The market doesn’t understand the COVID-19 pain that is coming

While there are many people who don’t take the coronavirus pandemic seriously, there are some people who want to see the government take quick and decisive action on COVID-19.  But here’s the problem with the decisive action camp: the people who believe in decisive action don’t realize how bad their healthcare system is.  Everybody is assuming that the coronavirus will somehow magically go away because developed countries are supposed to have first-class healthcare systems.  The reality is that most developed countries are far, far behind China and South Korea.  That idea may be difficult to accept.  But the stock market is not going to reward investors for making the same mistakes that everybody else is making.

I apologize for repeatedly writing about COVID-19.  But, it’s worth writing about because people aren’t getting it.

How big is the gap?

Segregating the infected from the non-infected

It takes testing capacity to find the infected people.  In South Korea, anybody can get tested for free if their doctor believes that they should be tested.  Those who want to get tested without a good medical reason can pay ~$130-$140 for a test.  Testing is widely available in South Korea.  In most developed countries, there are shortages of tests.  Doctors may want to get their patients tested but they can’t get approved for a test.  Currently, the test shortages are mostly because countries squandered their head start and allowed the number of infected to get out of hand.

Let’s suppose that a test occurs.  The first PCR tests used in China had a sensitivity rate of 30-70%.  That means that at least 30% of infected patients received a false negative test result.  China continues to go to great lengths to minimize the number of false positives.  Their main tool is to wait a few days before performing another PCR test.  The Chinese doctors know from experience that some infected patients may show symptoms but won’t test positive right away.  They are also aware that CT scans and/or an antibody test could be used to reduce false negatives.  Most developed countries aren’t so meticulous.

There is a culture among the medical profession that propagates the medical testing myth.  They lead patients to believe that medical tests are extremely accurate.  It’s not good medicine and it can cause harm.  Patients may go home and erroneously believe that the danger has passed and that they don’t need to engage in social distancing.  China and South Korea deal with this by making high-risk individuals go into self-isolation or quarantine even if their test result is negative.  In developed countries, doctors and citizens aren’t being informed about the false negative rates on PCR tests and what they should be doing.

Let’s suppose that a patient tests positive.  These individuals should not be sent back to their household because they can infect their household.  However, many developed countries have not established quarantine facilities for people to live in.  So, mild cases of COVID-19 are sent back to their homes for recovery.  The people they live with will likely go outside to buy groceries, pick up prescription drugs, or go to work.  This is one way that the virus spreads in developed countries.

Hospitals and healthcare workers as a source of infection

The reality is that healthcare workers are often infected by their patients or vice versa.  Hospitals are places where infection spreads.  This can be minimized by taking more precautions.  The most obvious way to reduce the spread of disease in the hospital setting is to provide accommodations for healthcare workers so that they do not go back to their families.  Most developed countries do not do this unfortunately.  (Of course, there are some doctors and nurses who have been proactive in living away from their families.)

If you look at videos of Chinese and South Korean healthcare workers, you will see that almost every inch of their body is covered.

While it’s unclear if it’s necessary to take such a high level of precaution, the prudent route is to err on the side of caution.  There is the possibility that viral material can land on exposed skin and later cause an infection through fomites or aerosol exposure.  China and South Korea are making the safe assumptions.  In Canada, Sunnybrook hospital has put together a video showing their idea of proper protection for an aerosol-generating procedure:

Taking additional precautions is not popular in developed countries due to their medical culture.


Healthcare workers in developed countries often wear inadequate protection due to shortages of protective gear.  They work with inferior equipment in a dangerous environment despite their nation’s wealth.

Areas of the financial markets that will be affected

Many business can shrug off a year of lost revenue.  Their stock price shouldn’t be affected by the COVID-19 disruption.  However, I’m paying attention to the stocks and securities that are disproportionately affected by COVID-19.


Here’s my theory about oil.  It’s pretty clear that lockdowns cause automobile traffic to plummet.  Google’s mobility reports provide insight as to the current level of vehicle traffic.  Italy’s traffic to retail and recreation related locations has dropped -94% after a country-wide lockdown.

The US has seen a lower drop in traffic as some parts of the country aren’t restricting normal life.

It seems obvious to me that the virus will continue to grow exponentially as there is nothing stopping it from doing so.  Standing 2m/6ft apart from one another in public most of the time will slow the spread of the virus; but, it likely will not be enough to stop the pandemic from growing.  The story will play out similar to Italy.  Lockdowns will be declared and traffic will drop even further.  The supply/demand imbalance is going to get worse (until people aren’t afraid of COVID-19 killing them) and oil prices should reflect that.

I do not believe that the oil futures market should be predicting higher oil prices in the next few months.  So, I’ve sold a tiny amount of call options on the oil ETF USO.  The implied volatility of the options is around 135 right now.  I do not expect volatility going forward to be quite so extreme (e.g. volatility was <40 pre-coronavirus), so I am willing to speculate on volatility going down.

Oil shorts

Unfortunately, I haven’t found many great shorts so far.  Gone are the days when independent oil and gas companies were talking about “40-70% IRRs”.  We know now that those numbers were too good to be true.  I shorted many of those E&Ps and wrote about them 6 years ago.

MEG Energy, ticker symbol MEG on the TSX, is interesting.  They extract oil using SAGD, or steam-assisted gravity drainage.  This is a high-cost method of producing oil which obviously fares very poorly now that oil prices have tanked.  With the technological advances and irrational investment in shale going on, it could follow the fate of other high-cost oil production into bankruptcy.

I’m confused by the world right now

Firstly, there is a segment of the public that is arguing that it’s ok to kill old people.  Even some people with leftist political views are arguing this because they want to be seen as smart people and smart people don’t succumb to fear mongering.

Secondly, I’m deeply disturbed by government inaction.  In theory, governments are supposed to save its citizens in times like these.  In practice, it may make sense for politicians to do their job poorly.  Voters have screwed up priorities right now because they don’t understand that their lives and their jobs are at stake.  It’s very strange that there is a serious situation going on and many citizens don’t want the solution to their problem because it would get in the way of their social agenda.

In any case, it seems obvious to me that there will be a lot of short-term pain in oil prices, airlines, and large events.  So, I will try to find ways to profit on my offbeat views.



*Disclosure:  I sold calls on USO, am shorting airlines, and still own some GIL and FWONA.

9 thoughts on “The market doesn’t understand the COVID-19 pain that is coming

  1. > Many business can shrug off a year of
    > lost revenue.

    I strongly disagree here. I think 1 year of lost revenue will be quite bad for a lot of businesses that are indebted and probably may need to continue supporting employees …

    Hotels, restaurants, shops etc have rent liability. Either the government pays the rent or someone will suffer …

    Everyone is the travel sector will be clobbered.

    All swimming teachers, driving instructors, cleaners, drivers … Etc are looking at major pain. The whole world is going to reduce expense …

  2. You think pain for airlines, large events and oil is a offbeat view?
    You are also wrong on the PCR test. They are way better, but after one week the virus can spread to the lung. If you then do the test on sputum it is reliable.

    • Oil futures are in contango right now (e.g. June > May > spot) so in that sense my view is offbeat. Certainly there are a lot of other permabears out there.

      Regarding the PCR test… I don’t believe that they are anywhere close to 95-99% accurate and I haven’t seen papers showing such. (The collection process and degradation when it goes to the lab can affect accuracy.)

      Thanks for commenting.

      • PCR test has >95%. The virus does not replicate as much in the throat after ~1week. Chinese data is not reliable. There were even reports of the same people getting corona twice. This was probably due to bad test design. Throat swap becomes negative. Virus is in the lung. It is more a problem of getting the right sample. If there is virus in the sample, the PCR test works.

        Contango after external shocks (corona+oligopol) is to be expected…

  3. Thx for the artcile, few comments:

    1) It’s not that we the western people has “agenda” of some kind of life style, we have values of liberalism that we intend to conserve as much as possible (the values that are not so familiar in china).

    2) Nevertheless, people in the west are more than willing to absorb pain (quarantines in many countries for example), but prefer to keep these measures for when they are required. It’s not that they don’t like old people, it’s that they look at the yearly numbers of death cases and ask if the numbers we see from corona justify the economic suffer more than other death cases (2M people dies from cancer wolrdwide, approximately the same number probabely from famine). If the number of death cases will be 5 times higher than the seasonal flu, does it require shutting the entire economy? what about 7 times?

    3) Thx for the short idea, interesting is that they hedged 70% of their production for H1/2020 at a price of 60/b, and 55% of the entire year. so the timing is challenging, but yesterday’s candle looks promising for a short-term top.

    • Yeah there are a lot of people who argue against lockdowns. Some of them argue that coronavirus disproportionately affects old people, skewing the mortality rate higher. That’s what my old people comment was referncing.

  4. Pingback: CF Industries | Stop worrying about coronavirus and embrace the shale boom – Glenn Chan's Random Notes on Investing

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