[In]Securities Guest Blog: Who's Zoomin' Who by Aegis Frumento Esq

March 19, 2020


Who's Zoomin' Who

Samuel Johnson said that "when a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully." Fortnight is one of those words that we've abandoned in our quest for precision over poetry, like "score" for 20 and "stone" for 14 lbs. A fortnight is 2 weeks, which seems a long time to contemplate one's demise, but maybe only because these days so few of us even do.

In a fortnight, if current models of the coronavirus spread remain unaltered, there will be about 2,300 dead from the virus in the US, and about 150,000 known to be infected. We won't know how many are actually infected, or were and recovered. We are blind -- not only for lack of good test information, but also for not having a familiar context. The last time anything like this happened was in 1918, and there's no one around now who remembers it. But Samuel Johnson's dictum is true, and we see it in the markets. Our collective minds are being concentrated on what matters. 

Take, for instance, one of my pet peeves. Bitcoin is selling this morning at about $5,300, almost half its value a month ago. Compare that to the S&P500 (down a quarter, though it depends on the day and the hour), silver and platinum (down a third), or gold (down 7%). Sure, oil is down more, but that's manipulated. Hmmm . . . .

But I'm more interested in the counter-examples. 

Consider what happens when a large chunk of the country is forced to work from home, and can only attend meetings remotely. Or when the country's students all need to attend classes on line. Well, what happens is that a mobile app that was popular among high school video bloggers and chatters suits up to shoulder an adult challenge. Zoom Video Communications is poised to be the leading facility for work-from-home learning and conferencing. https://www.investors.com/research/breakout-stocks-technical-analysis/zoom-stock-ipo-leads-coronavirus-stock-market/ Its stock went up 20% in the past month.

Or consider when not enough coronavirus test kits renders us ignorant of how to manage the pandemic. A small company in Utah with a COVID-19 test kit gets emergency approval to make and ship it. Co-Diagnostics Inc. will ship 50,000 test kits a day for the foreseeable future. https://www.deseret.com/utah/2020/3/17/21182512/covid-19-testing-co-diagnostics-testing-kits-fda-approval-utah-tech-community-silicon-slopes. Its stock price went from $3 to $10 a share in a month, a 248% increase.

This is what concentrating the mind means, coming to grips with reality and giving due concern to what really matters. It's interesting that bitcoin's price today is about what it was a year ago. In the meantime, it had gotten as high as $20,000. One now has to wonder what that was all about. Not me, of course; I've been wondering that all year long.

In the end, Zoom matters, and bitcoin doesn't. Zoom will be an essential tool for sheltered-in-place knowledge workers, and bitcoin will remain the oddity it always was. In a crisis, oddities don't do well. They get zoomed by reality-based goods and services.

A few columns back, I noted that markets have never before reacted so badly to epidemics. The Fever ([In]Securities Guest Blog by Aegis Frumento, Esq., BrokeAndBroker.com / March 5, 2020) 
http://www.brokeandbroker.com/5100/aegis-frumento-insecurities-covid/. Not even the Spanish Flu pandemic of 1918 caused the markets to quaver like they have today. I suggested from that historical perspective that something else was at play this time. The fate of bitcoin offers a clue: unlike in 1918, too much of today's economy is built on sand -- on unessential goods and services. The hospitality industry, for example, may lay off 4 million workers in the next few days. That's 2.5% of the US labor force. The ripple effect of those job losses could easily result in an increase in unemployment of over 8%. That will put us almost back where we were during the Great Recession a dozen years ago.

We lived differently in 1918. There were bars and restaurants, of course, but the hospitality industry was not as large or as consequential as it is today. Most people did not live in cities, and most ate and entertained at home.

But in our reality, today's massacre was completely predictable. We have been warned of the inevitable pandemic for years. And even in 1918 we knew that social distancing was key to stemming the tide of illness. Therefore, we should have known that a pandemic would come, and that the social distancing it required would wipe out the hospitality industry. That this one caught us by surprise IS the surprise.

I'm not suggesting that we all revert to our 1918 farmhouses. I enjoy bars and restaurants as much as or more than the next guy, but we should have seen this coming and been better prepared for it. If you know you will face a months-long shutdown sometime in the future, you insure against it. If you cannot buy pandemic insurance (I'm guessing not), then you self-insure against it. Ever since Joseph interpreted Pharaoh's dream, we've known to provision ourselves against the threat that is predictable in all but when. If that means higher prices and lower profits in the fat years, so be it. Unimaginative managements and itinerant shareholders, with their short-sighted focus on short-term profits, are to blame.

When this is all over -- and it will be all over -- we'll need to rethink how we live. COVID-19 caught us flat-footed. If we take some lessons that will help us manage the inevitable next one, then it may have been worth it. The hospitality industry wants a $150 billion bailout. https://www.travelweekly.com/Travel-News/Hotel-News/Hotel-industry-requests-aid-amid-mass-layoffs-coronavirus. I suppose they'll get it. It'd be nice if that money went to the laid off workers rather than to defray corporate losses, but I'm guessing it won't. But there should be some serious strings attached to safeguard against them cratering again the next time a pandemic hits. Last time it was the banks, and now it's the bars. Our entire economy shouldn't be at risk because one industry or another lacks imagination, courage, or both. If that's not why industry leaders are paid those big bucks . . . well, don't even get me started on that.

Samuel Johnson also said that "when a man is tired of London, he is tired of life; for there is in London all that life can afford." The very same can be said, in our day, of New York, and I miss it. I'm stuck at home with Zoom and a well-stocked liquor cabinet my only bulwarks against the storm coming in the fortnight. I hope that's enough.

Stay healthy, all.


Aegis J. Frumento

380 Lexington Avenue
New York, NY 10168

Aegis Frumento is a partner of Stern Tannenbaum & Bell, and co-heads the firm's Financial Markets Practice. Mr. Frumento represents persons and businesses in all aspects of commercial, corporate and securities matters and dispute resolution (including trials and arbitrations); SEC and FINRA regulated firms and persons on regulatory compliance issues and in SEC and FINRA enforcement investigations and proceedings; and senior executives of public corporations personal securities law and corporate governance matters.  Mr. Frumento also represents clients in forming and registering broker-dealers and registered investment advisers, in developing compliance policies, procedures and controls, and in adopting proper disclosure documents. Those now include industry professionals looking to adapt blockchain technologies to finance and financial market enterprises.

Prior to joining the firm, Mr. Frumento was a managing director of Citigroup and Morgan Stanley, a partner and the head of the financial markets group of Duane Morris LLP, and the managing partner of Singer Frumento LLP.

He graduated from Harvard College in 1976 and New York University School of Law in 1979. Mr. Frumento is a frequent author and speaker on securities law issues, and is often quoted in the media on current securities law developments.

NOTE: The views expressed in this Guest Blog are those of the author and do not necessarily reflect those of BrokeAndBroker.com Blog.