Dear Valued Clients and Friends –
Futures last night really hugged around the flat line non-stop from 3pm pacific until 9pm or so when I stopped checking. At 3am this morning they were still flat, and throughout the morning going into the market open they moved a tad lower. The Dow got down as much as 200 points, gyrated around most of the day up and down, and then rallied the final hour of trading to close up 300 points.
* FactSet, DJIA, June 25, 2020
The weekly jobless claims number came in at 1.48 million this morning, versus 1.35 million expected. On one hand, claims declined 2% from last week, but on the other hand they really are not coming down at the rate we would expect. Many analysts say this is because of a backlog in claims processing from several large states (California among them). What I do know is continuous claims were expected to be over 20 million, and they came in 700,000 lower than last week. So basically there was good and bad news in the weekly jobs data.
It may seem like a mystery to many why the markets reversed so dramatically when it did today, but we at The Bahnsen Group were able to pin the market’s turn to the exact moment that one Judah Lee Cummings was born, new son to our own Trevor Cummings! (Congrats Trevor and Nicole, and thank you, Judah!)
I have as much health info as I have ever had today, and I can’t emphasize enough how important I think much of it is. Fed stress tests on banks were another huge story today. Let’s roll …
As for health data, I encourage you to read all the F.A.C.T. (Florida/Arizona/California/Texas) section today (below) as there are some important factoids there I think you will want to read.
I believe that as case growth phenomena is digested, and an investment manager like myself weighs the risk/reward trade-offs of a whole host of potential scenarios, the two charts below are informative in assessing why the case growth could very well not lead to economic impact, or at least to the kind of economic impact we would worry about (in other words, marginal impact risk could exist without paradigmatic risk). The concept of case growth not leading to mortality growth is not only a wonderful idea to entertain from the concept of human life, but it also carries with it very different policy ramifications than if we started seeing a mortality increase along the lines of what we saw in March/April in NY/NJ/CT. The two charts provide not only a reason for optimism, but vitally important information.
We cannot say with certainty that deaths and severity will not rise to a point of macro concern, but we can say they haven’t yet, and we can say there is very good reason to believe they will not (far younger profile of current positive tests, etc.).
* Pantheon Macroeconomics, June 25, 2020
- Fascinating study out of Penn State published n Journal of Science Translational Medicine suggesting the COVID spread in March was exponentially higher than previously believed, and therefore lethality dramatically lower than feared. Available upon request, of course.
- I have also been reading more from Dr. Thomas Tsai of the Harvard School of Public Health. He is concerned about greater community transmission, but states quite matter-of-factly that “the younger demographic means less symptomatic/lower hospitalization rates”
* Harvard Global Health Institute, June 24, 2020
- Today’s testing data shows over 640,000 tests done today, with a positivity rate of 6.5%, a decrease of the last few days and a new record of tests done
* The COVID Tracking Project, June 25, 2020
FACT (Florida, Arizona, California, Texas):
- It is important to understand some nuances in the California data. Yesterday was the third time that California data included a significant backlog of data dumped with yesterday’s data, creating a lot of noise, and distorting normalized numbers. Today’s new positive case numbers in California are, as of press time, about half what they were yesterday.
- Arizona’s reported cases Wednesday were half that of Tuesday’s, which could mean a data reporting glitch on Wednesday, or it could mean an excess reporting on Tuesday, or it could mean organic decline. The mortality rate is staying contained.
- Florida’s data continues to be worthy of monitoring. A statewide median age of 35 in positive tests this last week, down from age 65 in mid-March. And some counties median age shows 29, 32, 27, etc. Long-term care facilities are seeing a decline in positive tests (thank God). Yes, testing is way up, but so is positivity rates within the testing. There has no doubt been an escalation of transmission. But so far, that escalation appears to be most present in the least vulnerable part of the population, and least likely to need medical resources.
- The percentage of ICU beds being used by COVID patients in Harris County, TX has grown, but the the total ICU beds in use remains essentially the same. The Southeast Texas Regional Advisory Council offers a COVID Executive Hospital Summary that suggests a significant amount of the new COVID infections requiring ICU care were nosocomial.
- Texas has not gone backwards in its re-opening, but has paused additional advancement.
* Worldometers.Info, June 25, 2020
In market technicals, I was shocked to see how many positive-for-equities charts and facts my technical analysis folks at Strategas Research had to offer this morning despite yesterday’s market sell-off and overall momentum softening over the last two weeks … A handful of charts today with the final one giving you some real technical summation of the state of affairs …
What the below is basically saying is that a two-month rally like we have just had is often followed by a couple weeks of the volatility we are in now, and yet the next two months, four months, and nine months are virtually always positive:
* Strategas Research, Daily Technical Strategy Report, June 25, 2020, p. 1
Various individual factors of the last two months reinforce the same factor behavior we have seen off of past market lows:
* Strategas Research, Daily Technical Strategy Report, June 25, 2020, p. 2
The sector performance since the market bottom is fascinating, if not contrarian to the core:
* Strategas Research, Daily Technical Strategy Report, June 25, 2020, p. 3
And the sentiment picture hardly suggests a bubble forming in stocks … bonds on the other hand?
And even that put/call ratio which was giving us headaches is starting to go the other way … (we like a high put/call ratio from a contrary sentiment perspective)
We are not oversold in equity markets yet, and these recent events are thus far a classic and very common consolidation.
* Strategas Research, Daily Technical Strategy Report, June 25, 2020, p. 7
In the Oil and Energy world, WTI crude shot back up 3% (above $39), even as natural gas hit a 25-year low. Natty gas’s metrics are the normal blend of demand evaporation combined with excessive supply pushing prices lower. As mentioned yesterday, LNG orders are starting to pick back up, but off of a very low level.
As for Housing, many of you know I have been a critic of the provision in the CARES Act that allowed borrowers to get forbearance on their mortgages without any demonstration of hardship. I was further very distressed to see those using the forbearance provisions jump up as it did in the second half of April and early May (note: the concern was not that the provision was available for those experiencing hardship, but rather that other provisions were already in place for real hardship, and that this was seemingly exposing the economy to the systemic risk of people utilizing it, even if they did experience hardship).
As the chart here reveals, the percentage of loans in forbearance flat-lined from there, albeit at a higher level than we wanted to see. This week was the first week that we actually saw the percentage number tick down a tad, indicating the worst is behind us.
* Strategas Research, Daily Macro Brief, June 25, 2020
And in Fed news, the results of the Fed’s annual CCAR stress tests (Comprehensive Capital Analysis & Review) were released after the market closed today. The outside pressure on the Fed to curtail banks ability to pay dividends has been on display. Today’s test results feature a so-called “sensitivity analysis” around a number of potential outcomes from this COVID era. Share buybacks have already been universally suspended outside of Fed mandates (at least for this quarter).
Banks had already increased loan loss provisions this last quarter.
The financial sector had rallied a lot today in anticipation of the results. The Fed effectively split the baby a bit, not asking the major players to cut dividends, but asking them to hold them where they are for one quarter. The capital foundation most banks entered the COVID experience with is a large reason for the Fed cautions. Ultimately, the Fed telling banks to cut dividends creates a negative feedback loop whereby banks that do have the capital to pay are penalized, and their ability to raise capital is jeopardized when investors are told at any sign of trouble regulators will jump in and take draconian actions.
I will be unpacking this more in the Dividend Cafe tomorrow.
I am writing more in the Politics & Money section of Dividend Cafe tomorrow on this, but it turns out I am not alone in investment punditry wondering out loud if part of the sell-off yesterday included recent Presidential polling as a factor. I read at least three reports last night and this morning postulating on the same, as yesterday saw the highly respected Siena poll come out reflecting a 14% lead for Joe Biden (his largest to date). Additional state polls in battleground states came out this morning reiterating this theme.
Would love to have you on Monday’s national video call, 11am pacific, 2pm eastern
Futures are flat. More to come.
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.