How we should respond to the coronavirus; It's the best time to be an investor in more than a decade; You'll never guess the best-performing major stock market in the world this year; Is today's puke-out the bottom?

By Whitney Tilson

Thursday, March 12, 2020
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1) I think New York Times columnist Nicholas Kristof has some excellent ideas in his latest column, 12 Steps to Tackle the Coronavirus, for things that our government and other institutions can do to reduce the odds that the coronavirus pandemic does to us what it has done to China and Italy.

I remain cautiously optimistic that we will avoid a worst-case scenario without the draconian measures being taken in those two countries. But quick, decisive, and smart action is necessary.

In addition to the high-level steps Kristof outlines, we also clearly need to follow the experts’ consensus advice and take meaningful steps toward “social distancing” to reduce the spread of the virus.

The problem I’m having is that I can’t find even one expert – much less a consensus – who has outlined, in detail, where we should draw the line and how we should try to measure costs versus benefits. For example:

  • Should all businesses in which employees can work from home, at least for a few weeks, close their workplaces? What about businesses whose employees can’t work from home?
  • Should all Americans – even those with no risk factors – cancel all travel plans, no matter the destination? What if they’re going from a higher-risk area like New York City to one I suspect is lower risk like Jackson, Wyoming, as my daughter did earlier this week? (Note that 15 million Americans work in the tourism and hospitality industries, including restaurants.)
  • Should we do what Italy just did and shut down all restaurants and retailers, other than essential ones like supermarkets and pharmacies? (Another 16 million Americans work in retail.)
  • Many colleges and universities have suspended in-person classes indefinitely. Should we close every school in the U.S., from preschool to graduate and trade schools (including canceling all events like proms and graduation ceremonies)? (This sector employs another 14 million folks.)
  • The NBA has suspended its season indefinitely and the NCAA will play its men’s and women’s basketball tournaments in empty stadiums. Should the NHL suspend its season as well?
  • Should we also close every venue and event in which more than a handful of people congregate? The list is endless: ski areas, amusement parks, charity galas, gyms, casinos, Broadway shows, movie theaters, sporting events at all levels, etc.
  • Should we cancel all family and life events like weddings, bar mitzvahs, and funerals? My friend’s father died suddenly this week. Should he be buried without a service to honor him? Should my daughter cancel her plans to have lunch with her grandparents this weekend?

These aren’t hypothetical questions. Every one of us needs to answer many of them every day.

Some of my friends would answer “yes” to every one of them.

And when I raise questions about whether the huge (and certain) costs of some of these steps might outweigh the incremental (and uncertain) benefits, they tell me to shut up because I’m “doing harm” by “encouraging complacency” that will result in more people getting sick and even dying.

I guess I’m “Whitney the Mass Murderer!”

Some of it feels like bullying, frankly…

To be clear, I am not saying we should be complacent.

While I think the stock market sell-off has gone too far (as I discuss below), I think that we should take very strong measures at the governmental and institutional levels – such as those Kristof recommends – and also take some reasonable personal steps toward social distancing.

What I am not persuaded of (at least not yet), is that we need to take all of the social distancing measures that I outlined in my questions above – which would effectively be a complete lockdown of the entire country. Nor am I hearing from experts that this is necessary (at least not yet).

In summary, there are a lot of unknowns and the range of outcomes is very wide, so we need to take strong measures immediately, monitor the situation closely to see if these are sufficient, and, if not and a worst-case scenario starts to unfold, implement ever-stronger steps.

2) With the S&P 500 Index closing yesterday down 18.9% from its all-time high only three weeks ago (it seems like a lifetime, doesn’t it?), and the markets down big again so far today, it looks like this will be the index’s fastest bear market (defined as a 20% drop) in nearly a century.

Investors are being bombarded with negative headlines like these:

  • World Health Organization Officially Declares Coronavirus a Pandemic
  • White House Coronavirus Expert: ‘It’s Going to Get Worse’
  • Trump bans travel from most of Europe to U.S.
  • NBA suspends its season after player tests positive for coronavirus
  • NCAA hoops tournaments will be played without fans
  • ‘An Eviction Notice’: Chaos After Colleges Tell Students to Stay Away
  • Tom Hanks says he and his wife tested positive for coronavirus

I fully expect similar headlines to dominate the 24/7 news cycle for at least a couple of more weeks.

In light of this, you might be surprised to hear my view that it’s the best time to be an investor in more than a decade – many stocks are incredibly cheap, and I think we’re near a bottom.

Those of you who know my history may be surprised to hear this, because during the first two market panics of my 20-plus year investing career, I didn’t turn bullish after a 20% decline…

When the S&P 500 fell 20% in 2000 as the dot-com bubble began to burst, I said things were going to get a lot worse – and they did.

And when we entered a bear market in mid-2008 as the housing bubble imploded, I said things were going to get a lot worse – and they did.

In addition, after I called the top of the bitcoin bubble to the hour on December 16, 2017, when the cryptocurrency quickly fell 20%, I said things were going to get a lot worse – and they did.

But I’m not a perma-bear. In my e-mail on December 21, 2018, right when markets were bottoming after a roughly 20% decline (depending on which index you look at), I rejected my friend’s comparison to the financial crisis in 2008 and 2009, writing “There is no comparison.”

I have the same view today: there is no comparison between the current market and 2008 to 2009 or 2000 to 2002.

The dot-com and housing bubbles took years to inflate and reached massive proportions, so when they burst, it took years for the markets to adjust.

What we’re experiencing now is very different: It’s a flash crash, caused by a black swan event.

If you believe that humanity, broadly speaking, will be able to get a handle on the coronavirus pandemic reasonably quickly – as China did earlier this year, and as Taiwan has done without locking down the country, as this study highlights: Response to COVID-19 in Taiwan: Big Data Analytics, New Technology, and Proactive Testing – then stocks will likely rebound sharply.

Though I’d be surprised if the major indexes surpassed their February highs anytime soon – certainly not this year – even a partial recovery would translate into big gains from here… especially among the most beaten-up stocks, which are now down more than 50% over the past three weeks. (We recommended four of them on Monday to subscribers of our Empire Investment Report…You can learn more about a subscription – and how to get 40% off the regular price – right here).

3) To see what this rebound might look like, let’s look at the best-performing major stock market in the world this year.

You’ll never guess which one…

China’s!

That’s right: the Shanghai Composite index is down only 4.2% year to date.

I was stunned to see this, in light of the near-total shutdown of the country’s economy less than two months ago and the halting recovery since then…

But as you can see in this chart, after a sharp 14% drop, the index quickly rebounded…

I expect the U.S. markets to have a similar recovery in the near future.

4) The question is: when? Is today’s puke-out the bottom?

I don’t know for sure, but would guess that, as of this morning (with the S&P 500 down more than 8% to around 2,500), we’re within 5% to 10% of the ultimate bottom.

What I can tell you is that I put another 15% of my long-term investment portfolio – which has been sitting mostly in cash since I closed my hedge funds in late 2017 – to work on the open this morning.

In total, over the past week and a half, I’ve invested approximately half of the total amount I plan to put into equities. My strategy is to dollar-cost average into high-quality U.S. stocks, buying on days when the market is down big, but with the humility to know that I will never be able to time the exact bottom.

As I wrote in Monday’s e-mail:

We claim no ability to precisely identify when stocks will stop going down. In fact, we can almost guarantee that any stock you buy right now will be lower – perhaps much lower – at some point in the future.

So why do we recommend putting some dry powder to work now? Because we think the coronavirus pandemic won’t be as severe as most people think, for reasons we outline in the full report. And because we have the experience, wisdom, and humility to know that neither we, nor anyone else, will know the exact moment when stocks have bottomed. Instead, we’re doing careful analysis of both the coronavirus pandemic as well as a handful of companies we know well, in order to be directionally correct in the timing of our buy recommendations.

Perhaps it sounds illogical, indecisive, or fatalistic to recommend buying stocks while also warning that they’re almost certain to go lower. But, as veterans who have profited from many other market panics, from the Asian and Russian financial crises, Long-Term Capital Management, the bursting of the dot-com bubble, the Great Financial Crisis, and the European sovereign debt crisis (not to mention health scares like Ebola, SARS, bird flu, and MERS), it’s the best we can offer – and it’s the truth…

In tomorrow’s e-mail, I’ll share my thoughts on what two pieces of data I’m tracking that I think will indicate when stocks will bottom. Stay tuned…

Best regards,

Whitney

Whitney Tilson

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About Whitney Tilson

Prior to creating Empire Financial Research, Whitney Tilson founded and ran Kase Capital Management, which managed three value-oriented hedge funds and two mutual funds. Starting out of his bedroom with only $1 million, Tilson grew assets under management to nearly $200 million.

Tilson graduated magna cum laude from Harvard College with a bachelor's degree in government in 1989. After college, he helped Wendy Kopp launch Teach for America and then spent two years as a consultant at the Boston Consulting Group. He earned his MBA from Harvard Business School in 1994, where he graduated in the top 5% of his class and was named a Baker Scholar.

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