Trump Says Coronavirus Is Under Control: Is He Right?

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Posted: Feb 25, 2020 12:02 PM
Trump Says Coronavirus Is Under Control: Is He Right?

Source: AP Photo/Alex Brandon

President Trump is correct, but the next few days will be dependent on greater transparency and better news out of South Korea and Italy.

There is no doubt, based on the US economy, things are more than great. But there isn’t a moat, and the largest names need the global economy to fare better.  There has been enough disruption for more companies to offer fresh guidance. 

After the close, we heard from United Airlines (UAL), which completely withdraw full year guidance, and Mastercard (MA), which sees a two to three percent hit on revenue for the quarter and nine to ten percent full year revenue. On January 29, MA was looking for currency neutral revenue growth in the “low teens.”

These adjustments are to be expected for multinational companies and many are already in trading on such assumption.  Meanwhile, while the selling felt orderly, despite the eye-popping number (perhaps the 235th worst session ever), market breadth suggested a flushing out process. 

NYSE

  • 295 advancers
  • 2,700 decliners
  • 345 million up volume
  • 4.47 billion down volume 

NASDAQ

  • 467 advancers
  • 2,826 decliners
  • 628 million up volume
  • 2.54 billion down volume

Despite the overly bearish nature of the selloff, including almost 4.5 billion down volume on NYSE and more than eight million with NASDAQ Composite, some market observers believe the selloff was too orderly.  The purists are saying there should have been more panic.  I argue there have been efforts to trigger panic for the past three years, and it has noting to do with the market and everything to do with politics.

People are not dumb.  Its fine to be proactive, and ever err on the side of an overabundance of caution. I don’t necessarily believe there has to be a classic selloff where everyone is running for the hills. When our economy is this strong, it really would be misplaced. Yesterday was climatic enough.

Wisdom from Buffett

It was a rough outing for the market, and it happened on the same day Warren Buffett released his annual shareholder letter.  His message was perfect for a day of panic and a reminder for many that nothing beats long term investing.  Ironically, the perception of stocks as an investment rather than a betting vehicle like the dog track or the Super Bowl was conventional wisdom until 1924 when Edgar Lawrence Smith published ‘The Power of Retained Earnings.’

I had never heard of the book, but I understood the notion of the perception of the stock market, especially back in the day of easier manipulation.  It was creating a new kind of wealth never known to mankind outside of royalty, but the notion was people born into modest means could become super wealthy.  The stock market became the way of others to hitch to those wealth wagons.

The most important thing he noted was his opinion of the futility of reaching for yield, calling it stupid but human.   I think its fine for folks looking to protect wealth or riding out periods of uncertainty to “reach for yield,” but I don’t think it is how people get rich, and that’s why we invest in the stock market.

Coronavirus

Coronavirus spreads outside China, but yesterday the World Health Organization was the 'world in Wuhan's debt' for the aggressive actions.  

Numbers continue to decline in China, but all eyes are on South Korea and Italy, where the last 24 hours has seen fewer counted infections than the prior 24 hours. They are still looking for the key carrier that might not even know he/she has the virus.

There are many articles today about the cost of panic, which has been much more than the actual cost of the virus.  Of course, there is the intangible of not spooking people, although locking them up in quarantine doesn’t give them the warm and fuzzies.

Today, the administration wants the authority to spend up to $2.5 billion to assist in stopping the spread of the virus. 

Housing Boom

Home Depot (HD)

Beat on revenue and earnings, and while management offered conservative guidance, it’s clear the company is well positioned for a monster spring and summer.

  • Overall Comp +5.2%
  • US Comp +5.3%
  • Transactions 396.6 million -6.4%
  • Average ticket $68.29 +4.1%
  • Sales per retail square foot $425.7 +2.8%

Guidance

  • Earnings $10.45
  • Comp sales 4.0%
  • Cash flow from operations $13.5 billion
  • Capital expenditures $2.8 billion

Management hiked the dividend 10%, to $1.50 Quarterly & Annual $6.00 per share

LGI Homes (LGIH)

This is a small homebuilder, but with strategic locations (see here), just beat on revenue and crushed on earnings. 

Portfolio Approach

We took a lot of action yesterday, including closing KTOS, which is down 13% this morning.

Potential Buy List

Two names that were on our potential buy list received downgrades this morning:

  • Micron (MU) at Bank of America
  • Nvidia (NVDA) at Nomura

We are looking at owning names with greater exposure to the US economy and consumer.  Moreover, I still like some of the names being downgraded, too.  I think investors should be cool and be ready to pounce, but not force the issue. If you are not a current subscriber to our Hotline service, contact your account representative or email us at info@wstreet.com to get started today.

Potential Buy List

Two names that were on our potential buy list received downgrades this morning:

  • Micron (MU) at Bank of America
  • Nvidia (NVDA) at Nomura

We are looking at owning names with greater exposure to the US economy and consumer.  Moreover, I still like some of the names being downgraded, too.  I think investors should be cool and be ready to pounce, but not force the issue.