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The Depth Report – Coronavirus – Truth, Rumors, Lies, and the Market

Last week, we updated you about the 2019 novel coronavirus (2019-nCoV). We considered the possibility that China was under-reporting cases, and that travel-related companies were “going to offer abysmal guidance for the first quarter”. While we continue to believe that the virus will burn itself out, because we didn’t believe that all the bad news was reflected in the market, we concluded with this advice: “We are looking for the right entry points for specific airlines, selected cruise lines, and one gaming company. We welcome subscribers to contact us for more specific information.” We continue to believe that this is the correct approach.

An Update on the Spread and Severity:
Over the past few days, the number of official new cases has been increasing by about 2,000 per day. The vast majority of those cases are in China, and the statistics are being reported by the Chinese government. At this point, we’ve seen too many reports that China is under-reporting cases to dismiss that possibility. We’ve seen estimates that the number of cases in China is actually somewhere between 100,000 and 250,000.

In our last report, we noted the possibility that China was understating cases, and given some of the facts we’ve seen, that’s certain to be true. At a minimum, Chinese hospitals are too overwhelmed to treat everyone and as a result, sick people aren’t being seen or diagnosed. In addition, these hospitals have run out of some testing equipment meaning that even if a sick person sees a doctor, and reports corona virus symptoms, without a positive test, there is no official diagnosis.

Finally, the Chinese government has known about this disease for over two months, but waited until there were thousands of cases to sufficiently warn the public and begin quarantine procedures. By the time the government had acted, millions of people had left Wuhan where the initial outbreak took place.

While we don’t believe the official statistics have any relation to reality, many of the skeptics and critics who are estimating the number of cases at hundreds of thousands don’t have access to any relevant data either. We are left with the conclusion that one side is lying, and the other side is making up facts and estimates. While we can conclude that the spread of the virus is worse than the official numbers say, we have no idea whether the truth lies somewhere in-between, or even above the pessimistic estimates.

The Fatality Rate is Worse Than Reported:
As of this writing, the Chinese government is reporting about 300 people have died. We’ve been tracking the official number of reported deaths vs the reported cases, and the government has kept the reported fatality rate in the 2% – 3% range. That’s a bit misleading as illness will always precede death from illness, but the percentage increases in cases and fatalities have been similar.

Last week, we noted that one way the Chinese government was keeping the death rate down was by listing the cause of death in corona virus cases as severe pneumonia. We’ve now seen multiple reports that the government has now moved past mislabeling the cause of death, and has just started sending trucks of the dead directly to a local crematorium. While we’ll never know the actual death toll from the virus, it’s clear that the disease is more dangerous than had been initially reported.

Two additional key points are worth relaying. The first is that we’re starting to see reports of otherwise-healthy people dying from the virus. The initial reports were that only the old, very young, and already ill were dying. The second is that we’ve spoken with a knowledgeable Center for Disease Control (CDC) official off the record. This CDC official thinks the death toll from the virus is 4x – 5x the official number reported by the Chinese. While they acknowledge they are making an educated guess, they are the most knowledgeable and credible source we’ve been able to find on the topic.

The Breathless Conspiracy Theory is Looking Less Crazy:
Last week, we reported that there was a conspiracy theory that involved the Chinese either accidentally or intentionally releasing the virus. We noted that Chinese scientists getting caught exporting a corona virus out of a Canadian lab, and Wuhan being home to a level 4 (highest level) bio lab was an incredible coincidence, but didn’t attach a lot of weight to the theory. These kinds of viruses can come from the animal kingdom, and cross contamination in an animal market was a much simpler explanation than a 3-year plan for the Chinese government to release a weaponized virus. Occam’s Razor dictated that the simple explanation was more likely to be correct.

In the last few days, we’ve seen two key pieces of evidence that have caused us to modify our view. First, the British medical journal, the Lancet, is reporting that they have tracked early cases of the corona virus in people who had no connection to the animal market, or to people who had been to the animal market. The second is that Indian scientists have found four insertions of HIV proteins in the current strain of the novel corona virus. That points to a bio-engineered virus. The theory is that the HIV proteins were inserted to make the virus more contagious, but it’s too early to know for certain.

A Comment on Statistics, and Their Misuse:
We’ve seen reports claiming that the spread of the disease outside of China has been faster than within China. However, the only place with a meaningful sample size is within China. Just because a US citizen with the virus infected her spouse, that doesn’t mean that US infection rates will be 100%. More importantly, if the Chinese government is lying about the number of cases, there’s no way to evaluate the claim that the virus is spreading faster outside China.

Complicating Factors:
There are now reports that approximately 18,000 chickens have been killed in China due to an outbreak of the avian flu. As of now, we haven’t seen any reported cases of transmission to humans. If that happens, it’s going to be a problem as the Chinese medical system is already fully extended in dealing with the corona virus.

The Impact on Travel Stocks:
We continue to stand by our initial conclusion that this virus will be a 1-2 quarter event, but that all the bad news is not yet reflected in the market. Macau has reported that daily visitation is down about 90% vs last year, and on last week’s earnings call, Sheldon Adelson, the Las Vegas Sands CEO, said that once the virus subsides, Macau will be back to business as usual. Company President, Rob Goldstein, mentioned that after prior emergencies, they saw pent-up demand and an increase in post-crisis activity.

Royal Caribbean put out a press release stating that the company had halted sailings on one ship that sails out of China for several weeks at a cost of $.10 in earnings. If the ship has to remain docked until the end of February, then the cost would increase to $.20 or about 2% of 2020 estimated EPS.

While we believe those numbers to be correct, there is an additional concern in the first quarter. Last week, a Carnival ship was quarantined because one passenger had symptoms that mirrored corona virus symptoms. Once it was determined that the passenger had the flu, everyone was allowed to depart the ship. Still, imagine being quarantined on a ship with people who had a contagious disease. We wouldn’t be getting on a cruise ship right now, and we have to assume that when Royal Caribbean reports earnings next week, we’re going to hear that demand and pricing have declined for the first time in years.

Airlines are also cancelling all flights to and from China, and people are hesitant to get on a plane during a pandemic of uncertain seriousness. In the end, these are significant current problems which will fade once the virus does. We continue to like to buy stocks that are down on temporary news, and it’s hard to imagine that the virus will affect 2021 earnings. As before, we are looking for entry points on airlines, cruise lines, and gaming stocks. Subscribers are welcome to call for specific stock-related views.

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