Rudi’s View: Bear Market Observations

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Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Apr 03 2020

Dear time-poor investor: better prepare for significant dividend reductions, and more negative news from oil, covid-19 and the USA

In Today's Rudi's View:

-Records Will Be Broken
-When Giants Are Wrong
-The Strong Will Be Stronger
-Banks Will Cut Dividends
-Oil Producers Under The Pump
-Infraboom, Infra-Kaboom?

-The Data Crunch

By Rudi Filapek-Vandyck, Editor FNArena

Records Will Be Broken

It was one of the easiest predictions to make when I predicted in mid-March: expect a lot more negative news from the USA.

That was not a political statement. It was simply an assessment that the world's largest economy was ill-equipped and unprepared for what was yet to unfold, with the covid-19 pandemic about to hit its exponential trajectory on American soil.

The situation on the ground has turned a lot worse since, and there still is no clear vision as to when the unfolding human tragedy, and economic damage, might end. Don't automatically assume that when this unfolding tragedy hits its peak life can quickly move to normal again.

If governments learned one thing from the Spanish flu pandemic more than one hundred years ago, it is that opening up too soon will simply trigger the next wave of infections. Already reports are out this is now the problem some Chinese regions are struggling with.

In the meantime, the 2020 pandemic & Bear Market are breaking all kinds of records, already recording the most rapid collapse of markets in the shortest time frame. Excessive volatility is likely setting another record as well.

Meanwhile, in the real world, central banks have unleashed the largest support programs -ever!- to make sure the world's credit system does not freeze or collapse, leading to the largest increases ever recorded to central bank balance sheets, while official cash rates and bond yields have equally set new all-time low records.

Still to come: the largest drop in economic activity inside one quarter plus the quickest increase in unemployment numbers, ever. Finally, the magnitude of what exactly is happening is dawning on governments, economists and others.

The largest government stimulus programs -ever!- are still likely to be enlarged further, and they will need to be in order to stave off all-time records in terms of personal and business bankruptcies, and to prevent setting new all-time records again later in all of the above.

Yet to follow: gigantic sums to prevent entire industries from collapsing. (A lot more than what is being publicly discussed at the moment). The old joke about privatising the profits but socialising the losses will dominate the picture in most economies in the months ahead. When I wrote "this is the Bear Market that changes the world" in March, some responses from readers suggested I was being alarmist.

Pretty confident that by the time all this is over, the general consensus will be that I wasn't nearly hyperbolic enough in my description and predictions. Regarding the latter, I'll happily repeat what I wrote last month:

But let there be no mistake: the answer to the question of how do we ever get out of this mess is still the same: with more money. Loads of more money.

This time governments around the world will join in with central banks. This is why this Bear Market is changing the world in front of our eyes.

All of us ain't seen nothing yet.


When Giants Are Wrong

When a giant among investment experts like Howard Marks discovers he was a bit too quick in assuming the quickest sell-off in equities -ever- had created an abundance in opportunities for longer-term oriented investors, he changes his mind. What else is he supposed to do?

Howard Marks' latest update to investors can be accessed here:

https://www.oaktreecapital.com/docs/default-source/memos/which-way-now.pdf

The Strong Will Be Stronger

Economic recessions and related Bear Markets are nature's way to separate the wheat from the chaff, which is a fancy way for saying when this crisis has been dealt with, the strong will be even stronger vis-a-vis the weaker players in each market.

This does not by definition imply corporate failures. Companies who face a recession as fierce as this one, while not being in the most healthy condition, can suffer so much damage to their financial situation it might take many years to salvage.

In the meantime, the strong and healthy competitor is able to launch new products, add extra services, invest in future growth, build out a wider moat, and grab some extra market share and leadership too.

The benefits from being the most solid, highest quality operator is something that might not always be apparent during the good times, but it will show up during and after this year's recession. No doubt about it.

The first such analysis I have come across in recent weeks was released by Wilsons, following Cochlear's ((COH)) surprise equity raising at $140/share.

Not only will the extra capital assist the world's leading cochlear implant manufacturer from successfully navigating this very tricky period, when no elective surgeries are being conducted in order to free up as much space in hospitals as possible to cope with covid-19 patients, Wilsons is equally convinced Cochlear will emerge in a much stronger competitive position.

This assessment is based upon the fact that major competitor Advanced Bionics has the added disadvantage of reputational set-back following the recall of its HiREs Ultra/3D product. Two other competitors, Sonova and Demant, have exposure to the retail audiology channel, which in the current context translates into exacerbated covid-19 impact.

This is why Wilsons, despite heavy downgrades to forecasts, retains its positive Overweight rating alongside a valuation of $213.15 for Cochlear shares. It's not about what is happening right now, it's about what is likely to unfold in the aftermath.


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