Dear Valued Clients and Friends –
The market was up 580 points today, almost recovering all of Friday’s point drop, despite a weekend of apocalyptic headlines from the media about COVID. My earnest hope is that the market itself has decided to see through the hype to the more substantive realities on the ground, but candidly, there is no assurance that (a) That will happen, and (b) If it did, the other realities on the ground would prove bullish (i.e. the economic ones beyond the COVID nitty-gritty). It is just a very volatile time right now and any investment fiduciary must be grounded in humility and preparation … Any number of outcomes are possible in the days, weeks, and months ahead. That is not hedging; that is just the reality of this period.
That said, the “range-bound” thesis is not going anywhere, and makes dividends a more important part of the total return than ever. Let’s really unpack today’s health data and all the usual categories of coverage …
As for health data, the major takeaways from the weekend data are that Arizona’s case growth seems to have begun a big reversal, that the hospitalization data and especially the mortality data continue to not move higher with the reported case growth, and that our case fatality rate rolling average has dropped from nearly 6% to right around 2%.
* Pantheon Macroeconomics, June 29, 2020
- The proportion of new cases that lead to hospitalizations has utterly collapsed versus the numbers of the spring, and in fact, has not stopped falling yet. This is almost certainly due to the younger and healthier make-up of those testing positive. Additional possibilities include the increasingly promoted belief that the virus itself is losing potency. The former is demonstrably true; the latter is theoretical at this stage.
- 1,500 pediatricians in the UK signed a letter pleading with the Prime Minister to prioritize the re-opening of schools.
- There really is nothing negative to show in Italy, UK, Germany, France, or Spain. Even Mexico has seen a recent reversal in case growth averages and deaths-per-day averages.
- The plans were announced for how hospitals would be charged for remdesivir. Thus far the therapeutics used as part of the government’s emergency use authorization were donated by Gilead. The plan into regular use will be a higher price for patients with commercial insurance, and a 33% reduction for those acquiring through Medicare or government insurance. In all other countries there will be one uniform price. The cost of remdesivir is considered a net savings to hospitals because of the statistical evidence that patients taking the treatment are discharged from the hospital, on average, four days sooner than those receiving standard treatment.
- The average age of positive cases has not just collapsed in Florida …
- Deaths are currently down (counting last week’s data and the week before) 75% from the peak in April, and really down ~90% (because the former includes back-dating). How this is not the headline story of the day vs. the data on cases is simply unbelievable to me.
Today’s national testing data shows over 569,000 tests done today, with a positivity rate of 6.4%.
* The COVID Tracking Project, June 29, 2020
FACT (Florida, Arizona, California, Texas):
- Arizona’s case growth not only dipped from 6% to 5% but did so in a week of intense increased testing. Intubations remain just over half of that they were ten days ago.
- In California, Orange County in particular, it is worth noting that 52% of the 325 deaths in OC are nursing home related, a statistic that is both tragic and contextually revealing all at once. OC’s fatalities per capita is tied with South Dakota at the lowest level in the country. California as a state is at 28th in the country (per capita), and OC is much better off than California as a state.
- As for the whole state of California, I trust you will find this chart as relevant to understanding present data as I do:
* California Department of Health, June 26, 2020
- Texas “ICU capacity” is the same this week as it was … wait for it … last year at this week! That is because “base capacity” is not the same as “surge capacity.” They frequently (even in a pre-COVID world) ran near capacity, with ample ability to increase ICU capacity as needed. My sources for the misleading nature of what is being said about Texas hospital capacity are Texas hospital directors and CEO’s themselves.
* Worldometers.Info, June 29, 2020
You’ll notice that Arizona is not in today’s, because it was not “top four” today. Hmmmmmm (maybe a reporting lag, though?)
My major takeaway from a weekend of research: the focus on cases may or may not stay the focus in the media for a while longer; but it will be the story of it ceasing to be the focus of society that most impacts markets.
In market technicals, one of the trickiest things about the whole world of technical analysis is the fact that correlation does not mean causation. When one sees a pattern (A) that is correlating to something else (B), the fact that the one may not have caused the other inherently means that something changing with A does not necessarily mean something changing with B. Such is the case with the growth of money supply and the S&P 500 (as demonstrated below). We know that money supply flew higher in March/April behind stimulus efforts, and we know the S&P 500 rebounded dramatically after its March swoon. We also know that the S&P has recently flattened out and entered range-bound period, just as the growth of money supply has done the same.
* Strategas Research, Daily Technical Strategy Report, June 29, 2020, p. 2
So it it fair to ask – was money supply growth the cause of S&P growth, and if so, does it stand to reason to wonder if the S&P can keep growing if money supply growth is not going to sit still?
My answer is that even if money supply growth was the cause of S&P growth in Q2 (it wasn’t entirely so), it doesn’t mean that there couldn’t be a break-up of that correlation in the future, or a replacement of one cause with another. In other words, this correlation is worth noting, but not formulating investment policy around.
In other technical observations, there are few indicators I think are more confirming of equity signals than the high yield market (either spreads or credit default swaps, basically measuring the same thing). As last week’s equity volatility was not accompanied by a great deal of commotion in CDS spreads, the technical risk backdrop remains hard to define right now, riddled with conflicting signals.
* Strategas Research, Daily Technical Strategy Report, June 29, 2020, p. 4
Finally, speaking of conflicting signals – how does one read this, exactly?
* Strategas Research, Daily Technical Strategy Report, June 29, 2020, p. 6
On the public policy front … Unsurprisingly, the Government Accountability Office (GAO) has determined that there is fraud that has taken place with some of the borrowers in the PPP program, and is calling on the SBA to crack down on such situations. They are also concerned about those who took unemployment benefits while also getting wages out of the PPP program. It remains to be seen if their focus will be more on fraud that took place at the application level, or takes place at the forgiveness level.
As for Stimulus 4.0, the head of Policy Research at Strategas, Dan Clifton, who for my money is the best in the business, is giving it a 50%+ chance that a bill is reached in July, and that it will address unemployment insurance, state aid, tax credits, PPP, liability protection, food stamps, and testing. He is placing the total price tag at $1.2 trillion, where I still believe they will end up exceeding $1.5 trillion. I do believe (as does Dan) that whatever they do with unemployment will both (a) Take away the dynamic where one can make more money not working than working, and (b) Extend some sort of support. A ton of ambiguity sits around what they will do with taxes, tax credits, tax refunds, etc.
In the Oil and Energy world, the bankruptcy filing last night of Chesapeake Energy (not a surprise) will offer a blueprint for various over-levered producers on what to expect in the months ahead. Few had the debt levels Chesapeake did (few companies in any sector, ever in history, for that matter), but it will be interesting to see if this is the high mark of company distress or the beginning of other weak players going the same route. I expect it is more the former than the latter, as many weak players have manageable situations relative to key assets, and offer a strategic opportunity for larger integrateds or private equity. In this case, the Barnett shale assets notwithstanding, the debt levels (not just as a leverage percentage but in absolute dollar terms), transcend what other parties could have/would have taken on.
WTI Crude, by the way, closed near $40 again, up ~3% on the day (rallying along with other risk assets).
As for Housing, there was a very distressing jump of 79,000 active forbearances last week. This pushed the percentage of active mortgages from 8.7% to 8.8% in forbearance. My initial prayer (which I knew to be too optimistic) was that somehow this number would hit a ceiling of 5%. When I saw the minimal effort to “promote” the fact that “forbearances still meant money had to be paid back” I feared it would hit 10% (a totally unacceptable level). We appear to be in the middle of those two numbers. But this last week’s increase is discouraging because we had been declining for three weeks in a row. To drop 57,000 one week but increase 79,000 the next week is very discouraging.
This all stems from that provision of the CARES ACT I have written about at great length, whereby Fannie/Freddie/FHA mortgages (roughly 65% of all U.S. mortgages) can receive permission to not be paid for a period of 6 months (and longer if extension is requested), with no substantiation of financial hardship. It is estimated there is over $1 trillion of unpaid principal and mortgage payments lingering out there from the 4.7 million borrowers using this program. The highest % of loans are the FHA/VA loans where credit scores are lower on average and loan-to-value ratios are much higher.
Some of the pressure this phenomena was putting on mortgage servicers has been alleviated as the FHFA “capped” the months of payments the servicers has to advance to investor pools at four months. Regardless, there still exists a systemic issue of how and when these payments will be made whole, and what mechanism and whose dollars are used to plug the hole. It has not trickled into overall housing values, yet, as demand has been very strong and low rates have driven greater buyer appetite. The concern would be if and when a series of default events take place when those who utilized forbearance realize they have a big hole that has built up that lingers over them in the form of deferred payments, etc.
And in Fed news, our nation’s central bank has bought $428 million of individual bonds so far (as the primary and secondary bond facility together is targeting $750 BILLION total – with a B – this is not very much money, at all). They have added $5.3 billion in bond ETF’s, though (above prior purchase levels).
Futures are up a tad (~40 points). Regardless of what the market does tomorrow, I am committed to closing the first half of 2020 strong, in mind, body, and spirit. I will be running through central park tomorrow at 5:30am eastern, so one of those three will be teed up. But the other two will as well. These are times for sober-minded work, a passion for markets, a love of clients, and a true attention to the seriousness of the moment.
To all those ends I work.
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.