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CAPITAL IDEAS: Build a house in China

This summer, homebuilding stocks came to life. They reacted to a combination of low interest rates and high demand. Some of that demand is coming from residents of densely populated cities moving to the suburbs to reduce exposure to COVID-19 infections.

Dalton — Last week I made some changes to my moderate and aggressive portfolios. I’ll share those changes with you at the end of this column. But let’s not bury the lead — we are close to a COVID-19 vaccine!

On Sept. 23 I gave a rundown of what I expected regarding the timing and distribution of a COVID-19 vaccine. I stated, “Pfizer CEO Albert Bourla says that the ‘likely scenario’ is that the company will be able to distribute a vaccine by year’s end (pending FDA approval).”

Further, I said: “The odds of a safe and effective vaccine being created relatively soon seem good. Because of that, it’s hard for me to justify adding more defensive positions to my investment portfolio.”

It looks like I got that call right. (And the Great Barrington Declaration got it wrong.)

On Monday, Nov. 9, Pfizer announced that the initial Phase 3 clinical trial results show that its vaccine is 90 percent effective. That percentage surpassed most people’s expectations. (The following Wednesday, Russia announced that its vaccine, Sputnik-V was 92 percent effective. There’s not much American confidence in the Russian vaccine. However, Sputnik-V a) was the first registered COVID-19 vaccine, and b) was voted the most likely title of a bad movie where Dracula feeds on cosmonauts.

The Centers for Disease Control and Prevention has asked states to be ready to receive the vaccine by November 15. That reception may be delayed a bit. The Pfizer vaccine must be stored at about -103 degrees Fahrenheit. That is 45 degrees colder than any other U.S. approved vaccine, so the states’ facilities need to adjust to those requirements.

Logistics will be handled. The more significant hurdle is the approval of the vaccine by the Food & Drug Administration. The CDC wants the vaccine in place for rapid distribution, but it can’t be given until it has achieved FDA approval. Pfizer says that the vaccine is on track to be approved for use as early as December.

The vaccine needs to be given twice, at least 21 days apart. The plan is to roll out availability in phases. Front-line health care workers would have access first. Army Gen. Gustave Perna, chief operating officer of Operation Warp Speed (OWS is described in the Sept. 23 column), thinks it will take about three months to vaccinate health care workers. Dr. Anthony Fauci, the director of the National Institute of Allergy and Infectious Diseases, believes that the vaccine will be available for most Americans by April 2021. We may achieve herd immunity through a vaccine by early 2022. That’s not as soon as any of us would like. But it’s the reality we investors must contend with.Fortunately for investors, so long as citizens and businesses can receive their own shots — in the form of a generous fiscal stimulus package — the stock market will be able to see beyond 2021 and avoid another meltdown. I don’t have a lot of hope for that fiscal stimulus package until February 2021. It won’t necessarily be too late, but the more time that passes, the larger the package we will need to avoid economic and stock market disasters. You read that right: I am not yet ruling out disasters.

Portfolio changes

I initiated about a 3 percent to 5 percent allocation of two investments. I invested in homebuilders and China. Below is the rationale for those investments, as well as the tools used to gain exposure. I scraped off some existing positions just enough to raise adequate cash to make these buys.

Homebuilders

This summer, homebuilding stocks came to life. They reacted to a combination of low interest rates and high demand. Some of that demand is coming from residents of densely populated cities moving to the suburbs to reduce exposure to COVID-19 infections. The most in-demand pandemic purchase isn’t hand sanitizer or toilet paper; it’s houses. People are learning that they can work remotely from anywhere, so why not work from a home with a spacious backyard?

Also, home inventory levels are low. Not enough houses are being built to keep up with demand. That’s an enviable position for those in the homebuilding industry.

According to the St. Louis Federal Reserve Bank, the monthly supply of houses in the United States hit an all-time low in September.

In September, the National Association of Realtors reported that U.S. home sales hit a record high in August. If homes continue to sell at that rate, then new home inventory would run out in under three months. That’s the shortest time frame since 1963 when record-keeping began.

That increased demand, coupled with a decrease in inventory, makes the homebuilding stocks a compelling buy. I took a small position in the iShares U.S. Home Construction ETF (symbol: ITB) in my Aggressive portfolios.

China

While the U.S. and Europe struggle with apparent second waves of COVID-19, China’s economy continues to recover. In China, I see the economic benefits from swift control of the pandemic. I see similar stories in other economies that have also been able to control the virus. That includes Japan, Australia, South Korea and New Zealand.

China will still have to contend with U.S foreign policy. The difference between Biden’s and Trump’s endgame with China isn’t terribly dissimilar from what I’ve read. However, the approach will be different. There’ll be more predictability and a greater appreciation of allies under Biden.

In response, for Moderate and more Aggressive portfolios, I took a small position in the iShares China Large-Cap ETF (symbol: FXI).

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Allen Harris is the author of ‘Build It, Sell It, Profit: Taking Care of Business Today to Get Top Dollar When You Retire,’ as well as the owner of Berkshire Money Management in Dalton, managing investments of more than $500 million. Unless specifically identified as original research or data-gathering, some or all of the data cited is attributable to third-party sources. Full disclosures: https://berkshiremm.com/capital-ideas-disclosures/. Direct inquiries to aharris@berkshiremm.com.

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