Of Interest, October 2020
Of Interest, October 2, 2020
“Yes, I believe in luck. I believe in bad luck. And I believe that I will always have it, so I plan accordingly.” Napoleon
“Victory is the sweetest when you’ve known defeat.” Malcolm Forbes
This occasional newsletter is a compilation of things I’ve found interesting or useful in the last month or so. Please share with me anything valuable you come across.
Jake
COVID-19: Are the reported trends indicative of reality?
9/29/20 This excellent piece, written by Dr. Mike Yeadon, a scientific researcher, examines false positives in the PCR COVID-19 test. British government researchers found that the false positive rate was 0.8%. While this may not sound like much, if the true positive rate was 0.1%, it exaggerates the rate of infection by 800%. Given the lack of significant testing volume in the Spring and the high rate of asymptomatic cases (which he does not believe are very contagious due to low viral load), he distrusts the early data as well. The article presents a corrected daily new cases chart which estimates the Spring based on deaths and hospitalizations and the recent data by correcting for the false positive rate. The edited chart shows much higher cases than reported early on and much lower cases now.
How does this apply to the US? The article doesn’t comment, but the general theme should apply. According to Johns Hopkins the positivity rate for April was around 20% while daily tests averaged less than 200,000 across the US. Currently the positivity rate has fallen to around 5% with over a million tests done daily. Applying the 0.8% false positive rate for the test would reduce April true cases by about 4% (0.8%/20%) and September true cases by about 16% (0.8%/5%). April false positives would have been overwhelmed by the cases not detected due to limited testing, which would be a much smaller effect now. If the actual case count continues to fall, the exaggeration caused by the test inaccuracy will grow. That said, the effect of a 0.8% false positive rate would be much less in the US due to a higher positivity rate.
A USC study of 863 adults found that 4.31% were positive for COVID-19, which projected out to a community infection rate over 40x what was reported at the time (April 10). This implies many more people have already beaten the virus, and the fatality rate was much lower than believed and the trend is much more positive than reported. Time will tell.
Some thoughts on fixed income (bond) investing:
8/24/20 Michael Lebowitz observes the disconnect between the economic uncertainty index and corporate bond yields, concluding that the price is now set by manipulation by the Federal Reserve.
9/9/20 Famed bond investor Jeffrey Gundlach warns about the dangers of passive bond investing, which seeks to allocate according to outstanding loan value rather than analyzing credit risk. He notes the very low rate currently being earned on high yield bonds, even as lending standards tighten and defaults rise.
9/30/20 Wisdomtree highlights the need to be selective in bond investing. The HY spread has cut in half since spring, while the default rate almost doubled, going from 4.9% to 8.7%, and is likely to go to double digits.
Contact me to learn about a systematic, principles-based approach to fixed income investing instead of passive investing or simply arbitrarily picking individual bonds.
Has the underperformance of the Value factor hit its extreme?
8/19/20 Smead Capital Management rebuts the myth that there has been a fundamental change to value stocks to warrant a wider discount to growth.
7/24/20 John Mauldin argues forcefully that the steep rise in the US stock indices is a result of investors bidding up a small number of stocks with no regards to fundamentals. He shows that there are opportunities which are not trading at historically high prices.
Work hack: put a 2 minute delay on emails being sent to stop embarrassing mistakes.
Humor: JP has funny videos on emotional distancing guidelines, how social distancing rules are created and many other topics. Warning – don’t watch if you are easily offended by people critical of the status quo.
Podcasts: The Grant Williams Podcast (long, but very thoughtful), The Brian Buffini Show, The Productivity Show, Kwik Brain with Jim Kwik
Books: First Things First by Stephen Covey, Limitless: Upgrade Your Brain, Learn Everything Faster and Unlock Your Exceptional Life (book reviews to be posted to https://rothmaninvest.com/resources/category/book-review soon.
Disclaimers:
Rothman Investment Management, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of Jacob Rothman and do not necessarily reflect the views of Rothman Investment Management or other members of the firm's staff. This letter is for informational purposes only as of October 5, 2020.
The information in this letter is not intended to be used as the basis for investment decisions and should not be construed as advice intended to meet the particular investment needs of any investor. The information in this letter should not be considered as a representation or warranty and is not an offer or solicitation of an offer to buy or sell any security.
The opinions, data, and statements contained in this letter have been obtained from sources believed to be reliable but have not been independently verified and are not guaranteed as accuracy nor does it represent a complete analysis of every material fact. Opinions due not necessarily reflect the views of Rothman Investment Management.
The benchmark for US Large Capitalization stocks is the S&P 500 Net of total returns, a market capitalization weighted index containing the 500 most widely held companies.
Past performance is not indicative of future results. Therefore, no current or prospective client should assume that future performance of any specific investment, investment strategy or product made reference to directly or indirectly in this letter or indirectly via a link to an unaffiliated third party web site, will be profitable or equal the corresponding indicated performance levels. Different types of investments and investment strategies involve varying degrees of risk and may experience positive or negative growth. Nothing in this newsletter should be construed as guaranteeing any investment performance. Historical performance results for investment indices and/or categories generally may not reflect the deduction of transactions and/or custodial charges, nor the deduction of an investment management fee, the incurrence of which would have the effect of decreasing historical performance results.
Due to various factors, including changing market conditions, such information may no longer be reflective or current position(s) and/ or recommendation(s). Therefore, no client or prospective client should assume that any such discussion serves as a substitute for personalized advice from Rothman Investment Management, LLC.