This One Factor Will Determine the Fate of the Market

On Wednesday afternoon, the World Health Organization (WHO) finally made official what we have known for quite a while:

The coronavirus outbreak is now a “pandemic,” meaning an epidemic with widespread outbreaks across the globe.

Soon after, the Dow, NASDAQ, and S&P 500 all entered a bear market, meaning they were now down at least 20% off their all-time highs.

And Thursday saw the biggest down day in the Markets since Black Monday in October of 1987.

And even as China’s fight with the coronavirus seems to be transitioning from containment to recovery, things are only getting started in Europe and here in America.

The opportunity to stop, or at least quickly contain, the disease has long since passed. We’re now at the point of managing the extent of the outbreak that’s already upon us.

So what’s the one question?

Will the U.S. end up being more like Italy, with uncontained growth of the virus and an overwhelmed healthcare system, or like Singapore, Taiwan, even South Korea, who have limited the spread of the disease?

The biggest Reality Gap right now exists between the number of U.S. confirmed cases and how many people are really infected. The information needed to close that gap will become clear this coming week.

And here’s exactly how to play it…

Coronavirus Cases are Spiking in Europe

As I’m writing this, the number of coronavirus cases in France just spiked by 27% in just one day. Spain’s by 31%.

And Norway saw a huge increase of over 50% in just a single day.

The European outbreak is centered in Italy, where now over 15,000 people are infected and the whole country has been put on lockdown. The only stores allowed to stay open are pharmacies and grocery stores.

Hopefully the rest of Europe will be able to slow their outbreaks before they have to resort to measures like Italy, for the sake of both people and the markets.

Now, this is not an impossible task. There are some success stories out there – countries that managed to stay on top of the coronavirus and kept it from getting out of control.

Singapore, Taiwan, and even South Korea, to some extent.

Whether America ends up like Italy or like Taiwan will decide where the market goes next. So let’s take a look at how these success stories managed to control their outbreaks…

Testing Early and Often is the Key

Singapore is, next to Hong Kong, the commercial and shipping hub of the Asia-Pacific region. It’s a very popular destination, and 3.42 million Chinese visitors came to the island state in 2018.

And yet, the country only has 178 cases of Covid-19, with a daily growth of just over 7%, mostly among visitors.

7% is nothing compared to what Europe is dealing with right now.

Or take Taiwan, the autonomous island off the coast of China. While the Communist Part in charge of mainland China claims Taiwan as its own, the island has ruled itself since 1949 as the last vestige of China’s pre-communist government.

For decades now it has been a democracy, and while political tensions with China remain high, most people can travel and trade between the two regions freely.

And yet among Taiwan’s 23.7 million inhabitants there are only 48 confirmed cases of Covid-19 – up just by one from yesterday.

Even South Korea, another close trading partner to China, is managing to keep its outbreak under control. Mostly centered around a secretive church in the southern city of Daegu, the country has managed to keep its cases down to 7,755, growing by about 3.2% a day.

The South Korean authorities have managed this without extreme measures such as China’s de-facto home detention of millions of people.

Now, to be sure, all three of these success stories have differences that Western Europe and America don’t have.

Taiwan and Singapore are both small islands where entry and exit can be easily controlled. Singapore, for example, relied heavily on blocking all travel from China early on in the outbreak.

The city-state also relies on a team of 140 “contact-tracers” who work 13 hours a day, without weekends, tracing every step of every infected person, testing and quarantining everyone they have been in contact with.

They’re helped by full access to ATM records, video surveillance from police and businesses, and other restricted information. Failure to cooperate fully is punishable by imprisonment or a $10,000 fine. These draconian measures are hard to replicate in more human rights-oriented countries such as the U.S.

And video footage is of course not as widely available in the much less densely populated U.S.

Taiwan also imposed travel restrictions in early February, but with some 850,000 Taiwanese living in China, a full stop on inbound travel was impossible.

Instead, Taiwan learned its lesson from the 2002 SARS epidemic. In January, before it was even confirmed that this new disease could spread from human to human, Taiwan began testing new arrivals, just in case.

In early February, the country began rationing the masks that the rest of the world would soon run out of. And much like Singapore and South Korea, Taiwan quickly began a massive testing campaign to find and isolate cases quickly, before the disease could spread.

All three countries also shut down public events, moved churches online, and emphasized that unnecessary travel be reduced, mostly without adopting China’s extreme measures.

If America’s outbreak were to proceed the way it did in these three countries, it would be contained within weeks.

Traders would calm down, and we would see both the economy and the markets bottom out very soon.

Unfortunately, on the one key ingredient that Taiwan’s, Singapore’s, and South Korea’s success hinged, we are failing…

Testing Delays Will Cost Us Dearly

Easily accessible, widely available, free testing was what enabled these three countries to rapidly identify and isolate their outbreaks, and avoid large-scale quarantines like the ones we’ve seen in China and now Italy.

Unfortunately, on that issue we here in America are weeks behind.

While President Trump restricted travel from China’s Hubei province early on, travel from other places where the disease had spread were slower to come into effect.

And while most other countries decided to use the WHO’s test kit for COVID-19, the federal Centers for Disease Control and Prevention (CDC) made the fateful decision to create its own test from scratch.

This meant that despite starting the process early on, while the outbreak was still limited to China, it took weeks to create a working American test. More weeks were lost as this test turned out to be unreliable, so state and local public health authorities could not use it on-site.

Instead, tests had to be sent back to the CDC’s center in Atlanta. A focus on this official test kit from both the CDC and the Federal Drug Administration (FDA) meant that labs across the country could not develop their own tests until much later.

And equally bad, the requirements to qualify for testing were far too restrictive for far too long.

While schools and universities are closing and moving to online classes across the country, and conferences are being postponed, we are still operating in the dark. South Korea, for example, has the capacity to test 15,000 people a day for Covid-19, and have so far tested 196,000.

In America, only about 2,000 people had been tested as of last week, with a daily capacity only in the thousands.

Unlike the H1N1 and Zika outbreaks, when test kits were readily available early on, the government’s delays this time means that we have almost certainly missed the opportunity to track and contain this pandemic here in America.

The true number of cases in this country is unknown, but what we do know is that the official number of 1,832 as of Friday morning is still just the tip of the iceberg.

The good news is this: The tone and urgency of U.S. officials including the White House has changed drastically over the last few days. When Americans come together to fight a problem, good things happen. And our citizenry is already taking prudent steps to limit transmission of the virus. Sporting events and other large gatherings are being cancelled or postponed. Universities are quickly going to online classes. Even my mid-sized church has cancelled services this weekend.

These are prudent actions, and by acting quickly and decisively, we can work together to limit social contact for a couple of weeks and therefore limit the spread of the virus.

But for now, test kit production is now ramping up, and the disastrous restrictions on testing have been removed or reduced. So, in the next week, we will see a real spike in U.S. cases. And probably in the week after that.

Then we’ll know where we stand. Most likely, the containment efforts will fall somewhere between Italy’s outcome and South Korea’s.

So what to do with our investment and trading dollars? We are seeing a short-term bounce on Friday morning. This could be expected following Thursday’s bloodbath. But with coronavirus cases still escalating exponentially in the U.S. and almost all of western Europe, we have not yet seen the short-term bottom in the market, so keep your long-term investing dollars on the sidelines.

For traders, in this extreme high volatility, I’m leaning toward using ETF’s for short-term trades and mostly avoiding the ultra-high options premiums in the market. Short-term rebounds in financial and energy ETFs (XLF and XLE, respectively) are tradeable – getting in and out in a short timeframe. Intermediate-term plays in China Large Cap ETF (FXI) as they focus on recovery from the coronavirus instead of containing it and in Health Care (XLV) as medical spending spikes are my current favorites.

And speaking of profitable rebounds, despite the pullbacks it has seen in recent months, the cannabis market is young and full of promise. The legal cannabis market brought in $12.8 billion last year. But the real demand for cannabis products? Estimated at $85.6 billion. That’s a $72.8 billion shortfall between supply and demand… because cannabis dispensaries can’t restock the shelves fast enough to meet the soaring demand in this industry.

Four of the brightest minds in cannabis recently gathered at the 2020 American Cannabis Summit – and they revealed what could be the three hottest trends in cannabis this year. We’re talking about plays with the potential for gains of 288%… 790%… even up to 1,000%. But you’re going to want to jump on these trends before federal legalization – because once the institutional money starts pouring in, the prices could shoot through the roof. You can view the entire Summit right here.

Great trading and God bless you,

D.R. Barton, Jr.

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charles A Affel

Right on with the testing lag comment. Today, Friday 3/13, during the president’s declaration of national emergency, Yahoo Finance announced their research of CDC test reports to the states. This revealed that the CDC reported out on just 100 tests this week. On the whole I liked the federal approach which had some refreshingly novel elements. The experts were generally encouraging and would have been even more credible if their repetitive fawning over the Pres hadn’t been so nauseating.

Neville Robeson

And in the end, big pharma will make a mint with yet another ineffective vaccine footed by taxpayers.

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