Why Investors Are Whistling Past the Graveyard

Tuesday, 11 February 2020
Adelaide, Australia
By Bernd Struben

  • Markets
  • On a knife’s edge

Blackmores. Cochlear. Carnival Cruise Line. Burger King.

At first glance these businesses have little in common.

One makes vitamins. Another hearing implants. The third sails tourists around the world. And the last serves up fast food.

So what do they all have in common?

Each of these companies is under mounting pressure from the coronavirus still spreading rapidly through China’s Hubei province. That virus has now officially claimed 1,013 lives globally. 974 of those deaths have been confirmed in Hubei. And the real toll may be far higher.

Beyond the tragic loss of life, the economic hit is also ballooning. With some 400 million Chinese now in virtual lockdown in an effort to isolate the disease, China’s economy is quickly losing steam. And the rest of the world is beginning to take notice.

Blackmores requested a trading halt yesterday, ‘pending an announcement by Blackmores concerning its half-year results and outlook for the full year’.

The virus has actually seen an increase in Chinese demand for the company’s vitamins. But it seems the travel ban between Australia and China has stymied the popular ‘suitcase trade’. Blackmore’s share price was down 8.5% since Wednesday before trading was halted.

Then there’s Cochlear. Its share price held up well during the early weeks of the epidemic. But it’s down 3.4% in intraday trading today after announcing a downgrade to its full-year profit forecast.

From the AFR:

Cochlear says its big problem is that hospitals across mainland China, Hong Kong and Taiwan are deferring surgeries, including Cochlear implants, as part of the barrage of measures being used in China to limit the risk of infection from the coronavirus.’

Longer term the company could also face supply chain disruptions if Chinese factories remain shuttered for more than a few months. A scenario facing thousands of businesses across the world.

Moving on, you’re probably aware of the headwinds facing Carnival Cruise Line. Carnival Corp own the Diamond Princess. The ship is currently quarantined in Yokohama, Japan with some 3,500 passengers and crew aboard. As of this morning, 135 of them had tested positive for the virus.

Carnival’s share price is now down 19.5% since 17 January.

Lastly we get to fast food giant Burger King…or Hungry Jacks here in Oz. According to Bloomberg, the company has shuttered more than half its 1,300 outlets in China.

Burger King is owned by Restaurant Brands International, which so far has managed to escape any share price fallout. In fact, the stock is up 7.6% since last Tuesday.

More, after a look at the markets…

Markets

Overnight, the Dow Jones Industrial Average closed up 174.31 points, or 0.60%.

The S&P 500 closed up 24.38 points, or 0.73%.

In Europe the Euro Stoxx 50 index closed down 5.31 points, or 0.14%. Meanwhile, the FTSE 100 fell 0.27%, and Germany’s DAX closed down 19.78 points, or 0.15%.

In Asian markets, Japan’s Nikkei 225 is closed for National Founding Day. China’s CSI 300 is up 0.84%.

The S&P/ASX 200 is up 40.07 points, or 0.57%.

West Texas Intermediate crude oil is US$49.75 per barrel. Brent crude is US$53.27 per barrel.

Turning to gold, the yellow metal is trading for US$1,572.01 (AU$2,349.79) per troy ounce. Silver is US$17.77 (AU$26.56) per troy ounce.

And bitcoin slipped below its brief foray over US$10k overnight. One bitcoin is worth US$9,883.81.

The Aussie dollar is worth 66.90 US cents.

On a knife’s edge

Getting back to today’s topic…

There are a host of other companies already being impacted by the coronavirus and global governments’ containment efforts. And that list will most likely only grow over the coming weeks.

Yet most stocks are faring more like Restaurant Brands International, posting solid gains, rather than Carnival Corp, down almost 20%.

In fact, the tech heavy Nasdaq clocked a new record high yesterday (overnight our time). The index added 1.1%, putting its 12-month gain at a heady 31.8%. And that’s excluding dividends.

I couldn’t help but contrast that performance with this headline from Bloomberg, ‘“Nightmare” for Global Tech: Virus Fallout Is Just Beginning’.

The article notes:

Just about every major piece of consumer electronics is made in China, from iPhones and gaming consoles to half the world’s liquid crystal display or LCD screens. The contagion has already shuttered plants across China for a week longer than anticipated after the Lunar New Year break — a disruption that could get much worse if rolling quarantines and suspended rail and air links prevent the return of the millions of blue-collar laborers at the heart of electronics assembly.

Now we all hope, of course, that we’re nearing the end of this epidemic…not the beginning.

But with so much uncertainty remaining, investors appear surprisingly complacent.

For an idea why, we turn to our head of research, Greg Canavan:

Put that down to the power of positive sentiment. This bull market has a solid head of steam. Central bankers have underpinned its rise for years.

Right now, the belief in the power of low interest rates is stronger than the fear of a global pandemic.

That tells you a lot about the strength of this bull market. It could also suggest that we’re at that late stage where investors become blind to the risks and continue to go all in.’

Judging by the recent market performance in the face of a potential global catastrophe, ‘blind to the risks’ sums it up well. Sure, central banks stand ready if the situation deteriorates.

More QE. Even deeper interest rate cuts…

But central bankers’ days of riding to the rescue may be numbered.

From The Daily Telegraph:

Central banks have lost control of global liquidity. The dollarised international financial system has become treacherously unstable and vulnerable to a sudden reversal in capital flows…

A surge in offshore dollar lending – increasingly through opaque security markets – has exploded to $18 trillion and has overwhelmed the safety buffers of the existing financial architecture. The concern is that a continued surge in the value of the US dollar – potentially triggered by the coronavirus epidemic, or any other black swan catalyst – could bring this to a head.

You only need to look at the value of the Aussie dollar — at 66.90 US cents near its post GFC lows — to see how close we could be to triggering the next crisis.

In his new research report, my colleague Vern Gowdie explains how the US Fed’s decision to create trillions of dollars out of thin air in 2008 quickly caught on around the world.

It gave a green light to other central banks in the developed world. It told them that it’s okay to run up huge government debts in order to prop up your stock market.

So of course, everyone did it.

In 2008, after many decades of monetary operations, the world’s major central banks had amassed US$6 trillion in total “assets” (debt).

Within the space of just one decade following the crisis, they had added another US$13 trillion.

Vern’s been concerned with lofty stock valuations and exploding debt levels for years now. But he sees it all coming to a head in 2020. And when it does, he expects it will be too late for regular investors like you and me to sell out with our capital intact.

Market crashes are truly awful, gut-wrenching events. As a financial planner, I had a front-row seat for three of them. They creep up on you gradually. Then they sell off suddenly.

First, institutions dump stock. I mean, billions of dollars’ worth, inside of a single trading session. The effect is like springing a trapdoor under share prices.

Then the newswires cotton on and instantly flood the internet with scary headlines.

That’s when private investors discover what’s happening, panic, and all try to sell too.

Unfortunately, you and I are at the wrong end of the food chain.

We’re the ones most likely to see years — if not decades — of capital appreciation wiped out in a morning, long after the big boys have all covered their positions.

You can find out why Vern expects the Aussie market to crash between 50–65% in 2020 — and the actions he recommends you take today — in his new research report. Just click here.

That’s all the time we have for today. Be sure to check back in with us tomorrow.

Cheers,

Bernd