Dear Valued Clients and Friends –
The market dropped 130 points today (Dow). Futures were down 300 when I woke up this morning and the market opened down 300, then actually went up on the day, then fell over 300 again, then zigged and zagged into the close before closing down 130 (-0.47%). The Nasdaq was down 1.25%, and it remains off right around 10% from its high.
* FactSet, DJIA, Sept. 17, 2020
The weekly jobless claims came in at 860,000, as expected, but continuing claims dropped by almost a million, landing at 12.6 million (now half of that 25 million high we had early on).
There is a lot today – from Housing to the Fed to policy to oil – the way I like these missives to go – but starting off with all the COVID news that is fit to print …
COVID Health Information
- The United States has now tested the most people in the world, per capita, double and in some cases triple that of some European countries.
- Eli Lilly announced today successful results from a trial for their viral treatment, indicating a 72% reduction in hospitalizations for patients taking it. No adverse side effects were reported. This is an outpatient treatment and the study was done on 800 symptomatic COVID patients. Separately, Lilly also announced a collaboration agreement with Amgen to manufacture their treatment once final approval is achieved (driving capacity higher, and offering a lot of confidence in eventual approval).
- As has been rumored and expected in recent days, the Big-10 football conference did reverse course yesterday and authorize football season to take place this fall. That leaves just the west coast/Pac-12 as the holdout determining not to have a fall college football season (and the Pac-12 is suddenly taking steps to re-consider as well; such bold leadership).
- It is hard to see how this is NOT the biggest story of the day. Obviously the “half-empty” glass is that such a prominent group of politicians and public health officials would conspire to lie, withhold facts, and create unfounded public alarm. But the bright side? Sure looks like the health side is more positive than many had believed, eh?
* Pantheon Macroeconomics, Sept. 16, 2020
- Today’s testing data shows almost 836,000 tests done today, w/ a positivity rate of 5.1%
* The COVID Tracking Project, Sept. 17, 2020
Key State Info
- It may seem like a non-COVID story, but the huge spike in unemployment claims in California, recently representing nearly half of the w.1hole nation’s total jobless claims, is most certainly tied to the pandemic. In fact, these claims are specifically tied to the Pandemic Unemployment Assistance fund, and have prima facie acceptability because of the stubbornly consistent restrictions on economic activity (despite a statewide positivity rate of just 3.6%, by the way). Well, it now appears a significant part of the unemployment claims jump (with profound implications to the national level) are fraud-related. Ay yi yi.
- Speaking of California positivity rate … Something about the chart below might surprise people in the context of the high restrictions on economic activity, schools, and churches (taken straight from CA COVID website).
*California.Gov, COVID-19 Statewide Update, Sept. 16, 2020
- And last but not least, some Orange County updates …
*California COVID-19 By the Numbers, Moorlach Postings, Sept. 17, 2020
* Worldometers.Info, Sept. 17, 2020
Stock Market Today
Yesterday was a very interesting day in advancing this so-called mean-reverting leadership change I am so confident will inevitably come:
*Strategas Research, Daily Technical Strategy Report, Sept. 17, 2020, p. 1
I said last week that the big test of market risk appetite and direction would be corporate credit spreads. The High Yield CDX made new lows yesterday, indicating the most bullish risk appetite in capital markets we have seen since COVID began (judged by this measure, which I consider a significant one).
*Strategas Research, Daily Technical Strategy Report, Sept. 16, 2020, p. 2
A few thoughts on the competing opinions regarding a potential “relief” or “stimulus” bill. Yes, there are more media reports of a few Democrat members of Congress pressuring Speaker Pelosi to start looking more seriously at a deal, and she did issue a statement after President Trump made comments indicating he was closer to her side of this deal than the Republicans.
Senator Thune has stated that $500 billion+ in state aid is a “non-starter” and that seems to remain the issue keeping a deal from getting done.
But there are sources of mine in the White House saying they are ready to move on some version of this bi-partisan “problem solvers caucus.” And yesterday POTUS basically was as clear as he has been that “he wants to go for the higher number” – meaning, the White House and Congressional Democrats may not be that far off, at all. We may end up with Pelosi having to make a decision as to whether or not she wants to take the White House giving her everything she asked for (or close to it). That may be a harder sell here than getting the GOP Senate to do what they don’t want to do. Think about the irony here. If I am right about where POTUS wants to bring this, it will be harder to get Pelosi to do what she wants to do than it will to get the Senate to do what it doesn’t want to do.
We live in weird times.
For those of you who like the policy wonkishness, I think one possible way – just possible – that they all end up capitulating on aid to states is with language about “real revenue losses.” We’ve seen that several times in the last few days in comments from Mark Meadows plus this problem solvers caucus proposal. Tying relief to states to “real revenue losses” gives red state Senators cover for the accusation that they bailed out irresponsible states for pre-COVID malfeasance.
I am not saying this is going to happen. I am saying a new round of negotiations is underway, and much of it is taking place on television.
And in the meantime, while all of that plays out, there is a remote chance of at least an isolated PPP re-launch allowing businesses to take a second loan if they meet certain criteria. I really do question if any stand-alone piecemeal components will get passed outside of a bigger bill given the rancor and partisanship behind all this, despite the fact that everyone involved says they agree with this policy piece of the puzzle.
Oil and Energy
OPEC+, everybody’s favorite little cartel and coalition of both behaved and criminal nation-states, is back in the news after a decent little hiatus, this time to again review production cut plans and compliance with past agreed to production cuts. With oil demand forecasts remaining on the low side there may be some pressure to further current production cuts, though I doubt that will happen very much. Rather I imagine the focus will be on maintaining present levels and raising pressure on potentially non-compliant nations to play along.
Fannie and Freddie issued $322 billion of new mortgage securities in August – $322 billion (with a “B”) – in one month. A good amount are re-financing loans which means much of this volume is taking out pre-existing mortgage securities, creating pre-payment risk in the asset class. Low rates creates high demand for mortgages, which creates more volume of mortgage securities, the demand for which comes out of low treasury yields, which in turn feeds more capital stock for more mortgages, rinse and repeat.
The Fed now owns ~30% of all mortgage bonds in existence.
New housing starts declined 5.1% in August, by the way. The number came in 72,000 below expectations (~1.41mm vs. 1.48). Single-family starts actually increased but multi-family pulled the aggregate number down. All in all builder confidence has been a little hot and to see things cool a bit is not a big deal.
The first news on the Fed comes from their September FOMC meeting yesterday. As expected, they did not touch rates, and as was reasonably expected, they extended the time frame they admit rates will be held to 0% through 2023 (they previously had said “at least 2022”). The market did jump 300 points on the news yesterday but then an hour later had given that up. There wasn’t any real policy news out of the meeting but I suppose one could say that the language and such were as strong as we have seen to date in reiterating long-term dovishness. As expected, Chairman Powell used much of his press conference to effectively say, “we’ve done all we can on the monetary side; we need Congress to act on the fiscal side.”
Chairman Powell did address questions about the Main Street Lending Facility, which clearly has not had the demand or draw on it yet that many had anticipated or hoped for. There are disagreements as to whether or not the reasons for the muted participation thus far are lack of loan demand, lack of underwriting prowess, or limitations in cost and risk (at the bank level). Treasury and Fed officials say more tweeks and twists are coming that they anticipate will drive participation higher – mainly, educating banks as to why their underwriting can be and should be “lighter” with this program than normal. At $2 billion of purchased loans in a $600 billion facility, they are 0.3% of the way through.
It may not just be California riddled with unemployment claim problems. That whole story is one worth watching. From COVID data to now jobs data, this problem in analytics from really quite sophisticated agencies and organizations has been disheartening this year (not to mention the mistakes have always been on the side of making bad news look worse, never bad news look better – not good for the national psyche).
Anyways, futures are up a pinch. The weekly Dividend Cafe comes tomorrow. And we are here if you need us, 24/7.
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.