Small Cap Value Report (Mon 11 May 2020) - Covid/Macro, ELCO, CER

11th May '20 by Paul Scott

104 comments 10135 reads

Good morning, it's Paul here.

I'm writing this first bit on Sunday evening, so that you have something to start reading first thing tomorrow, which I know a lot of subscribers like.

Estimated timings - 13:00 official finish time should be achievable today, as I wrote half of it last night!
Today's report is now finished. I'll put any further updates into tomorrow's placeholder.

Covid/macro preamble

As expected, Boris Johnson's address to the nation explained how the Govt expects to gradually, and cautiously start lifting some lockdown restrictions. I can't help feeling that the Govt doesn't really know what it's doing, and the latest catchphrase seems pointless & incoherent: "Stay alert. Control the virus. Save lives". Absolute nonsense. There again, I wouldn't want to be in a position of power, having to make life or death decisions. It feels like we're being governed by a bunch of PR people, who seem more obsessed with "messaging" than with coherent policy. Hopefully I'm wrong about that.

I finally escaped from London (after about 10 weeks), and managed to return home to Bournemouth on Thursday. Not being keen on using public transport right now, I walked from Moorgate to Waterloo, and was really shocked at just how extreme the lockdown is. Everything was shut, apart from a Waitrose I passed.

Here is Queen Victoria Street, in the heart of the City, at about 16:30 on a Thursday, when it would normally be heaving with vehicles, cyclists & pedestrians;

I took this video, showing how the heart of the City (Moorgate/London Wall junction) is eerily missing the usual pedestrians & cyclists;

How about Waterloo Station during rush hour looking like this?

It was quite nice having a train carriage all to myself though. Although how much is this going to cost the taxpayer, running regular train services, but with hardly any paying passengers? Billions.

This all got me thinking that re-starting the economy (words I never thought I'd hear or write) is not likely to be easy, or simple.

I've been building up a long position in Marks And Spencer (LON:MKS) recently, because I think it has the following advantages;

Sound financing & plenty of liquidity (see recent update)
Stores trading,…

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mojomogoz

11th May '20

Covid19

Reality: Its a crisis of coping and not a crisis of scientific/technical solution.

We are mad to continue viewing it as the latter and we should move the former asap.

Stay at home was easy as sheltering from the storm feels relatively safe (and most people on here are probably reasonably financially comfortable or relatively securely employed).

Any move away from this is going to be messy as we move from simple shelter backed and promoted by the state to general life and contact. And so we have an explosion of angst and anger lashing out. Political gamesmanship and point scoring fully back in play. Either your team Boris or not....vent spleen accordingly. Politicise everything....ahhh how reassuringly quickly we go back to normal....obviously this tells us that things are not so bad as if we had the real immediate fear of "invasion" we'd be one team. Normality will be here sooner than we recognise ;)

Truth: The only path back is care, stoicism and acceptance of personal risk (which is generally very vey small)

Test, trace and isolate is a false emotional shield...its an excuse to hide your fears behind or to beat those you disagree with. We will not TTI the whole population all the time. Many people will not want this interference either. Would we really enforce something like this as law in the UK? Highly unlikely. Majority of population don't take flu jabs and that includes a lot (majority?) of vulnerable people.

The economy isn't magical. The last 2 months have seen a neat conjuring trick whereby govts called a complete halt to much activity but we have not experienced the devastation personally or nationally of such an explosion of depression forces. We all know this. Perhaps most acutely the less financially secure....ohh how progressives weep for these people but never actually do anything useful. This potential depression pressure is huge...

The idea that we can stay in shelter until there is a vaccine or near foolproof treatment path is nonsense. But govt doesn't want to tell us this....and they can't as they closed everything down to save us....they left us no room to judge risk and responsibility for ourselves.

Under 15 2 deaths attributed, under 25 it's c.16. Are we really going to severely restrict the lives of our young for another 12+ mths and gift them a devastated economy for a bug that is so inconsequential to them? Will parents support locking them down. Will grandparents want their nice grandkids to be locked up particularly when the rogue ones are out messing about anyway? Once a sustained warm spell hits end of May, into June it will be impossible to stop youths gathering in large numbers. We just can't...and we wont want to stop them.

We are in the midst of hysteria all around. This hysteria will now crescendo over coming weeks as the lockdown loosens and we face our risks without the all comforting safety net.

Quite frankly we either man up or f*$k up

Make your choice. Shout, scream and blame as much as you like....but there is only one choice you can make obvs...

So we are on a journey to much more rapid normalisation than is currently relayed in media or even by govt. I guess that govt strategy (all round the world) is to hope that their populations asked to be allowed to risk living....and I suspect that is what we will ask for.

Last night I spoke to two relatives - 1 lead critical nurse at giant midlands hospital and the other a palliative care nurse. There view is that it is sort of like the flu, nasty impacts but that's partly death process generally and absolutely everything is recorded as covid in way wouldn't normally be (no doubt it pushing problems so we have excess deaths). They think their hospitals do have it under control. Very clearly some people are more affected (men, obesity, existing conditions, most unfairly perhaps BAME).

Of course, I could be wrong and the bug accelerates and causes carnage amongst the healthy as well as the vulnerable....but all the available evidence (as opposed to dodgy modelling) says this is not the case. The Spanish flu second peak comparison is bogus. Spanish flu cut down the young and healthy most of all...it was an entirely different and much more ominous risk that was much harder to cope with.

Lets get on with it. In a month from now we will be impatient to (with a little fear for sure...I don't want to be foolhardy or die just like the rest of you)

harvs19

Have noticed you posting this same comment on a lot of discussion pages over the last few days. Perhaps you could share your views on the business rather than just asking everyone else to look at it?

WarrantStar

Hopeless management at M&S wake up 10 years late & decide they need to have an online offering! Talk about being behind the curve!

UK_Investor_8888

mojomogoz - What an excellent piece! Thank you.

laurie

A new memo from Howard Marks: https://www.oaktreecapital.com/docs/default-source/memos/uncertainty.pdf

robmahan

Have you looked at FRP ? To me its a cheaper BEG.

Nick Ray

12th May '20

Regarding the R number, I suspected that they gave the range (0.5 to 0.9) to cover that it was different in different parts of the country. But for some reason didn't want to say where it was good and where it was not so good. Although as the cases in London has fallen steeply I suspect it is nearer 0.5 here. In other regions their graphs suggest a broadly static number of cases and presumably a figure closer to 0.9. The regions where the number of cases has been more static include Wales and Scotland.

You can see estimates of the R values for all the UK regions in figure 7 from here:

https://epiforecasts.io/covid/...

Looks like the last update was 4-May so they must be due to do another one soon. But Scotland and the North East (see figure 4) were the most worrying regions from the point of view of needing R<1.

Vsihv

re M&S mgt - dated scuttlebutt - was at a recruitment fair with a senior marketing executive presenting. Seemed to me head was buried in the sand regarding their business. That their reputation and history would carry them through - managing on hope over strategy.

Make your own parallels to UK govt / Brexit (sorry couldn't resist!)

Adding to the above. Today the Italians asked to risk living more

https://www.ansa.it/english/news/2020/05/12/govt-okays-reopening-of-bars-restaurants-next-week_1c7bf65a-0000-4cfa-b7d5-45be76296496.html

Note that it is the regions asking the central government in this case. Italy is an interesting case generally. Many conflicting feelings and issues at play:

There is a feeling by many regions that Lombardy handled things poorly. For example Veneto has been critical of its neighbour. It believes they amplified the problem through poor management of their hospital system effectively turning treatment into a major vector of spread. Very poor Naples where the fears that their '2nd world' (compared to Lombary's very shiny 1st world) society could cope proved robust and again a better medical approach is partly the reason (plus the mob helped people out supposedly!). My point here is that Lombardy influenced how we all viewed the trauma coming.

I cannot remember source at this point but some indications that the prevalence of the disease in the north is earlier and higher than officially measured.

The Italians have been much more traumatised and saddened that we have been by the whole experience. Without be crass (this comes from Italian friends) I think they view life as much more precious perhaps than we or even northern Europeans generally do. For example, very quickly the NHS makes a decision re things like DNR orders whereas culturally in Italy I believe that the feeling is everyone should be saved. I repeat, not trying to be crass/stereotypical etc...comes from speaking to Italian friends.

Ciao

PhilHofGrowYourDough

"The Spanish flu second peak comparison is bogus. Spanish flu cut down the young and healthy most of all...it was an entirely different and much more ominous risk that was much harder to cope with."

My understanding is that the so called 'Spanish' flu arrived in the Spring, receded in the Summer, mutated and came roaring back in the Autumn in a more virulent and deadly form.

See ... https://www.history.com/news/spanish-flu-second-wave-resurgence

It also had a W curve exhibiting a "high numbers of deaths among the young and old, but also a huge spike in the middle composed of otherwise healthy 25- to 35-year-olds in the prime of their life."

Trying to 'tough' our way of this isn't a good option in my opinion

But Phil, Covid19 isn't the spanish flu so I don't see why the 2nd wave of that flu should be used as a basis of comparison for Covid19. That is a flawed and implicitly hysterical way to look at C19 2nd wave. The impact was fundamentally different. I do not know what the mortality rate for under 25s was or 25-45 with Spanish flu but it was high and I believe these groups were over represented in the c.2% mortality rate....whereas this bug is nearly inconsequential for those key age groups. Its not really very risky for u65s. Italy was the shock case in Europe and the median death was over 80 (it was last time I checked). I'm not saying to hell with older people . And even once we look at the total including over 65s we get to a population death rate that seems to be well under 1%....and that 1% is very heavily weighted to very old people. Not being callous and don't want all my old aunts and uncles to be impacted...but its clear we are not dealing with anything that is remotely as dangerous and problematic as spanish flu...so there will be no need to close down our countries due to a second wave if we've designed a better coping strategy when/if it comes.

Note, I'm not claiming that there won't be a resurgence of C19. There's a high chance but there are potentially significant mitigating factors. Coronavirus are renowned for burning out and being a bit of a flash in time and then dissipate (not forecasting that, just stating what I believe is a fact). Respected scientists have suggested/forecast that C19 would hit with a very powerful initial wave as it attacks the most vulnerable...so we get an aggressive quick peak...and once that's passed the mortality rate is lower and permanently flatter.

IMO its important to assess the reality of what we have rather than the hypermedia. I feel a bit bad saying it....but C19 isn't that bad....time to move on

It isn't the Spanish Flu but it has the potential to be and history has shown us what can happen.

The first wave of 'Spanish' flu was in itself not as big a threat as the autumn 2nd wave.

To compare the 2nd wave of Spanish flu to the 1st wave of Covid-19 is a mistake.

I'm suggesting caution, that's all, no hysteria

Okay. I think your perspective is deeply illogical....but I might just not be computing correctly. Place your bets, take your positions.

As an aside, this is an interesting thought: We have moved from unknown unknown to known unknown and so price accordingly....the next pandemic will just be a dip to buy...

https://lt3000.blogspot.com/2020/05/coronavirus-update-from-unknown-unknown.html

Could be just ex post justification for a searing fall then come back that's hard to intellectually and emotionally process ;) ....and the doom plunge lies before us as the the 2nd wave rips through us

So it's deeply illogical to use a previous pandemic pattern as a possible outcome for this pandemic?

#mustbemissingsomething

Yes, as explained above.

To make point in extreme, might as well compare secondary ebola waves to Covid19 too...right?

I'm no epidemiologist but I'd suggest it's not at all similar ...

Ebola didn't infect 4 million people all of whom provide a petri dish in which the virus can mutate.

Ebola also killed it's host quicker limiting it's ability to spread

You seem to be labouring under the illusion that we 'know' the virus and that it cannot change.

Time will tell. Plan for the worst, hope for the best

13th May '20

Phil, you've made up a lot of stuff about what I think to suit your own emotionally driven proclamations.

As you are in a deep hysteria about things you don't understand you have decided to hang doggedly on to what you have decided are your truths. This is a well known psychological phenomena that occurs under periods of stress (often associated with some form of scarcity/loss relative to our normal environment) whereby IQ actually falls and we become unable to absorb new information rationally.

Yes, I know my comparison with ebola is ludicrous...that's my whole point...apples and pears...its equally ludicrous to draw comparison with 1918 flu epidemic on biological, health and socioeconomic grounds.

I can bat back and forward with superior analysis ;) all day...but you and other petals in here might get annoyed with me so don't be offended if I don't respond.

PS I welcome the red thumbing....I take it as an indication I'm on/near the money ;)

I rarely if ever thumbs down, I prefer dialogue

You seem to have some interesting perspectives on me <shrug>

Some facts:

1) Spanish Flu's first outbreak was in the Spring and less deadly
2) It largely retreated over the summer of 1918
3) It mutated and returned as a more deadly variant in the Autumn

That is a possible outcome for Covid-19. Sory if it doesn't fit with your view of the way things will play out,

The positives for this potential path compared to 1918 are:

1) Social distancing is already in place (in 1918 large troop movements meant the virus was able to spread easily)

2) Hopefully governments are more transparent (in 1918 the UK & Germany hid the outbreak to ensure morale wasn't lost)

3) Hopefully individuals are healthier and have greater access to healthcare (in 1918 the men in the trenches had compromised immune systems and a lack of healthcare)

4) The medical community is further down the track in terms of understanding the currrent variant of the virus

All facts, no emotion.
No hysteria either. <shrug>

Implications for investing ...

Sure I can see that Covid-19 has transitioned to more of an known unknown and arguably the fact that I, a lay person, could lay out the progression of the 1918 outbreak suggests that the worst case scenario of an escalation of the current outbreak as a result of a more severe 2nd wave in the Autumn also suggests that it is also a known unkwnown.

Who knows what further damage could be done to economies if the gets worse rather than better?

You pay your money, you make your choice.

It's what makes market.

Small Cap Value Report (Mon 11 May 2020) - Covid/Macro, ELCO, CER

Covid/macro preamble

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Paul Scott

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