Market Update – 03/19/2020

First and foremost, I wish all of you safe health during this very dangerous period. I do not believe anyone can remember a time when our country was shut down for a period of weeks or months. It is going to be very difficult for many people in all types of businesses. Having just come off a period of record employment and economic growth, hopefully the resilience of the country is better than the market is anticipating. In time, I can’t imagine most Americans will not be chomping at the bit to get out of the house and spend some money.

As you are aware, stocks are currently experiencing their sharpest decline in history. There have been very few places to hide. The transportation stocks, financials and oils have all been slaughtered. As I write this letter crude oil is trading at $22/ barrel – significantly below the price required for even the most efficient operators to replace reserves. The question for the industry is – who has the staying power to weather a prolonged period of oversupply? I feel confident Exxon and Kimbell Royalty Partners will be survivors, their current rate of dividends, probably not. As for Schlumberger, debt due for 2020 is relatively minor, but we will have to see what their plan is in a world of potentially very slow activity – the dividend I’m assuming will be the first thing to go.

The airlines, an unprecedented stoppage. Government assistance is virtually guaranteed. Rolls Royce, after just announcing an excellent quarter, will struggle due to airplanes being parked and new engines being delayed or cancelled.

The banks, a complete meltdown. I thought you might be interested in knowing the Federal Reserve’s “severely adverse scenario “stress test they must pass in order to pay dividends to shareholders or buyback shares – the unemployment rate climbs to 10%, the economy drops 8%, housing prices fall 25% ,the stock market falls 50%, treasury bill rates fall towards zero, the yield on the 10-year treasury drops to .75%, and the vix, (volatility index) hits 70. Wells Fargo, J.P. Morgan and Citigroup all comfortably passed! Even though most of these requirements are still a long ways away, the group this week decided to suspend their share repurchases in order to have excess capital available for their clients. The right thing to do for our country. Their generous dividends will continue to be paid.

As for the rest of the portfolio, I feel very confident in the future of Berkshire Hathaway, Apple, Google, Facebook, Alibaba, Johnson&Johnson, Nestle, Diageo, Starbucks and gold. FedEx is struggling, but online shipping and express delivery is currently seeing a rebound. As for new additions, I would like to own Amazon, Visa and Mastercard on further declines. Consumers use of electronic payments and online activity will only continue to grow.

So where do we go from here? I guess we could continue down another 20% if things were to get really bad, that is certainly what the charts and technicians are looking for. But no one knows. On the other hand, if there was a hint of a potential cure or slowing of the virus it could quickly go up 20%. Remember, if you had invested at the highs in 2007, held on through the 57% decline in 2008 -2009, you were back to breakeven 5 years later. But you had to stay the course! If it takes 5 years or 10 years to get back to last month’s high from yesterday, that is a 40% return! The most you can make sitting in cash by comparison is around 8%. That is a huge difference, history tells us to hang in there!

To give a little positive perspective on the values being created by the current selloff, I have attached a link from the Oakmark Funds, an outstanding manager with over 40 years of successful investing experience.

In the meantime, let’s all stay calm, be safe and have faith. I cannot imagine given a reasonable amount of time things will not be feel a lot better.

David Burgess

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David Burgess