COVID-19 UPDATE: Florida announces re-open plans (5/4) -> 22 states = 38% GDP. Lessons from GFC -> Discretionary EBIT = ATH with 11% lower sales
COVID-19 remains a global crisis and we realize that many people need to keep up with COVID-19 developments, particularly since we are moving into the more critical stage ("restart economy"), so feel free to share our commentary to anyone who has interest.
There were three notable positive developments on the COVID-19 front today. The biggest is the Phase 3 trial of Gilead's remdesivir, a government-funded study, found that patients who took remdesivir recovered faster than patients who did not from an average of 15 to 11 days. The improvements were so notable that the study was ended early and according to the NY Times, the FDA plans to announce an emergency-use authorization for remdesivir. Ultimately, when effective treatments are developed for COVID-19, this will become another treatable ailment. Thus, clearly a positive on the treatment front = reduce seriousness of COVID-19 = reduced consumer fear = re-open economy faster.
Also, NY Governor Cuomo accelerated further the re-start of NY state. He announced today several NY counties, all of them upstate, will be permitted to resume elective surgeries, but only if they can keep 30% of their hospital beds and ICU beds free. And Florida announced plans to re-open in phases beginning 5/4, making it 22 states = 38% GDP on track to re-open.
In all, it looks like the US continues to see positive steps forward in mitigating this pandemic tragedy, and at a pace that seems faster than many expected even a week ago. The fact that 22 states may be open within the next 10 days is tremendous progress.
The S&P 500 gained about 3% today, totaling 8% gains in the past week. We have remained in the camp that the market shifted into the hands of buyers since 3/23 ("half full") and given the cautious positioning of investors, stocks have been steadily gaining. There remains so much uncertainty that one cannot reasonably make "bold" or "high conviction" statements. But in financial markets, uncertainty leads to cautious positioning = same as being bearish. And as "uncertainty" abates, if the incremental shift is positive, this is a shift in positioning to "buyer hands." If an adverse development, a cautious position remains the same.
This is the framework we have been using and it does hint at the asymmetry of risk/reward -- positive developments lead to buying. One thing to be mindful of is that companies are not sitting still. During this pandemic, they are assessing all their processes and cost structures and likely preparing for a slow recovery. This is what happened during the GFC (great recession 2008) and this resulted in enormous operating leverage.
Consumer Discretionary saw EBIT recover to all-time highs by 1Q2010 (+10% higher actually) with 11% less sales. Homebuilders, the epicenter of that crisis, saw EBIT at ATH with a 69% reduction in revenues (see below). So, there can monstrous operating leverage. In fact, this is another reason to look at the "epicenter" stocks (Consumer Discretionary) because of the potential to dramatically re-engineer costs. For instance, Discretionary employee expense is est. at 32% of all cash costs, the highest of any sector in the S&P 500.
POINT #1: USA cases 25,856 (27% off highs) but US reports deaths 2,609, still not from all-time high of 2,685
Our data scientist, tireless Ken, aggregates USA case data by combining information from COVID-19 tracking project, Johns Hopkins and his scraping from the various state dept of health websites. So, our figures do not always match what COVID-19 or Johns Hopkins reports.
USA case count creeping up slightly but still well off 35,512 highs from 4/25/2020...
The USA case count crept up today to 25,856 which is up from yesterday. This entire rise is attributable to NY state, which reported +1,475 increase in cases from 3,110 to 4,585. The US case numbers will fluctuate for several reasons including: each region has its own curve, testing numbers vary by day and delayed reporting causes increases.
- since NY state is accounting for this rise, this does not represent a new breakout. And given Gov Cuomo is even allowing upstate NY hospitals to perform elective surgery, it does not look like the state believes the rise in daily cases represents a change in trend.
