Macro trumps micro.
Macro trumps micro. We learned that Thursday as stocks fell sharply into the red at the open and then after an attempt to find the breakeven line once again declined in the afternoon.
So, what is happening and how should you be playing it?
First and foremost, the market didn't hear what it wanted from Federal Reserve Chair Jerome Powell. As difficult as it is for me to explain the zeitgeist of a market that as recently as last week was willing to pay 23x earnings (a generational high and a level not seen since the dot-com bubble), I would summarize the market's reaction thusly: We are not hearing that things will be OK by year-end.
To their credit, FOMC members did not make any scientific claims regarding the duration of the Covid-19 epidemic. None of the members of the FOMC are scientists, so that candor was refreshing in the midst of an election season. It was also expensive to stock market bulls, and I believe caution is warranted here.
Real Money readers are looking for ideas, though, and as promised, here are some stock-specific ideas for the post-Fed, anti-Powell era of investing.
I am very worried about the rising tide of vaccine nationalism. I don't think that factor is apparent at all in the sky-high valuations of vaccine plays like Moderna (MRNA) , CureVac (CVAC) and BioNTech (BNTX) .
What happens to planet Earth if one of the nationalized players (China, for instance) is the first to successfully manufacture a vaccine? Does that leave folks in the U.S and India out in the cold?
Also, if Moderna or CureVac come up with a novel, mRNA-based approach to a vaccine, to whom will they sell it? That's the key point here, and one I don't think the market is considering.
Governments will be the purchasers of vaccines, when proven safe, and it is likely that marketing will be just as important as the science. That works in the favor of larger players like AstraZeneca (AZN) , which by definition have larger legal and marketing departments than glorified start-ups like Moderna. So, it may not be the most effective vaccine that wins, but the company with the most effective sales team.
I own Arcturus Therapeutics (ARCT) , which is currently in Phase 1/ 2 trials with Duke-NUS hospital in Singapore and also has a marketing agreement with the Israeli government. I am a big believer in ARCT's self-transcribing and replicating RNA (STARR) technology, but do their smart scientists have enough of an advantage over companies backed by the governments of China or Russia? For a Covid-19 vaccine specifically, probably not, so ARCT will have to win on the science.
One way to "punt" on that difficult question is to buy Catalent (CTLT) -- recently added to the S&P 500 to the chagrin of Tesla (TSLA) bulls -- which has manufacturing agreements with Arcturus, Moderna and AstraZeneca, among others. Marketing a Covid-19 vaccine is going to be a race the likes of which the scientific world has never seen, so perhaps sticking with a company that only makes the vaccine itself is a safer bet.
In contrast, the market's continuing fascination with "recovery plays" opens players up to bets that are anything but safe. Airlines, cruise lines and hospitality companies are still radioactive to me. If you want to "play" them, that's fine, but please remember that you are gambling, and presumably NOT with the house's money.
Also don't forget the someone will have to pay for all of this. In my opinion, banks and insurance companies have only scratched the surface of their real liability for the distress of companies (and people who work for them) in travel, tourism and hospitality.
Also, the companies (REITs, for instance) that own the properties that are rented to operating companies in the aforementioned industries still face a liability crisis.
It's a different world. Saying "it's 2020!" has become a catch-all to describe the insanity of the year, but just make sure that your portfolio is composed of sane assets for the balance of this crazy year.
