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Welcome to The Comet

 

When I was growing up in the Buffalo, NY area, one of my favorite activities of summer vacation was a trip to the legendary Crystal Beach amusement park built right on the shore of Lake Erie in Canada (back then you didn’t need a passport to cross the border). The highlight of the visit would inevitably be riding their world famous roller coaster, “The Comet.” Eighty-seven feet high with speeds as fast as 55 miles per hour, often times you would feel like you were going to be flung off into the depths of the lake. But eventually, the ride would slow down and you would step off onto the platform with a line of anxious folks, ready for their turn.

This stock market sort of makes me feel like I’m back on The Comet. Fortunately, my roller-coaster days are well behind me and all I have to do is look back on those summer vacations and the fact that eventually the ride ends and you’re back safely where you started. Now, I can make adjustments to the ride, as we did last week when we made all of our diversified mutual fund portfolios more conservative. Less speed and shorter drops, and those turns that made me feel like I would end up in the lake – they’re slower and smoother now.
 
Covid-19 is doing its best to add more twists and turns to the ride. This morning, Angela Merkel said that they expect as many as 70% of Germans to be infected with the virus. More and more restrictions are being put into place by governments worldwide, including travel, large group gatherings and sports events. This will probably have only a marginal effect on transmissions.
 
The response of the US government has been, in a word, abysmal. We have been reactive as opposed to proactive. Back in January, when the first case in Seattle was discovered, an infectious disease expert wanted to adapt flu test kits to coronavirus, but was turned down by public health officials. Even today, there are still not enough test kits to go around, and there is an extended turnaround time to get those kits analyzed. The virus has been detected in 36 states and I’d be willing to bet that it’s in all fifty.
 
The US had two months to prepare for this from a public health perspective and did nothing (or very little). Now they’re trying to play catch-up and the result will be unnecessary illnesses and deaths. Congress appropriated $8 billion to coronavirus response, but it’s simply too late. The train has left the station as they say.
 
In a reactive attempt to “save” the economy and recent market gains, they choose to focus on economic stimulus (as other countries around the world have done). They are taking this opportunity to try and cut taxes again which is the last thing our long-term economy needs – as our federal debt grows and grows. As I said in my last letter, the virus does not care about short-term economics – it only cares about replicating itself – and it is succeeding quite well. If the administration had originally focused on public health – both domestically and abroad, perhaps these band-aid measures would be less necessary. 
 
I do not see us making any more major adjustments to our portfolios (although I am not ruling it out). Our proactive adjustments left our aggressive model portfolio with only 50% in stocks, balanced 35% and conservative 20%.  These are historically quite low and should cushion the roller coaster ride we’re on. 

On Monday, the price of oil dropped by around 25% because of production tensions between Saudi Arabia and Russia.  The oil sector (as represented by the XLE) was down 20%. One of the advantages of having fossil-fuel-free investments is that we were not directly impacted by that volatility. We felt it in the market in general, but not in our direct holdings. 
 
Every evening, my wife Melissa and I have our “coronavirus update.” Remember, she has a PhD in microbiology and molecular genetics, so she’s my science communicator and translator and has been invaluable as I’ve crafted our policy and tactical response. 
 
There still is a long way to go as this virus continues to spread around the world – it will get worse before it gets better. There will continue to be human and economic losses – but it will end. That end will come as the virus burns itself out, a viable vaccine is produced, or public health officials get their act together. Probably all of the above.
 
We will be here keeping a close eye on your investments and communicating as often as we feel is necessary. We are grateful for your continued trust and business. Please reach out with any questions or concerns that you may have. 
 
My Best,

Peter Krull
CEO & Director of Investments
Earth Equity Advisors, LLC
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