Dear Valued Clients and Friends –
Futures were pointing down as much as ~300 points Sunday night (netted for fair value), though that number improved as the night went along. By 3:15 am this morning they were pointing to a flat market open. The market traded down ~200 points early and closed up over 150 points, in a 400-point range today …
* FactSet, DJIA, June 22, 2020
We will go around the horn, as usual, today covering all the normal things …
As for health data, after 30,000+ cases reported Friday and Saturday (nationwide), and then 26,000 Sunday, the case growth today appears to be +29,000 (as of press time) … Arkansas, Louisiana, Tennessee, and Alabama all saw their case growth reverse over the last few days. The states where case growth has been substantial enough to warrant coverage are Florida, Arizona, California, and Texas, the first two of which the positive case growth has been higher even adjusted for new testing (more on this below).
* Pantheon Macroeconomics, June 22, 2020
- Today’s testing data shows 475k tests done today, with a positivity rate of 5.5%.
* The COVID Tracking Project, June 22, 2020
- I would like to congratulate those media outlets who, in reporting “Brazil’s almost doubling of daily cases on Sunday” were able to squeeze in that “there had been no reporting the day before from their three largest cities, so two days were reported together.” I can understand why that slightly connected factoid would not fit in the headline, so kudos for making the space to “asterisk” that little guy in there.
- I had to do this data pull myself, but Texas makes available a spreadsheet online that shows their daily testing county by county. From June 1-18 they averaged 28,426 tests per day statewide. They saw the aforementioned surge in cases Friday and Saturday, but testing was 45,926 on Friday and 67,273 on Saturday. This would actually imply a reduced case growth adjusted for testing over the weekend.
- Gilead is starting tests on an inhaler version of remdesivir (as opposed to the intravenous version that is being used now). They will begin screening for phase 1 volunteers this week and will begin trials on COVID-positive patients in August. An inhaled formulation would be a significant stepping stone in therapeutic treatment. The goal is to see if the success remdesivir is having in limiting hospital stays (accelerating recovery) in severe cases can be reflected in earlier stages of the virus.
- We need to see several days of case growth reversal before we can feel that the worst is behind us, so the reduction in some problematic states today needs more decline days before we can read into it. Likewise, while California’s case growth is coming with an explosion in testing, we want to keep monitoring the other metrics that go with it to verify
FACT (Florida, Arizona, California, Texas):
It looks to me like California’s testing growth is higher pro-rata than its new case growth, even as its new case growth has continued to move higher. 70% of last week’s case growth in California is in the Latino/Hispanic population, and 57% of total cases since February. This would suggest that the economic re-opening makes no sense as an explanation of case growth since that is so out of proportion to the population demographics.
* Worldometers.Info, June 22, 2020
Three facts to close out the health data today:
(1) The case growth in these states is a problem and something being monitored closely
(2) It seems incontestable thus far that the nature of the new cases we are seeing are less severe and in younger, healthier people
(3) Hospitalizations and deaths are trending the right way
In market technicals, I think various contrarian indicators continue to provide the technical backdrop for this market.
* Strategas Research, Daily Technical Strategy Report, June 22, 2020, p. 4
In the Oil and Energy world …
WTI Crude closed above $40, a symbolic but powerful statement based on where we were two short (long?) months ago!
As for Housing, while all the focus lately has been on the positive data of new purchase mortgage applications and homebuilder sentiment, delinquencies in May were up to 4.3 million, unsurprisingly 723,000 more than the month prior. This is 8%+ of all U.S. mortgages. Now, why do I say “unsurprisingly”? Because the U.S. Congress opted to make it legal to not pay your mortgage. This number includes those making use of the forbearance provisions of the CARES ACT.
We expect total home sales to begin a V-shaped recovery in June’s data.
* Strategas Research, Economics Report, June 22, 2020, p. 1
And in Fed news, the annual stress tests on the big banks, implemented after the financial crisis to annual assure Fed regulators of the capital adequacy of our nation’s financial institutions, will have a little more drama this year than they have the last few years, as bank financials will have to be stress-tested in the context of the COVID recession. Regulatory head of the Fed, Randy Quarles, indicated stress tests will be conducted under a presumed quick recovery scenario, a gradual recovery scenario, and a second drop scenario.
The banks’ capital requirements will be announced after the stress tests are complete. Dividends and share buybacks will surely be addressed.
I believe there is so much significance in this chart below, I hardly know where to begin. It offers a lot of social and economic information. Essentially, there is no doubt that the economic impact if the shutdown was most severe for those in bottom income brackets. And this absolutely explains why housing and other metrics that have reflected positive comeback data have done so.
* Federal Reserve, Semi-annual Monetary Report, June 12, 2020
Futures are pointing up ~100 points or so. Have a great night – back at you tomorrow.
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.