Dear Valued Clients and Friends –
The market ended basically flat today, but with some very strong performance in select shopping mall REIT’s, banks, and life insurers. Yield curve steepening is driving the performance in some of those select industries (widening spreads between short rates and long rates – look at the green line below vs. the red and blue).
The weekly jobless claims came in at 1.87 million, and continuing claims totaled 21.5 million. We will get the official unemployment number for the month of May from the Bureau of Labor Statistics tomorrow morning. The numbers today were about as bad as expected if not a bit worse, whereas yesterday’s number was exponentially better than expected. More on all of that in tomorrow’s Dividend Cafe!
As for health data, we saw another low in case growth percentage yesterday (just +1.08%), and the absolute number was below 20,000 (barely), all as testing is up ~60% from the same days of last week. Even with a record low 4.4% positivity rate yesterday, the reality is that new cases adjusted for testing levels were down 33% vs. last week. Even with “probable COVID deaths” being added to some states’ data, the daily death number is continuing to decline. Hospitalizations have continued to show a very steady and very significant decline, uninterrupted by data anomalies. And when we look to the few states that have seen case growth, particularly Arizona, California, Kentucky, and Texas, the testing has increased so dramatically, that case growth adjusted for new testing levels is either flat or actually declining.
* Pantheon Macroeconomics, June 4, 2020
- Today’s testing data shows over 465,000 tests done today, with a positivity rate of 4.46%.
* The COVID Tracking Project, June 4, 2020
- The Roche test for severe COVID cases received emergency FDA approval yesterday. This is a blood test called Elecsys IL-6, and it essentially identifies patients who are virus carriers that are likely to develop extreme respiratory distress, all in less than twenty minutes. The test is simply focused on identifying those most at-risk, which of course could lead to early therapeutic treatment which could lead to a decrease of cases that become severe or fatal. Roche also makes one of the most lauded antibody tests.
- To my comment the other day about infection risk from the wide-scale protests taking place all over the country this last week, I quote my favorite analyst from Fundstrat: “Protests started 5 days ago and ~92% of those exposed to COVID-19 are symptomatic by day 14 (50% by Day 7). Day 14 is June 11th. So if no massive second wave starts by June 11th, we have a definitive break in transmissability.”
- And the NBA Board of Governors approved plans to finish the 2020 season at Disney World (the players association must still approve). 22 of the 30 teams will go beginning July 31 (why so late, guys???) and there will be 8 games to play into the playoff bracket. They will then do playoff series for the next couple months finishing up in October.
In market technicals, I had a feeling yesterday’s breadth was spectacular, but I did not know that 68% of the S&P companies traded at a 20-day high yesterday, one of the best such readings in over fifty years.
* Strategas Research, Daily Technical Strategy Report, June 4, 2020, p. 1
- Past observations of such an occurrence where over 50% and over 60% of market names have been at 20-day highs on the same day have led to significant out-performance vs. regular average returns two months out, four months out, and nine months out. There is no reason to believe history would repeat itself here, but it is a substantial historical precedent. And it aligns with our view of short term agnostic, but medium term optimistic.
- I will spare you yet another chart but yesterday also marked the day that for the first time the average stock in the index is starting to outperform the index itself!
- This is bothering me, though, short term. Contrarianism simply believes that markets do better when people are more weighed down by fear (because, people are wrong, a lot). A screaming number of bearish option trades (puts) compared to a collapsing number of bullish option trades (calls) is a very bullish contrary indicator. As markets have rallied in dramatic fashion the last two months, that indicator has reversed.
* Strategas Research, Daily Technical Strategy Report, June 4, 2020, p. 4
On the public policy front, as expected the Senate did pass the House’s fixes to the PPP legislation, prepping the bill to go to the President’s desk for signature. In fact, they passed it by unanimous consent, which many of us can be forgiven for believing was an obsolete concept. The payroll requirement is now 60%, not 75% (as a percentage of what PPP proceeds are spent on), and the window to use funds is now 24 weeks (versus the prior eight weeks).
The changes are by far most significant to the restaurant industry, for a variety of reasons.
The big question mark now is whether or not this re-kindles interest in the program, which after a monstrous run had seen the demand for funds finally stop (about $550 billion has gotten out the door, but the program has another $120 billion in the tank).
In the Oil and Energy world, WTI crude broke past $37/barrel – a number not seen since it gapped down from $40 to $30 on the evening of March 9 on news of the Saudi/Russia supply war.
And in Fed news, I focused on the Main Street Lending facility yesterday so didn’t touch this, but there is increasing chatter about the fact that the Fed’s Corporate Bond Facility has so far bought … ZERO BONDS. It is partially a case of Paulson’s Bazooka Theory working twelve years late (he famously said of Fannie/Freddie in July 2008 that if the market knows Congress has a bazooka, it wouldn’t have to use it; that didn’t work out too well then – but there are different circumstances here). In this case, (a) the market has improved, (b) issuers would have to pay the Fed a user fee which makes this more expensive [per a bond money manager source of mine], and (c) companies don’t want (or necessarily need) the stigma of having tapped the facility.
Now, the secondary market facility has to get up and running because surely there are bond buyers who bought on the news in March and April with the intention of selling to the Fed later. But regardless, this entire Fed tool is looking less and less necessary for financial stability by the day – the only question is whether or not that’s because of a self-fulfilling prophecy, or external improvements.
- And if other central banks are allowed to make my “Fed News” section, the European Central Bank (ECB) announced this morning they are increasing their quantitative easing (bond-buying) from the prior target of 750 billion euros to 1.35 trillion euros (an increase of $672 billion). They are also giving themselves until June 2021 to do this.
The weekly Dividend Cafe will come to you tomorrow!
I welcome your questions, as always.
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.