This & that Wednesday, May 27, 2020
Occasional bouts of extreme volatility are a known and expected feature of the stock market. Predicting when they occur or what specifically will set them off is another matter entirely. Nothing in life is free – the price of being able to participate in the compounding nature of equity ownership is the occasional stretch of time with uncomfortable paper losses. Stocks have done very well over long periods of time precisely because of the “risk premium” they earn as compensation for these drawdowns. Bear markets rarely move in straight lines, and historically have tended not to bottom until after a solution to the original problem has been found. As for the current problem, current estimates are a vaccine is at minimum 6 to18 months away, and we are still waiting for the manufacture and distribution of large quantities of reliable antibody tests which may allow for a coordinated gradual resumption of normal work. I believe we are going to have to live with many uncertainties until then. The next couple of quarters of earnings will be telling. - Samer Hakoura, Alphyn Capital Management

As long as companies are able to weather this storm without dilutive financing or bankruptcy, the long-term effect on their prospects should be minimal. Equity investors will likely ignore the reported results of 2020 and focus on the long-term prospects of companies in their valuations with the expected loss from this year being removed from their normalized model of the company’s enterprise value. We face a similar situation to past financial crises in that historical financial statements and analyst consensus estimates both have reduced utility in evaluating the future prospects of equities. We will need to rely on logic and qualitative evaluation of businesses to predict which companies are likely to be more impacted by the rapidly shifting situation. - Andrew Oskoui, Blue Tower Asset Management.
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