The Depth Report – Depth Check – Net Short

Last Monday, we wrote a report stating that we had gone net short in our portfolio. This was a result of the specific way the corona virus was spreading combined with concerns about the associated economic disruption. A lot has happened in the last week, and we thought it was a good time to revisit our analysis and predictions.

What We Got Right:
We established a large cash position several weeks ago, and went net short two weeks ago through options spreads. The market was down 11.5% last week, and set records for speed of descent. The market still finished down on Friday despite Federal Reserve Chairman Powell indicating the Fed would take action to protect the markets.

In a section titled “Why This Has to Get Worse Now”, we explained how people without symptoms and with no way of knowing they were sick were spreading the disease. We saw huge increases in cases in South Korea and Italy. We also saw the first case of person to person transmission in the US, and unfortunately, the first US fatality from the disease. The disease is indeed spreading.

Finally, we advised people to consider non-portfolio concerns, and stock up on food, water, medical supplies, cleaning supplies, and prescriptions. The mainstream media has just started to advise people to start preparing for a possible disruption of supply lines and beat projected mad rushes to stock up on supplies. We continue to think this is solid advice, and note that the worst-case scenario for this kind of preparation is you end up with extra toilet paper, canned food, and water that you can use later in the year. Let’s hope no one ends up needing protective masks and medical supplies.

What We Got Wrong:
Nothing this time. Understanding the way the virus was spreading and being short was the right move.

We admire Chairman Powell’s desire to do his best, but this isn’t a problem that can be solved with low interest rates. We continue to have a large cash position and a large option-based hedge. We did cover a portion of our short position at the end of the week. We will get an opportunity to buy great companies at discounted prices, but don’t think that opportunity is today. As always, we’re happy to speak with subscribers about the specific stocks we’re watching.

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