Mellon on the Markets: FLASH UPDATE

With markets in full-blown panic mode, Master Investor Jim Mellon issues a quick note to update regular readers.

A FLASH OF OPTIMISM!

My colleague Greg Bailey sent a very good meme today:

Your Grandparents were called to war – all you are being asked to do is to sit on your couch. Can’t be that hard.

Puts it somewhat into perspective.

There is far too much information – in the sense that a lot of it is alarmist, propagandist and unhelpful – going on about the virus. I said it would be serious, but NO-ONE (apart from the odd US Senator with insider info) had any idea how it would rock financial markets – and all of them, together, in sequence and more violently than we have ever seen before.

The fact of the matter is that the figures are showing a progressive deceleration in the percentage increases of the disease in most countries, and my own view is that we are within a month of this particular peak. It could be that there is a resurgence in the winter if nothing is found to combat it, but I’m pretty sure the boat has sailed, and someone has something effective, right now.

So, the issue is, who will survive, what should investors buy and how quickly will things take to recover? My own view is – quickly, in most places. Asia is already, to a degree, recovering.

The floodgates of liquidity have been opened in the US, the UK, and to an extent, pace the penny-pinching Germans, in Europe. Governments have done the right thing, and in the UK, done it pretty well.

There will be no mass unemployment, just mass boredom for a few weeks. There will also be human tragedy on a remarkable, but certainly not unprecedented, scale.

What this whole thing has revealed is: a) Asian economies seem to work better than ours, although the quantity of US dollar-denominated debt is a major concern; b) European unity is a veneer that has been exposed by the callous indifference of the eurozone to Italy’s particular plight; c) Italy will probably leave the euro, but not just yet. That will be fun and games for a year or so down the road; and d) service economies – eg the UK – will fare better than manufacturing economies in crisis.

Bond markets were very badly hit in the last week, and my favourites gold and silver were also hit, but are recovering nicely. Massive liquidity normally means inflation and watch those precious metals go in the next couple of months. The margin calls on gold and silver have probably been made and I reiterate: gold could easily go to $2,000 an ounce and silver $25/oz – this calendar year.

The dollar’s strength is probably also a reflection of a critical shortage of US dollars in the current crisis; but the emperor has no clothes, and short dollar is a good strategy.

I am not even looking at my stock portfolio, otherwise my anti-reflux medicine will run out.

But here are some cheapish ones to consider:

Pets at Home (LON:PETS) – Fido will always eat and needs toys.

Walgreens (NASDAQ:WBA) – owner of Boots and surely a good one.

AbbVie (NYSE:ABBV) – excellent US drug company.

Gilead (NASDAQ:GILD) – long-term favorite of mine, and the only stock apart from Ocado to go up that I know of.

IAG (LON:IAG) – ignore the headlines, buy for the recovery.

Lloyds Bank (LON:LLOY) – unless people stop paying their mortgages, this is an outstanding domestic focused bank. A lot of the “challengers” will go bust.

Stay calm and resolute. Investors who have cash are lucky and should consider deploying some of it in the stock market now. None of us knows when the bottom will occur, but if Warren Buffet is buying, that’s good enough for most of us.

Happy Hunting!

Jim Mellon

From the Bunker