Valuentum Exclusive Analysis for the Discerning Investor

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President of Investment Research at Valuentum, Brian Nelson provides an emergency update on COVID-19. He talks about how policymakers have dropped the ball thus far, and why investors should not let their guards down, despite what has been a nice bounce from the March 23 bottom.

As of April 24, the world has now borne witness to the deaths of nearly 182,000 people from Coronavirus disease, or COVID-19, with more than 2.6 million confirmed cases. The United States remains the epicenter of the global pandemic with the country confirming 830,000 cases and more than 42,000 deaths.

The sad reality is that, despite the many months that have now passed, medical professionals know little more about the disease than when news of COVID-19 first broke. My friends, here is what we wrote January 31, nearly 3 months ago:

Just how serious is the…2019 Novel Coronavirus? It’s deadly serious…The biggest concern…is that it could have an incubation period of up to two weeks, meaning that people are spreading the virus without even knowing they have it. Symptoms such as fever, cough and shortness of breath are also very common to other ailments, so people in infected areas may have (virus) without even reporting it.

As recently as this month, however, reports indicated that Georgia’s governor didn’t know that individuals could transmit Coranavirus disease asymptomatically.

This information has been available for months.

Generals – get your lieutenants on the same page.

On February 24, Valuentum reported the following in its market-crash alert to members:

Adding to the widespread containment concerns is that many patients that tested positive for COVID-19 were reinfected later. The implications of this consideration on a potential vaccine could be dire, in our view, as it remains uncertain why the human body's subsequent built-up immune response would not prevent re-infection.

It was just today, however, that Business Insider reported that the UK’s Chief Medical Officer noted that "there is 'concerning' evidence suggesting people can be reinfected with the virus" and "that immunity quickly wanes."

According to the note, and I quote:

“Scientists fear that it may prove impossible to produce a working coronavirus vaccine and believe the world may have to simply learn to adapt to the permanent threat of COVID-19.”

Furthermore, Reuters reported April 25, and I quote:

“The World Health Organization said on Saturday that there was currently no evidence that people who have recovered from COVID-19 and have the antibodies are protected from a second coronavirus infection.”

We are facing a global killer, the likes of which the world has never seen, and we cannot assume that we know more about the disease than we do. When lives are at stake in the field of physical sciences, we do not place bets. We collect the evidence and find out the answer.

Medical Officers – continue to challenge assumptions in fighting this disease.

When common sense is needed most, however, policymakers have thrown it out the window. Of course, wearing some sort of protection over your mouth and nose is better than not wearing anything at all. We know COVID-19 can be spread from respiratory droplets when an infected person coughs, sneezes or talks. It took months for medical professionals to suggest American citizens start wearing cloths over their nose and mouths.

Friends – continue using your common sense, and please stay safe.

Now, there seems to be a debate over whether there may be a second wave of infections in the coming months. I can tell you that a second wave of infections is very, very likely. In almost every city during the 1918-1919 Spanish Flu pandemic, there was a second and sometimes third wave, and in some cases the second wave was worse than the first.

I encourage epidemiologists to examine the curves of St. Louis, Kansas City, Birmingham, Spokane and Milwaukee, among others, to examine what practices led to a second wave of spikes worse than the first during the Spanish Flu of 1918-1919.

The work of Markel, Lipman and Navarro in their piece, “Nonpharmaceutical Interventions Implemented by U.S. Cities During the 1918-1919 Influenza Pandemic” may be informative. We must study history to learn from it, but we must continue to make forward-looking projections to save lives.

Epidemiologists – continue to evaluate future expected data.

As in the case of warning about not using masks of any kind to preserve personal protection equipment for healthcare workers, despite the negative impact on everyday Americans, I feel the relaxation of social distancing measures and stay-at-home orders is not a move remotely based on science, but rather one based solely on preserving the economic environment.

At this point, authorities don’t even know the origination of COVID-19. In one of the most recent press conferences, the leader of the free world suggested testing certain types of treatments, which I will not repeat here (out of the concern of the safety of our viewers). These types of suggestions, however, show how far behind we are in dealing with COVID-19, or even understanding the disease.

That press conference served as the catalyst for this video report.

Policymakers -- tell Americans the truth; do not send them irresponsibly to their deaths.

What today’s concerns over COVID-19 may mean to the stock market is a different thing, altogether, however, as the Fed seems ready to buy the worst of the worst junk-rated debt, and Treasury seems poised to bail out the worst of the worst companies from airlines to the overleveraged oil and gas firms. Moral hazard is running rampant, and prices in the stock market continue to be severely disconnected from general economic conditions, something we’ve talked extensively about in the past.

We’ve also explained how the U.S. economy could experience a Depression-type scenario, even as the stock market could be setting up for an irrational blow-off top scenario, as prudent and responsible investors are forced to play catch up in a marketplace that may very well end up seeing many of its largest corporations nationalized via equity stakes; their share prices propped with tax payer money as many Americans sadly remain out of work.

Right now, however, the markets seem to be largely looking past any and all bad news, even negative oil prices, perhaps holding the view that not only will a vaccine for COVID-19 somehow be broadly available before 2021, but that economic activity will somehow return to normal before that time, setting up for a valuation of 15 times pre- COVID-19 2021 numbers, or about 2,940 on the S&P 500. At current prices, however, the market has already discounted a full return to pre-COVID-19 economic conditions.

That, however, doesn’t mean stock prices cannot spike from here. Even if the bull case comes down to unlimited quantitative easing, runaway government spending, massive bailouts of any and all companies, and a Fed/Treasury put to buy equities at any price, the stock market does not have to reflect economics. With another attack on price discovery, this time by government intervention, we may to use the tools of behavioral sciences to understand what is happening today, as anchoring to the prior highs of 3,400 on the S&P 500 continue to drive decision making and rebalancing activities.

Investors – do not let your guard down.

We believed many savvy investors were able to dollar cost average into the equity markets near the bottom of this swoon, and we’ll cover more of our favorite ideas that we released for consideration, almost with perfect timing, near the March lows. Until then, my friends, be well, and God bless. This is Brian Nelson from Valuentum.

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Brian Nelson owns shares in SPY and SCHG. Some of the other securities written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.