/ COMMENTARY

Compounding Coronavirus: How I'm Positioned

Quite a few have asked how I’m managing my money through the coronavirus crisis. Instead of replying to each individually, I’m going to post my positioning publicly to invite both constructive criticisms and give my readers and understanding of my thought process.

My Positioning

As of February 18th, I positioned my portfolio in treasuries (GOVT, TLT) and some gold (GLD). I posted this on LinkedIn. I didn’t purchase these assets for yield, I purchased them for appreciation.

TickerPercentage
GLD17%
GOVT58%
TLT25 %

As you’ll notice above, I own zero stocks. To understand why this is a huge deal, please see the following visualization. If you’re not interested in watching, the video shows how stocks drastically outperform bonds and gold over long periods. I also enjoy valuing companies, and I suspect I won’t be doing that for some time.

[ Please keep in mind that I trade around positions often based on technical signals. The primary point that I’m trying to drive home here is that safety is of utmost importance. ]

My Thesis

The coronavirus correction will last longer than most assume. There could be a pension pandemic.

The Covid-19 Rough Timeline

The narrative espoused by many financial advisors is that we’ll be out of this thing by quarter’s end. And while I could be wrong, here’s the math behind why I find this advice not mathematically sound.

Covid-19 has a reproduction rate of about 3. This variable is called the R0 or “R naught”. The R0 is the number of new cases of infections on average with someone who has the disease.

Here’s a table showing how a small increase in R0 has a drastic increase in the number of cases.

R01234
11111
22345
3391625
442764125
5581256625
662431,0243,125
777294,09615,625
882,18716,38478,125
996,56165,536390,625
101019,683262,1441,953,125
Total5529,524349,5252,441,406

To stop CV, we need to get the R0 below 1, which is incredibly tough to do. And while R0 is not necessary to perform these calculations, it is required to make a judgment to determine how far this disease spreads. In my opinion, we’re past the ability to contain it, and now we must perform mitigation. Here’s what that might look like with conservative assumptions.

Using these assumptions and not factoring in undiagnosed infected, which we know are out there, here’s what we’re looking at:

DateCasesBed Capacity
03/09/20423268,401
03/15/20846268,337
03/21/201,692268,210
03/27/203,384267,956
04/02/206,768267,449
04/08/2013,536266,434
04/14/2027,072264,403
04/20/2054,144260,342
04/26/20108,288252,221
05/02/20216,576235,978
05/08/20433,152203,491
05/14/20866,304138,518
05/20/201,732,6088,573
05/26/203,465,216-251,318
06/01/206,930,432-771,101

As you can see by the above with these overly-optimistic numbers (we don’t know everyone who has the disease), we’ll eventually run out of hospital bed capacity. Lack of beds, in turn, will cause the fatality rate to rise. These simplistic assumptions don’t factor in a lack of medical supplies, prescription drug shortages, and a whole host of other issues.

Governments have no good options:

  1. They can either perform large-scale quarantines to slow the spread or
  2. Let the virus burn out through the population unabated while overrunning the community causing unnecessary death.

I don’t think the latter will occur for multiple reasons forcing governments to quarantine. Especially for Western nations due to the median age.

Here’s what that looked like for China’s PMI numbers:

China PMI.

As this disease spreads to other countries, they will have to do the same. PMI’s will flatline, and globalization will compound the problem both in time and complexity.

We’ve also said nothing on behavior changes due to the fear and panic.

As you can see by the numbers above, it’s going to take at least three months, not counting supply-chain disruptions of different countries becoming infected at different times – or considering the infection rate will slow or potential reinfection. The real timeline is likely longer.

How Do I Time/Approach The Markets

Many of my readers know that I’m an algorithmic trader. I’ve spent years developing an algorithmic system based on rules.

I feel as though it’s best to be the jack of all trades and incoporate macro, micro and technicals into the system. The reason is that macroeconomic indicators can scream recession (they have), but if price action is still going up, I’m not selling – I’m just tightening my stops. The reason is this: Prices can detach from fundamentals for quite some time, and I don’t want to miss out on those profits. Additionally, when market fundamentals are deteriorating, actions such as repo market purchases can push up asset prices.

The same goes for the other way around. If I based my decisions only on technicals, I wouldn’t see the potential train coming, my stops would be larger, and I definitely couldn’t select the best individual assets.

With this in mind, I combine global macro fundamentals with price action to determine the asset class. And then, I use fundamentals and price action to identify individual assets.

For me, I will continue to hold the assets mentioned above in various proportions, only trading them when they get overextended/oversold.

I will change my assets when both the fundamentals and price action change.

For those of you that are interested in following my positioning, I’m planning on making my trades part of my newsletter in the future.

Most importantly, stay healthy and safe.

leo

Leo Smigel

Based in Pittsburgh, Analyzing Alpha is a blog by Leo Smigel exploring what works in the markets.