The Brains Trust - 2020, page-455

Thought this was a nice summation sent to me.
"We live in unprecedented times. A health crisis ofrarely seen proportions is upon us, and when one follows what’s happening inEurope as we speak, how can that be a good thing? While China has managed tostabilise the coronavirus outbreak, by rigorous means hardly acceptable toliberal democracies, the West might be in the process of missing its chance todo the same. Gradually, and probably grudgingly, Chinese methods are beingadopted across the Old Continent and America.

No one can know how this will eventually pan out.Apart from the potential of a humanitarian disaster on our doorsteps, theeconomic damage is already a certainty. That is why stock indices have crashedlike never before in history and fallen by up to 1/3 in values in the shortestperiod of time. Investors who haven’t pushed the sell button on time have beenaghast watching the carnage and writing down the mark-to-markets of theirportfolios.

The sentiment is that this is far from over and onlythe beginning of a massive bear market. So, shouldn’t we all be running for thehills and make cash as much as the residual market liquidity allows for? Afterall, isn’t the world coming to a grinding halt and the possibility of a quickrebound far-fetched. Travel is ever more restricted, and increasingly peoplecan’t get back to work and make a living. Policymakers around the planet havewoken up to that fact and promised help, but how much and for how long?

The hysteria is perfectly understandable. Instead ofcalming minds, however, this Asia morning’s surprise Fed action to slashinterest rates to zero, prior to its meeting on Wednesday, another round of QEas well as expanding global swaps lines to ensure liquidity is ample seem tohave had the opposite effect from what was desired. S&P futures aretumbling and down 5% in early morning trading as if the market is saying to theFed "whatever you are doing, it won’t work”.

But the question remains whether it makes sense tojoin in and panic. Here are a few observations to maybe consider: One, we haveseen quite a shake-out already and discounted a lot. Clearly, fear over coronaand a break of correlations due to the oil price drop have ensured that a goodamount of risk positions are forced to be unwound and squared. Whip-sawingrate, commodity and FX moves parallel to the plunge in stocks are a testamentto that.

This in itself does obviously not mean that the marketis cheap, but fundamental considerations and earnings outlooks are not the onlycomponents of stock price valuations. In technical terms, the market isdefinitely oversold and laden with short positions, which bears the chance of arebound in coming trading sessions. Friday’s rebound into the close has, Ibelieve, given us a hint of short positions in need to be covered before theweekend.

There is probably barely any hope to be had for themost affected sectors amid the chaos, such as transportation, tourist andleisure industries, and the resource companies, at least for now. Many of them,particularly the smaller- and medium-sized enterprises, will struggle and maywell go out of business, and big oil might be in for a prolonged era of correctionbefore they can see the light of day again.

Across the past years, we have had slews of companieswhose rising share prices depended on significant buyback volumes. Nothingwrong with that, but they were predominantly financed with debt, and amid adeteriorating investment-grade corporate bond market that debt will be harderto come by going forward. One might want to stay clear of the usual suspects inthat part of the woods.

However, there must be beneficiaries as there alwaysare. We may feel a supply shock, and consumption is likely to be down, buteconomic life will not stop. We may simply be forced to go after our shoppingand social affairs in a different manner. For example, in China Alibaba andother e-commerce companies have started to perfect deliveries withoutperson-to-person contact. Amazon is launching a Just-Walk-Out shoppingexperience without interacting with a cashier.

Social media traffic has exploded during theshut-downs of cities, provinces and entire countries, in the wake of the socialdistancing drive and in lieu of traditional social behaviour. Online gaming andstreaming services have had a field day. Apps offering remote healthconsultations are another phenomenon taking on wider circles. And there aremany more services that are being provided and consumed within the newso-called platform businesses in different ecosystems.

Platforms are superior to linear businesses and willprobably replace many of them during and coming out of this crisis. The key, asI mentioned in a post earlierthis month, is to integrate linear enterprises onto your platform and notbecome one yourself. Amazon’s GO isn’t just to be applied to its ownbrick-and-mortars but to be licensed as a concept to every retail outlet in theindustry. Google is not to become a transportation company in its own right butlicense its Waymo self-driving technology to every carmaker in the world.

They are weirdly still being called tech companies,and erroneously so. Platforms are the new ecosystems that will dominate theeconomic world and have a finger in every pie and every business transaction.Stocks of many of those companies are poised to perform even through corona andoutperform when we come out of it on the other end. And, you know what, as theyare ever more heavily weighted in the indices, markets might just keep upand/or bounce in the face of the crisis."