How I'm Hedging My Finances For the Impending Coronavirus Test Results in the U.S
U.S hasn't rolled out large-scale Coronavirus testing yet
U.S doctors are bracing for a rapid rise in U.S. coronavirus cases this week as state and local public health labs ramp up testing after weeks of delays due to a flawed test by the U.S. CDC.
This NYC ER doctor went on CNBC to talk about how the CDC has screwed up the testing kits.
Due to limited testing for Coronavirus right now, it's very clear that the current stats (as of 3/3/20) of ~100 cases and 6 US deaths are drastically understated.
The Federal Reserve is trying to get ahead of this by announcing yesterday they are lowering interest rates by half a point, as a direct result of coronavirus concerns.
Widespread U.S Coronavirus Testing Coming Very Soon
Now that the U.S. appears to be ramping up testing, the number of reported cases and deaths will grow quickly in the next week or so. Public-health officials are currently cautioning people not to worry as that happens, but it will be hard for the average American to delineate which portion of the ballooning number of cases is the result of more testing and what proportion is from the actual spread of the virus.
"Up to 1 million people could be tested for coronavirus by the end of week, the FDA said, as cases across the US rose to more than 100 and health officials warned the number will keep climbing." - CNN
When widespread testing is finally rolled out in the U.S, it will likely lead to a major loss in consumer confidence, and conceivable a similar response that China had to contain the breakout. The testing is coming very, very soon.
How This Could Likely Impact Airbnb Hosts & Vacation Rental Companies
I'll be honest, I'm not concerned about the virus from a personal health perspective. It appears the virus is only life-threatening to the same portion of the population that dies from the Flu each year.
HOWEVER, as an Airbnb owner, consultant for vacation rental companies, digital nomad, and stock investor, I'm very concerned about the implications of the worst case scenario here on my finances. The impending U.S statistics, seem like it has the potential to be a black swan event for companies that rely on travel, tourism, and in-person experiences.
Airbnb is already rumored to be delaying their IPO due to expected negative financial repercussions from the Coronovirus. Airbnb has a history of creating very pro-guest and anti-host policies when it comes to gray areas like this one.
How Airbnb Reacted to the Asian Outbreak
When the outbreak hit China, Airbnb cancelled all bookings in Beijing until May! Granted, Airbnb is one of the few tech companies that's allowed to operate in China, so they were probably forced to do this by the Chineses Government. It's unlikely a response this drastic would happen in Western countries, but it's still possible.
Potential Impact on U.S Airbnb Hosts and Vacation Rental Industry
As both a host and a frequent guest on Airbnb, I love the platform, but the reality is it's very likely that Airbnb will allow all renters to cancel their bookings with zero penalties once the new test results come out. There is also the small chance that Airbnb will not allow ANY bookings from guests/hosts in hot spots that are infected.
This could lead to a loss of income of $10,000+ for me from cancelled bookings and decreased revenue per night. Not to mention, how my stocks might continue to react in this type of scenario. For the vacation rental companies I help, this could be a very hard hit on to their business and their clients.
Creatively Insuring Against Potential Future Lost of Income
Despite my best effort to find a loss of income insurance for Airbnb hosts, there is no insurance product that covers short term rental companies or owners from loss of income related to natural disasters or pandemics.
Without direct insurance available, the next best option to mitigate the financial risk of coronavirus is to turn to the U.S stock market to find ways to profit off of negative impacts to the travel industry. This is called hedging your bets. Although, I haven't bought put or call options in years, this seems like a unique circumstance where it makes sense to buy put options as indirect insurance against the risk.
What is a put option?
A put option is a contract giving the owner the right, but not the obligation, to sell, or sell short, a specified amount of an underlying security at a pre-determined price within a specified time frame. The pre-determined price the put option buyer can sell at is called the strike price. A put option becomes more valuable as the price of the underlying stock decreases.
Put Option Ideas
Bet against WYNN National Resorts $WYNN, who operates 2 major casinos in Asia. As a 5 star resort company, this stock is also a decent hedge against an economic downturn, in addition to coronavirus concerns. Their average customer is older, and therefor more afraid of going to public places with large amounts of people.
Bet against Marriott $MAR, the largest lodging company in the world. Marriot's brand attracts an older demographic that will likely be in fear of the coronavirus.
Bet against Booking Holdings $BKNG, which owns travel aggregators like Booking.com. and Priceline. Coronavirus aside, this is a stock I don't like. In my opinion, this $72 billion company can only go down because of disruptors like Airbnb, HotelTonight (owned by Airbnb), Google Flights, and Google Hotels. At a $72 billion market cap, it has a long way to fall after one bad earnings call. The coronavirus might be the wake up call investors need to realize $BKNG's model has been disrupted over the last 5 years.
Put Options I'm Not Buying
Airlines and cruise ships have already been oversold in my opinion. Their P/E ratios are less than 10X, across the board which signals they are extremely cheap. I don't like to bet against stocks in that P/E territory.
Other Ways I'm Hedging Against the Worst Case Coronavirus Scenario
Today, I sold all of my stocks that rely on in person experiences and travel for a large portion of their revenue. For example, I sold all of my Disney stock because of their theme parks and reliance on in-person experiences like movies.
Staying liquid in cash to buy the cheap Airline stocks once summer hits and the coronavirus numbers level off in the U.S
Although recent history has shown that these scares are overblown, it was only 102 years ago that 50 million people were killed by the Spanish Flu. With today's health care system in the West and the low mortality rate of the Coronavirus, this is extremely unlikely. However, until there is a cure and vaccine available, the Coronavirus and it's ability to grow exponentially poses a real threat to the world and to the stock market as a consequence.
I hope the Coronavirus doesn't turn out to be as bad as the worst case scenario would suggest. I also hope that the CDC and U.S government can act quickly to prevent as much life lost as possible.
With that said, it's always good to hope for the best, and prepare for the worst when it comes to finances.
Disclaimer: I have positions in the put options mentioned in this post.