It is the time for nostalgia. I fondly remember Christmases from my childhood in England with a close friend and our two families. Here in New Jersey, my wife maintains many of our English culinary traditions, since they’re from her childhood too. Christmas pudding (also called Plum pudding) was acquired weeks ago. None of our children will touch it, a disdain I’ve wasted little time trying to reverse since it means there’s enough left for Boxing Day too.

Covid has canceled bits of Christmas, including our annual Christmas Eve fish dinner with friends. And a virtual church service remains a poor substitute for live Christmas carols. I admire our rector for gamely pressing on in solitude in front of a camera, but this year organized religion has offered less when some needed more, leaving it with a diminished role.

I’m currently reading These Truths: A History of the United States, by Jill Lepore. It was on Bill Gates’ summer reading list. An engaging read, it covers much but rarely in depth, since it’s a single volume. I have reached the 1940s. Winston Churchill knew that Britain could only prevail against Germany if the U.S. could be persuaded to enter the war. Following World War II, Churchill referred to his bonding with President Roosevelt thus, “No lover ever studied the whims of his mistress as I did those of President Roosevelt.”

My old country could use Churchill’s leadership today. Most of the population is under virtual Covid house arrest, and they’ve agreed a Brexit deal with the EU very different than voters were led to expect during the 2016 referendum. I have never regretted growing up there, nor leaving for the U.S.

How ironic that British PM Boris Johnson’s wonderful biography The Churchill Factor: How One Man Made History represents a bigger tribute than his current leadership of the country.

Few individuals produce enough lifetime material for a book of humorous quotes, but my library includes The Wit and Wisdom of Winston Churchill, boasting over 1,000 entries. Browsing reveals gems such as, “Although always prepared for martyrdom, I prefer that it shall be postponed.” Another favorite is, “There’s nothing more exhilarating than to be shot at without result.” When a close friend of mine with Covid risk factors survived an extremely mild case, I read this quote to him.

Churchill’s mother was American, and he felt strong affection for our country. During a speech to Congress in 1941, he noted that, “… if my father had been American and my mother British, instead of the other way around, I might have got here on my own.” This overlooked the constitutional requirement that a U.S. president be born here, but still drew appreciative laughter.

Some of Churchill’s descriptions of America remain true today.

“The Americans took but little when they emigrated except what they stood up in and what they had in their souls. They came through, they tamed the wilderness, they became a refuge for the oppressed from every land and clime.”

“There are no people in the world who are so slow to develop hostile feelings against a foreign country as the Americans and there are no people who once estranged, are more difficult to win back.”

In the House of Commons when a veteran member offered disjointed criticism of Churchill’s war leadership, the PM warned that his critic, “…will run a very grave risk of falling into senility before he is overtaken by age.”

Churchill’s ready wit was often deployed in social settings to parry criticism. Nancy Astor was a Virginian who became Britain’s first female member of the House of Commons. Astor was part of a clique that admired Hitler, prompting Churchill to describe appeasers as those who, “…feed the crocodile hoping that it will eat him last.” At a dinner party Astor told Churchill, “Winston, if I were your wife, I’d put poison in your coffee.” To which he replied, “If I were your husband, I’d drink it.”

Perhaps his most famous exchange was with an unknown woman who complained that he was drunk. “My dear you are ugly, but tomorrow I shall be sober and you will still be ugly.” he replied.

It’s been a testing year in so many ways, with little of recent humor to offset it. I hope you and your family are healthy, and that you’ve enjoyed Christmas and the holiday period under whatever Covid restrictions allowed. We all have much to look forward to next year.

We are invested in all the components of the American Energy Independence Index via the ETF that seeks to track its performance.

The positive Presidential Covid test has provided plenty of material for the media. Trump’s known physical disposition is being compared with tables of statistics to assess his likely prognosis. The Financial Times noted that he is in the “vulnerable” population, and gave him 20% odds of requiring hospitalization with a 5% risk of death. Regardless of politics, writing about a living person’s chances of dying strikes me as rather tasteless, although inevitable since it’s the president and the election is a month away.

More interesting than mortality tables was the reaction on PredictIt, a website that allows modest wagers on numerous electoral outcomes. Many believe that betting markets offer more accurate forecasts than opinion polls, presumably because people are more thoughtful when money is tied to their view. PredictIt showed that the odds of Trump dropping out of the race before November 1 had soared from 4% to as high as 17% on high volume, following his positive Covid test.

This seems odd, because it’s hard to conceive of any sickness that would cause Trump to withdraw. And if he really does succumb to the virus, his name will remain on the ballot. The only plausible way he’s withdrawing by November 1 is if he concludes an overwhelming defeat is inevitable, when he might declare the entire election a sham hopelessly distorted by mail-in ballot fraud, paving the way for a challenge of the results. This has nothing to do with Covid, and the reaction of PredictIt shows that even the commitment of modest sums of money doesn’t assure a rational view. The Robin Hood trading platform offers another rich source of financially irrational actors.

The 5% Case Fatality Rate (CFR) referred to by the FT relies on a study from OurWorldInData, which estimated the CFR for different age groups by looking at just four countries (South Korea, Spain, China and Italy). This limited data set took no account of any pre-existing conditions (“comorbidities”). A study in June from the Center for Global Development (“CGD”) took a more precise look, and found that a male aged 70-79, with at least one co-morbidity living in a rich country, had a CFR of 4.35%. Take away any pre-existing condition and the CFR drops by 89%, to 0.48%.

Trump’s pre-existing health conditions, if any, are unknown. He claims to weigh 235lbs, which for his height puts him on the threshold between overweight and obese but well short of severely obese. The 4.35% CFR doesn’t differentiate between one or several co-morbidities.

Trump’s debate performance didn’t show shortness of energy, regardless of whether you found the content appealing or not. There’s little public evidence that he’s chronically sick.

Moreover, the CDG study is from June. CFRs keep improving – although infections are rising again in many countries, fatalities are not. More testing, better treatment and a less fatal strain of the virus are among the possible explanations. It’s likely the CDG study would produce lower figures if the data was updated. And Trump will be receiving the best care available.

On Friday, stocks and crude oil both fell on the news. Pipeline stocks surprised by moving higher, perhaps showing that attractive valuations are finally overwhelming negative sentiment.

The absence of any formal training in virology has not prevented us from offering a data-based view on Covid. So for Trump, the odds are high that he’ll emerge from self-quarantine reporting a mild case easily handled, confirming his assertion that widespread popular fear of the virus is unwarranted.

We are invested in all the components of the American Energy Independence Index via the ETF that seeks to track its performance.

Last week the Centers for Disease Control (CDC) told state health officials to prepare for vaccine distribution as soon as November 1. “My fellow Americans, our long national nightmare is over.” was first spoken by President Gerald Ford following Nixon’s resignation under threat of impeachment in 1974. But it could equally apply to Covid in 2020.

The pain has been unevenly distributed. Since March, stocks have defiantly marched higher in the face of relentlessly bad news. Hundreds of thousands of lives have been lost, and billions turned upside down. Yet people have adapted, and technology stocks such as Apple (AAPL) and Amazon (AMZN) have benefited enormously from the shift to socially distanced living. Tesla (TSLA) has shown that stock splits are bullish, even if caused by prior huge gains (see Tech Stocks Have Energy).

The market’s gains have reflected the distasteful reality that the economic impact of Covid is driven by our efforts at mitigation. Public understanding of the actual numbers reveals huge misconceptions (see Covid Exposes Innumeracy) about its lethality and who is really at risk. Recently, the CDC quietly added the following to Table 3 of its Covid website (Conditions contributing to deaths involving coronavirus disease): “For 6% of the deaths, COVID-19 was the only cause mentioned.” In other words, 94% of Covid victims had a pre-existing condition (a “co-morbidity”) which may have contributed to their outcome. It’s still tragic for each person, but as we learn more the seeming randomness of Covid becomes less so.

For an interesting perspective on mitigation efforts elsewhere, see Brazil – Not the Disaster We’ve Been Led to Believe.

Last week’s sharp market reversal around the CDC’s announcement was probably no coincidence. U.S. hospitalizations are down by a third from their recent second peak. Fatalities never reached the levels of early April, and in former hotspots like New York and New Jersey, hospitalizations are down by 95% from the peak.

A vaccine will accelerate the progress towards herd immunity that seems to be already underway. The possibility that the near future may see a modified return of our former lifestyles has hurt technology stocks but breathed new life into stocks like Carnival Corp (CCL). A resumption of cruising might be the final confirmation that we’re post-Covid, that the hospitality business no longer faces quite the same existential threat.

Few will be surprised that the outperformance of energy stocks caught our attention. The least liked and therefore most undervalued sector doesn’t suffer like AAPL from the loss of momentum investors, because there were none. The rubber band between liked and hated sectors is stretched taught. If the imminence of a vaccine has triggered a great unwind, pipeline stocks have substantial upside.

Last week’s ejection of Exxon Mobil (XOM) from the Dow Jones Industrial Average looks like another indication of the declining relevance of energy stocks. XOM had been in the Dow since 1928, and until 2013 was the most valuable publicly listed company. Its market cap peaked with oil prices in 2014 at $446BN, and is now around $171BN.

Pfizer (PFE) and Raytheon Technologies (RTX) were also dropped along with XOM, and these three were replaced by Salesforce (CRM), Amgen (AMGN) and Honeywell (HON).

Being dropped from an index is never good. For the much maligned energy sector, it’s tempting to regard this as the bell ringing at the market bottom – the sign that sentiment is so irretrievably poor that the only way from here is up. But the list of such past signals is already long.

The quirky construction of the Dow is the cause of these changes. The Dow may be “venerable”, and still the most widely followed index, but nobody would create anything quite like it today.

This is because it’s a price-weighted index, rather than market-cap weighted like most indices. This means that the price of a stock determines its importance in moving the Dow. Apple (AAPL) is the highest weighted stock in the Dow by virtue of its price. Because of its impending 4:1 split, its weighting is about to drop by around three quarters – for market cap weighted indices such as the S&P500, a stock split has no impact on the weights of the components.

If Berkshire A (BRK-A) was in the Dow, at $326K per share it would dominate the index.

Perhaps when Charles Dow and Edward Jones first published their eponymous average in 1896, calculating the average daily price of twelve stocks without a calculator was already enough work for two financial reporters. But their simple approach remains with us today.

The tables below illustrate the shortcomings. Perhaps the biggest is that a price-weighted index doesn’t reflect market cap weighted moves in its components. This makes it less representative. From next week moves in AAPL’s value will have much less impact on the index. An investor wishing to track the Dow Jones has to sell most of her AAPL’s shares, even though it’s still in the index. Tracking the Dow is more difficult and costly because it requires frequent rebalancing. That’s why there’s far more money invested in products linked to the S&P500, and they have much lower tracking error.  Market-cap weighted indices by definition reflect the experience of all the money invested in their components, and are more easily tracked by portfolios invested in them.

One result is that although the recent rebalancing reflects the biases of the committee that oversees the Dow Jones, the smaller size of Dow Jones-linked funds limited the rebalancing trades by investors tracking the index.

Energy investors can console themselves that XOM’s ignominious ejection is due to AAPL’s meteoric rise and subsequent split. Several big companies have had a sporadic relationship with the Dow. General Electric (GE) has been spurned three times, most recently in 2018. Since then, GE has lost almost half its value. Given valuations, energy investors are likely to do much better.