Introduction:
Happy Leap Year Day! February 2020 has been a wild month for stock and bond markets. The COVID-19 virus has dominated the headlines and the markets have been trading on those headlines. If the latest news is negative, markets fall, and if the latest news is positive, markets rally. Here are five stories from the past month or so:
- Read: Global Credit Markets Seizes Up as Coronavirus Halts Bond Sales. This article discusses how the global corporate bond market has dried up. It’s unusual to see many straight days without any bond offerings; much like the IPO market for new companies and the secondary market for older companies, the global bond market serves an important economic function in raising capital for commercial enterprises. Meanwhile, the US 10-year has fallen to its lowest level ever at under 1.30%.
- Watch: CNBC's full interview with Warren Buffett. Here Buffett talks briefly about his understanding of the virus, about conversations he’s had on the topic with Bill Gates, and about his father’s experience of the Spanish Flu epidemic at the end of World War I. Coronavirus aside, this video is full of practical and actionable advice.
- Read & Watch: TSX halted and closed early on technical issues. On Thursday, February 27, heavy volumes and technical issues related to a problem with order entry halted trading on Canada’s major stock exchange. The CBC and BNN-Bloomberg also reported extensively on this issue.
- Read: Fellow contributor Ploutos wrote two great articles: A History of -3% Down Days, and A History of Consecutive -3% Days. The second article illustrates how unusual it is to have consecutive -3% days, and unlike the dataset for the first article, the dataset for the second is very small. Since then, the situation has only become more unusual. According to this CNBC YouTube video, this is one of the fastest 10% drops ever. History is a good guide, but imperfect at best.
- Read: In late January, I wrote an article here on Seeking Alpha called Alpha Pro Tech: An Antifragile Stock That Gains From Disorder. Since the article was published, the stock has rallied from $4.95 to $21.00. The situation at APT remains very volatile, and like the rest of the stock market, it is trading on COVID-19 headlines. But still, as the article argued, the worse the virus situation gets, the better APT performs. For full disclosure, we no longer own the stock here at Contra the Heard.
Twitter Question:
This situation got me wondering… which of the following options listed in the photo below will COVID-19 result in? Feel free to participate via this Twitter link:
Summary:
It’s hard to say where this story goes from here, or when the markets will stop trading on COVID-19 headlines. The world is stuck in a tough place. If human activity proceeds normally the virus will spread further and faster, but if human activity is curtailed then the economic, social, and political impacts may be severe. Regardless of how this unfolds, it’s safe to say the health of the global financial system is frail. Valuations are high after a record bull run, global debt reached 322% of GDP last year according to the Institute of International Finance, and central banks have limited room to cut interest rates. It also looked like certain economies including China, Japan, and Germany were already slowing down in the fourth quarter.
On a side note, this event may either validate or invalidate Michael Burry’s concerns regarding issues with ETFs around price discovery and liquidity.
Finally, before COVID-19 was in the news, we discussed the chances of a global slowdown in January at the Vancouver Resource Investment Conference. A recording can be found here on YouTube: Three Resource Stocks to Watch – Benj Gallander.
Disclaimer:
The opinions expressed – imperfect and often subject to change – are not intended nor should be taken as advice or guidance. Contra the Heard Investment Newsletter is not an investment advisor or financial advisor. Contra the Heard Investment Newsletter provides research, it does not advise. The information enclosed in this article is deemed to be accurate and reliable, but is not guaranteed by the author.