Saxo: Watch Global Logistics Shares For Virus Supply-Chain Signals
Authored by Peter Garnry, head of Equity Strategy, Saxo Bank,
Summary
Logistics stocks have underperformed the global equity market since 17 January 2020 but overall the declines have not been severe enough to be called an all-out warning. Drilling deeper we observe the most stress among logistics stocks in China and Asia-Pacific (ex. China) and among industries we observe the worst declines in the marine shipping and transit services industries.
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The coronavirus in China has still not peaked and mixed reports are coming out of China in relation to when production can be resumed in some regions of the country. Equities in general have been calm on the coronavirus outbreak with the real impact showing up in commodities such as crude oil which tells a tale of the world’s factory grinding to a halt. Within equities the epicenter is in the logistics industry group which was down 5% last Monday compared to the official start date of the coronavirus’ impact on financial markets. However, news flow was on balance positive last week pulling back equities as investors were betting on the coronavirus being contained fast enough to leave little impact on the economy.
We take a more cautious view and believe the coronavirus could get much worse globally. As of this morning the Bloomberg World Transportation Index is down 3% from the close on 17 January 2020 which means that investors have not really discounted any meaningful disruption yet from the outbreak.
Underneath the index value the data tells more stories about where the impact really is. Across regions it’s clear that Asia-Pacific and China (a few of the larger names are pulling the weighted return into positive) are the two regions that are suffering the most which is not a surprise.
When we look at industries we observe that marine shipping and transit services (basically passenger transport by rail) are hit the hardest.
So the global supply chain has seen a materially decline in activity also supported by the 83% drop in the Baltic Dry Index since August 2019.
[ZH: And The Capesize Freight Index is negative! Shippers are paying you to be able to ship your gear]
While shipping and transit services are flashing some signs of warning here the declines are not catastrophic but we recommend investors to watch these industries for guidance. The overall market cap weighted equity indices are broadly reflecting technology companies which are not living in the same physical world as manufacturing companies.
It’s worth noting that the transportation sector has not been an attractive investment over a five year period delivering less than 9% return while the global equity market has delivered 34%.
In our technology-driven society our equity markets are no longer reflecting the underlying manufacturing economy but more a services and software economy.
DOJ Confirms Giuliani Providing Evidence In Ukraine Investigation
US Attorney General William Barr acknowledged on Monday that President Trump’s personal attorney, Rudy Giuliani, has been providing the Department of Justice with information collected during a months-long investigation of Ukraine.
The former New York mayor has been interviewing witnesses and gathering evidence to shed light on what the Bidens were up to during the Obama years, and get to the bottom of claims that Kiev interfered in the 2016 US election in favor of Hillary Clinton.
Barr said that Giuliani’s Ukraine findings must be carefully vetted to ensure accuracy and authenticity, according to Bloomberg.
“The DOJ has the obligation to have an open door to anybody
who wishes to provide us information that they think is
relevant,” said Barr during a press conference in Washington, adding “We have to be very careful with respect to any
information coming from Ukraine. There are a lot of agendas in the Ukraine, there are a lot of cross-currents and we can’t take anything we receive from the Ukraine at face value.”
Barr didn’t specify what kind of information Giuliani has been providing. Trump’s personal lawyer has previously said he has been collecting information about the activities of former Vice President Joe Biden and his son, Hunter, in Ukraine. Giuliani’s efforts became a central factor in Trump’s impeachment for pressuring the Ukrainian government to announce investigations into the Bidens to help his re-election. -Bloomberg
Giuliani has been providing conservative news network OAN with regular exclusive interviews from his travels:
In December we noted that Rudy has been working on this project for a while. In late January, he conducted phone interviews with former Ukrainian prosecutors Viktor Shokin and Yiury Lutsenko. On the call was George Boyle – Giuliani’s Chief Operating Officer and Director of Investigations. Boyle started as a NYPD beat cop in 1987, and was promoted to detective – eventually joining the Special Victims Squad. In short, the ever-grinning Giuliani has some serious professionals working on this.
“When he believes he’s right, he loves taking on fights,” said longtime Giuliani friend, Tony Carbonetti.
Giuliani challenged Fox News senior specialist Bryan Murphy to a debate, after Murphy recently wrote an internal memo titled “Ukraine Disinformation and the Trump Administration,” in which he suggested that some of the network’s top commentators were misleading the public.
Murphy accused Giuliani of having “high susceptibility to Ukrainian disinformation.” The former mayor responded by saying, “Fox owes us an opportunity to respond to this attack.”
“I can prove what I’m saying, can he?” asked Giuliani.
The memo went on to target network correspondent and investigative journalist John Solomon. Murphy said Solomon “uses unreliable sources, focuses on stories (that are) part of the disinformation campaign and also misrepresents his sources.”
The final two victims, couple Victoria Toensing and Joe DiGenova, are attorneys who frequently guest star on the network as commentators. Murphy argued they have ulterior financial motives related to their non-disclosure agreements.
Giuliani said if he gets the opportunity to debate, he may bring Toensing and DiGenova to support him. He added, “All facts are backed up by witnesses, documents and tapes.” –OAN
I challenge Brian Murphy to a debate on Fox on the lies he is spreading about us.
If he needs help maybe he can bring a few others. I’ll bring Joe or Vicky or John or all of them.
Fox owes us an opportunity to respond to this attack.
Oh how I miss George Carlin. Yes he was mainly known as a stand up comedian, but he was more than that, much more. He was a social critic, he challenged that status quo, he dared to go where society wasn’t prepared to go: Look at ourselves critically. He did it with biting humor, masterful oration and a directness digging into core truths that were not only uncomfortable at times, but needed to be heard and said.
His voice has fallen silent as he passed away a few years ago and I’m sorry to say: We don’t have anyone like George today. I didn’t agree with everything George said and I don’t need to, nor does anybody else, but his talent was to make us think and to view the world with a different perspective and yes he was a prophet.
He saw long ago where this was all heading. The political charades and manufactured dramas that are sold to the public as choice, the illusion of choice as the agendas have long been in play.
“What do they want?” he asked.
“More for themselves and less for everybody else.”
He spoke of the owners of this country, the owners that control everything, the media, what to believe what to think, and the great business and lobbying interests that spend billions of dollars lobbying for ever more benefits for themselves.
And boy did they succeed. Under the mantle of populism and draining the swamp they got themselves the biggest tax cuts in corporate history, a historic killing:
Wall Street celebrated and celebrates to this day.
Wealth inequality skyrocketing for years and now trillion dollar deficits as far as the eye can see and debt through the roof:
“But now they’re coming for your social security money” George prophesied.
“So they can give it to their criminal friends on Wall Street. And sooner or later they’ll get it all”.
After all after Act I is complete here comes Act 2:
Act I: Big corporate tax cuts for the top 1%.
Act II: Cut benefits for the poor. https://t.co/UrrrDn8rHP
“President Donald Trump will propose a $4.8 trillion budget on Monday, with sharp cuts to safety-net programs and international aid.
“Trump would increase military spending by 0.3% to $740.5 billion for the fiscal year 2021, which starts on Oct. 21. Spending cuts of $4.4 trillion over a decade would target $2 trillion in savings from mandatory spending programs, including cuts of $130 billion tied to Medicare drug-pricing and $292 billion from safety-net programs, such as food stamps and Medicaid. The budget assumes the $1.5 trillion tax-cut package enacted in 2017 and set to expire by 2025 is extended.”
Protect those tax cuts for Wall Street, but cut benefits for the rest, the needy and poor specifically. But we always have money to increase military spending which was already increased dramatically in the past few years on yes, a bipartisan basis. Both Democrats and Republicans voted for those. Lobbying dollars freely flow into both parties of course. Elections are expensive, don’t you know. And who are you going to listen to? To those that pay for access of course.
Don’t act surprised though. George Carlin, the prophet, told you years ago this was all coming in a brutally honest and biting rant that only George could’ve pulled off:
I miss his voice and I do wonder what he would tell us today. I shudder to think.
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Is China Really Resuming Production? Here Is The Dismal Answer, And An “Alternative” Way To Track What’s Really Going On
As we discussed earlier today, for traders following every twist and turn in the coronavirus saga, just one thing matters: “did China go back to work today or not” (the answer would also indicate whether global supply chains are still operational, or are as some fear, fraying and jeopardizing corporate earnings around the world). Of course, a cynic could interject that if China is lying misrepresenting the number of infections (as it clearly now is) and undercounting the epidemic casualties, why wouldn’t it lie about the logical next step: the number of people who have returned to work?
Conveniently, Morgan Stanley has come up with an answer.
As the bank’s strategist Min Dai writes today, echoing what we said earlier, “the most asked question among investors these days as they try to gauge the economic impact from the coronavirus is how to track the resumption of production in China.” His answer?
Sitting on a high floor in the International Commerce Center does give us the advantage of monitoring air pollution in Hong Kong, which has improved significantly in the past three weeks due to the suspension of traffic and industrial production in the Great Bay Area. This gives us the idea of whether we are able to monitor air pollution in China to gauge the resumption of production., as an alternative to the daily power coal consumption and daily national passenger traffic highlighted by our economists.
Inspired by his Hong Kong penthouse vista, Dai shows four cities’ air pollution since the start of the year versus their average in the past six years. These four are Shanghai, Guangzhou, Chengdu and Beijing, which to Morgan Stanley are a good representation of Eastern, Southern, Western and Northern China.
The key takeaways are:
The start of the new year normally sees higher pollution across China due to higher coal/fuel consumption for heating and resumption of industrial production after Chinese New Year.
Guangzhou, Shanghai and Chengdu see a clear pattern – air pollution is only 20-50% of the historical average. This could imply that human activities such as traffic and industrial production within/close to those cities are running 50-80% below their potential capacity.
However, Beijing pollution is similar to the historical average, probably because pollution in northern China is usually not good during winter time due to heating.
In summary, Morgan Stanley – which is as confused about what is really going on on the ground in China as the rest of us – believes that these sets of data “could provide an alternative view of economic activity in major cities in China, which are important for China rates and FX markets”, and going forward will provide timely updates in due course. At least until China decides to “adjust” the pollution data too, making this latest “alternative” indicator of China’s economy also meaningless.
Global gas price convergence tops this week’s pick of energy and commodities charts to watch. Plus: US LNG exports, coronavirus impact on Asian crude oil and bunker fuel trade, emerging European power market dynamics, and global steel price trends.
1. Globalized gas prices race towards rock bottom…
What’s happening? Global gas spot prices have converged again in recent weeks to the downside as the coronavirus outbreak and its impact on Chinese LNG demand adds to already very bearish sentiment across the world. Spot prices in Asia, Europe and the US have converged in an extremely narrow $1.10/MMBtu range as the global gas glut looks set to worsen amid weak demand, high storage stocks and mild winter temperatures. The JKM Asian spot price has fallen to an all-time low of just $2.95/MMBtu.
What’s next? Coronavirus has begun to weigh significantly on Chinese LNG import demand, which has been the main driver of global gas demand growth in recent years, with state-owned CNOOC declaring force majeure on some of its import contracts. With cargoes expected to be diverted to Europe, it seems likely there will be more pressure on northwest European hub prices in the coming weeks. With no improvement in global gas prices expected through 2020, the trend for price convergence looks set to continue.
2. …setting US LNG exports on a bumpy path
What’s happening? The upward trajectory of US LNG exports is expected to stall next year before falling and rising again, leading the market on a roller-coaster ride through the middle of the decade amid uncertainty about new project start-ups, S&P Global Platts Analytics data shows. Weak prices in Asia, lower than expected demand in key markets and geopolitical concerns have been weighing on suppliers and end-users. Add in the coronavirus outbreak and a perfect storm of challenges is festering.
What’s next? Relief may depend on China’s next move. It plans to cut tariffs on imports of US crude and other products February 14, but for now is leaving duties of 25% on US LNG in place. US developers of new liquefaction projects are counting on long-term contracts with Chinese customers to help advance their terminals.
3. Chinese refinery activity drops, hitting Russia’s ESPO crude
What’s happening? China’s domestic oil demand has already drastically declined with industrial, manufacturing and construction activities coming to a halt due to the coronavirus outbreak. For example, Sinopec, the world’s biggest refiner by capacity, recently slashed overall crude throughput by about 13% and its refineries across China are currently operating at minimum run rates. Throughput levels for another state-owned refiner, PetroChina, saw sharp declines in recent weeks. Independent refiners in Shandong province have also reduced their average run rate by more than 17 percentage points from mid-January, sources told Platts.
What’s next? In the oil markets, the coronavirus outbreak continues to cast its spell on Asian Pacific crude price differentials. Far East Russian crude oil, in particular, is likely to bear the brunt of China’s economic slowdown aggravated by its outbreak, with both state-run and private Chinese refiners poised to cut imports of their favorite feedstock ESPO Blend crude amid faltering refinery throughput. Platts assessed first-month ESPO Blend crude at a premium of $4.6/b against Platts Dubai on Feb 6, marking the lowest price differential since $4.5/b on July 19, 2019.
4. Ship diversions could benefit South Korean bunker suppliers
What’s happening? In the North Asian bunker markets, bunker demand in China has fallen significantly this week as markets reopened after the extended Lunar New Year holiday, with the seasonal low demand period amplified this year by the coronavirus outbreak.
What’s next? Despite efforts by some 16 ports and port groups in China to offer exemptions and reductions in port charges in a bid to spur business, including the main ports of Shanghai and Ningbo-Zhoushan, bunker fuel traders in South Korea are expecting an uptick in demand as vessels increasingly divert from China and refuel in South Korea, where marine fuel is already available at competitive prices. Although ships en route to China were unlikely to change course mid-way, shipowners said they may consider other options for upcoming journeys. Delivered marine fuel 0.5% was assessed at $580/mt in Shanghai Thursday, higher than $550/mt in South Korea, S&P Global Platts data showed.
5. Warmer winters could reshape EU power price dynamics
What’s happening? Above-average temperatures have knocked the stuffing out of Nordic power prices, which are sensitive to the widespread use of electric heat. Reduced demand for electric heat combined with healthy hydro reservoir levels and strong wind generation to drive Nord Pool system spot prices down to a Eur17.25/MWh average in the first seven days of February – a 40% decline on month.
What’s next? In the short term, forecast precipitation in the Nordic area over the next two weeks is 50% above seasonal average, according to broker Energi Danmark, while temperatures are set to remain five degrees Celsius above average. Longer term… is this what electrification looks like? Winters are getting warmer and conventional gas-fired heat systems such as the UK’s will move towards to heat pumps and other electric-based techs. UK power prices are based on the cost of gas, in turn supported through winter by heat demand. This dynamic will ebb away as zero marginal cost renewables encroach on heat markets, UK housing stock evolves and, alas, weeks of hard frosts pass into folklore.
What’s happening? Prices of steel heavy melting scrap 1&2 (80:20) delivered into Turkey plunged almost 16% from mid-January to the first week in February. The product is a basic raw material for steelmaking, particularly in electric arc furnaces, and is one of the most traded scrap grades in the export markets. Prices plunged as the coronavirus outbreak weakened steel market sentiment and prices generally, and Turkish steelmakers pressured for lower prices for their key input amid slack domestic steel demand.
What’s next? A slight uptick in scrap prices at the end of last week may continue as Turkish mills seize what they perceive as an opportunity to sell more steel into export markets temporarily vacated by China due to port and other transport restrictions. Turkish mills are reportedly already increasing their steel output to plug this gap.
Germany Reports Outbreak Of “Highly Pathogenic” H5N8 Bird Flu Virus
Pig ebola decimating millions of pigs in China; Coronavirus infecting tens of thousands in China and around the globe, and now bird flu killing Germany’s chickens.
Germany has reported an outbreak of the “highly pathogenic” H5N8 bird flu virus in a backyard in the southwestern part of the country, the World Organisation for Animal Health (OIE) said on Monday, according to a Reuters report. The virus killed 44 birds out of a flock of 69 in Bretzfeld, in the Baden-Wurttemberg region, the Paris-based OIE said, citing a report from Germany’s food and agriculture ministry.
“All poultry and captive birds have been culled and safely disposed of on Feb. 7, 2020. No poultry, poultry products or captive birds have been dispatched,” it said in the report.
H5N8 virus.
The good news: according to BFR, it is unlikely that the pathogen can be transmitted to humans via food (then again, China also did say for about a month that the coronavirus pandemic was contained). The not so good news: even if just Germany’s chicken population is impacted, it could push food inflation substantially higher. How high? Recall that last night China reported that in December CPI for the country printed at a 9 year high of 5.4%, mostly as a result of a 100% increase in the price of pork, as China’s pig population has been decinated as a result of “pig ebola.”
A case of H5N8 bird flu – not to be confused with the H5N1 bird flu outbreak reported in China’s Hunan province last week – had been confirmed in a wild bird in the eastern German state of Brandenburg in January but no birds on farms were involved, the ministry had then said.
Unlike China, however, this time the viral outbreak probably did not originate in a lab and instead may have been imported from one of Germany’s neighbors. In early January we reported that avian influenza had been detected in Europe’s largest poultry producers, located in eastern Poland. Reuters, citing local media reports, said up to 40,000 turkeys could be culled in the coming days to prevent a further outbreak. This was the first outbreak of the bird flu since France culled 800,000 birds to prevent the spread of H5N8 in 2017.
Ironically, there is one similarity to the coronavirus outbreak in China: back in January, local broadcaster Polsat said, “to prevent the virus from spreading, the police blocked roads in the vicinity of infected farms. Within a radius of three kilometers, it can be up to 350 thousand pieces of poultry.” Alas, just like in China, this quarantine also not only did not work, but now the virus appears to have spread all the way to Germany.
Sanders To Seek ‘Partial Recanvass’ Of Iowa Precincts – Yet IDP Says Bad Math Can’t Be Fixed
Sen. Bernie Sanders (I-VT) will ask the Iowa Democratic Party to recanvass several precincts after journalists and social media users pointed out irregularities in the final delegate calculations, according to The Hill. It is unknown how many precincts will be requested.
According to totals released on Sunday, former South Bend, Ind. Mayor Pete Buttigieg (D) would receive two more pledged delegates than Sanders, bringing their totals to 16 and 14 respectively.
The announcement comes shortly after the Iowa Democratic Party released updated totals for the state’s caucuses held last week following days of uncertainty over the contest’s winner.
…
Some journalists, including The Appeal’s Daniel Nichanian, noted that even after Sunday’s update some of the delegate calculations remained incorrect, including one case where a precinct allocated more state delegates than it had to allocate. –The Hill
The IDP results are still riddled with errors.
They are mathematically incoherent. In some cases they don’t conform to what local precincts are reporting.
They can claim what they want. Thankfully, the press isn’t bound to just account. That’s where we come in. Let’s dig in.
That said, an attorney for the Iowa Democratic Party says that nothing will change. According to a Saturday email from the IDP chair, “The incorrect math on the Caucus Math Worksheets must not be changed to ensure the integrity of the process. Most importantly the Worksheet is the caucus chair and secretary’s “certification” of the results as required by Iowa Code 43.4(2-3). It is the legal voting record of the caucus, like a ballot.”
“The IDP’s role is to facilitate the caucus and tabulate the results. Any judgement of math miscalculations would insert personal opinion into the process by individuals not at the caucus and could change the agreed upon results. That action would be interfering with the caucus’ expression of their preferences.”
Quoting the opinion of the IDP attorney:
“The incorrect math on the Caucus Math Worksheets must not be changed to ensure the integrity of the process….”
2/r
A sudden rise sulphur dioxide (SO2) levels is associated with sudden burning of organic matter including human bodies.
Massive Release of Sulphur Dioxide
We now have further evidence of hidden coronavirus cremations in China.
Data from https://t.co/oDMad8pquE shows a massive release of sulfur dioxide gas from the outskirts of Wuhan, commonly associated with the burning of organic matters. Levels are elevated, even compared with the rest of China. pic.twitter.com/XgBfJd7dDS
Data from http://windy.com shows a massive release of sulfur dioxide gas from the outskirts of Wuhan, commonly associated with the burning of organic matters. Levels are elevated, even compared with the rest of China.
From the same time, using the same scale – notice that the emissions are heightened across the board. Only other city that comes near to it is Chongquing, which is also afflicted by the coronavirus.
A few distinct possibilities:
This is a power plant releasing all this gas. Unlikely, considering how deviant the numbers are from the norm. No other city comes close to how much SO2 is being released from Wuhan.
A second one: Wuhan is burning municipal trash and possibly contaminated animal carcasses. Possible, but why would they not just dump it where they usually do?
And the third and most morbid: Dead bodies are being burned on the outskirts of the city, the death numbers are way higher than the CCP is letting on about, and things are really, really bad.
I don’t know the relative probabilities of these events, make up your own mind as to which is most likely.
Also note that I changed the scale displayed to view only the peaks, look at concentrations above 500ug/m^3 to see the real story.
Current SO₂ levels are extremely elevated, at 1700ug/m^3, where 80ug/m^3 is considered dangerously high.
The article refers to the above Tweets and also mentions two other possibilities.
According to the Department of Public Health of the U.S. state of Georgia, crematories release a wide variety of chemicals besides SO2, such as “mercury, dioxin, hydrochloric acid, nitrogen oxide, carbon monoxide, and dioxins.” Twitter user Vet Watching pointed out that the elevated SO2 levels could also be explained by the burning of tons of contaminated medical waste.
Environmental scientist Dr. Jorge Emmanuel was cited by Health Care Without Harm as saying that the burning of medical supplies releases a number of pollutants, including “fly ash; heavy metals such as arsenic, chromium, copper, mercury and lead; acid gases such as hydrogen chloride, hydrogen fluoride, sulfur dioxides, and nitrogen oxides; carbon monoxide; and organic compounds. “
Mr. Zhou said more than five million people have left Wuhan, leaving about nine million. Many residents hail from around the region and normally leave town for Lunar New Year, and it isn’t known how many specifically fled because of the virus.
My Jan 26 Comments
“5 Million Potentially Infected Fled Wuhan”
“Let that stat sink in along with the fact that the incubation period is up to two weeks and mutations could be higher.”
For that observation, I was accused of fear mongering.
On February 4 they hit the ceiling on the number of tests that can perform. This assumes no tests are no mistakes, no patients having multiple tests, and it assumes the negative test rate of 30% is constant every day.
In other words, the officials in Hubei province cannot keep up and are reporting what they can do, not how much the coronavirus is actually growing.
NYPD ‘Declaring War’ On ‘Anti-Cop’ Mayor De Blasio: Sergeants’ Union
The Sergeant’s Benevolent Association (SBA), which represents thousands of New York City police sergeants, said on Sunday that they will go to ‘war’ with ‘anti-cop’ Mayor Bill de Blasio (D) after several police officers were targeted in brazen attacks over the weekend, with one ending up in the hospital.
Suspect Robert Williams was arrested after allegedly attacking two officers within 12 hours – starting when he opened fire on a marked NYPD van on the evening of Feb 8, hitting officer Paul Stroffolino, 31, who was shot in the neck and chin. Almost 12 hours later, Williams walked into the 41st precinct station house just before 8 a.m. on Sunday morning and opened fire in the lobby in the presence of several police officers. He has been charged with attempted murder and criminal possession of a weapon.
Stroffolino was released Sunday morning to applause from his fellow officers following a full recovery.
Earlier Sunday, the union tweeted that Mayor de Blasio would not be welcome to visit wounded officers in the hospital, and that the police has no “respect” for the Democratic mayor, according to The Hill.
“Mayor DeBlasio, the members of the NYPD are declaring war on you! We do not respect you, DO NOT visit us in hospitals. You sold the NYPD to the vile creatures, the 1% who hate cops but vote for you,” tweeted the SBA.
“Police are being targeted.The anti cop tone infecting our city & state is causing bloodshed. Before any public official sends their thoughts & prayers, they should ask themselves how the language & behavior they’ve been tolerating has contributed to violence against police,” the union continued.
Mayor DeBlasio, the members of the NYPD are declaring war on you! We do not respect you, DO NOT visit us in hospitals. You sold the NYPD to the vile creatures, the 1% who hate cops but vote for you. NYPD cops have been assassinated because of you. This isn’t over, Game on! https://t.co/XyruPraM9T
Police are being targeted.The anti cop tone infecting our city & state is causing bloodshed. Before any public official sends their thoughts & prayers, they should ask themselves how the language & behavior they’ve been tolerating has contributed to violence against police.
This is a stunning moment in American culture. Proud, dedicated police sergeants declaring war on a treacherous cop-hater who has done more to incite violence against #LawEnforcement than anyone in history. No punches pulled. A shocking indictment of #CopHaterDeBlasiohttps://t.co/7C3LymzImX
Let’s revisit the chart from Friday’s T-Report where we examine stocks, bonds, and oil.
Oil Didn’t Buy into the Bounce
At the start of the week, stocks retraced all of their coronavirus losses, but treasuries only retraced a portion and commodities in general (oil specifically), barely budged.
With high levels of uncertainty and stocks near all time highs, the risk/reward seems skewed in favor of being prudent. There is nothing to stop stocks from making new, even greater highs but as the official death toll of the coronavirus surpasses SARS and much of China is in lockdown while the virus continues to spread globally, it is difficult to be risk-on at the moment.
On a subjective basis, it seems like Wall Street was fixated on coronavirus long before it gained mainstream attention, which might mean we haven’t started to see retail’s reaction to increasing media coverage of coronavirus.
Garbage In, Garbage Out – The Problem with Existing Data
Garbage In, Garbage Out (or GIGO) is an important concept that warns against taking too seriously the results of any calculation or thesis based on low quality data.
As of Sunday morning, the Johns Hopkins dashboard that I’ve been using states that there have been 37,592 confirmed cases with 814 deaths and 2,920 recoveries.
It is tempting to use this data as being highly accurate. 37,592 confirmed cases seems pretty accurate, as opposed to giving a range of 35,000 to 40,000 but do they really have such precise information? I suspect that the “precision” of the counts implies a much higher degree of certainty around the numbers than there actually is. Rather than trying to work with the data today, I’ll highlight what I think the biggest risks are to using this data.
Some simple questions that I don’t think are being answered (or I haven’t found where to look)
Confirmed cases
o Any estimate of how many might be infected and have not yet been tested?
o Any good estimate of ‘suspected’ cases? Or at least those who have been tested and are awaiting results?
o How is it attributed to a specific country? By citizenship? Where they were when discovered? Where they likely caught it?
o I see lots of estimates of R0, a measure of the rate of infection that is critical to modelling, but given the quality of data we have, it seems like at worst a wild guess and at best something that has been fitted to what is potentially low-quality data.
Deaths and Recoveries
o Deaths have been very steady around 2% of confirmed cases, but we don’t know much about who is dying or when they are dying relative to becoming a confirmed case. It is similar for recoveries. What might be much more helpful is some sort of cohort or detailed analysis of age and time they were confirmed (though this may be biased early on, maybe only severe cases tried to find out what was wrong and now everyone is trying to find out).
o While it is highly encouraging that recoveries are now outpacing deaths at almost 8% versus just over 2%, that still leaves 90% of confirmed cases sick.
o I see lots of estimates of the mortality rate, another measure critical to modelling the risk the virus poses. Many seem to be using 2% or so, which fits the current data, but seems extremely optimistic on the outcome of the remaining cases (I hope they are right as it would save a huge number of lives).
How much of China is in quarantine and how long will it last?
o While this seems like it should be a simple question, the answer is not obvious to me. It seems like quarantine or further Lunar New Year extensions are case specific and I have no idea what sources of information are trustworthy and what could be fake news (domestically, I have a decent understanding of the biases of various sources and can try to adjust it, but not on this information flow). Making it more difficult, some seemingly “alternative sites” (a polite way of saying fake news) do seem to have had stories days before traditional, larger, global media had published similar stories. In this case, I think quarantine and travel bans are evolving quickly which is the reason it is difficult to get a precise number, but that still makes it difficult to estimate the impact.
o On the Bloomberg terminal, I pulled up NI China (stories on China) and picked Bloomberg only as a source (to limit the number of repeat stories). The most recent 10 headlines included EL AL suspending Hong Kong flights, Mattel closing 2 factories in Asia and one in Canada, Foxconn says plant restart hinges on China’ guidance, and J. Crew closing Hong Kong stores. The fact that these stories mostly related to Hong Kong seems to indicate we are far from done with seeing risk to supply chains and the global economy diminish.
The cruise ship quarantined in Japan.
There are now over 70 reported cases of coronavirus on this cruise ship alone. Is what seems like a high rate of infection a sign that it is more infectious than we realize or is the nature of quarantine in such a situation the problem? Even with precautions being taken, I’d want off that ship, yet it is understandable why Japan wants the quarantine to run its course since so little is really known about the spread or the incubation period. Of all the stories out there this weekend, this one makes me the most nervous as it would indicate the ease of which this is transmitted might be higher than expected (the argument against that is the nature of the quarantine/life on a contained vessel). Ultimately, it scares me in that it could give credence to those arguing the measures taken already indicate a more severe problem is occurring than the data we’ve received so far. Probably alarmist, but…
I am hopeful that the ‘good’ data is accurate, but I’m not sure we can rely too heavily on the data that we have, as its quality across the globe could be influenced by many factors. Some would argue that we have to use the data we have, but that is precisely why we have to be cautious of making decisions based on potentially low quality data, because garbage in, garbage out is real and leads to bad decisions.
Tourism and Travel
According to Nielson, overseas travel spending by Chinese tourists reached $261 billion in 2016 – ranking first worldwide. That was an increase of 4.5% over 2015. This report does include trips to Hong Kong and Macao as foreign travel (which is debatable) but the top 10 destinations include Hong Kong, Japan, Macao, Thailand, South Korea, the U.S., Singapore, Taiwan, Australia and France.
China outbound travel has been growing at a rapid rate. In 2003, when SARS hit, China GDP was about 4% of the global total – since then it has climbed to 16%. My understanding is that the percentage of global tourism is even greater than their share of global GDP now.
Thwarting the ability of the nation with the largest outbound tourist spending to travel is likely to have a significant impact on the global economy and it will be orders of magnitude greater than what it was in 2003.
It is too early to tell how long travel bans will be in place. If the spread is contained could travel restrictions be lifted early? Possibly, but for now I think that this is an underestimated issue for the global economy to deal with.
Supply Chains
There is no shortage of stories about potential supply chain disruption.
I am sure that China will make every effort to support their most critical global customers. China is extremely commercial and will do what it can to ensure they don’t lose their place as a global leader in production. Having said that, it is unclear even with that intention, what can be done given the quarantines and domestic travel restrictions. Away from the massive global companies they supply, there could be serious risk to small and medium sized companies that are more susceptible to supply shocks.
Again, worth remembering that during SARS, which resulted in fewer deaths, China was 75% less important to the global economy than they are today.
I am not generally a big fan of the Baltic Dry Index (I have a great story on how it was created and how little respect some of the creators have for it), but as Shakespeare said, the devil can cite Scripture for his purpose, so let’s run with it.
Baltic Dry Index Nears Record Low
It has declined over 83% since it peaked in early September. While I don’t think it is a particularly useful measure, it does tell us something and you will certainly see this widely circulated by the doomers in the coming days (if you haven’t seen it already).
Stay positioned for more “risk off” and stay safe!
