Dear Valued Clients and Friends –
First and foremost, today’s National Video Zoom Call replay:
The market exploded up over +900 points today. Futures were up a hundred points or so when I went to bed last night, and were up +200 or so when I woke up this morning. They continued a trajectory higher the next 90 minutes. But by 4:45 am they had exploded higher (up almost +600 points) on reports of positive vaccine testing (covered below). The market stayed high throughout the day and just leaned upwards throughout the day. The idea of positive movement towards a vaccine and Fed Chairman Powell expressing willingness last night to do even more if needed seemed to drive this market rally.
As for health data, our +1.3% in new cases Sunday was a new record low since the crisis began. Substantial increase in new testing has kept the absolute number of cases low but still declining even with the elevated testing levels. And one of the major contenders for vaccine development (Moderna) reported significant updates in their human trials (see below).
* Pantheon Macroeconomics, May 18. 2020
- Moderna’s early-stage human trial saw antibodies produced in 45 out of 45 participants. “These interim Phase 1 data, while early, demonstrate that vaccination with mRNA-1273 elicits an immune response of the magnitude caused by natural infection starting with a dose as low as 25 µg. When combined with the success in preventing viral replication in the lungs of a pre-clinical challenge model at a dose that elicited similar levels of neutralizing antibodies, these data substantiate our belief that mRNA-1273 has the potential to prevent COVID-19 disease and advance our ability to select a dose for pivotal trials,” Tal Zaks, the chief medical officer at Moderna, said in a statement. Reach out if you would like the full deck on the results of this recent trial.
- There continues to be a significant decline of new cases in the European countries that have begun re-opening their economies, alleviating concerns of a flare-up once restrictions were eased.
* Pantheon Macroeconomics, May 18. 2020, p. 2
- Today’s testing data shows over 346,000 tests done today, with a positivity rate of only 5.7%. The average tests per day the last seven days is now 355,000 and the average positive ratio is just 6.4%.
* The COVID Tracking Project, May 14, 2020
- I also want to add that the critical/serious percentage of total active cases in the U.S. is 1.5% (16,355 out of 1,090,297
- It will be very positive to see new cases in New York City fall below 1k/day this week (that is widely projected now, but I want to see it before I celebrate it)
- Sweden’s cases and deaths are tracking sideways. U.S. cases (daily) are running 20% higher than Sweden’s, adjusted for respective populations.
In market technicals, the continued persistence of short speculators remains a bullish indicator from my perspective.
* Strategas Research, Daily Technical Strategy Report, May 18, 2020, p. 1
Today’s market breadth will be very interesting to analyze tomorrow. Energy, Industrials, and Real Estate led the way today.
Credit default swaps (the cost of insuring against default) remain stable – not collapsing, but not moving higher.
Nearly 80% of Health Care stocks remain in an uptrend, whereas just 50% of Technology stocks are in an uptrend. Yet, Tech overall has recently outperformed Health Care. The shocking conclusion? It is a select and limited number of tech stocks bringing the sector higher …
The VIX closed a tad below $30 today (-8.1%)
On the public policy front, the Treasury Department is sending 4 million pre-paid debit cards this week to taxpayers for their Economic Impact Payment ($1,200 single, $2,400 married couple, $500 up to two kids, subject to income caps). The debit card methodology will serve as an interesting test for potential future direct-to-taxpayer support payments.
PPP loan forgiveness instructions have been posted and will surely set off the latest round of media coverage of this program.
Speaking of PPP, adjustments to the program providing greater flexibility on how the funds are spent and extending the time period in which they are spent are expected any day now. These changes were heavily requested by the industries most hurt by the COVID shutdowns – restaurants, hotels, salons, etc. 37% of the second tranche (which was itself $310 billion) is still available, confounding those who predicted round 2 would quickly be depleted as round 1 was. My belief is that the waning demand for PPP is a reflection of the adequacy of the size of this facility, and the need to fix these pieces of the program that were written when they shut down was forecasted to be shorter than it ended up being. I do not believe these adjustments will require Congressional approval, and indeed, many believe the guideline of 75% of funds being spent on payroll was outside the Congressional intent to begin with.
In looking at the Oil and Energy world, the >$32 close today in WTI reinforces greater technical strength. I have lots of sector coverage coming this week. Energy stocks were up > 8% today.
* Strategas Research, Daily Technical Strategy Report, May 18, 2020, p. 3
As for Housing, the NAHB Housing Market Index pointed to a very modest pick-up in the monthly survey after the collapsing read from April. The survey focuses on the single family home market and looks to present conditions and six months forward. Now, the drop in April was the largest drop on record (this survey began in spring 2009), but the May number was slightly better than expected. We will get the housing starts number and building permits number tomorrow.
* NAHB Housing Market Index, Wells Fargo, May 18, 2020
And in Fed news, it was fascinating to see that use of some of the Fed’s emergency facilities has substantially declined in recent weeks. Now, the corporate bond facility just got off the ground last week, and the municipal facility is still awaiting commencement, as is the Main Street Lending facility. But the original major funding mechanisms from the beginning of the crisis have seen a substantial decrease in demand, as the primary dealer credit facility (large Wall Street firms who are approved primary dealers at the New York Fed) has seen its balances reduced by two-thirds, and the money market liquidity facility balances have reduced by 20%. The commercial paper facility has not seen a reduction but the balances have stayed low.
* Pantheon Macroeconomics, Weekly U.S. Economic Monitor, May 18, 2020
Even at their peak, the primary dealer borrowings never exceeded $34 billion; by comparison, borrowings were $150 billion in September 2008 alone! The PDCF is used for primary dealers to gain liquidity off of eligible collateral for short-term funding. The three facilities I refer to here are pure measurements of Fed efforts to stabilize financial systems. All indications are that those efforts have gone as desired.
It’s almost worthless to share this next chart, because the cries of “you can’t trust China’s data” can be heard across the airwaves right into my study as I type this … And yet, I do not share it because I believe it is precise or accurate; I share it because this is the data that has been released. It is a part of the official economic record. And it would be foolish to over-think it in either direction. Had they said industrial production had collapsed, and since flat-lined, analysts would be hyper-ventilating. And they didn’t say that. So that is the takeaway – true or false, they shared a very positive industrial production number (the vast majority of which will be validated or not by American counter-data in the weeks ahead).
I look forward to any questions you may have on today’s national call, and anything else on your mind. Futures are open for Monday night/Tuesday morning, flat/slightly up in equities; up over 3% in oil …
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