Ch-ch-ch-ch Changes: Turn and Face the “Strain”-ge

Since the outbreak of COVID-19 began, Brazil is one of the countries I have watched closely.

Primarily, that’s because I have traveled there far more than any other single country – primarily through professional obligations as a natural resource and industrial analyst. Because of that experience, I have a lot of friends, colleagues, and former clients in the country.

But I’ve also seen the scarcity of health care available in less populated suburbs and more rural areas of the country – that’s where a lot of the mines and industrial plants are located.

And let’s just say my friends in those areas have been on my mind.

Especially when I read stories like those I saw yesterday, where Brazil showed a record number of new coronavirus infections and deaths. Worse, it showed a chaotic and disjointed response from the government, with President Jair Bolsonaro so dismissive of COVID’s seriousness that two Ministers of Health have now left the administration.

That lack of guidance is playing out much the same as in the US, with a wide variety of responses across states and municipalities ranging from spotty restrictions on non-essential services, to full-on lockdowns.

In areas of larger population density, hospital capacity is coming under strain just as it did in New York City… ironically at the same time some state officials are considering rolling back restrictive measures.

And all this is happening at the same time Chinese doctors are reporting that patients hospitalized in the country’s first “second wave” are taking much longer to test negative.

While there could be several contributing factors there, the obvious concern is that the virus may have mutated into a new strain.

Now, changes aren’t necessarily bad, as many articles and videos have pointed out.

But it is the health and finance-related uncertainty surrounding the coming days, weeks and months that is really taking its toll on consumers.

And as I’ve pointed out before, we’re seeing that play out in their travel behavior all over the world.

Take São Paulo, for instance, which is one of the Brazilian cities hardest-hit by COVID-19. The city has been under lockdown orders since March, and traffic activity there is roughly 25% of normal.

Source: TomTom.com

Now let’s look at Beijing, which “re-opened” months ago.

Source: TomTom.com

Although traffic during the week has almost returned to normal levels, driving activity on the weekend is still down 50-75% compared to a year ago.

What that tells me is that people are only driving when they must.

To go to work. To go to the grocery store. To go to the pharmacy… in other words, essential activities.

But on the weekends – when consumers typically go places because they want to – they’re still staying at home.

I even got a chance to do some real-world research last week, when Governor Larry Hogan ended stay at home orders here in the state of Maryland, and some businesses re-opened near my home in downtown Annapolis.

Usually, on the first sunny weekend of the year, downtown would be filled with people walking around, shopping, watching boats, eating lunch…you wouldn’t even be able to find a parking space.

Last Saturday – at 1:30PM on the first day of “re-opening” – downtown looked like this:

Source: Seawolf Research

Crickets.

And when I looked at traffic data for Baltimore last weekend, there was no discernible change over the prior week.

Source: TomTom.com

We did see less bearish dynamics in Miami and Atlanta traffic when I wrote about this last week. But the weekend data showed those gains leveling off in Miami and even falling slightly in Atlanta.

And with yet another brick-and-mortar bankruptcy announced this past week in mall stalwart JC Penney, it’s hard not to revisit the ProShares Long Online/Short Stores ETF (NYSEArca:CLIX).

While I still think that economic conditions indicate markets remain due for a pullback, downside for physical stores far outweighs their online counterparts, which helps that ETF.

So, let’s jump in by deploying ¼ of any intended stake here, and keep the remaining ¾ in dry powder for buying any potential dips.

I’m also watching crude oil markets, which have rallied on news that China’s demand has returned to pre-COVID levels.

All that means is that China is buying… it does not mean they are consuming any more gasoline or diesel. In fact, the Beijing traffic chart above shows exactly the opposite.

And with US demand looking absolutely terrible in this morning’s EIA report, we may also want to think about firing another salvo at ProShares UltraShort Bloomberg Crude Oil (NYSEArca:SCO) at this level.

But first, I need to dig into the numbers, and we will revisit this on Friday.

All the best,

Matt Warder