Dear Valued Clients and Friends –
The futures opened yesterday down a pinch and reflected a down 80 or so opening for a couple hours. By the time I went to bed U.S. futures were pointing up 100, and more interestingly, the Nikkei was up over 400 points (see why below). I woke up to the futures pointing up 200 points at 3:30am, and the June delivery contract on WTI oil down 17% to just over $14/barrel. (The disconnect between short term oil futures and equities is a sight to behold).
The market opened up ~100 points, and throughout the day traded up about +250 (most of the day). Oil was down ~20% most of the day even as, once again, most energy stocks were higher. Financial stocks were the huge leadership names today. The Dow ended up closing +360 points, just off the highs of the day.
In market technicals, the flows into the triple-Q’s are so overdone (top percentile all time for rolling flows into the Nasdaq ETF), it is incredible to watch. We are not Nasdaq let alone ETF investors, but we would note the top five weighted names in the triple-Q’s are the same top five weighted names in the S&P 500 (highest concentration of index in history).
An interesting dynamic holding up markets – the speculative shorts (in the futures), still representing present and future buying pressure.
* Strategas Research, Daily Technical Strategy Report, April 27, 2020, p. 7
Those waiting for “bad economic news” to see the market go lower will certainly get more economic bad news. But will they get “bad economic news surprises“? Is the bad economic news priced in?
* Strategas Research, Daily Technical Strategy Report, April 27, 2020, p. 8
On the health front, the confirmed case growth in the U.S. of just +2.9% on Sunday was the lowest to-date, and the declining death count, declining positive-ratio, and increasing testing level all pointed to one of the best health data days we have had so far (and it only got better across the pond).
* Pantheon Macroeconomics, April 27, 2020
- The New York death count on Sunday was the lowest in a month
- Lower death counts in Spain, Italy, Holland, and France over the weekend adding optimism
- I expect this antibody test story to continue exploding – so far out of CA, NY, and MA – suggesting that the virus was much wider spread than understood, with a huge portion of the population having no symptoms, or very mild symptoms. The results coming in to this effect will substantially change policy understanding going forward with so much more of the population immunized than previously thought.
- I don’t expect the media to talk about it much, but I do know that many, many Governors are closely watching Sweden’s data, to see the direction of their cases and deaths despite their lack of strict lock-downs.
- Expect another disconnect on new testing tomorrow as I see one tool reflecting 136k tests today but another reflecting 191k.
- Orange County, CA sits at a total of 2,126 cases of COVID to date, with 39 total deaths (population 3.2 million)
As far as Japan is concerned, the Nikkei would close up over 500 points, now within a whisker of re-hitting 20,000. It was 16,500 at its March low, so up over 18% or so in six weeks. The BOJ basically committed to “unlimited bond-buying” – specifically tripling the maximum amount of corporate bonds and commercial paper it will buy (up to 20 trillion yen, which equals $186 billion). They are also targeting a 0% federal funds rate and suggesting no cap or limit to government bond-buying. They are offering to pay financial firms 0.1% to tap its lending facility (to incentivize bank lending). The rhetoric was perhaps as important as anything else – pretty unwavering “whatever it takes, stop at nothing” type talk.
The non-conforming jumbo mortgage market continues to be basically dead. I am certain the Fed and DOT are aware of this, but not at all certain what they are going to do about it.
In commercial real estate, the complete lack of rent payments that retail landlords likely received in April and (will receive in May) – estimated to be less than 2o% of normal rent rolls – may seem like just a retail landlord problem. But there is a reason policymakers may care more about the plights of commercial mortgage bond pools than they let on … sales tax revenue to municipalities! Retail landlords going out of business, bondholders enacting foreclosures, and significant disruption across commercial assets – means one thing: less sales tax revenue to cities and states. Okay, I lied. It means another thing, equally unacceptable to policymakers: Less property taxes to municipalities!
The Fed is being lobbied hard to broaden eligibility for their facilities so as to allow collateralized loans, which sit in the heart of many of these businesses. And we know the pressure to broaden eligibility for CMBS usage as well.
I remain humbled by the fact that I do not know what the Fed will do, what DOT will do, how they will do or not do it, and what nuances will be involved when they do or don’t do what they do or don’t do. BUT, I will say that the connectivity to sales tax and property tax receipts to commercial real estate does give plenty of cover to pols and central bankers feeling more cover is needed in this space.
Will negative interest rates be a part of the Fed’s took kit this week? The answer is no, which is different than a claim that they will never go there. Here are the two things I will say:
(1) They will not go there this week
(2) They ought not go there, ever. They are fundamentally distortive, counter-productive, and seek to solve a problem we do not have (i.e. economic actors do not lack the desire or ability to spend money; they lack the opportunity to do so). Cheaper credit is not the incentive the world is waiting for. Leaving their houses, on the other hand.
There is no precedent for negative rates boosting growth, none. There is ample precedent of them failing to do so.
So in a nutshell on the Fed, I am curious where there may be guidance on the residential mortgage market (jumbo, non-confirming). The municipal markets may receive more support than expected. Commercial mortgage markets look for more clarification, as do the levered loan markets. Negative rates will not be touched. And an ongoing “whatever it takes” approach strikes me as very likely through the center of this shutdown and its ramifications.
I spoke with Charles Payne on Fox Business today about the Fed and about the midstream energy sector.
Futures for tomorrow just opened, close to flat. Oil is up $0.12 cents, which is these days almost +1% (ay yi yi). The beat goes on.
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