Dear Valued Clients and Friends –
The market rallied again today, coming off of a night and a morning where futures were pretty flat (up a tad, down a tad). The media seems to me to be overplaying their hand at sensationalism right now, whereby the more rational interpretation of data that markets are responsible to conduct (“skin in the game”) has gone a different direction. I have to continue repeating that so much of what is happening right now is the market process of accepting COVID cases as a part of life. I believe the media knows it, too, but this little run of sensationalistic coverage will either need to result in a whole bunch of worse news, or it will transition entirely. Cases will not be the jury here – the medical system’s capacity for treatment will be. If I sound optimistic about our capacity for coverage all the while seeing a substantially decreasing mortality rate, eventually ending with a vaccine and societal immunity, it is because I am optimistic about such. But I recognize that as for markets, there are plenty of things that will feed volatility along the way.
In the present moment it is tempting to assume that COVID is the only story in financial markets (with maybe a little room for the Fed and some economic data, but then only if it is negative). However, I will suggest that the developments in Beijing/Hong Kong are a substantial story, and will look forward to unpacking much more of that in this Friday’s Dividend Cafe …
In the meantime, we’ll go around the normal horn of topics today, and I truly hope you will reach out if you have any questions or comments.
As for health data, just as national positivity rates had increased from the sub-5% range to the >7% range, the rolling average has now dipped to around the 6% range. If the positivity average continues to settle and decline, I imagine the attention will re-shift to the absolute cases again. There should always be some data point someone can find to maintain an obsolete point of view. Data is funny that way.
I imagine the reason rolling average fatalities are not included below is to allow a few days beyond the weekend to see if there are any data lags, as those numbers have really dropped. If there has not been a mere reporting lag, I think the rolling average drop in fatalities will change the conversation entirely. We’ll see by the end of the week.
But overall, the facts on the ground remain – cases are increasing, fatalities are decreasing, hospitalizations are not moving much, capacity for hospital beds and respiratory equipment is extremely high, and there are disparate results in various states. Versus a week ago at this time, I would say Florida is the state that bears watching where Arizona is seemingly on the mend. Each day’s reporting requires new interpretation.
* Pantheon Macroeconomics, June 30, 2020
Any coverage of case growth or charts showing such that are not, at minimum, accompanied by this chart, are, well dishonest.
* Strategas Research, Daily Macro Brief, June 30, 2020
And I might say that this chart ought to be part 2 in the two charts that warrant attention.
Today’s testing data shows ~649,000 tests done today (all time record for the USA), with a positivity rate of 6.8%.
* The COVID Tracking Project, June 30, 2020
- Denmark, Germany, UK, Canada, Spain, and Italy all truly stable and benign situations
- Mexico’s numbers (deaths and cases) showing a multi-day decline trend forming
- Georgia (the state in our country) reached a 3-month low in COVID deaths. They were the first state to enact loosening of lock-down restrictions.
- When you hear that > 50% of new COVID cases are in people under the age of 35 (nationwide) the last two weeks, it could potentially cause you to believe the protests are a part of that, or that going to bars is a part of it, or, if you are a rational grown-up, you could assume it is a bit of both.
FACT (Florida, Arizona, California, Texas):
- It is too early to tell, but the “surge” of a few days ago have now had three days in a row of significantly less cases (the third day is today, which is again around 6,000, not 9,000). I do not know why there were three days of sudden ~9,000 cases, but if a number 35% or more less than that is sustained, perhaps it points to a data anomaly in those three days? I would also point out that deaths (by date of death) immediately below that (a chart that shows deaths with COVID, not from COVID).
*Both of the above two charts are direct from: Florida’s COVID-19 Data and Surveillance Dashboard, Florida Department of Health, Division of Disease Control & Health Protection
- Arizona’s cases seem to be coming down but their reporting is a little trickier than Florida’s (and it must be said, Florida is the gold standard for reporting). They remain around 650-675 ICU beds in use by patients with COVID across the entire state, and intubations are now down well over 50% versus last week. I imagine the reason the hospital usage has come down a bit (and capacity up, a bit) is continued flow of discharges (as the other reason, mortalities, are simply not evident).
- California has provided the opportunity for the most inane, inexcusable media headlines of the week. 41 deaths were reported yesterday, which I might add is below its own 14-day average of 59 deaths. The positivity rate has averaged 5.6% for the last two weeks, and the “surge” of the last week has seen that go to … wait for it … 5.9%.
- Texas experienced 21 deaths yesterday, statewide, 5 of which were in Harris County. Their state reporting is not as robust as the other members of “FACT” but the data that does matter is that (a) They certainly have seen case growth in the last ten days; (b) Their mortalities are among the lowest in the country per capita (not in the top 40 of our fifty states, believe it or not).
* Worldometers.Info, June 30, 2020
In market technicals, a few interesting tidbits today (and I will have a much bigger focus here tomorrow with quarter-end numbers to share) …
On one hand, we see extreme (and I mean, frightening) levels of inflows into the Nasdaq settle down …
… and on the other hand, the outflows from the Russell 2000 (small-cap index) are perking the attention of the contrarians at The Bahnsen Group.
* Strategas Research, Daily Technical Strategy Report, June 30, 2020, p. 1
On the public policy front …
- the Supreme Court upheld the right of the President to fire the head of the Consumer Financial Protection Bureau (I will spare you the Constitutional insanity of what this bureau’s formation dared to imply). The CFPB lacked a board or commission, unlike other independent federal agencies. One can debate the constitutionality or wisdom of independent federal agencies that lack oversight of Congress, but if there is to be one like the CFPB, its director will no longer work without any direct accountability to either the executive or legislative branch of government.
- Today was the last day for small businesses to apply for a PPP loan. It appears 4.8 million loans totaling $520 billion of loans have been granted, with 50-75% of that amount expected to be converted to “forgivable grants.” Over $140 billion of the second tranche of PPP was never tapped, a data point that will be debated for some time (i.e. did more businesses just not need the money, or did they set up too many obstacles to receiving these funds).
In the Oil and Energy world, WTI Crude closed just shy of $40, and with a 34% gain in Q2 close out the best quarter in 30+ years for the commodity …
And in Fed news, Chairman Powell testified to the House Financial Services Committee today. Secretary Mnuchin also testified about the fiscal support being offered the economy, and the need for more another round.
As for all that firepower the Fed has thrown into markets, let’s take a look at how much they still have to go, and where it is focused. Though there is plenty of room to go in commercial paper and money market funds, they have received a good chunk of the support they will receive, and no one in their right mind those short term instruments are remotely lacking for liquidity right now. Where the Fed is still to drop significant resources are corporate and municipal bonds, though admittedly the corporate bond market has significantly front-run that fact and it is well-priced in credit now.
I will propose the following three issues as THE issues in front of the Fed for the coming months that could be catalytic to various capital markets (not merely the stock market):
(1) Will the Fed, either by outside pressure or their own volition, expand the scope of the municipal bond facility (i.e. credit rating criteria, size of issuance, maturity extension)?
(2) Will the Fed embark upon Yield Curve Control?
(3) Will the Main Street Lending facility be efficacious or a flop?
(BONUS – will TALF 2.0 be expanded in the margins with greater bandwidth of syndicated loans and CMBS?)
And this brings the first half of 2020 to a close. All I can say is, wow. What a first six months it has been. Praying for a safer, calmer, and less eventful second half. And while I don’t think the next six months will be safe, calm, or uneventful, I actually do think safer, calmer, less eventful are all pretty attainable!
Futures down a tad – pretty flattish.
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.