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COVID-19 remains a global crisis and we realize that many people need to keep up with 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 are several new COVID-19 developments lately, such as a surge in reported cases in California, but I am focusing this note on the hard-hit travel sector because that’s where I think there could be some opportunities for investors. These are among the ‘operating leverage’ and epi-center stocks we think can outperform post-COVID 19. POINT #1: CA cases surge, which is not good. It reported a new all-time high in daily cases at 2,417 cases, 900 more from the day prior, exceeding the prior record of 2,288. U.S. testing has moved to a higher level of activity, and, logically, as testing increases so will the number of new cases, as a function of better capture of the phenomena. As I have noted, several serology studies have shown the prevalence of COVID-19 is likely 10X to 85X the confirmed levels. Testing is important, but we see treatments > testing > vaccines. Moreover, CA is not really a place where COVID-19 has ravaged, with 1238 cases per million vs. 25,000 per million in Westchester, NY. That said, NY state has come a long way, with cases down 60% from previous peaks. I view a 75% decline as the decisive line and NY state is getting there. POINT #2: Boeing $25 billion recent bond sale was the largest private debt sale in 2020 — arguably a sign debt investors are looking past crisis “window” — 40-year tranche at around a 6% yield. The company says it is now fully capitalized. Broadly speaking, April is another record month for debt offerings, surpassing the March $260 billion. So, it is clear debt markets, investment grade and high-yield, are fully functioning and credit markets are looking through the near-term morass. This should have positive implications for equities and valuations. Meanwhile, Federal debt is set to surge to 120% of GDP by 2030 (+800bp), but US interest rates are down 130 bps since start of the year, across the spectrum of maturities. The combined effect of the two is a drop in federal debt service. The revised debt service (as % GDP) is actually lower now than it was at the start of the year. One way to see this is the huge CARES Acts stimulus spending is having no “crowding out” effect on the economy, as the debt burden is falling. That is a good thing. The other way is to observe that low interest rates is a bad sign. And thus, ominous. POINT #3: Real-time data showing barely perceptible rise in travel bookings, especially for singles/couples (42% households). The travel industry is one of the “epicenter” social distance victim. Oxford Economics published a report estimating the total losses for 2020, assuming no economic re-start, is $519 billion first order (direct) and second order-plus impacts bring this loss to the US to $1.2 trillion. In GDP terms (which look at final sales), the combined effects are $651 billion or 3% of USD GDP, leading to 8 million job losses (2.8 million in food service), and 20% of all jobs lost if the US sees 30% unemployment rates. Oxford Economics say the impact of COVID-19 is 9X 9/11 attack. There is no precedent. According to data from Tourism Economics, US national travel spending is down 89% YoY to $2.5 billion per week, vs a normal $20 billion per week, with no region showing positive comps. Unsurprisingly, there is significant distress across all areas of the travel industry: airlines, cruises, agencies, hotels, restaurants and businesses that rely on tourism. We will be monitoring this data as more states open and we can therefore see how travel rebounds. Conceptually, in a post-COVID-19 world, travel returns but transformed… so there is “uncertainty.” Any analysis we provide is “theoretical” since there is no precedent in the modern world for this. One potential behavioral change is people will be mindful of physical distance, that is, 6 feet, whether standing in line, eating a restaurant, at the bank, etc. Industries that can accommodate and function with 6 feet of space will eventually adapt. Source: FS Insight, Bloomberg Except for airlines, travel seems like an industry that can accommodate 6 feet. Once fear recedes (if it does, as we expect), then business and consumer travel will rebound—with changes. Perhaps vacations will trend more to road trips vs flying. Hotels/tourist destinations make less money from food and beverage (harder to scale with 6 feet) but could offset with experiences. There is a chance, if COVID-19 fades more substantially and quickly, these changes are transitory and we are back to packed tables. Thanks to our tireless data scientist Ken Xuan, we know from Adara, a data intelligence provider to travel industry, there was a “barely perceptible” bump in forward bookings. After flight volumes and hotel bookings collapsed, in the past few days it looks like the flat line has possibly increased. Leisure (both Family and single/couples) travel bookings are rising, for short term and for +91 days, prior to any states formally easing travel restrictions. And while we do not know exactly why this is happening, it is a good thing. Source: FS Insight, Bloomberg STRATEGY: Casinos, Timeshares and Hotels/Resorts can do ‘6 feet’ and 30%-45% upside to match S&P 500 62% retracement. We define five basic categories for travel-related stocks and list their ability to comply with ‘6 feet’ in a post-pandemic world. Cruise lines and airlines have a low ability to comply and casinos a medium ability. It’s already happening in Macau. Hotels/resorts and timeshares have a high ability to comply. If demand picks up the latter three I think can also achieve operating leverage in a post-COVID 19 world. Based on their achieving a 62% retrace of the Feb to March decline, casinos could see +45% overall. Biggest upside is Eldorado Resorts (ERI) +113% but even WYNN is +29% upside (to 62% retrace). Timeshares + 38% overall. Biggest upside is BBX Capital and Wyndham +57%/+53%, and Hotels +28% overall. Biggest upside is Red Lions (tiny) +71% followed by Marriott +28%. Hotels seem to have already benefited from ‘6 feet’ as they did not fall as much and have recovered more of their losses. But the epicenter stocks still have lots of upside. Figure: Comparative matrix of risk/reward drivers in 2020Per FS Insight Figure: FS Insight Portfolio Strategy Summary – Relative to S&P 500** Performance is calculated since strategy introduction, 1/10/2019 Source: FS Insight, Bloomberg

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