mattee2264

https://www.bloomberg.com/news/articles/2020-11-10/-frenzy-for-airline-stocks-spurs-dislocations-in-2-billion-etf I found this interesting regarding the JETS ETF. Record trading volumes. Record call option buying. Short interest now close to 0%. Briefly trading at a premium to NAV. Imagine similar things going on with a lot of other recovery plays people are piling into. I've noticed serious service interruptions on my retail brokerage website and apparentely this is the case for many other retail brokerages as well. I think a rotation into cyclicals is long overdue but wondering if this is a set up similar to the summer when on re-opening fever stock prices of sectors such as energy, airlines, real estate got way ahead of themselves and corrected significantly once the realization set in that the virus wasn't over and there was a long road to a full recovery. I'm not really interested in airlines but energy and tobacco and financials are also getting a lot of inflows and making big moves and it is much more comfortable to be investing when the crowd have lost interest and moved on to the next big trade. So I am trying to decide whether to wait for a pullback given the market has jumped 10% over the last week and over the last few days energy and financials are up around 20% and travel related names a lot more or whether to invest now before good values disappear altogether as momentum and FOMO kick in.

muscleman what is your pullback thesis? I remember from earlier in the thread that you think good news re the virus is bad news for the stock market.

Viking as someone who is also sitting on quite a bit of cash would be great to hear your updated thinking. Vaccine news is very promising but as might not be available for mass distribution for some time doesn't take off the table the possibility of rolling lockdowns until the spring and also might reduce the appetite for a large stimulus bill. And perhaps with a vaccine on the way politicians will be more inclined to play it safe and impose restrictions with the knowledge it will be the last lockdown

Did a bit more reading and yeah only 50M doses estimated to be available by the year end enough for 25M people and that has to be divided between the US, the UK, Canada, Japan and the EU. So it probably doesn't spare us from the possibility of rolling lockdowns through to the spring and you are right it could take some time to build out supply chains to handle the challenges of mass distribution. So the original timeline of mass distribution by summer 2021 might still be the most realistic outcome.

Initial reaction has been a pop of around 10% in energy, 10% in financials and 20-30% in travel related names and real estate. Obviously quite big moves but then again these sectors are still well below pre-COVID levels and had already sold off significantly from the summer when the initial re-opening/V shaped recovery fervour was taking steam and the market is so driven by momentum that there might be a much longer rally before the good news is fully priced in. Of course still some uncertainties re approvals/timing of the roll out. But perhaps there is an opportunity here.

Obviously great news for humanity. What do we think are going to be the market implications? Initial market reaction has been euphoric. Obviously a very effective vaccine that can be rolled out pretty quickly wasn't priced in and should accelerate a return to normal and amazing news for travel related stocks and energy stocks and financials. But on the other hand markets are trading well above where they were a year ago before anyone had even heard of COVID-19. And perhaps markets can no longer count on much fiscal and monetary support now.

samwise I am trying to figure out the same thing. I think there will be a much higher tolerance this time. Hospitals are better equipped and much better at treating it. We've adapted to a new normal of more remote working, more online shopping, more takeaway food, and so on. Also the data in Europe suggests that cases have already peaked and are starting to decline and they've only just started ramping up lockdown measures. And I think if there is a market reaction it will be more discriminating. Cyclicals will sell off. Tech will go a lot higher. There might be a modest sell off but nothing resembling the panic of earlier this year.

I guess what is more certain than the election outcome is that the Senate is going to the Republicans and there isn't going to be a Blue Wave. That dispels the fear of higher taxes and more regulation which would have ruined the party for Big Tech. Interestingly a lot of healthcare stocks have bounced and they are also sensitive to taxes and regulation and not reliant on big stimulus measures for their growth.

I think it depends what the S&P 500 is going to do. S&P 500 has a feast or famine dynamic that you don't have to the same extent with Berkshire. I think the days of Berkshire compounding at a double digit rate are long gone. But it is a nice capital preservation vehicle. You can probably count on 7-10% returns which could well be a lot better than the market over the next decade and certainly a lot more attractive than the 1% you get on long term Treasuries.

Agree with you Simba. Just as e-commerce meant that there was far too much retail space, I think more flexible working patterns could mean too much office space going forward. Tough to figure how much of it has been priced in.

I see Berkshire as a pretty safe bet. Its stock price performance will mostly be driven by business results and you'd expect it to do around 7-10% ROE and shareholder returns should quite closely match that. That could end up being a lot better than the S&P 500. Brookfield I do not really understand. It seems like you are paying quite a large premium to book value and the underlying assets have already enjoyed a nice tailwind from low interest rates and economic expansion. Also with any real estate company leverage can be a double-edged sword. Also the stock price isn't much lower than a year ago before Covid-19 even though the long term fundamentals for CRE have probably changed for the worse. Fairfax seems like the highest risk-reward. It is difficult to see much downside when you are paying 0.6x book and if it gets its act together you'd expect a peer multiple of around 1.2x book which is an easy double. And that is even before considering book value increases. But that is a big "if".

I think there is going to be another leg down. I do not think another lockdown has been priced in and it is only November so warmer weather isn't going to save the day. The US election is distracting the markets but once it is over there might be an even greater focus on the rising cases and the scary possibility of another lockdown and I think it is inevitable because we've already seen lockdowns seem to work whereas partial measures do not really seem to (because of lack of compliance etc). A vaccine was supposed to be ready in time for winter to avoid the need for Lockdown 2.0. But that doesn't seem to be happening. Of course positive news will buoy markets because it will allow them to see through the winter to a strong recovery in 2021. But further lockdowns will mean a more protracted recovery. I see energy as a good opportunity. To some extent winter lockdowns are priced in and the difference this time round is that lockdowns won't be global and China demand is strong and there is no price war. Also the focus is on weaker demand when the other part of the equation is tighter supply. I am less confident but banking also feels like a good opportunity. Difficult to handicap credit losses. But there has been a lot more income support than usual in recessions and banks have also been stress tested and are very well capitalized. And especially in Europe you are seeing GFC type valuation levels. With the airlines I think Easyjet and Ryanair are safer bets. US airlines have a history of going bankrupt and Easyjet and Ryanair have a massive cost advantage and will benefit longer term as a lot of the other low cost airlines have or will go under. Also they are not as reliant on business travel. Not so keen on the aircraft manufacturers as will be a while before there is sufficient confidence to expand fleets. Not keen on hotels. I think for present conditions there is overcapacity and that will put pressure on room rates. Also maybe there will be some secular changes such as preference for Airbnb, less business travel etc. And for companies that own their hotels leverage is very high and for franchisors like IHT and HLT where you don't have the same degree of balance sheet risk stock prices aren't really that much lower than pre-COVID levels. Booking.com if it got cheaper would be my preferred way to play an eventual recovery in the sector. I think another interesting angle is to scoop up some nice dividend yields. With companies cutting dividends left right and centre every dividend has come under suspicion. But once that passes and a recovery is underway there is no way you are going to find blue chip companies sporting mid to high single digit dividend yields. So you get the dividend plus a re-rating kicker! Also some of these companies are fairly defensive so even if cases get out of control you won't see massive quotational losses. Kinda stuff I have in mind are the Big Tobacco stocks, AT&T, Verizon etc. But would welcome any other ideas. What you could even do is have a mix of cyclical/recovery and defensive/income and rebalance.

https://www.pzena.com/third-quarter-2020-commentary/ Pzena draws an interesting parallel in his 3Q20 commentary. The gist is that value outperforms growth after a recession and after a long long wait we've finally got one.

The other thing that gets forgotten is that a coronavirus vaccine may need to be as much as 70-80% effective before we can stop social distancing. So preliminary versions of the vaccine may not reduce the risk to an acceptable level and in the meantime social and economic costs continue to mount. So I think to some degree we do need to build up some natural immunity and learn to live with the virus while shielding as much as possible those for whom the virus could be deadly.

I think a hybrid model makes a lot of sense. A way of getting the best of both worlds. Also caters for differences in job functions. For example at the momentcompanies tend to like sales teams onsite whereas back office e.g. IT and accounts are being allowed to continue WFH. Perhaps another implication will be that companies try to save money by moving their HQ to cheaper locations. There isn't the same need to have a central location that is easy for people to commute to if people are WFH most days. So you might get little business parks cropping up in the suburbs as opposed to the traditional city office blocks. Either way I think there will be a reset of office rents as leases roll off and a lot more vacant space which will be difficult to repurpose.

What is the story in Asia? Data probably isn't as reliable (especially China) but looks like they've got the virus firmly under control with no immediate worries about further lockdowns (although I guess it is still early days).

Problem is that with optimism about a vaccine available for next year there is little appetite for governments to explore a "learn to live with the virus" or "herd immunity" approach. Much easier to play it safe and wait for the cavalry justifying yet more social and economic costs with the argument that the end is near and rising debt can be paid off later down the line. And as soon as one country starts imposing lockdowns it is tough for others not to follow or else risk criticism for leaving things too late. It is very hard politically to sell a policy of "lets wait until the bodies start to pile up" before we take action. And even if the early action is entirely unnecessary so long as enough countries follow suit and death counts stay low governments can take credit as averting potential catastrophe.

I'm not convinced it is totally priced in. Rolling lockdowns through the winter even if they are designed to keep as much of the economy open as possible will have an impact on consumer and business confidence and delay the economic recovery another year or so. Further stimulus packages will offset some of the economic damage and of course further lockdowns will reinflate the tech bubble. But I think at least part of the rally was because of improving economic data and easing of the lockdowns and that looks like it will now partially reverse in the winter. And while vaccine development seems on track it is clear that any vaccine will not be available for mass distribution until middle of 2021 at the earliest so we will probably have to hunker down this winter and spring.

Agree. Playing it safe made a lot more sense in the spring when the potential health outcomes were a lot wider and we knew very little about the virus or how to treat it and also had a lot less data to work with due to limited testing capacity and also the limited number of cases. But now we know that while the virus spreads quickly it is mostly only dangerous for certain identifiable groups. By now the most vulnerable would have either succumbed to it during the first wave or developed some immunity. And in the general population there will be some degree of immunity by now. And yes the lockdown was meant to flatten the curve. But the problem was the benefits of the "circuit breaker" were quickly lost because of poor compliance and enforcement of social distancing rules. And health care spending seems to have gone towards ill though out and unworkable test and trace schemes rather than increasing capacity and equipment and staffing to allow us to accommodate a rise in cases in the winter. So the easy way out for governments is to go back to partial or total lockdowns knowing that even with only partial compliance they will have some success in reducing case numbers and transmission rates. And of course it will be justified as being prudent, playing it safe, not putting lives at risk and politicians will say it is the public's fault there is another lockdown because they didn't follow the rules. But really it would be a failure of governments who had pretty much unlimited resources and unlimited powers to fight the virus but failed to use them effectively.

Risks of a second lockdown seem to be rising and in the UK they are already talking seriously about a two week circuit breaker nationwide lockdown to coincide with the school holidays. I imagine the rest of Europe will take similar measures. Problem is that lockdowns are generally accepted as having been successful in reversing the tide. But no real effort was made to properly enforce more moderate measures such as social distancing over the summer which are more viable long term solutions. So looks like a winter of rolling lockdowns which is the whole situation that governments were desperate to avoid. Imagine that future lockdowns will be designed to impose less damage on the economy and mostly involve social restrictions such as curfews, closing bars and pubs, stopping non-essential travel and mingling between households. So impact will be more localized. But still pretty frustrating. I gather cases are rising fast in the USA as well although you guys seem to have a lot more tolerance for high daily case rates. How do you all see things developing in the coming months....in terms of health outcomes, economy etc.

Yeah it is good that Berkshire seems to be adapting. Warren has been whining for years about how cheap money and competition from PE has made it very difficult to find any good acquisitions that move the needle for Berkshire and over the last decade lack of exposure to Big Tech has hurt investment returns. Todd and Ted are clearly very smart and tech savvy so if they are able to use Berkshire's deep pockets and reputation to get in on some of the better tech IPOS then why not especially if they are not risking a huge amount of money?

Yeah I think he is just echoing the consensus view that the short term and long term outlook isn't good. But that can often create good opportunities for patient investors with say a 3-5 year investment horizon by creating attractive prices. Take oil. Short term demand is going to remain weak and enough oil is economic at today's prices to keep a lid on prices. Longer term alternative energies will take a lot more share. But in the medium term prospects are quite interesting. Demand will recover and while alternative energy will continue to take share it will be a much more gradual process than the market is expecting. Capital constraints and lack of confidence about the future is going to limit investment and European oil majors are already reallocating a lot of their budgets towards long cycle and uncertain alternative energy projects. And shale productivity is already showing signs of declining and has a natural high decline rate and it will take much higher prices to bring a lot of other production back online. So there seems to be a nice set up for higher prices in the medium term and much more rational competition. And so long as supply is reasonably balanced with demand and adjusts for declining demand over time then companies should earn reasonable returns especially in relation to today's prices. I'm less optimistic on banks. US banks are trading at similar levels to a year ago when interest rates were higher and there were very little worries about credit losses and a soft landing expected.

I think easiest is to make a vaccination certificate akin to a passport. If you need a vaccine certificate to get into bars, restaurants, travel on planes, and go to work then people will still have the freedom of choice to refuse a vaccine but will find life incredibly limiting.

In the past a typical value investment had the attractive combination of a cheap price and average quality and long term prospects usually as a result of temporary company or industry problems that were likely to resolve themselves in due course. And you would be able to diversify to a sufficient extent that you wouldn't need every situation to work out and you could still beat the market. These days to get a cheap price you either have to accept poor quality and/or poor or very uncertain long term prospects often involving some kind of existential threat. And often you have to embrace cyclicality with all the attendant timing risks. So the average result is less favourable and selectivity is required but a lot of this stuff is too hard and even experienced professional value investors often get it wrong. And the problem with value investing is there is limited potential upside so losers dominate your results and therefore mistakes can be incredibly costly. And of course interest rates are a factor. The spread in P/E multiples for growth stocks in low and high interest rate environments is much wider than for value stocks. If there is a proper tightening cycle then multiple compression will be far less damaging to value stocks than it will be for growth stocks. And then the limitations of growth investing will become more obvious i.e. growth doesn't last forever and multiple compression as growth slows and interest rates rise can punish returns. But while that would reduce returns from growth investing for returns to value investing to improve I think you still need prices to get cheap enough that you can get back to that old combination of cheap price average quality/prospects.

Also disagree. Herd immunity requires the majority of the population to be infected which would be a terrible health outcome when there is a good chance by middle of next year an effective vaccine will be wildly available. There is an obvious middle ground of social distancing and mask wearing where social distancing is not possible. And after the hard lockdown was eased it was the perfect opportunity to try it out. But it hasn't been given a proper chance because there has been very little attempt to enforce these measures and compliance has been piss poor. In the UK for example people have swarmed to overcrowded beaches, fill the streets outside bars with drinks in hand, attend mass rallies, and walk side by side with their friends. Perhaps as a result cases have gone from <1,000 a day in the middle of the summer to over 3,000 this week. Of course there is more testing so the results aren't directly comparable. But there is no doubt that cases are rising again and it is gonna be a long winter. The government is already starting to impose new restrictions and if cases continue to rise the restrictions will get more and more onerous until we are back in full lockdown. And in Europe the same scenario will play out. I am not so familiar with the US politics and the US government seems comfortable with a much higher infection rate but I am sure there is still a threshold at which point their hand will be forced especially if other countries in the world are starting to lock down their economies.