The case for buying Macau on a coronavirus fear trade keeps getting stronger every day. Here we’ll explain the reasons. First, we’ll briefly outline the reasons mentioned last week, then add a few new ones, and finally talk about what I think will be a safe and effective trading strategy. Opportunities such as this are hard to come by and when they do, most folks are too afraid to take them.
However, before we begin, let’s get the Bernie Sanders caution from last week out of the way. The Iowa conferences have just finished and the fear of a Bernie Sanders market plunge is almost off the table now. Keeping pure politics out of this, at least for markets, the results were even better than a Sanders loss. The whole Democratic party lost since there are no results, something or other crashed or whatever, and the whole thing seems like what usually happens with the election of a new US puppet government somewhere in the Middle East after the army just ended bombing it and clearing out the earlier regime in its newest attempt to spread democracy and show US exceptionalism. This time at least, Trump didn’t have to summon for airstrikes on Iowa. It was unnecessary, and fortunately nobody has been killed till now.
A very quick review on why not to be alarmed from last week. As reported by calvinayre.com, the mortality rate of the new coronavirus is already dipping, now at about 2% from 3%. It’ll keep dipping. According to the China National Health Commission, the median age of those succumbing to the virus is 75. February is peak flu season, which ends in 3 weeks, and the quicker this thing spreads, the quicker it will burn out. Here are some more reasons why coronavirus alarm is baseless and the selloff will reverse.
The Totalitarian Attitude Of Macau
After the whole mass famine thing which claimed about 45 million people 60 years ago, China may have forsaken a pure communist approach; however, the political culture is still noticeably totalitarian. The means the government will employ, and indeed are employing already, to nip this epidemic in the bud, will be intense and brutal, by Western standards at least. Yesterday, Macau was featured on the CNN homepage, here is what was described there.
The gambling hub is described as a ghost town with ambulances filled with health workers covered in hazmat suits wandering in the streets. The casinos are mostly vacant, every visitor has a mask on at all times except during obligatory thermal scans to ensure nobody who enters any casino has a fever. January tourism has dropped 87% year over year, hotels at 50% capacity. Macau police rushing room to room like Gestapo, chasing visitors from Hebei province where Wuhan is situated and forcing them into a 2-week quarantine. If they object, they are being kicked out of Macau completely. Now Macau hospitals have special coronavirus sections cordoned off with special air filtration systems. There are widespread calls to totally close down all casinos. At this juncture, that may be the cleverest choice if only for economic reasons because casino staff already greatly outnumbers the distributed diehards still gambling.
The harder the fall, the quicker the recovery
All these dull statistics will have a huge negative effect on forthcoming earnings reports, lowering expectations drastically, which is bullish. Keep in mind also that all the economic damage here is willingly self-inflicted. The virus hasn’t ruined anything actually. A negative feedback loop is in play here. The stronger the economic restrictions imposed to get this thing under control, the worse the impacts on the casinos will be, but simultaneously, the quicker the epidemic will be brought under control, and so the quicker Macau will recover. Instead of strictly from a technical regression-to-the-mean chartist view, from a fundamental view as well, the harder the fall, the quicker and harder the rebound.
Social media is making a mountain out of a molehill
It can be debated that this outburst is really the first social media epidemic scare. Social media lends itself to hysteria, lack of forethought, hyperbole, knee-jerk instinctive reactions, and outlets clamoring over each another trying to beat competitors with how startling they can make their headlines to capture the most clicks. Quick example: Last week’s article garnered a comment calling me “totally wrong” and referring me to the Twitter feed of a Chinese epidemiologist, Dr. Eric Feigl-Ding, enjoying a huge rise in his social media popularity recently.
Yesterday, the first pinned tweet I saw on his feed was how a number of his earlier posts were deleted because they cited a disturbing article about the virus which was not yet peer-reviewed. Today’s pinned tweet is of still another retraction of still another quick statement made by a virologist who had previously claimed that the virus can be transmitted before symptoms arise. Now it’s unsure and she has apologized.
Thorough trading strategy
Again, fundamentally speaking, I am still not a Macau bull; however, there is a good trading prospect here. Seasonal monetary growth usually rises around May, and we can anticipate the same this year on steroids with the Federal Reserve on everlasting repo-printing overdrive. China’s monetary policy usually follows the Fed, though amplified. The People’s Bank of China has already announced steps which will add $174B in extra liquidity to soften the blow. This is all the more money which will be plowed back in whenever the scare is over.
I recommend taking a 5% position in Macau through Wynn, Melco, Galaxy, or Las Vegas Sands, divided into two parts. 3% should be the core Macau position for the trade, to hold until mid-to-late May. 2% can be used for day trading over the next 2-3 weeks. Macau will probably have unstable swings up and down with the headlines. Buy the dips and sell the rallies with that 2%.
Putting this together, the full trade would mean buy 5% in, say, Wynn. On a strong up day which we can define arbitrarily as 2% gains or more in the stock, sell 2%. You are left with 3% core to hold until mid-to-late May. On the next strong down day, buy back 2%, and you are back up to full 5% positions. Another strong up day 2% or more above your earlier reentry, sell 2% again, and so on through February. Once instability settles down and alarming headlines subside, you’ll be left with a 3% position to ride until May. If you can’t manage the day trading, just take a 3% position and hold until May. That’s the safer way to do this in any case.
If I’m mistaken and the Wuhan coronavirus sweeps the world and totally crushes the global economy for months, then you’ll lose around 2.5% in a worst case scenario if Macau stocks are halved all of a sudden. In my opinion, the chances of that happening, are very unlikely.