STRATEGY SUMMARY

Short term period of sober assessment to get through - As you know we have gone to 15-20% cash in our SMAs. That is basically us taking a negative view of the market in the short term (wrong today!). We think this ultra-fast sentiment recovery has probably run its course and is going to be replaced by a period of more sober assessment and the headlines aren’t going to be good. Disastrous economic headlines are cascading in at the moment. We need to get through this ‘quantification’ period before getting optimistic.

Having said that the Dow Futures are up 715 this morning on a Gilead drug remdesivir which is an anti-viral medication some severe patients are responding to – All patients treated recover in a week. Gilead up 15% overnight.

SPECIFIC COMPANY RISK

All the economic headlines are interesting but they don’t mean anything to stock market prices unless a company’s earnings are specifically affected. Stock prices are about company earnings – valuing companies is about earnings. Economic headlines are simply a top level summary of how large groups of companies, if not all companies, are faring at once. But the stock market is about individual companies and that boils down to their own earnings. On that front there are a couple of points to be made.

THERE IS A HIGH LEVEL OF ANNOUNCEMENT RISK

The key metrics (unknowns) for each company at the moment is the impact of shutdowns/lockdowns on company earnings. Whether they impact and if they do those companies need to know when lockdowns are going to come to an end – those two variables are what will dictate the corporate damage and companies can't clear that up for us until they know the duration of their business disruption.

What is happening in Australia will happen globally – lockdowns will move up and down through the different levels/stages and will be relaxed and possibly reinstated as the coronavirus ‘spread risk’ dissipates or returns.

Until that timetable is known, earnings will be unknown. Until duration is known the individual company risk is high.  Until duration is known all affected company share prices live with the risk of earnings guidance downgrades, profit warnings, capital raisings, and share price ‘shocks’.

Ahead of the results season in August (four months away) we are going to see a litany of untimetabled, unpredictable, company announcements as they try to communicate expectations, and almost all of them will be downgrades.

For the next few months we have to live in fear of company guidance announcements. The company-specific risk now and for the next few months is the same as it is during the results season, you never know when you’re going to be blown up.

The way to handle that is the same as it is in the results season. Minimise your ‘disaster’ risk. Don’t go too big on any one stock, avoid holding super volatile ‘popular’ stocks on low (or no) PEs (the market will take no prisoners if disappointed) and buy any stocks that pop on good announcements. Good or bad, announcements de-risk a company for a few months and allows you to ‘value’ them (and maybe buy them) with some level of certainty.

I don’t have time to do this for you this morning, it is a moveable feast anyway, but you need to distinguish now between companies that have put out earnings guidance already and those that haven’t. The risk is a lot higher in those that haven’t. Look through the recent annoucnements of the companies you hold or any company you are about to buy and understand whether they are at risk of a shock, or have already cleared that up.

Running into the bank results season for instance, Westpac has already cleared the decks. Its safe(r).

WINNER AND LOSERS

You probably saw Amazon up 4.4% overnight and Netflix up 2.9%, both hitting all-time highs as New York pushed shutdowns back from May 1 to May 15. They benefit from the coronavirus.

This teaches you that coming out of this once in a decade buying opportunity, there are going to be winners and losers because this is not a plain vanilla event, it is a behaviour changing event, with permanent if not very lengthy consequences. For instance, are we all going back to work, will office space demand take a permanent hit, are we going to keep using the technology that we have learned to use in our homes, is the property market going to dive as it usually does 18 months after the stock market, are we going to shop online a lot more, will international travel race back or crawl back, has discretionary consumer spending taken a significant hit and will it recover fast or slow.

We now need to distinguish the segments of the stock market that will (1) Benefit (2) Survive and (3) Suffer from the lockdowns. We also need to focus on sectors that will emerge and those that will deteriorate permanently from behavioural changes that have been caused by this episode.

There is a good Livewire article summarising Nick Griffin’s views on survivors and losers. He's a smart man.

They include:

WINNERS

• Digital Enterprise (the shift to the cloud)
• E-Commerce
• Digital Payments
• Internet disruption
• High-performance computing
• Innovative health
• Big Data

LOSERS

• Financials
• Healthcare
• Restaurants
• Autos
• Media
• Tourism
• Leisure
• Energy

The themes are pretty obvious. The next stock market phase after the 'panic sell-off stage' and the 'sanity returns rebound stage' will be the recovery stage the the long term bull market stage. It is too early to buy the ‘long term quality portfolio’ for the long term bull market stage yet. For the next few months the job is to exploit one of the best buying opportunities in a decade and being in the right stocks for the recovery – this is not the time to buy ten year winners, you want the recovery winners. Its different.

We’re working on that, on identifying the themes and therefore the stocks to hold for the recovery. Its becoming obvious already who the winners and losers are from the top down themes, and there are company specific winners and losers as well.

More work to do. Enjoy your day.