney. We are still doubtful about Disney’s new management capability, but willing to give it the benefit of doubt. The semiconductor sector was hit last week. However, given the relative stability of demand for online businesses (Amazon, Google, Facebook, Microsoft), we believe it was overblown. There will be opportunities in our favorite picks (AMD, Nvidia and TSMC). The memory price seems to bottom out soon in this cycle, Samsung and MU will be the ones we keep a close watch.
Keep safe everyone! Be patient and we may finally take some time to think slow about the market.