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” Lets take off the systematic risk off the table, besides the scary virus” – Jim Cramer

Systemic risk? Or simply a global slowdown that has yet to be priced into the stock market? Lets bet it is the latter, plain and simple, even as the stock market didn’t react that way.

If China does a total shutdown of their economy by keeping people away from work or staying at home, so they can’t make anything in a manufacturing economy and they can’t go out and spend to the way the government would like to them to.

Influenza is a terrible disease. Did you know that 15 million people have caught the flu so far this season just in the United States alone? Do you know that 140,000 people have been hospitalized? Or, did you know that 8,200 people have already died? China did its best to hide the SARS illness, which, while not as infectious, was certainly more lethal than the coronavirus. The covert pictures of hospital scenes are horrendous, but they can be so in our country, too. I wonder even if the Chinese are being overly cautious to the point where the lockdowns of 18 cities could be counterproductive.

The possibility of all of us wearing masks and gloves when we are in the public places may be far-fetched, but even if that happens, there will be repercussions and troubles, but we will get through it. Regarding this as nowhere near the hazard of Ebola, although even in the epicenter of that illness we had Dr. Mark Bristow then of Randgold, talking about doing business and simply declining to shake hands. Get some Purell, carry some Clorox (CLX) Wipes, wear a mask, but more important is that to keep your arms to your sides and don’t touch your face. If you haven’t, get the current flu shot, if only to be able to find out if you have the coronavirus and not the regular flu.

A lot of commerce will be slowed down — more on that in a moment — but nothing will be ground to a halt the way that systemic risk would grind it to a halt. To refresh, we had systemic risk from 2007 to 2009, when a combination of ridiculously poor lending combined with abstruse instruments that bet on that lending brought down a host of gigantic banks and almost brought down the entire lending system.

If a huge percentage of people in the country come down with the flu — say ten times the 15 million that already have — there will be a fraction of the spending we have right now. But that won’t cause any company of considerable size to be threatened and credit should remain available provided that the Treasury Department and the Fed recognize the risks of a temporary cessation in work and spend.

With that preamble, let’s do the kind of security analysis you have to do if you are going to try to navigate this moment.

There are the stocks that are in the midst of the blast zone and aren’t worth speculating on, because you have no idea how well or poorly they are doing. Including all Chinese stocks in this category. Buying Alibaba (BABA) if it went much lower because that’s how people will shop, but they have to have the money to spend.

There are the derivative stocks that rely on Chinese spending for their growth. Those include Starbucks (SBUX) , Apple (AAPL) , Nike (NKE) , Nvidia (NVDA) and YumChina (YUMC) . All of these deserve some sort of haircut and that’s what they are getting. Each one is now worth waiting for, because they are on the verge of reporting and unless they can reassure that spending is going to continue on the same trajectory — something that will be difficult to do — we are going to get a better chance to buy. There’s also the gambling companies, Wynn (WYNN) and Las Vegas Sands (LVS) : Numbers have to come down so hard that they aren’t worth buying, even if you think that there’s a vaccine on the horizon.

There are the travel stocks. These went down about 25% during the SARS epidemic 17 years ago. We have to use that as a benchmark and we shouldn’t touch them until they do. Given that every sector trades like an exchange-traded fund, because there are so many of them, you can’t try to pick one and ride it.

The companies that will be hurt by a worldwide slowdown. That’s many manufacturers like Caterpillar (CAT) who rely on China for business. Lets say Boeing (BA) , but that’s already so convoluted, who can tell. Also, 3M (MMM). It is the same with United Technologies.

A worldwide slowdown plus innate fear of what’s going to happen mean the buying of treasuries. That means lower interest rates. Lower rates mean lower earnings for the banks — hence why they have been coming down and probably keep coming down. Fintech companies that rely on volume could be cut. You would need a lockdown like they have in China to shutdown retail — although we can see some just staying home and ordering from Amazon (AMZN) .

We are back to the domestic stocks, housing, food, drugs including biotech, and social media. Home entertainment: Netflix (NFLX) , Comcast (CMCSA) , Disney (DIS) — yes, Disney, China is not as important as the rest of the franchises. They do work. 

Now, because we are taking off the table the systemic risk, it is a matter of price for all of these. We can’t be too eager about anything, but now we know the pecking order of what’s worst to best given the possibility of several weeks of a selloff. Knowing that this seems trite, but lets come back to this week two years ago, when we had a hot employment number and then a bizarre Volatility Index (VIX.X) unwind that few saw coming.

Stocks quotes in this article: BABA, AAPL, NKE, NVDA, YUMC, WYNN, LVS, CAT, BA, MMM, AMZN, NFLX, CMCSA, DIS, VIX.X, CLX, SBUX

Source: The Street / Real Money


 Trader Milko Zashev


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