First, the Federal Reserve came out with over $4 trillion of liquidity support and is pledging unlimited Quantitative Easing. Second, the Federal Government came out with $2.2 trillion of fiscal support. Expect more support in the coming months. Third, the efficacy of Gilead’s Remdesivir has provided a real turning point in that humanity now has a treatment works to some extent and it is a building block to for future treatments against COVID-19. Remdesivir’s trial results with a double blind placebo study with the National Institutes of Health have help to extend the rebound. Fourth, state governments are easing shutdowns and companies are discussing how to reopen offering more hope to investors. Fifth, there is hope of a working vaccine produced at a record shattering pace.
 |
| There is hope of a working Covid-19 vaccine produced at a record shattering pace. |
This current Market upturn has a lot of risk. Every asset class in the world is strictly reacting and moving to any news related to the COVID-19 virus. At some point, economic reality will set in and many investors will realize that some industries and companies are changed until we have a vaccine.
The economic reality is grim in the next two years. Over 33.5 million Americans have filed for unemployment benefits in a record shattering 7 weeks. That is 20% of the American workforce. Millions more are going to do so in the coming weeks. I do not believe everyone will return to the work force right away even if a vaccine arrives. For example, several high profile retailers recently filed for bankruptcy and laying off over a 100,000 workers combined. I am not confident all of these workers will find new employment soon. Where will they go? The jobs market is in a deep recession and it will take time to come back.
A number of my predictions in my last investor letter have become reality. Some industries are getting pummeled by this shutdown. Many companies in these hardiest hit industries are suffering a total loss of revenues. Many of these companies have been able to tap capital markets to raise capital either with more debt or dilutive equity issuances. I find it troubling because in the past most companies that raise debt or issue equity is to grow their businesses through acquisitions or organic business initiatives.
Right now, these companies are borrowing money to literally burn it to keep afloat. Even when the economy picks back up, the debt will be there and it needs to be repaid or it will crush the current equity. Some of these companies simply will not survive this pandemic. Some industries will be hurt so bad that it will take more than two years to recover. Other industries will never fully recover as some consumers shift buying behaviors in the long run.
Pandemics come more often than people think. The media has been focused on the Spanish Flu of 1917 to 1918. That pandemic came in three waves. The scary thing for that one was that the third wave killed the most people. Did you also know that there were two subsequent flu pandemics that killed millions? There was the Flu of 1957-1958 that killed 1.1 million. Then the Flu of 1968 killed 1.0 million. There was a pandemic that started in 1981 that has killed approximately 30 million and it is still with us today. It is called HIV.
This is the third coronavirus in less than 20 years. SARS appeared in 2002 and MERS appeared in 2012 and COVID-19 in 2019. That is three coronaviruses affecting humans in less than 20 years. The first two coronaviruses were much more contained so the medical industry did not focus on treatments and vaccines for this family of viruses. Times have drastically changed and the whole world is focused now on coronaviruses due to the contagiousness of COVID-19. No treatment has been focused on this family of viruses until now. But we as a species definitely need to focus now as there are going to be more types of coronaviruses that affect humans in the years to come.
Only one virus has been eradicated by humans throughout history. That is Smallpox which was eradicated in 1980. The origins of COVID-19 remains to be determined. One leading theory is that COVID-19 originated from bats. That would make sense as bats are mammals, they live in close quarter, and there are a lot of them in the world. Did you know that bats make up 20% of all the biomass of mammals on the planet?
There are reasons to hope and to be concerned in regards to a COVID-19 vaccine. First we have the entire healthcare industry focusing on it. I likened smaller healthcare companies to frigates and larger ones to big battleships. Right now every cannon on every research “warship” is taking aim at this virus. The Trump Administration formed a Manhattan Project called “Project Warp Speed” which consists of healthcare companies, government agencies, and the U.S. Military to accelerate the creation of a COVID-19 vaccine. The goal is to have a COVID-19 vaccine by the end of this year with hundreds of millions of doses by the start of 2021. While this is a good thing, we needed a coordinated response earlier in my view. It remains to be seen if this is a true coordinated project with the proper funding and collaboration. There is also the question whether this will work in producing an effective vaccine in an accelerated matter. Time will tell.
Unfortunately, U.S.-Chinese relations have been contentious in recent years. This pandemic will drive a bigger wedge between the two nations that are vying for world economic leadership. There will be some economic effects in the years ahead. Expect more threats of tariffs and counter tariffs. Some American companies will shift some of their supply chain out of China. Other nations that have vied for China’s manufacturing business are unlikely to have the capacity to take on all of China’s manufacturing capacity. Trust is at a multi-decade low between the U.S. and China. However, it does not mean things can not get better in the future.
What’s Next:
I live by the mantra that we will do well in the good times. However, the key to real successful investing in the long run is to avoid total losses. If your investment can survive downturns and bad news you will live to fight another day. My investment philosophy has helped us avoid the companies that have been hit hard.
My goal is to survive the one year that no one else does. This is that year.
Therefore, we will continue to play defense while being cautiously optimistic. Note the road ahead is long for a recovery. Just look at China where they were able to take draconian measures to limit its spread in Hubei Province. Lockdowns have been lifted but many of its citizens are still not doing as many economic activities as before. In fact, weekday activities have come back significantly but weekend activities are way down suggesting many are focused on going to work and doing essential activities while forgoing leisure activities, especially ones in crowded spaces. It will take time.
However, I am very optimistic about the long term future of both the U.S. and Chinese economies. I am and will continue to evaluate businesses that have been able to generate cash flow during this pandemic. I foresee a number of opportunities in the coming months. Therefore, I am seeking fresh capital to take advantage of investment opportunities when they arise. Invest now so you can share in those opportunities as many are fleeting and will be gone quick as you have seen with the recent volatility.
I hope you and your family stay safe and happy. Take care and I look forward to the day we can shake hands and have a face to face coffee or tea together once again.
Best,
Dan H. Chen
President
Talguard Investments LLC
Disclaimer Statement:
This document and information herein represents the views of Talguard Investments LLC and is not to be considered investment advice. The information herein should not be considered a recommendation to purchase or sell any particular security or financial instrument. There can be no assurance that any securities discussed herein will remain in the Talguard Value Fund LP.
This document does not constitute an offer to sell or a solicitation to buy membership interests in the Talguard Value Fund LP. Past performance is not necessarily indicative of future results. All information provided herein is for informational purposes only.
Investment in the Fund will involve significant risks due to, among other things, the nature of the Fund’s Investments (as defined herein). Investment in the Fund is suitable only for sophisticated investors and requires the financial ability and willingness to accept the high risks in an investment in the Fund. No assurance can be given that the Fund’s investment objectives will be achieved or that investors will receive a return of their capital.
In making an investment decision, prospective investors must rely on their own examination of the Fund and the terms of this offering, including the merits and risks involved. Prospective investors should not construe the contents of this letter as legal, tax, investment or accounting advice. Prospective investors are urged to consult with their own advisors with respect to legal, tax, regulatory, financial and accounting consequences of their investment in the Fund.
©2020 Talguard Investments LLC, all rights reserved.