Dear Valued Clients and Friends –
In the height of market violence throughout March and April it was routine that the overnight futures would do one thing, the opening the next morning something totally different, and the action throughout the day something different still. Sometimes even then there was no clarity as to how things would end up as 400+ point moves down or up even in the final hour of trading were extremely common (either as reversals or pile-ons). Lately the futures I have seen before bed time, the futures I wake up to around 3:00am, and the market opening levels have all been pretty in line with one another. There have been late day trading reversals (as I highlighted most days last week), but the futures and the opening levels have been pretty consistent.
I went to bed last night with futures down 200 points, and woke up to futures flat. By 5:00am the futures pointed to a 120+ point move higher. We opened flat, traded flat to modestly down throughout the day, and then markets closed down over 450 points, most of which came in the final half-hour of trading.
* FactSet, May 12, 2020
Now, as for the market action today and in recent days, vs. the market action in March:
(1) The level of normalcy in the market now vs. four weeks ago, but especially six and eight weeks ago, is like a totally different universe.
(2) With that said, markets are still not “normal,” and unpredictable behavior is going to continue. Underlying uncertainty, volatility, and some erratic action is to be expected (for good and for bad).
Today’s COVID and Markets contains some of the best news I have had to report since I began doing these daily missives.
As for the health data, as mentioned yesterday late in the day, Monday represented:
(a) The lowest case growth as a % since the crisis began (just +1.4%)
(b) The most visible drop in absolute number of new cases, as well (18.6k yesterday vs. 22.3k a week ago – a 16.5% decline week-over-week)
(c) The highest daily testing number (394k, which surged behind 113k new tests done in New Jersey)
(d) A new low in positive tests as a percentage of total tests (just 4.6%)
* Pantheon Macroeconomics, May 12. 2020
- Today’s testing data reflects another 306,000 tests conducted, with a positivity rate of just 6.6%.
* The COVID Tracking Project, May 12, 2020
- I would also point out that there is no evidence yet of any case pick-up in Georgia, Tennessee, or South Carolina (who led the way in economic re-opening). This is not to say we will not see any pick-up there, but so far we have not. Case growth is much slower in the U.S. than it was in Europe when they began easing their lock-down restrictions.
- As expected, the MLB plan to re-launch the baseball season has run into some resistance with the player’s union. I am not particularly surprised, and hopefully there will be some agreement in the days ahead.
- Broadway has made it official that their show schedule will not resume over the summer (not a big surprise, but still a disappointment for those of us who hate the idea of a whole summer with no theater shows). The new target is Labor Day but we shall see if the powers that be allow that.
- Moderna has received the fast track designation from the FDA for its vaccine treatment. The company is prepping for both phase 2 and phase 3 trials of its vaccine candidate.
- I may not live in Switzerland, but I think their manner of re-opening and posture around their safety and economic well-being is quite interesting.
- A simple suggestion for those who value an objective press and accurate information: Do not be content to get your news/information from a simple headline or sub-title or pull quote. I am encountering more and more coverage where one thing is said in a headline, and a reading of the full article reveals something very different than the headline itself indicated.
In market technicals, I thought some of the research here about the historical regularity of markets rallying through awful payroll reports was really worthwhile.
*Strategas Research, Daily Technical Strategy Report, May 12, 2020, p. 2
Specifically, the 1974 atrocity and 2009 atrocity both saw the same thing – by the time the worst unemployment report came, the market bottom had already happened (another way of saying this: it is common that markets would be going higher even as unemployment is still worsening).
*Strategas Research, Daily Technical Strategy Report, May 12, 2020, p. 3
I bring this up to provide historical reference (the empirical confirmation). The explanation of it (the theoretical confirmation) has been offered in various forms ever since the market recovery began – markets overshoot on the downside in every panic sell-off, so when markets “recover” a lot of the “recovery” is really just making back the first part of excess that had sold-off. Then, when markets begin to assess the future, prices reflect more than just current headlines, but rather anticipation of the future sometimes many months out. Additionally, they do this with a view to the relative realities in the marketplace, such as what other risk-free assets are offering. Markets can be wrong, but investors are wrong much more frequently.
- Just a couple other technical observations:
(1) The financials (banks) continue to be the weak link in this market
(2) Health care continues to shine, but not just “big pharma” – small cap biotech, and everything in between as well
(3) The small-cap area is really beginning to sustain some technical strength, particularly where higher quality factors exist
- Finally, I would note that the VIX finally got as low yesterday as it was before the real COVID market distress launched in late February …
* FactSet, May 12, 2020
That said the VIX was up 20% today, back to $33 …
On the public policy front, Secretary Mnuchin yesterday showed the clearest signs to date that he is bending towards making PPP guidelines less restrictive and more flexible. The two areas where flexibility needs are most highlighted continue to be in (a) The length of time loans can be held on to before requesting forgiveness (something longer than the current eight-week allotment), and (b) More bandwidth in how funds are spent to still be eligible for loan forgiveness (currently requires a 75% spend on payroll). First of all, an Inspector General report has already come out and said that guideline (offered by DOT and SBA after the legislation passed) may be excessive relative to what Congress actually passed in the CARES ACT. But additionally, the open lobbying for some greater flexibility there has not let up. Mnuchin has not fully capitulated here – he just has referred to “being open to technical fixes.” The words “technical” and “fix” when they come from policymakers usually mean some adjustment (capitulation) is around the corner.
As for Stimulus 4.0, Pelosi’s House bill has been titled the Heroes Act, and it calls for $500 billion direct to states, $375 billion direct to local municipalities, $175 billion for a social services emergency fund, $20 billion for tribal relief, $75 billion for housing assistance, $25 billion for the post office, $10 billion for small business, and $3.6 billion for “election planning.” Again, this is an early negotiating move by the House Democrats and not a serious attempt at legislation. All indications from the White House and Senate Republicans are that serious talks and efforts are 2-3 weeks away.
In looking at the Oil and Energy world, I am increasingly focused on what I perceive to be a breakdown in the relationship between the U.S. and Saudi Arabia. Saudi’s foreign currency reserves fell a stunning $27.5 billion in March, and one expects April will be as bad or worse. The most common offset to this debacle of affairs Saudi faces would be a weakening of their currency, but of course Saudi has pegged to the U.S. dollar forever. I do not believe any of the analysts I am reading have yet made the case that the U.S./Saudi relationship is irreparably broken, and we are talking about decades of alliance (that have often made very little sense). However, the implications are vast, and I want to tee up in these pages that it is a subject I want to substantially explore in the weeks to come: What does it mean to the global economy if the standard playbook of U.S/Saudi dynamics is altered? I assure you, the implications would go far beyond oil prices!
U.S. News & World Report heavily quoted me in this story on top energy stocks to consider right now.
By the way, oil closed up ~5% today to $26 (WTI crude).
As for Housing, to be very candid, the increase in loans in forbearance from 7.54% to 7.91% last week was much lower than I expected, and is really actually good news. The absolute level of 7.91% is far higher than I wanted to see, but if the week-over-week pace has slowed that much that will prove to be a very good thing.
As for new purchases, we have seen purchase loan rate activity about 15% per week less than the corresponding week of a year earlier over the last six weeks or so. I have been surprised the number was not greater. And now this last week, purchase rate locks were only down 8% year-over-year, all signs of a pretty robust new purchase market.
The caveat: This is more or less entirely in the conforming market (where the loan amount is $510,000 or less). The jumbo market and more subprime market within FHA is pretty much frozen entirely. The loan market for investors is almost entirely broken as well.
And in Fed news, they officially began their corporate bond-buying today, long-anticipated since their announcement of such over a month ago. High grade corporate bonds have increased in value 15%+ since the Fed’s announcement, and “junk bonds” are not far behind. ETF purchases of corporate bonds began today through the Fed’s “Secondary Market Corporate Credit Facility (SMCCF).” The Fed is using Blackrock to administer the program (great corporate citizens that they are), and has promised to offer more information as to what is being bought and why throughout the program. The stated purpose of this endeavor is to “reduce the broad-based deterioration of liquidity” that we have seen since the economy turned in March. How the mere announcement of Fed intervention has already resolved much of that liquidity deterioration will be an interesting fact to juxtapose with their actual purchases.
And how did Fed entry into the bond ETF world go?
Here is the chart of today’s bond ETF’s that I track and monitor all day long. Suffice it to say, despite a big sell-off day for stocks, and a non-eventful day in rates, corporate credit rallied a great deal and munis were well-bid as well. You can do the math here.
* FactSet, May 12, 2020, 12:00pm PST
I would add to the world of interest rates and monetary policy that the President of the United States today tweeted this. I am adding to my nightly prayer list that no central banker or obscure populist movement will take up the cause of destroying American financial markets and price discovery with negative rates.
I continue to spend every day searching for the right investment opportunities that will come out of the COVID experience. Non-traded loans to middle market companies from non-bank lenders was an area we were beginning to like before the COVID crisis, and are finding even more attractive now. The Fed’s downward pressure on yields and heavy support for the investment grade corporate bond market neuters much of the potential reward in that aspect of corporate debt. Well-underwritten loans with a senior position and floating rate terms provide investors spread opportunity and technical advantages that we think are under-appreciated.
* Cliffwater LLC, Middle Market Lending as an Asset Class, May 2020, p. 4
I would encourage you to check out the newest of our 2-minute video series, this one on “What to do with interest rates so low?” We will have one on housing/real estate in a few days, and another on how to think about oil prices next week.
And finally, please mark your calendars for 11am pacific/2pm eastern next Monday the 18th for our national bi-weekly video call.
We are open for questions!
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