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Apple’s Warning

The world’s most valuable technology issued a warning on Monday (when US markets were closed) that the fallout from Coronavirus would cause it to miss its sales target for the quarter.

This is not entirely unprecedented, because if you’re a trillion-dollar company, you’d rather be safe than sorry. The firm has been struggling with production in China as quarantine measures have hit multiple cities. Not only are several stores in China shut, but production has taken a hit as well with fewer workers available for work.

About 17% of Apple’s revenue comes from China. In 2019, this was ~ $43.6 Billion. If we were to divide that by 365 days, it means Apple sold $119 million dollars worth of product every day.

Even though not all stores in China are closed, and not all production has been halted, this still means that each additional day of the outbreak is a lesser dollar amount in revenue from China.

Apple has largely led the FAANG rally in the past few months, and the performance of the other giants is usually positively correlated with each other. Except for today, when every FAANG stock except Apple posted gains.

One possible explanation for this is that other firms such as Amazon and Facebook don’t rely on China as much as Apple does for their revenue.

How bad will the hit be on Apple’s earnings? Depends on how bad the coronavirus gets here on out. How bad will the coronavirus get?

The conclusion amongst expert seems to be that the number of cases observed will continue to grow. The disagreement lies in whether the virus can be 1) contained successfully in China, and 2) if it is already global.

For some, it’s already a global pandemic, while others believe it is successfully contained in China.

Apple stock closed at $319.00, down 1.83%.

Pandemic Bonds

If you’re an investor looking for a return, one place you could put your money is the bond market. Bonds are issued by all types of entities for all types of reasons - including governments, municipalities, or even corporations. But there’s a special type of bond called the pandemic bond - first issued by the World Bank in 2017.

The bond essentially transfers the risk that a nation/entity would bear to other investors, and essentially works like insurance. In the aftermath of the Ebola outbreak, it was clear that raising capital immediately was a hard problem in times of need. Enter - pandemic bonds.

Here’s how it works: the world bank or a government issue bonds and promise a coupon payment at maturity, usually certain percentage points above LIBOR. Then there is a detailed document that lays out what classifies a “catastrophe” or a “pandemic”. Before maturity, if these trigger conditions are met - investors lose the principal and the money is used for relief efforts. If not, then investors get their principal and return. Not bad!

In 2017, the World Bank’s raised $320m by issuing catastrophe bonds backing its Pandemic Emergency Financing Facility. They payout 11.5 percentage points above LIBOR and the first two trances of the bond were set to mature in July this year. However, the trigger conditions are very close to being met and are investors might just lose their money as Coronavirus cases continue to rise.

If the coronavirus hadn’t happened, then investors would’ve made ~13% every year for three years. The money for that would’ve come from the rich countries that donate money to the World Bank.

Currently, there are 75,183 confirmed cases of the virus worldwide, with a total of 2,009 deaths.

It mostly seems like an irrational market at the moment, that has difficulty determining whether the Fed will give them a rate cut - so buy more stocks? - or if risks are rising with global pandemic on the horizon - so buy safer assets like gold and bonds?

Also, gold closed above $1600, (at $1603.60) an ounce for the first time today since 2013.