When you tear out a man’s tongue, you are not proving him a liar, you’re only telling the world that you fear what he might say.”
– George R.R. Martin, A Clash of Kings
I hope the entire Seeking Alpha community had a safe and relaxing holiday weekend with family. This Easter and Passover will go down as one of the most surreal in the nation’s history. Most of the country has been in virtual lockdown for weeks, while being inundated by non-stop media coverage around the COVID-19 outbreak with death tolls breathlessly updated almost hourly.
Armageddon-type talk has invaded our private space, thanks to social media and the 24/7 news cycle. Equities have been one massive roller coaster ride for over six weeks now, although last week’s historic rally was a welcome respite.
I wish I could say this was going to change in the coming days and weeks, but unfortunately, things won’t be going back to normal for quite some time. However, I can list three things we can all be grateful for this holiday season as it relates to the Wuhan coronavirus and its impact on us all. Hopefully, this piece will be our contribution to post-holiday good cheer and provide a more optimistic outlook than what is currently being portrayed by most pundits and the media.
Things Could Have Been Much Worse
At the start of the month, the CDC and Dr. Anthony Fauci were projecting that 100,000 to up to 240,000 Americans would lose their lives before this outbreak was over. Thanks to social distancing, other prudent measures such as washing hands frequently and more draconian “shelter-in-place” orders, the current baseline estimate from the CDC is calling for approximately 61,500 COVID-19 deaths.
Approximately 15% of overall deaths recorded to this point have been from nursing homes and long-term care facilities, among the most vulnerable populations in the country. In addition, almost half of all COVID-19 deaths worldwide are among those at least 80 years old. The United States is skewing younger than the average. My guess is part of that is due to higher obesity level, which is a key reason the mortality rate in New Orleans is much higher than that in New York City or Seattle.
New York remains the epicenter of the outbreak in the United States with approximately 175,000 confirmed cases to date. Until recently, the state was estimating that it may need up to more than 135,000 hospital beds, but now it will never use much more than 18,000 beds in reality. This was less than one-fourth the baseline scenario provided by the IHME of 73,000 beds needed at the peak.
The governor of New York, who was pleading with the Federal government for 30,000 ventilators late in March, has now been shown to be wildly wrong in his projections. The CDC is currently saying the most ventilators that will be needed for the entire country going forward will be a bit north of 15,000. Peak ventilator use in New York will come in right around 5,000.
Governor Cuomo is not the only local political leader to be much too dire in his projections. The military built a 250-bed field hospital by Seahawk stadium in Seattle at great cost. It housed operating rooms, X-ray facilities, a lab and significant other medical equipment to deal with the overflow from the region’s hospitals that was expected. It is already being dismantled for use for other harder-hit areas of the country. This facility never saw a single patient in its time in Seattle. Here in Miami, we are doing the same, erecting an even larger (and more expensive) overflow medical facility in the Miami Beach Convention Center. Given daily confirmed COVID-19 cases in Florida have already flatlined and are starting to fall, its fate will be similar to the Seattle facility. So far, the Sunshine State has had one hospitalization due to the COVID-19 outbreak per approximately 8,000 in population.
Despite all the vitriol we have seen from media and political figures over the past month and a half about the handling of the outbreak, the country has weathered this storm quite well compared to other developed Western nations. As early afternoon today, our death toll stood at 76 per million of population. This compares very well to Spain (386), Italy (348), Belgium (359), France (241), the Netherlands (173), the U.K. (178) and even Switzerland (136). The only major Western country that has done better is Germany (39), which very probably benefited greatly from the dearth of Chinese tourists in the country during the winter. In addition, if you take out New York, our country is right at Germany’s levels with regard to death toll per million population.
Our mortality rate of 4.14% also compares favorably to those listed above, with all but Germany above 10%. This mortality rate is wildly overstated, as we are mostly testing the sick. This is one reason our daily confirmed cases in the country are dropping, even as we are testing more and more people on average every day.
According to a study just out from Germany where they tested everyone in a large town that was one of the first where this Wuhan coronavirus appeared, the city had a 15% infection rate but only a .37% mortality rate on interim results, less than one-sixth the country’s official 2.49% mortality rate. Another recent study of a major sewage treatment center in Massachusetts showed a minimum of 2,300 and up to 115,000 residents had COVID-19, compared to the just 450 confirmed cases in the area that uses this facility.
Things Are Getting Better
According to the CDC, daily peak deaths were projected to peak last Friday in the United States. Indeed, deaths from COVID-19 had dropped by approximately 500 since hitting a peak of 2,035 on April 11th, although they popped back up today. Spain is also seeing solid progress over the past week on this front.
In addition, the COVID-19 death toll is likely at least partly overstated, and possibly largely so. The CDC has relaxed criteria in what constitutes a “COVID-19” death. The rise in official Wuhan coronavirus fatalities coincides with a huge drop-off in official flu deaths in the country compared to recent years (above).
Some of this is due to mis-classification, and the rest likely because of the effects of social distancing and shelter-in-place decrees. What the actual split is, I doubt we will ever know. If I had charts of other respiratory illnesses that can be lethal, I am sure they would present a similar picture. Combined with large drop-offs in auto fatalities and murders over the past six weeks, it would not surprise me if the overall death toll in the States in 2020 would be exactly as it would be if the outbreak never came to our shores. It is just that different people are dying for different reasons.
Daily confirmed COVID-19 cases are also starting to slowly fall in the United States even as testing ramps up exponentially. Daily new cases came in at 26,641 yesterday, which was down from a peak of 34,196 on April 4th.
New daily hospitalizations in New York are falling dramatically. This should lead to a substantial reduction in the daily death toll in the coming days. Given the state accounts for nearly 45% of all confirmed deaths in the nation, this should improve optimism around the country that COVID-19 is on the way to being contained. Daily deaths in New Jersey, which has the second-highest death toll of any state, are starting to drop on average, but the number is volatile on a day-to-day basis.
The Global Economy Will Be Restarting Soon
China, the second-largest economy in the world, has already started to restart their economy. Largely unaffected countries like Australia and Austria are rapidly heading in that direction as well. Even Spain will be restarting its manufacturing and construction sectors next week under pandemic guidelines.
Here in the States, the administration has started a task force in charge of determining how and when the nation’s economy can restart. This is likely to vary by region, as places like Texas that have seen little impacts (11 deaths per million population) should be restarting soon, while New York (552 deaths per million) will be a logical laggard. It appears six northeast states have formed a coalition around working on reopening their economies in coordination, and a similar thing is happening on the west coast.
Finally, massive economic support is on the way. The Treasury just deposited the first of tens of millions $1,200 checks on Saturday, which were part of the $2.2 trillion stimulus bill that was just passed. In addition, over 16 million people have already filed for unemployment over the past three weeks. They will be entitled to $600 a week for up to four months from the Federal government, in addition to state unemployment payments (average nationwide $463/week). This means anyone that was laid and was making $20 a hour or under is going to get more to stay at home than to work for at least four months. While this is an extreme “moral hazard,” it will allow people to continue to pay rent, credit card, insurance, utilities and other bills. We won’t even touch on the unprecedented levels of liquidity the Federal Reserve is providing to the markets.
The $64,000 question is how fast the economy can restart and whether the recovery will be U- or V-shaped. I definitely think last week’s rally was likely overdone, and I raised 5% more cash for my account late Friday after being pretty much all-in via covered calls to start the week. (I was approximately one-third in cash within my personal accounts when the market was at all-time highs in February.)
Once successfully restarted (obviously a big if at the moment), there should be so much liquidity in the economy, thanks to the efforts of the Federal Reserve, other central banks and Congress, one would think all assets will get a tremendous, boost as those funds have to go somewhere. That is what happened after the financials crisis ended on a much lower level of stimulus. It may be a few rough months before then, and I wouldn’t be surprised if we retest lows before all is over. I am only putting new money to work (below) on days where the S&P 500 is down at least three percent on the day.
However, historically, the country has always been more resilient than the pessimists and “experts” project. My hope is that brighter days are in the cards in the foreseeable future. Until then, stay safe and try to maintain an optimistic outlook, and I leave you all with this final thought this Tuesday following the holiday weekend.
How I am positioning my portfolio remains the same. As I have articulated since the second half of last year, both here and in my columns on Real Money Pro, almost all new money I am putting into the market is being deployed via covered call or buy-write option strategies. This involves simultaneously buying stock and selling call options against the new position. This provides significant downside risk, even as it limits upside if those shares have a substantial rally. It is a trade-off I am more than willing to make right now.
I prefer using long-dated just out-of-the-money call options, as these provide the most option premium income and provide the most downside risk. At the height at the sell-off, option premiums were easily the highest they have been since the financial crisis. Two weeks ago, at-the-money January calls on major index ETFs like the iShares Russell 2000 ETF (IWM) or sector ETFs like the SPDR Biotech ETF (XBI) were offering potential 20% returns, even if the underlying index ended at the same trading level as now by the beginning of 2021. While those premiums have come down some during the rally in April, they are still substantially above the 8-11% returns one can normally expect from these simple option plays.
Potential returns using individual stocks within these type of covered calls are significantly higher. At the end of March, I gave you three “COVID-19 proof” biotech stocks that made great sense for this strategy, as they were on names with great balance sheets that were either already profitable or on the way to becoming so. All three stocks in that article are nicely up since that piece ran. If the market has another significant decline in the coming weeks, they still make good candidates.
Finally, I have also built up a substantial position in the ProShares UltraShort 20+ Year Treasury ETF (TBT). With all the stimulus the Federal Reserve and Congress are pumping into the economy, it is hard to imagine the 10-Year treasury yield at three quarters of a percent going forward. This is especially true if we see an economic recovery in the third quarter as I expect. This is one easy way to benefit from that expected yield rise.
And those are our updated investment thoughts in the current market.
When truth is replaced by silence,the silence is a lie.”
– Yevgeny Yevtushenko
Bret Jensen is the Founder of and authors articles for the Biotech Forum, Busted IPO Forum, and Insiders Forum
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Disclosure: I am/we are long IWM, TBT, XBI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.