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The Depth Report – Novel Coronavirus and Travel Stocks

Last week we wrote about the 2019 novel coronavirus (2019-nCoV). The disease is spreading and may have changed, and we thought it was time for an update. There is speculation that the virus has mutated into a more transmittable form, but it’s unclear right now whether the virus has, or whether doctors are getting a better understanding of how 2019-nCov is transmitted. As of this writing, we’ve seen estimates that around 2,700 – 3,000 people worldwide are infected. We’ve continued to consult with Dr. Brian Meltzer, former Medical Director of the Urgent Care Center at the memorial Sloan-Kettering Cancer Center and long-time pharmaceutical industry executive.

An Update on the Spread and Severity:
The number of cases reported worldwide has gone from increasing by 300 per day to increasing by around 600 – 700 per day. Since last week, we’ve gone from 1 case in the US to 5 currently. This increase is not the exponential rise we’d expect to see out of a worldwide pandemic. The virus was identified in late December, and started spreading outside of China about two weeks ago. At this point, it’s clear that the virus can be spread from human to human. Right now, the best information is that the virus can spread via bodily fluids like saliva, or through airborne droplets from coughing or sneezing. Still, even with the virus identified in multiple large Chinese cities, and multiple countries, we’re not seeing an exponential spread of the disease. This is due to one of 3 reasons discussed below.

Reason 1: The Virus Isn’t as Contagious as People Fear:
Wuhan, China is home to over 11 million people. Millions of people left the city prior to China’s decision to impose a quarantine last week. Infected people have gotten on planes and gone to other countries. Despite that, we’re seeing only 600 – 700 new cases a day.

Reason 2: China is Understating Cases:
We’ve seen estimates that China is understating the number of cases by 10x. It’s not clear how anyone is counting these cases, but let’s assume for the moment that the number of cases in China is closer to 20,000. This is a small fraction of people who get the flu or pneumonia every year. More on that in the next section.

Reason 3: The Long Incubation Period is Masking Contagion:
Recent evidence is that this corona virus has a 14-day incubation period. Initially, doctors thought that the virus wasn’t contagious during this period. New evidence is that the virus could be transmitted between people during this 14-day period when a human carrier may experience no symptoms. The conclusion is that while we’re not seeing a large increase in cases on a daily basis, it’s possible that the rate of transmission could increase substantially over the next two weeks.

Let’s Put This All in Perspective:
Right now, reports are saying that about 3,000 people have become ill, and around 80 (about 3%) have died. That’s a tragedy for the families of each of those 80 people as well as for the people who are sick and scared right now. With proper respect to the people currently suffering from the corona virus, we think it’s valuable to put all of this in perspective.
We compliment Bill Ackman on presenting a well-thought-out plan to protect both the public health and the economy. We urge our readers to continue to exercise caution and maintain safe social distancing for the immediate future. And we wish everyone good health.

Every year, in the US, 5% – 20% of the population gets the flu (17MM to 66MM people). Worldwide, 5% – 10% of adults and 20% – 30% of children get the flu (about 1.1 billion cases). Worldwide annual flu deaths range from 250,000 – 500,000 according to Health Vigil and 650,000 according to the World Health Organization.

Every year, in the US, 3 million people get pneumonia and 60,000 die from the disease. Worldwide, there are 450 million cases of pneumonia with about 3 million deaths in 2016. That’s a fatality rate of around 1% – 2%.

Even if the spread of the corona virus expands by 100,000 times, that would make it less than 1/3 as bad as a typical flu season.

We’ve read rumors that the Chinese government is under-reporting the number of corona virus cases by listing the cause of death as pneumonia. It’s hard for us to evaluate that claim, but we consider that to be possible. Either way, whether 3,000 people have the corona virus or 30,000; whether 80 people have died or a few hundred have died, this disease has caused much less suffering than the typical flu season or an annual pneumonia toll. What we’re seeing is the media amplifying a scary message. We further note that like pneumonia, the corona virus is dangerous to the very young, the very old, and the already sick. For a relatively healthy person, it’s a temporary discomfort.

The Breathless Conspiracy Theory:
Wuhan is home to one of China’s level 4 (highest level) biolabs. In addition, in 2017, Chinese nationals were found to be exporting a corona virus out of the lab in Canada where they were working. Some have speculated that this is too much of a coincidence and the virus was released from the lab accidentally, or as an experiment. While it’s exciting to imagine the Chinese have created their own Umbrella Corporation from the Resident Evil videogame, right now there’s no proof, and we’re not linking to that kind of speculation. If we see real proof, we’ll update you.

Effect on the Travel Stocks:
The airlines, the cruise lines, and the Macau-based casinos have all seen a huge downturn in their stocks. Some of this is concern based on reality. The cruise lines; Royal Caribbean in particular, do sail out of China, and Royal Caribbean and Costa Cruises (owned by Carnival) has temporarily shut down some China-based ships.

This Saturday brought the start of Chinese New Year, and the year definitely got off to a ratty start in Macau. Golden Week visitors were down 49.9% and Macau tourism from China was down 80%. Some facilities in Macau have either closed attractions, or closed for any new business.

These travel-related companies are going to start announcing fourth quarter earnings shortly, and are going to offer abysmal guidance for the first quarter. Right now, business is terrible, and these companies don’t know when the quarantines, and travel bans will end. Dr. Meltzer and I believe that this virus will burn itself out like all viruses do, and will do so with a much lesser human toll this year than common diseases like the flu or pneumonia. We think these travel-related companies will report terrible first quarter earnings, but will be back to business as usual later this year.

We like buying stocks that are down on temporary bad news. 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.

What it Looks Like if We’re Wrong:
We make the same note here we did last week. Our analysis is based on what we’re seeing with the 2019 novel corona virus as it currently exists. If the virus mutates into something more contagious and more deadly, that would change everything. This outcome is unlikely, but not impossible. To the extent that you are concerned about this outcome, we advise stocking up on food, water, medical supplies, anti-viral masks, and finding a path out of crowded cities. In this scenario, stock market returns will not be your primary concern.

Update 1:
Since we wrote this piece last night, the Chinese government has updated the virus numbers. We’re now seeing 4,700 cases worldwide, a roughly 50% increase overnight. While 4,700 cases aren’t a lot, this does represent a faster transmission rate which will continue for a while as people in the incubation period start to show symptoms. The death toll has risen to 106 making the mortality rate a little over 2%. Macau is reducing contact with the mainland which will be a problem for the gaming companies in the short-term.

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