Dear Valued Clients and Friends –
The market was down 350 points today, though once again the Nasdaq was down much more on a percentage basis. Frankly, when all the top big tech companies are down 3-5% and the Dow is only down 1.3%, it wasn’t that bad of a day.
* FactSet, DJIA, July 23, 2020
Weekly jobless claims came in at 1.4 million yet again, higher than expected even as continuing claims dropped more than expected, all the way to 16.1 million (from 17.3 million). In theory, this means 1.1 million came off unemployment and 1.4 million were added (but it isn’t really that simple).
We’ll unpack today’s market action and so much more in today’s missive.
COVID Health Information
Data this week has been quite a mixed bag with some of the encouraging data being more encouraging than I expected, and some of the negative data being more negative than expected. “Sustained outright declines in new cases are not that far off” [Ian Shepherdson, Pantheon Macroeconomics], but right now we are just watching the new case curve peak, and disparate results in different states makes it all tough to analyze.
- The chart and information I provide at the top of our FACT section below is, I think, the most important part of today’s missive. Fundamentally, these two realities have all held up incredibly true: (1) Case growth has been mostly amongst the young and healthier, and (2) Treatments have substantially improved since March/April.
- I was fascinated to see that Sweden had 132 new cases countrywide yesterday, while Australia had 468. It is just an interesting contrast between a vigorous lock-down and shut-out of visitors (Australia), versus the encouragement of a herd immunity build-up. Sweden’s new cases and mortalities are now so low that all eyes are really on whether or not they get a sort of “second wave.”
- The chairman of the Scientific Advisory Committee of the National Institute of Epidemiology in India stated yesterday that Dehli, India is fast approaching herd immunity, another massive world city showing huge positivity in seroprevalence tests and therefore a large part of the population already infected.
- Major League Baseball season officially kicks off tonight, and while fans are not allowed for now even with masks and distancing (no comment), it is symbolically and substantively delightful that the Yankees will be teeing off on the Washington Nationals tonight. I expect big ratings. Really big.
* Pantheon Macroeconomics, July 23, 2020
- Today’s testing data shows over 774,000 tests done today, with a positivity rate of 9.1%.
* The COVID Tracking Project, July 23, 2020
F.A.C.T. (Florida, Arizona, California, Texas)
This chart is important in demonstrating what has been a major focus in this missive for the last six weeks. Here you see the relationship between CASES (left side) and DEATHS (right side) in New York (blue). But you also see the CASE growth in AZ/TX/FL (red dotted) and its relationship to their deaths (red solid). Even as cases are starting to decline (AZ) and stabilize (FL/TX), the ratio of deaths-to-cases in this surge has not even come close to what NY saw a few months ago. This has really been a primary theme in our assessment of COVID’s impact on markets and economic behavior – the mortality risk and severity toll has dropped exponentially in the last few months, thank God.
* Source data: COVID Tracking Project, July 22, 2020
Of course, the case growth itself has led to a larger suppression of economic activity than any would have wanted to see. We will get more measurement of that in the weeks ahead. All is not rosy on that front, and if indeed it leads to a wide array of school not opening for six weeks, there is further economic impact coming there. This has more to do with policy response, though, than actual health reality on the ground. The variables are policy and economic activity, and the thought has always been that a health reality with less risk to mortality and resource capacity would foster less restrictive policies and therefore less suppression of economic activity. The health side has been easier to forecast than the policy response in a lot of states.
- I think this chart expresses so much better what I am trying to track manually in a spreadsheet – which is the daily update to the death data in Florida, by date of death. The line showing the rolling average becomes so much more useful because the numbers for the last two weeks on the date of reporting do not mean anything now. We hear 150+ deaths on a given day, and it includes above 20 deaths from that day. So as numbers get back-filled everything becomes a moving target and it is quite confusing. So here is where we are, followed by what we know:
- Essentially, Florida’s reported deaths of over 100 deaths today and yesterday do not tell us anything about the present mortality level. This week there are deaths reported (in this week’s data) from June 8, June 18, June 19, and a significant amount from June 30 thru July 8.
- What we do know is that the 7-day average of mortalities has moved from 45 per day from mid-April thru mid-May to 80 per day, and has not started to go down yet. Now, on one hand, the increase of 35 per day statistically may seem pretty light (just from an analytical, not a human standpoint). But the positivity rate has not declined yet in tests/cases, so
- The 7-day average of new cases is down 28% from its July 6 peak. One analyst pointed out that Florida has consistently lagged Arizona in various health metrics by ten days throughout, so we should see a downward case trend in Florida emerging very soon as well.
- Arizona’s inpatients w/ COVID dropped to its lowest point of July today. Intubations also lowest since late June. % of visits with Covid-like illness lowest since mid-June (in emergency departments and inpatient)
- The hospitalizations continue to flatten in Los Angeles County … Statewide cases are high but per capita not, and positivity rate not. Trivia: What state has the most COVID cases since COVID began? California. Trivia #2: What place is California really in for most COVID cases (per capita, which is all that matters)? 24th place.
- I can’t determine if there is some data anomaly or explanation, but I do all of my own tracking and monitoring of all data manually (not relying others regurgitations of reported data). And in my own daily tracking of Houston medical data, I see those hospitalized for COVID in the entire Houston market dropping from 2,803 to 2,729 to 2,369 (today). That is a massive reduction in just a few days. And in what I presume is a combination of new resources and heavy discharges, available beds have gone from 1,746 to 2,706 in just a few days. ICU capacity is up 25% as well. This seems to be huge news.
- And just as I type the above, I see this: *DSHS is reporting incomplete hospitalization numbers today due to a transition in reporting to comply with new federal requirements. For July 23, 84.5% of hospitals reported complete data. DSHS is working with Texas hospitals to ensure all data is fully reported.
* Worldometers.Info, July 23, 2020
Stock Market Today
My friends at Strategas did a dive into Consumer Staples today, and Consumer Staples are and always have been my favorite sector (never too hot, never too cold), so I thought I’d share a little love here. More or less, the sector is breaking out in a technical sense, but not in a relative sense to the broader market.
* Strategas Research, Daily Technical Strategy Report, July 23, 2020, p. 1
I don’t much care if the Consumer Staples sector takes on a “leadership role” or not, but I do believe that the strong multi-national nature of many names stands to benefit from a weakening dollar. And I believe the very nature of the sector contains many embedded protections in the uncertain nature of these times.
- In terms of today’s intra-day market action, it’s asking a bit much for the big tech leadership stocks to drop 3-5% in one day and not have the broad market indices drop.
- I don’t believe the reports of issues between Mnuchin and McConnell had anything to do with the market action today. There was a combination of factors, and a trickle-down effect from big tech.
It is clear to me now that Senate McConnell’s strategy of waiting until the last second to take up the fourth stimulus bill was quite purposeful, and that if discussions had begun 4+ weeks ago, it would still have taken until this point to get passed, yet would have had four weeks of both the House Democrats and the White House adding to it, making it much larger than he knows his chamber has an appetite for.
The “fiscal cliff” is now here on the $600/week of federal supplements to unemployment, and so a deal will get done, but McConnell is confident that a trillion or two (I can’t believe I just said that) will be left out that otherwise would be there.
My predictions after more conversations with capitol hill sources and friends:
(1) The unemployment benefit will get extended but phased down, and with income restrictions (Secretary Mnuchin is floating a 70% level, so ~$400/week vs. current $600)
(2) There will not be a payroll tax cut, but there will be conditional corporate tax credits that the White House will hold out as a victory (particularly, an extension of immediate expensing for R&D, Capex, etc.)
(3) There will be a “second bite of the apple” from PPP for small businesses
(4) And significantly for those who desperately believe businesses need to get their employees back to work and school opened, there will be a liability protection plan in place chamber had an appetite to see.
This issue may seem too esoteric or complex for coverage in the missive, but I am telling you all from the bottom of my heart it is a big, big deal for everyone … and that is the issue of how forbearances that came out of the Cares Act will be treated (if still in forbearance) after six months when their mortgages are part of Credit Risk Transfers sold from Fannie Mae and Freddie Mac to private investors (mutual funds, hedge funds, etc.). I am working on a larger piece for clients engaged in the Structured Credit space, and there is certainly more direct exposure for those invested in the still-dislocated non-agency RMBS world, but the impact is relevant to all homeowners and all home borrowers.
The eventual democratization of mortgage lending in our country and relief of reliance on Fannie/Freddie as governmental entities is something that affects everyone. The ability of the government to move towards greater privatization is in serious jeopardy if Credit Risk Transfers are treated outside the expectation of private investors [request the structured credit piece if you want a deeper dive].
Just sayin’ …
* Pantheon Macroeconomics, U.S. Monitor, July 23, 2020
The Futures are up a tad.
I will be on Mornings with Maria on Fox Business at 7:00am ET tomorrow (Friday).
Tomorrow is our weekly Dividend Cafe commentary.
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.