Dear Valued Clients and Friends –
The market rose 160 points today, perhaps from a mix of reasons (Fed talk, hurricane control, and COVID testing news – see below). The S&P was up just a tad, and the Nasdaq was actually down on the day.
* FactSet, DJIA, August 27, 2020
I do feel like today’s missive is a meaty one, so I hope you will enjoy reading it as much as I enjoyed writing it. I confess, this “every other day” missive schedule has been much more manageable for yours truly! Okay, let’s go around the horn …
COVID Health Information
- Only one state in the country (Georgia) has more than 20% of their hospital beds being used by COVID patients. 45 states are under 10%. 27 states are under 5%. This. Is. Not. Being. Reported.
- Confirmed new cases are now down over 37% from the July peak of a month ago, and are down over 12% on daily average basis from last week. The case decline is rapid, and while I am of the opinion it must be hospitalizations and case severity that drives public policy, not merely the existence of cases, the actual decline in cases adds ammo to the arguments for greater freedom of movement and activity (an economic plus).
- The only states not seeing rapid decline in hospitalizations are Alaska, Hawaii, Montana, and West Virginia – more or less the overall national trend and data reality where there is a real COVID presence is in overwhelmingly declining COVID hospitalizations.
- And even apart from the dropping hospitalizations, and dropping cases, the hospitalizations-per-confirmed cases has dropped substantially from the spring levels, unambiguously supporting the notion that the recent infections affected a less vulnerable and more healthy group, and lending support to the idea many epidemiologists have proposed that the virus is losing potency.
- A new study from a team of researchers at the La Jolla Institute of Immunology has provided further support to the notion (quickly becoming the consensus scientific view) that prior exposure to the coronaviruses that cause the common cold may be providing some protection against COVID-19. The questions appear to be how reliable and long-lasting these protections are, and not whether or not they exist. Cross-immunity is an important part of T-cell protections, and an important part of evaluating where the whole herd immunity threshold may lie. It also may explain less symptomatic and severe cases.
- “This potential preexisting cross-reactive T-cell immunity to SARS-CoV-2 has broad implications as it could explain aspects of differential COVID-19 clinical outcomes, influence epidemiological models of herd immunity, or affect the performance of COVID-19 candidate vaccines.” – aforementioned paper (26 researchers)
- “Clearly, there is some cross-protection for other seasonal coronaviruses” – Sarah Fortune, chair of Harvard’s Department of Immunology
- The FDA gave emergency use authorization to Abbott Labs yesterday for their $5 rapid response antigen test. The test is tiny, cheap, and fast, and uses a similar technology to a home pregnancy test, with results expected in 15 minutes. Tens of millions of these tests will ship in September now. They will not be sold directly to consumers – but are intended for use by medical professionals, school nurses, etc. Accuracy levels are estimated to be roughly 97%.
- One of the tricky things about analyzing the summer surge in cases and determining where or where not a potential herd immunity analysis becomes useful from all of it was that so many places being analyzed had not had a real “first wave” yet. Louisiana was an exception – as they were hit pretty hard back in March/April, and then again in June/July, indicating that perhaps the herd immunity hopes that were a possible explanation for low reinfection rates in some places like New York were premature. I have benefited immensely from the work of Youyang Gu, a data scientist at MIT, throughout the last few months, and I took the time this morning to read his exhaustive analysis of Louisiana’s “second wave.” Not only do we see that it was very different parishes/regions of the state impacted in March/April vs. June/July, we see that the mortality in the “second wave” was a fraction of the first.
* Pantheon Macroeconomics, August 26, 2020
- Today’s testing data shows over 742,000 tests done today, with a positivity rate of 5.9% (you might note Johns Hopkins has refined some of their nomenclature)
* The COVID Tracking Project, August 27, 2020
F.A.C.T. (Florida, Arizona, California, Texas)
- What preceded a massive drop in Florida hospitalizations, mortalities, and positivity ratio? Emergency room visits for COVID-like illnesses (CLI), of course. This reliable leading indicator is currently down 75% in Florida from its July 7 peak.
- The per capita mortality rate for Florida seems to have peaked out at just 28% of what New York’s is, despite all the concerns this summer that Florida was headed to a New York March/April level of mortality. Thank God, it never even got close to that, and at just 28% of the level, is a huge data point for analysts.
- Of the 135 deaths Florida reported today, 70 (over half) were from JULY – a month or longer lag.
- So you can see why I will no longer cover Arizona in the daily “FACT” section … ICU beds from COVID is top left; hospitalizations from COVID is top right; the share of available beds and non-COVID patients is the bottom.
*Arizona Department of Health Services, COVID Data Dashboard, August 27, 2020
- Riverside County hospitalizations are down over 60% from July 14 low
- Orange County now five days into its 14-day goal of being off the monitoring list.
*Orange County COVID-19 Dashboard, August 27, 2020
- It is surreal to read some of the predictions from ~three weeks ago in Texas about hospitalizations and deaths, and see how the data has trended. The hospitalizations in Texas are down 32% in the last two weeks alone.
* Worldometers.Info, August 27, 2020
- You may recall the New York Post published my article last month encouraging a safe and substantial re-opening of offices in New York City. One of the nation’s largest real estate development companies has echoed the sentiment in the Wall Street Journal this week.
Stock Market Today
No additional comment, other than to say mean reversion is a powerful phenomena.
*Strategas Research, Daily Macro Brief, August 27, 2020
I talked with Charles Payne today about the drop in COVID and the rise of the market.
Both sides are doing their best to message to the public that they are trying to reach across the aisle, and both sides are doing their best to message to their own constituencies that they will not roll over. Speaker Pelosi said today after a call with White House Chief-of-Staff, Mark Meadows, that they were at an impasse.
Oil and Energy
Oil prices have continued to climb. Three million barrels per day of refining capacity have been closed as 84% of Gulf of Mexico oil output has come off line from the hurricane. Inventories fell another 4.5 million barrels last week and gasoline stockpiles shrunk as well. The build-up through the lockdowns was something fierce, but the depletion of those inventories is going better than expected, supporting prices favorably.
I am having a hard time understanding this, and don’t think I would have even known about it if it were not for the work of Edward Pinto at the AEI Housing Center. But over the last few months, the share of loans being done by Fannie/Freddie (the lion’s share of our country’s residential mortgage market) without an appraisal (i.e. the appraisal requirement being waived) has exploded. Going into COVID, the number had been about 25% of Fannie/Freddie loans being done with the appraisal waived. That number has now exceeded 40% of all loans in just a few months! Now, the easy reply may be, “well, this is not ideal, but it was because of COVID restrictions from visiting the house, etc.” First of all, if that were the reason, it is patently absurd. Realtors and would-be home buyers are able to visit properties and sign COVID waivers, etc.; obviously a one-person appraiser could do the same for a 60-minute visit. But beyond that, note how the number had exploded up (from 5% to 25%) the year before COVID as well. In other words, this is not a COVID trend … this is just a, well, trend.
*American Enterprise Institute, Edward Pinto, AEI Housing Center, August 24, 2020
I cannot figure out for the life of me why this is happening. The housing market is plenty healthy that pushing the envelope in risk underwriting strikes me as wholly unnecessary. And yet no one can argue with a straight face that this “hockey stick” level change in valuation methodology reflects a rather rapid decrease of risk mitigation. A valuation methodology that lacks an appraisal is highly subject to “gaming” (manipulation), especially with the huge increase in cash-out re-finances we are seeing.
Separate note – 67% of mortgages in Q2 were re-financings (though that is not a surprise with the lockdowns limiting new purchase activity for much of Q2). But 1.69 million borrowers re-financing their mortgages is a LOT of people, a 100% increase from the year prior. And the $513 billion they re-financed was up 130% from the year prior. My prayer? That these are mere rate reduction re-financings, and light on “cash out.” Never forget Bahnsen’s law – falling home prices did not create the 2008 crisis; a lack of protective equity did!
Call it 2002-2007 PTSD (I am not afraid of being accused of that, since I freely admit it), but anything systematically reducing proper protocol in the housing industry gets my attention.
Yes, my projection was that the Fed would rationalize a “more accommodative” monetary policy “for longer” soon, and today we got the official word that they are officially re-wording their 2% inflation target to allow for a >2% run so as to “average” that number over longer periods of time. But I think an important comment has to be made … I don’t want 2% inflation, let alone 2.5% inflation, so you would think that them “upping the ante” would upset me. But if they have been unable to create 2% inflation, why would I think that they will be able to create 2.5% inflation (or whatever)? I don’t. String-pushing is a monetary reality.
Essentially, the deflation that the financial crisis bore has never gone away, and with 12 years of unbelievably aggressive monetary accommodation, the Fed’s target has not been hit (core PCE is their preferred measurement of such).
*Pantheon Macroeconomics, U.S. Economic Monitor, August 27, 2020, p. 1
They can (and will) re-frame their policy goal rhetorically, but substantively, I do not think this changes anything. Some have criticized the Fed for saying they want more inflation, but not doing more to create it. My view is that they can’t, because velocity of money is needed to generate inflation, and velocity is positively correlated with the growth of unproductive debt. That is what we are battling.
Futures are up a little over 50 points. Weekly Dividend Cafe coming tomorrow. In the meantime …
Be well, be safe, be free.
David L. Bahnsen
Chief Investment Officer, Managing Partner
The Bahnsen Group
This week’s Dividend Cafe features research from S&P, Baird, Barclays, Goldman Sachs, and the IRN research platform of FactSet.