We are not trying to buy companies that are in ICU
Short Points Today - have been caught doing some media this morning.
- Very happy we were fully invested for the 7% rally yesterday.
- The best case scenario now is that we all get bored. If we do, if we get numb to coronavirus cases, if we get numb to the economic damage, the markets might just hold on to this rally, the volatility might die down, and stock market confidence might slowly seep back in as we quietly move through the virus timeline to the other side.
- Even better scenario - Vaccine. Drugs to alleviate symptoms that reduce morbidity rates.
- The biggest risk from here is "Negative Shock". That the virus situation seriously deteriorates again. That we see new news that is significantly negative. A resurgence of cases in China and South Korea. A mutated virus. Infection in the US accelerating unabated. No flattening of any curves. At this point the 'quietly moving through the timeline' scenario is more likely than the significant deterioration scenario, which is good. But it could happen. Negative shock is the one thing that would prompt us to sell again.
- Be careful about stock selection. There is a significant risk of negative shocks from individual stocks - virus aside. Some could shock us at any moment. Avoid the risks. Its like results season, you can never know when you are going to get blown up. But buy into travel, airlines, casinos, hotels, retailers too early and you might well be blown up, today even. We are not prepared to take an aggressive approach to stock picking yet, we are not trying to buy companies that are in ICU that will miraculously survive. At the moment we are playing it safe - there will be time for those 're-capitalisation trades' later (companies issuing cheap equity in order to survive), but surely not yet. For now, the main call is being in or out of the market, not trying to buy low odds survival cases for spectacular gains. Avoid companies in the front line that are taking damage. No doubt there is an opportunity someday, but this is not the main game. It's not time for them yet.
- The riskiest thing we have done is target a few energy-related stocks. The damage in that sector is extreme, most of the damage is unrelated to COVID-19 and we could see a resurrection on a single comment at any time.
- NSW introduces fines for any gatherings of more than two.
- The police in WA are bringing in police drones to police social distancing (Big Brother?).
- Virgin Australia (VAH) is seeking a $1.4bn bailout/loan from the government to stay in business and envisages the government taking a stake in the company.
- Shane Oliver is talking about 15% unemployment in Australia although it may only appear to be around 8% if the government subsidy keeps jobless people out of the unemployment queue.
- An Industry fund CIO is quoted as saying “we are going to get smashed” by people selling to access up to $20,000 of their Super with a lot of assets like Private Equity, Infrastructure assets and Property being illiquid and hard to sell. But before you get worried about the equity market, if all the 1.3m people the government expects to access their super did so to the maximum amount then you are talking about $26bn of Super being liquidated. Its a drop in the ocean.