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Coronavirus, Rate Cuts, and Travel & Leisure Stocks

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The markets have broken down over 3% Thursday following a 1,180 point rally by the Dow on Wednesday. Stocks are unable to decide on a direction with the unprecedented amount of uncertainty surrounding the novel coronavirus and the monetary stimulus that should have incited hope in the marketplace. The containment of this virus now appears to be an unlikely scenario as the number of global cases continues to accelerate.

The Federal Reserve made an unprecedented 50 basis point rate cut Tuesday morning, pushing the Fed Feds Funds rate to the range of 1.00% - 1.25%. Now the markets are pricing in another 50 basis point cut for the Fed’s planned March meeting on the 18th. I do not think that cutting rates is the answer to controlling the coronavirus’s economic impact. If this pathogen spreads in the US, people will be staying home, and spending will plummet no matter what the interest rates are. We are also risking our benchmark 10 Year Treasury bond going negative, which creates a whole other bucket of issues. 

The World Health Organization (WHO) announced today that they estimate the mortality rate of this new pathogen to be closer to 3.4%, which is considerably higher than initial estimates of 1% to 2%. If this figure is accurate, it means that this disease is 34 times more deadly than the seasonal flu, which kills tens of thousands annually in the US alone.

The virus is picking up a considerable amount of steam, with over 2,500 new cases outside of China today. There are now 87 countries being affected by the coronavirus with a grand total of roughly 98,000 case. Over 54,000 have recovered, but more than 3,300 have died. Health professionals are concerned that these numbers are only a fraction of what the ultimate impact will be. 

Travel & Leisure Impacts

People are canceling trips and avoiding large public gatherings with leisure & entertainment stocks getting hammered. Since the beginning of the year, Six Flags SIX has lost over 50% of its value, with today alone taking out 11%. Tripadvisor (TRIP - Free Report) is also done a nosedive with an over 10% loss today. Disney DIS is down almost 25% this year on concerns about lost profits from its parks, despite its recent release of Disney+, a business transitioning direct-to-consumer offering.  

Both TRIP and SIX have been trending down since the beginning of 2019, with over 60% of their value wiped out. Their antiquated business models have been losing momentum, causing investors to jump ship. Disney on the hand has been making big moves to transition its business model to one that is more sustainable. The enterprise’s recent acquisition of 21st Century and launch of its monumental Disney+, illustrate this transition. Disney+ has already become a “must have” streaming service in the US. The coronavirus will have people cooped up in their homes around the world, giving the newly released Disney+ streaming platform a chance to prove its in-home entertainment worth. I think that DIS’s stock price drop off has created a great buying opportunity.

Take Away

The coronavirus is swelling and slowly but surely turning into a tidal wave as it spreads across the globe. 16 countries have reported new cases in the double to triple-digits.

I think this market drop off is creating a tremendous opportunity for those that missed out on the massive Q4 rally into Q1. I am not a buyer quite yet, but I am holding enough cash to put on sizable positions once the full impact of this pathogen can be quantified and priced into the markets. 

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