#marketviews

[michaeldempsey]

We Are Inevitable(?) (Market Views 4/7/2020)

Healthcare Risk & Economic Risk

Disclaimer: This is more for scalable sending notes and personal accountability. Not a professional public market investor, not investment advice, likely all bad advice from someone spending not nearly enough time researching public market dynamics. Also not really editing these pre-posting.

Markets are sharply higher over the past two days as data shows possible peaks in major cities (like NYC) and countries (Italy/Spain) around the world. Markets are seemingly holding onto any good news while growing tired of the barrage of bad news for the past month (or months depending on where in the world you are). It's my view that this stock market reaction is very much an emotional reaction to one component of this recession and not rooted in material data relative to the actual long-term effects of COVID-19 on the economy. There are two way to look at this.

The bull case is that markets bottom out near the peaks for given countries and/or focal points of the coronavirus. We saw a fast and unexpected (to some) rise in COVID-19 spread globally, and this scared the world into a risk-off view, unwinding all sorts of debt and equity positions, because it was a perfect storm of both healthcare and economic shock, leading to demand shock. As I wrote yesterday, we now believe we have more clarifying information, which is understanding the magnitude of spread on the healthcare side of this equation, and the view that estimates could come in on the low-end of the range of projections for death tolls should push markets up. We're also seeing some encouraging (though not conclusive) data on things like various treatments, impact of social distancing over short periods of time, and even seasonality.

Economically we are seeing strong willingness from participants to move back into the market (previously I called this the BTFD recession), a change in retail investing to continue to systematically allocate capital to public markets (leading to minimal data of movement in vanguard accounts), as well as consumer confidence at very high levels. In addition, I am not of the belief that humans change materially, and don't think we will be living in some drastically different world where people want to all work from home, do zoom happy hours, and not travel anymore. That said, my mind is fucking blown that cruises are still in demand.

Pair this with unparalleled pace and scale of fiscal policy and stimulus from governments (with much more to come) and we can start to see how there is a narrative about how, as a human race, we have figured out how to pair sophisticated financial structures with societal collaboration in order to defeat black swan events. 

But...

There are a ton of shocks and unknowns relative to COVID-19. Despite all of these positive signs, I still can't quite shake the continual view of bear markets seeing fast rises before steeper falls. We haven't seen the next order effects yet, and we haven’t seen the second sell-off either.

If we look at 1929, we can see that this didn't happen, and perhaps this is where we are headed. Markets process information faster than ever before and the rarity of this event could have perhaps led to a steep sell-off that pushed straight to rock bottom, and then back up.

The rational argument is that it feels unlikely that we priced in the downside scenario bound of economic outcomes (humans likely did price in the healthcare downside bounds, due to fear and plenty of pop culture that enables us to see pandemic destruction).

With fiscal policy, it's not clear that we actually have a good infrastructure in place to properly deploy trillions of dollars to Main Street in a short enough period of time that we save these businesses and don't create serious, lasting economic impact.

With the pros of social distancing, it's not clear that we won't see some short to mid-term changed behavior and restrictions surrounding dining, entertainment, and hospitality broadly. And we don't actually know if these types of businesses have economic structures in place that can weather those restrictions on behavior. We also don't know how resurgence will impact the market (my view is if we have to social distance again, we will see a very steep sell off and even larger levels of layoffs that may be permanent).

With forgivable loans, will we not see companies meaningfully change the economics of their business post-covid, perhaps less growth, more cash, fewer workers, less infrastructure, all paired with a lack of buybacks to push up stock prices? (to this point, this could be a further widening of the mega-cap technology companies increasing in value, and the mid-cap and small-cap non-tech companies falling. This is one of the reasons I have kept or adde to a variety of tech longs throughout this downturn)

As I wrote yesterday, I do think that we are going to be continually in search of yield, with low interest rates, and thus markets will recover sharply and tightly with earnings recoveries, however I think we still have imperfect information on the scale of the downside to truly understand the economic impact for the next 18 months. Earnings figures over the next month for individual companies might show small signs of this and could drastically correct the market one way or the other, though I'd imagine next quarters earnings to be far more indicative of how the following 18 months looks from a supply and demand sense.

And alas, this chart is probably one that I find most interesting and relates heaviest to the BTFD recession.

Despite all of my doom and gloom, I am still long term bullish on technology and bio as meaningful contributors to how we evolve with our new futures and believe that many of the behaviors will persist in middle to upper middle class America. A point to think about related to this is that perhaps this is another driving factor which creates an even wider (and faster) economic class gap in our country and other developed nations.

Back to the economy, as with the prior hundreds of years, humans continue to find solutions that outpace the problems that we create, or are thrown out us as we hurl through space on this large blue marble. Maybe we are inevitable, but I don't think it will look that way for the next few months.

Art: Nan Lawson

[michaeldempsey]

Market Views 4/6/20 - Why didn’t jobless claims crash the market and when will stocks recover?

Disclaimer: This is more for scalable sending notes and personal accountability. Not a professional public market investor, not investment advice, likely all bad advice from someone spending not nearly enough time researching public market dynamics. Also not really editing these pre-posting.

We now need clarifying news to move stock prices

Last week after a horrible jobs number everyone in the twittersphere was shocked that the markets didn't tank and looking for answers. There are a few ways to look at this, with the easiest being to point them to a discounted cash flow model and explain that companies are based off a belief in future value of earnings. While the jobless claims number was a shocker to many (especially because the chart looked so stark), it really didn't change the economic view of many of these companies. As I've been harping on across basically everything I've written over the past few weeks, we all are operating under the assumption that this is going to be really bad, that "main street" is outsized effected vs. wall street, and that we don't have a good way to quantify that loss. Thus, after a massive sell-off in public markets a few years weeks ago due to fear and an impending global pandemic, the only thing that can materially change our view is clarifying news. So when we see 6.65M jobless claims the market shrugs and says "uh, seems bad but doesn't really allow us to materially update our model" and then public markets trade sideways on the news.

Clarifying news can hold different definitions at various points in time. For some reason, markets believed that Trump speaking qualitatively was clarifying news a few weeks ago, however have begun to drastically mark down the value of that input, as he continues to fire from the hip daily in his pressers. A similar view has been held with respect to China numbers (of which many early models were based off of), which as we talked about last week, has now been slanted more towards a garbage in and garbage out data modeling view.

(h/t Bulger) https://twitter.com/conorsen/status/1247098556512710656

With that said, perhaps we are starting to get better quantifying data as we're seeing deaths and infections fall across Europe and have perhaps passed a peak in NYC (see chart below for ER data) here in the states. The NY Times has doubts on some of these numbers (as do many others) but it's more likely the positive news gets amplified and markets trade up on it in the short-term.

I say short-term because we still don't have strong data on resurgence rates, timelines for testing, or a ton of other things that could lead to the secondary sell off that I've been anticipating. As I've said, a lot of these also assume a stronger level of distancing than I think we'll be able to sustain. Right now, in early spring, we're seeing humans' ability to stay inside (sorta) and isolate for a few weeks (with a ton of complaining). As weather continues to turn for the better across the country (and northern hemisphere) and we get pushed from April 30th to maybe memorial day, I don't have a ton of faith we'll see pseudo-elective social distancing maintain, and a government mandated lockdown would likely send things further south.

COVID-19 & Stock Recovery Timelines

Timeline of distancing is the big question on everyone's mind as it will drive economics and likely the gap between a recession and a depression. These questions come at the economy from multiple angles but largely rely on how earnings can return after suffering a demand shock for 2+ months, as well as how the world is changed after this.

On the first order (and broad) question of "when can we go places again" these two charts below show both where some believe we are on the curve, as well as the likely restriction lifts. I'd say that the April 30th lift of restriction will likely not come to fruition in the US and instead be pushed a few weeks as Trump potentially sees positive signs in the market with improving, post-peak data.

How the rest of the global economy will impact markets, is something I'm less of an expert in, especially with the complexity of supply chains that has only grown stronger over the past decade. But for reference, here's a chart from JP Morgan on the various countries and their respective phases.

So now that we have a timeline of some sort (let's just say June 1), we have to begin to look at the earnings impact. Goldman is projecting that after a crisis, we usually see a bounce back of ~3 years before we get back to prior earnings per share levels.

So back to stock prices and earnings. If we see the above Goldman report of 3 years to get back to EPS levels, we can look at past data from bear markets to understand potentially how stock prices will follow. Looking at the last two bear markets, we see a slight lag between where earnings breakeven and markets do, however both of these were followed by very strong bull markets. As Ben Carlson notes, this slight lag could provide massive tailwinds for another large bull run.

My opinion is that we could see a slightly closer coupling of these two principles as the shock isn't one of financial systems or company health this time around but instead one of exogenous risk exerted on the market. Because of this as well as aggressive fiscal policy to push people towards risk-on assets in search of yield, it's more likely that we'll see markets want to pay for future growth at a faster rate than before. As Carlson says:

It’s true that the price of an asset should reflect the present value of all future cash flows but investors often over- or under-react based on their expectations of the future, meaning the pendulum can swing far above and below fundamental values.

Other Notes

Related to a lot of these unemployment numbers, we should be continually watching those that leave the labor force. As any economics undergrad can tell you, discouraged workers and those not in work force have a real draw on the economy, and thus are good tertiary indicators.

A lot of people are staring at Alphabet and Facebook stock prices while trying to understand the impact of a large portion of ad demand fleeing the market in the short-term. This chart shows some data on that across various categories. Anecdotally, I’m seeing closer to 50% drop off for digital advertising prices, but probably even a larger flight from demand on some consumer areas I’m exposed to.

Americans realizing that the light stuff won’t do and headed straight for premixed cocktails for that extra spice in their day is a trend I didn’t see (vs. just pure grain alcohol or moonshine). #quarantinis

What I’m Doing

I’ve sold off all of my VIX longs. Still short TSLA, ZM, URBN, MNST, and a few other + most indices. Likely selling part of my FTSE short today as I’m not sure I want to ride the ups of amplified good news with quieted bad news in the short-term (this is an interesting dynamic of where we are in the cycle that should be written more about).

Art

[michaeldempsey]

Market Views 4/2/20 - Garbage In, Garbage Out, Jobless Claims, and VC Markets Aren’t Clearing

Garbage In, Garbage Out

There's a saying in the data world called Garbage In, Garbage Out, which basically means that if you input bad data into a model, the outputs (or conclusions) of that model, and thus the decisions made off of that model, are going to similarly be worthless.

It seems that we are seeing that play out in real-time

On the international front, we're now in a shouting match with China about who is telling the truth or not. My gut (and a lot of anecdotes from urns to spikes in deaths and more) tells me that China has been vastly downplaying the extent at which COVID-19 has impacted their population. It seems US intelligence has confirmed this in a new report that was handed to government officials last week.

China has a reputation for not being the most transparent country in the world, however what's more important is that based on the early outbreak there, the garbage data we received from them has drastically impacted the rest of the world's ability to model out various scenarios. If you look at early research papers, many were leaning on Chinese data in order to model out scenarios of spread and economic impact. All of this research now feels like it must be thrown out. However, as Nicole Williams points out, maybe we should have just not trusted this in the first place.

There are two other interesting parts, to me, about all of this.

First - I hate that this gives another narrative for the Trump administration to push off blame for their poor reaction time to COVID-19 stateside. Even with the existing Chinese data, they should have acted faster. And based on decades of intelligence, they also probably should have assumed/did assume that the data was bad.

Second - On a lighter note, yesterday Trump said that he hadn't received an intelligence report. I imagine this isn't true, but I like to think of a world where intelligence people all give that look of "yeah we're not going to bother Trump with this, for the good of our country." Kind of like when one parent tells their kids not to tell the other parent about something bad that happened at home or at school. It's even funnier if you imagine them deciding it's best for the press to know and have Trump learn about it at the same time.

Garbage Jobless Claims Data

There are scenarios where the bad data can allow you to still get a directional view of something. You could argue this is what is happening with initial jobless claims in the US. Last week we saw a record 3.2M jobless claims which seemingly did very little to the market, last Thursday. This is possibly because the figure fell within projections from many economists, however there is another hypothesis surrounding incomplete data. That is, because it was incredibly difficult to meaningfully parse the signal from the noise, as the narrative was that this data was incomplete due to infrastructure issues of people not being able to get through to file for unemployment, it was difficult for the market to truly understand the magnitude at which this data was garbage.

Today we saw a new record of 6.65M jobless claims, breaking the upper bound of most projections (6.5M was the highest I saw from a credible source, with a few 7M's around the internet). The market digested, futures fell a bit, but the movement hasn't been super steep either way. 

It's likely that Wall St has been largely bracing for "very bad" news, hence the lack of steep fall in markets on a historical unemployment figure. While some investors are publicly saying they are buying the dip on certain names, I don't know anyone (disclosure: i don't know a lot of people) that is horizontally buying the economy and thus without a more existential fear, likely related to health of citizens or policy change that extends the duration of an economic slowdown further (and making the "v-shaped recovery" more difficult) I don't think these types of indicators will materially move markets.

As I mentioned yesterday, Trump takes all of his cues from the stock market, and it's likely he's watching today with close eyes before figuring out what he's going to say at his presser either today, or even more importantly Friday going into the close (if he prepares for these things at all). If things aren't too bad today in the market, I imagine he continues to talk about how the current "relief" package (good god this post feels like years ago) is helping tons and tons of Americans and great businesses. If things get out of control, I imagine what we'll see is further rumblings about the next wave of stimulus and how the government is prepared to take any action necessary to save the economy.

Related to data, I still don't have high confidence levels that even this week's data is clean. Yes, we've seen some better infrastructure in place and guidelines for managing load on phone lines and internet for unemployment claims, but it's highly likely we see another spike next week.

Sweden Reversal

So yesterday I wrote about the great British Reversal and specifically talked about the cognitive dissonance that shifting from downplaying to strict measures causes within citizens, companies, and countries broadly. Today we're seeing this happen again in Sweden. Up until yesterday Sweden was perfectly content watching the rest of Europe burn and their neighbors that are 8 kilometers away take strong measures against COVID-19, while they did...nothing.

The former Prime Minister even had a lovely quote on CNN where he said something to the tune of "Swedish people are already predispositioned to social distancing more than others".

On cue, Sweden now has announced more strict (I guess?) social distancing measures, while still allowing shopping. It will be fascinating to see how the data looks relative to the rest of Scandinavia in the coming month.

Other Notes

VC Markets Aren’t Clearing

I wrote a post about how and why VC markets are being affected by COVID-19 paralysis. Specifically I walked through the trickle down effects that lead to lower pricing in the market. Read the post here. 

What I'm Doing

I shorted Zoom yesterday ($ZM not $ZOOM) at $140/share. We can talk about product differentiation, some whispers of negative news, or the insane valuation run-up that feels not sustainable, and then we can pair that on my continued view that a downward trend in markets will effect almost all stocks. There’s some mix of all of those things, but I also felt comfortable riding this out without having to worry about material volatility on the upside case (i.e. the stock running up against me) unless we see revised guidance ahead of earnings in June.

Art

Dystopian Garbage

[michaeldempsey]

Market Views 3/30/20 - Is This Time Different?

Disclaimer: This is more for scalable sending notes and personal accountability. Not a professional public market investor, not investment advice, likely all bad advice from someone spending not nearly enough time researching public market dynamics. Also not really editing these pre-posting.

I’m a bit surprised that markets are pointing to an upwards open this morning. After a steep sell-off into the weekend (which I think will keep happening) and Trump showing that he’s willing to push out the social distancing timeline, I would have expected a bit more negative sentiment, and IMO this only further solidifies that while Trump will continue to short-term speak about what’s best for the economy, I’m not sure he has it in him yet to mid-term take a massive health risk.

This Time Is Different

There's a lot of debate right now about whether we've hit the bottom of the market. But bear markets don’t bottom in a month. And if you look at the data surrounding bear market length, it's largely been true that these things can take far longer than a few months. The one difference is in 1987 which from all of the reading I’ve done (see: 20 minutes of googling this morning and a forgotten economics class from college) seems like I can’t get a conclusive view on the direct cause of the shock, and also was at a time where a lot of infrastructure level changes were happening in public markets that we clearly weren’t ready for. 

The continual psychological issue we have as humans is that in extreme scenarios, each time feels different. Narratives are incredibly powerful for outlier events, businesses, and times. This time, the world is increasingly more connected, our (or our machines’) ability to parse information and act upon it is faster than ever before, and disruption comes at a feverish pace relative to any other time in history (just look at the displacement rate of the S&P 500). 

The chart above was really interesting showing even from the 2008 crisis to now (just 12 years) the difference in time in which we enabled serious fiscal policy.

With that said, I’m still trying to parse whether or not this time is truly different. My job as a venture capitalist and how I interpret today (and the next 20 years) vs. any other time in history makes me strongly lean towards this time is different, but across so many financial lessons this is hard to believe. If you take a retrospective look, history often tells us similar lessons. So for now to save some time I’ll just end with this quote.

History is not a road-map, but a compass.

Studying long-term economic impact of pandemics in Europe from 1331 to 2009

This paper took a look at the long-term economic effects of various pandemics on European economies (due to data availability). I recommend reading the paper but the main takeaways here are that we see multi-decade lasting lower rates, in addition to an increase of real wages.

Measured by deviations in a benchmark economic statistic, the real natural rate of interest, these responses indicate that pandemics are followed by sustained periods—over multiple decades—with depressed investment opportunities, possibly due to excess capital per unit of surviving labor, and/or heightened desires to save, possibly due to an increase in precautionary saving or a rebuilding of depleted wealth.

As with my prior point above around narratives and "this time is different" I'll fall into the trap and argue that in 2020 we have significantly more global economy that relies on machines to lever humans' output in an outsized way vs. any other prior pandemics analyzed. In addition, our governments feel more sophisticated with how to utilize monetary policy to mitigate shocks to our systems, learning from each shock to better improve (see the introduction of circuit breakers after Black Monday in 1987). The paper ends by recognizing these different times, on the basis of average lifespan as well as lower rates allowing for better government intervention.

If low real interest rates are sustained for decades they will provide welcome fiscal space for governments to mitigate the consequences of the pandemic. The major caveat is that past pandemics occurred at time when virtually no members of society survived to old age. The Black Death and other plagues hit populations with the great mass of the age pyramid below 60, so this time may be different.

Other Notes

- This is the current google trends search for the term "can't pay" in the US. Take a look at the relative timescale as well to see how this very imprecise metric looks. See the full page for yourself here. (Source/inspiration: WSJ)

What I’m Doing

Mostly just staying steady in my continued belief that this isn’t the bottom. I’ve admittedly begun to look at longer time horizon views (as you’ll see above) and understanding what the world may look like over the next 24 months in 3 month intervals. Compared to my day job, it’s a remarkably short time horizon, which is a change of pace.

- I sold half of my long VIX positions on Thursday at the open (as noted). It’s possible that this was a bad decision (especially if I believe in the impending fall as much as I do) but I would rather have that cash or redeploy it elsewhere.

- Still holding short the overall market and specific names, still doing research into other names for long/short or pairs trades.

Art Time

[michaeldempsey]

Market Views 3/26/20 - It’s a ~*Relief*~ Package

Disclaimer: This is more for scalable sending notes and personal accountability. Not a professional public market investor, not investment advice, likely all bad advice from someone spending not nearly enough time researching public market dynamics. Also not really editing these pre-posting.

Let’s do “Relief” for $2T, Alex.

I know the news everyone wants to talk about is unemployment claims, but first can we talk about the words relief vs. stimulus?

Normally we call these sorts of things stimulus packages because they are used to boost demand and buying within the economy, thus stimulating it. However it seems we can’t even begin to imagine demand coming back into the economy right now, so instead we’re just trying to make people feel like they can survive. Which brings us to our word of the day, relief.

Yesterday, before the largest uh, relief package, in the history of our country was fully agreed upon and put into action, we started to hear about how this is just the first economic policy step of likely more to come.

Our boy James Bullard (Fed Reserve Bank of St. Louis President) said that the $2T is “about right for the situation” but made sure to clarify that “This is not stimulus.”

This article from Bloomberg does a good job of breaking down all of this, but it’s hard to feel great about how things are going in the economy when we haven’t even signed into place the $2T and we’re coming up with euphemisms for the largest stimulus package our country has ever seen. Meanwhile former economic strategy leaders are saying “Further stimulus will be needed in coming days and weeks to further bolster the economy and leaders should begin working on that now”

Not to go all private markets on you but this kind of reminds me of this quote I read from Dalton Caldwell yesterday on his advice to himself as a founder in 2008:

Doing multiple small layoffs is a form of cascading failure. Do one layoff, but much much deeper than seems correct. Do it decisively. Do it so that you get profitable. In your case that is something like a 70% cut, not a 5-10% cut. Yes you read that right: a 70% cut. Cutting once and cutting hard allows you to reassure the people that are still here that you are truly profitable and won’t need to do it again. Doing a layoff and remaining unprofitable and counting on fundraising to save you is a stupid plan.

$2T temporary relief, some impending stimulus in days, and Infinite QE. Feels hard to feel truly stable about things unless you’re willing to take the view that our government just won’t let the economy fail, which uh, I’m not.

Initial unemployment claims spike

The big news out of markets this morning is the initial jobless claims, which came in at 3.28M, or seasonally adjusted 2.9M. This is brutal, but the market seems to be responding better than I anticipated. For reference, here's some historical data that includes 2008 financial crisis. Next Friday we'll get a full report on labor in the US for the month of March from the BLS (to pair with next Thursday's updated initial claims). It's likely we could see more large numbers as there have been countless stories related to those unable to even apply for unemployment benefits via digital or physical purposes.

My main commentary here is that I'm surprised the markets didn't move more (currently S&P is barely up) on this news (as well as the early indicator which was Governor Newsom last night dropping the 1M unemployment claims in CA number). It's likely we knew this was coming for an initial spike, and now the next order movement will come from sustained claims that outpace this one week spike (which feels realistic as non pureplay travel/hospitality industries begin layoffs).

That said the Newsom data I think had a better headline than what actually was happening. Upon looking at the Department of Labor data this morning, it seems that advance claims were 186k for this week (ended march 21) of data. I can't seem to find a state by state breakdown for this week for pure initial claims but last week (end march 14) California was 57.6k and ~43k for the week prior (march 7). Newsom's comment was "since March 13th" and an estimate. So now we have to ask: Was Newsom including advance claims, initial claims, or are we going to truly see 1/3rd of the country's initial unemployment claims come from California (the state is about 12% of US population). Due to the early lockdown, it's possible. This data likely is what is scaring the shit out of Trump as late movers to lockdowns could see continued spikes in unemployment claims, which would lead to prolonged downturns in markets (again, versus one single shock).

This was also interesting but I don’t know enough about how Canadian government and employment policies work to understand how much this can correlate to the US.

What I’m doing

- Praying that Trump flip flops on his view that bringing the economy back in a few weeks is a smart idea.

- Still holding shorts but likely selling off half of my long VIX positions today.

- Wanting to dive deeper into some individual names that feel oversold and undersold. Maybe we’ll talk about this more soon.

More dystopian art to end today

[michaeldempsey]

Market Views 3/25/20 - Bear Markets Don’t Bottom in a Month

Disclaimer: This is more for scalable sending notes and personal accountability. Not a professional public market investor, not investment advice, likely all bad advice from someone spending not nearly enough time researching public market dynamics. Also not really editing these pre-posting.

$1T or $2T?

We don't have full information yet on what the stimulus package is going to hold, but we do have some high level numbers. Numbers that have dramatically changed from $1.2T to $1.4T to $2T to $2.5T and back down to $2T. The rational POV is that there are various concessions between the two parties that inflated the stimulus package because when you're printing $1T...why not just go for $2T? The more cynical POV is what I ended yesterday's note with, which is that there is no remote consensus on how long this lasts or what the proper response is (and this is increasingly become a political issue vs. science-backed), creating a $500B+ variance in proposed plans. 

“Bear markets don’t bottom in a month”

Will all this stimulus matter? The talking point from basically every economist I’ve read over the past 24 hours has been that none of this whipsawing in public markets will stop until we see material declines in infection rates, and we’re not getting there anytime soon. I expect this to ring even more true for the private markets (specifically talking about venture capital here) as our collective group feels very bearish on this ramp of recovery, and very bullish on the idea that the worst is very much yet to come.

As I said yesterday, in fact, we could see an even worse turn of events if Trump does get people back to work by Easter. And to my initial point, how long is this going to last us? Can we do a second stimulus package for main street if we see demand shock for the next 12 months? Honestly, probably, but that’s above my paygrade.

Hospitality’s Rally

It's been remarkable to see the rally in hospitality over the past few days, with names like Darden, Ruth's Cris, MGM, Dave & Buster's, and more spiking 25%+ on stimulus talks after getting annihilated (chart above courtesy of Raymond James equity research).

I’m still not sure how stimulus will materially impact most of the independent operators across food (my gut tells me they are done for, no matter what check the government is willing to write them) as well as this fracturing cities/states/societies component I keep talking about if Trump does push the economy back into motion too soon (i.e. April). I tried to run a quick screen to see which publicly traded restaurant groups had the most exposure to states like NY and CA and if it was a material % of revenue, but haven’t been able to easily find that data in the 20 minutes I spent searching. My thesis would be that these states could see a marketed drop off in demand based on political leanings, or continual shelter in place by their governor’s, thus creating continued economic struggle while the rest of the country that *today* doesn’t really seem to worry about COVID wines and dines to their heart’s desire.

I’m still processing this all so expect more notes at a later date, but also, Dave & Busters (up over 100% in past few days) reports earnings next week on April 1 (ironic). Excited to hear that guidance and whether these groups sandbag projections or are overly optimistic in the hopes of Americans Americaning.

What I’m Doing

I added a tiny amount to my Tesla short yesterday at $500/share (don’t feel strongly about this) and added to index shorts (S&P and Russell 2000). I’m still long the VIX but think VOL may have peaked for now and likely start scaling back those positions and taking gains. Admittedly, I’m a bit hesitant to do *anything* right now. My views on timelines have fractured into: 

Short-term a) we see sell offs as numbers continue to spike and public officials become more outspoken with how screwed their healthcare systems are, driving down markets.

and mid-term b) The trump sends people back to early and we see a secondary meltdown after a large rally situation.

TLDR I’m pretty bearish overall, but I’m long-term (18+ months) bullish and still holding all tech and bio positions (+Walmart). Also, I’ve never materially traded through a $2T stimulus package and infinite QE before, so there’s probably some knowledge gap here of understanding economic policy flows into markets that I could be mispricing.

Here’s some art for you to get through the day.

[michaeldempsey]

Market Views 3/24/20 - 15 Days and Out: Early thoughts on market impacts of short-lived social distancing

Disclaimer: This is more for scalable sending notes and personal accountability. Not a professional public market investor, not investment advice, likely all bad advice from someone spending not nearly enough time researching public market dynamics. Also not really editing these pre-posting.

The idea that trump wants to send people back to work early continues to gain steam, and he said "very soon" last night in his press conference (while of course, comparing COVID-19 to the flu and automobile accidents). So there are a few things that seem to be possible if/when we defy scientist recommendations and re-ignite the economy.

If after the 15 day quarantine, Trump pushes markets another few weeks, and then let's say we get a first-order distancing lift (rumors are he plans to layer people back into the workforce by age) on April 10th announcement (so that market rallies into weekend, businesses open, and rock and roll on Monday): We'll see a nation that is largely split in how they take this news. Some will still be terrified, rationally knowing this is bad advice, that will continue to weaken demand for a section of spend (think physical activities sans food perhaps) as well as some offices that will stay remote. Based on The Atlantic's piece on how Dems and Republicans are viewing this, it's likely those cities which are hardest hit from an outbreak perspective will be in this camp. But we'll see a large chunk of the population go back to work because..well...THEIR GOVERNMENT TOLD THEM TO and more importantly, they need the money to live.

I'm in the "bad idea" camp here, and believe that we'll also see a fracturing of state vs. federal views on this, that will create continued panic and volatility in markets as we digest specific company earnings reports that reflect Q1 numbers and rest of 2020 fiscal year guidance. So now we're at some set of companies getting murdered after a macro rally on the government loosening on distancing (like we're seeing today). There are also international economic impacts here to take into account. We'll then want to look at which companies have international customer exposure vs. not and how those countries and their policies are adapting.

Fast forward a few more weeks and perhaps we'll see continued data surrounding the spread and disastrous healthcare situation that Trump has put us in. At some point, he could be forced to put in place social distancing measures again, likely blaming governors as their healthcare systems faulter. This secondary shock could only terrify the market more surrounding the "how long can this last" dynamic, and we'll see an even deeper cut, giving up any rally that markets had gone on in the few weeks post-quarantine v1 and pre-quarantine v2 and bad Q1 earnings. These fires will only be flamed by the various thinkpieces and discussions from the Imperial College report that without a vaccine, we basically must social distance for 18 months. I'd hope that we'd get a treatment before then, but I don't have a good read on how likely that is (though as I wrote yesterday, am of the belief that humans are pretty good at outpacing treatment of new problems, if just for short-term relief).

So to summarize, will trump pick the market over the healthcare system? And if so, will large multinational companies follow suit and send workers back in? And the other important question is: While congress will likely come to some conclusion on a stimulus package this week, will this process really be effective if they are making this decision in a vacuum of not knowing what type of policy surrounding distancing we're headed for? (This question assumes congress doesn’t have a good idea for what Trump plans to do, which I believe, because Trump doesn’t have a good idea of what Trump plans to do.

Yes we have Infinity QE, but if we pass stimulus for Main Street assuming a lockdown that suppresses R0 to below 1 by June 30th and gives the healthcare system slack, only to have that world we're planning for ripped out from under us, will we really be in a better economic place?

Conversation for another day.

What I’m Doing

Looking for potential short opportunities in this upswing today, and starting to think about longs again. Still not deeply confident on how all of the new fiscal policy impacts markets yet.

Other Notes

- I tweeted this but I liked this letter from James Bullard, the CEO of the Federal Reserve Bank of St. Louis. Specifically his realistic take on how we must choose our words carefully surrounding the initiatives we put in place to support American people.

[michaeldempsey]

3/20 Market Views

Disclaimer: This is more for scalable sending notes and personal accountability. Not a professional public market investor, not investment advice, likely all bad advice from someone spending not nearly enough time researching public market dynamics. Also not really editing these pre-posting.

First - we published our letter to LPs on how we’re thinking about COVID-19 and our portfolio/venture investing broadly. Read it here.

It seems like public markets are set to open and rebound again today (after a small up day yesterday. I bought new, short dated S&P puts (April 17th) as I believe I misjudged the ramp time for the market’s understanding of economic impact due to massive losses to hospitality sectors, tied with ramp time of cases and more drastic measures creating volatility (that said, Gov. Newsom shut down California last night).

With respect to hospitality, I don’t think we have a good understanding for just how much food is falling off a cliff (regardless of delivery), and both the ramp down time (almost immediate) as well as the ramp back up time in an economic downturn (restauranteurs that were burned and forced to bankrupt aren’t going to just all sign new leases, hire staff, and go right back into business at the first sign of neutralization of COVID-19, and investors aren’t going to come back to the table either). As many have pointed out, hospitality employs a similar number of people to manufacturing, however the fragmentation and inertia needed to re-enter the labor force for manufacturing even feels lower than restaurants. There will be more stark economic impacts than we think, however I don’t have deep confidence in when that will become priced into the market (and send markets down further, as I believe we’re directionally going).

If I were to bet (I am.) I’d guess that markets hold steady today and sell off into the weekend. But I don’t feel great about that outside for the fact that we know there is some point in time where the CDC needs to step in and give an update, and based on spiking cases, I’m not sure people want to be holding equities over the weekend.

Other Notes

- There’s more research to be done on understanding when are the earnings reports for companies that have taken a less than market hit (a lot of tech) and understanding how analysts have revised their earnings reports. Based on all the narratives floating around surrounding procurement and things we’ve talked about here, I’d imagine there are some poorly understood revisions that need to happen. Especially interesting if we can understand customer composition for usage-based pricing models (think API-centric businesses) and work through the secondary effects of customer slowdowns. Possible this has been priced in, but likely not across the board.

https://twitter.com/garrytan/status/1240684513677590528

Garry brings up a good point that due to reduced spending from larger palyers we’re seeing ad costs and overall CAC begin to fall for some categories. That said, I’m not sure how the other side of the CAC equation will swing in terms fo converting users to purchase. It is a fun time to experiment and perhaps we’ll see newer brands benefit but my general sentiment seems to be that enterprises are freezing new procurement and consumers aren’t exactly fleeing to spend discretionary income.

https://twitter.com/eladgil/status/1240580676664979457

Elad brings up a good point here, but also, it’s remarkable how fast we’ve seen sentiment begin to turn from “we know we fucked up, but everyone needs to distance for us to get through this” to “we fucked up, it’s unacceptable, and we need to get through this, but...the economy?” This change has happened in <7 days (Elad and many other smart people have been worrying about COVID-19 in the US for far longer). I’m not sure what the right answer is but IMO this is a dangerous rallying cry at this point in the quarantine cycle as we don’t understand what has already happened yet, and we are having enough trouble as is encouraging responsible behavior by large swaths of the population. TLDR; I get it, but I don’t deeply oppose Elad’s view on econimic destruction being worse than human destruction, but I do oppose ringing the counter-narrative bell right now.

Listen to kevin please and read his thread here. Layoffs are happening already and we’re going to see them accelerate over the next few weeks into startups at scale.

What a shitshow the UK policy around COVID-19 turned into. The comparisons between Trump and Boris Johnson only continue, but it feels like where Trump says stupid things and probably knows he doesn’t know what he’s saying, Johnson genuinely believes he’s smarter than everyone. At least, until a group of scientists, economists, and more all come to him and tell him he’s going to kill a large portion of the population of his country. I personally was intrigued by what could have been the largest A/B test in recent human history, but alas, we’ll have to wait for the next pandemic for someone to go hard into the herd immunity route at a material scale.