the condition or status of a(n) … organization when operating …or as if a state of war existed.https://www.dictionary.com/browse/war-footing
This week we’ll delve into the dark side as 2020 is rapidly evolving into a nightmare for investors. While stabilizing a little this week, I believe the market can easily take another leg down. Just let the headlines sink in a little … questions on the length and breadth of the pandemic and the efficiency of the mobilization of the government’s economic response. Meanwhile the numbers roll in – record unemployment and GDP contraction. Pundits are debating whether this is a recession or even a depression – you never are quite sure until you’re in the middle of it. The icing on the cake? Earnings season is upon us with some nasty surprises likely in store. So what’s an investor to do? First and foremost … maintain your sense of humor in order to keep your perspective intact. Here’s one for the Hormel investors:
Many DGI folks are in the selection phase – identifying the potentially weak links. The ones that could be in the position of cutting, suspending or even only maintaining (not growing) their dividends. This is where it gets tricky as geography, industry, diversification and geopolitics need to be incorporated into relative financial strength of a company with the estimated disruption time frame on earnings as the divisor. Best of luck with that model. Particularly when there is little consensus on when the US will fully reopen for business. Not mentioned publicly is the liability factor. Will the government indemnify consumer-facing companies from lawsuits arising from contagion?
The EU banking regulator now “urges all banks to refrain from dividends distribution or share buybacks which result in a capital distribution outside the banking system, in order to maintain its robust capitalisation” through at least October. Australian and New Zealand banks are also scaling back and there are calls in some quarters for US banks to do likewise. I take this as a signal that regardless of the daily message being delivered, there is some feeling this won’t be enough – and it may last a little longer than some would hope.
Florida tourism appears to be closed at least until June 1st with Universal’s announcement. Schools remain closed with remote learning in full swing and graduations postponed. We’re looking at even odds that the granddaughter’s first college semester will be distance learning as well. Four small businesses on my walking route have been shuttered, so there is tangible evidence that change is afoot.
My approach to investing and life has always been to prepare for the worst but hope for the best. With the prospect of a depression looming ever larger, my realization is that my portfolio is not on war footing. In fact, I remain unsure exactly what war footing would look like given the circumstances of today. The one certainty at this moment is the government has successfully recruited several private sector companies to marshall the distribution of the first wave of the largess. Ones from my portfolio include, Blackrock (BLK), State Street Bank (STT), Paypal (PYPL), Intuit (INTU), JP Morgan (JPM) and Bank of America (BAC). Little doubt these will generate new business with the initial volley.
If the economic hit worsens or broadens, there is but one historical reference to use as a guide. Granted the causation differs, but we’re only looking at outcomes. During the Great Depression, the baseline differs as we were a creditor rather than debtor nation and a more industrialized rather than service economy. The human factors (I think) would be similar in nature to enable a broad brush comparison.
The major difference between the eras is that then, movies and events provided an escape from reality – today, this outlet is non-existent with social distancing and AMC Theatres (AMC) may now require a bailout to stave off bankruptcy. Venue operators and concessionaires loom large in this equation as well, although diversification may limit some of the impact – or worsen it. Companies in my portfolio waving caution flags in this regard include, Disney (DIS), Comcast (CMCSA), Compass Group (CMPGY) and ABM (ABM). Non-portfolio public companies include Aramark (ARMK) and Sodexo (SDXAY).
A 2008 analysis by Dave Chase (which was geared more towards the role advertising played) did present some useful findings:
% DECLINE IN CONSUMER SPENDING BY PRODUCT TYPE
Perishable – meat, vegetables, dairy products, prescription drugs
Semi-Durable – clothing, furniture, preserved foods
Durable – automobiles, home appliances, electronics,, firearms, toys
Services – haircuts, doctors, car repair
While past performance may not be indicative of future results, if human nature and the self-preservation instinct remains intact there should be some correlation. My investments don’t quite match these categories and the task at hand is to perform more research – especially where secondary effects may be present, one example (of many) being Southwest Airlines (LUV) capacity cuts impact on ABM Industries (ABM).
This line of thinking will probably be prevalent this year. But I’d be more than happy to chuck it in the trash if, as the President promised on February 28th, “It’s going to disappear. One day, it’s like a miracle, it will disappear.” And may that day be soon.