Dear Valued Clients and Friends –
The market was down 100 points or so in pre-market at 3:15am today, and stayed close to flat or modestly down until the open. It bounced a round a bit, then found the flat line and stayed there most of the day, before then seeing a substantial sell-off in the last 45 minutes of trading (see chart below). A report circulated just before the market sell-off that yesterday’s positive report on early phase vaccine trials may have been incomplete in some of its data. If that was indeed the reason for the sell-off, then these markets are a lot more susceptible to pops and drops around [silly?] vaccine headlines than I would have thought.
* FactSet, May 19, 2020
As for health data, case growth was +1.45% yesterday and new cases were 21.6k. Some of the increases yesterday were from a couple states that did not report on Sunday. Florida’s data is worth watching but case growth in Georgia and Tennessee is quite benign (and Texas was down 9% yesterday vs. the Monday prior). The Florida data will end up being watched closely all week.
* Pantheon Macroeconomics, May 19. 2020
- Data in European countries that have begun re-opening is very encouraging, and suggests more good data for U.S. states beginning to re-open.
* Pantheon Macroeconomics, May 19. 2020, p. 2
- Mexico and Brazil are seeing significant increases in deaths and case growth, by the way. It will be interesting to watch how the warm weather climate of those two countries impacts the virus spread in both places.
- The outlier concern that those who had COVID-19 could re-acquire it and even transmit it after a second bout is increasingly being refuted and dismissed. Recent studies have all but left this concern to the most fringe groups. The Korean CDC tested 285 patients who tested positive after their disease resolved, and they showed no infectiousness or ongoing symptoms and discomfort.
- Today’s testing data shows 400,000 tests done today, with a positivity rate of only 5.2%.
* The COVID Tracking Project, May 19, 2020
In market technicals, yesterday’s massive market rally showed an 8-to-1 advance/decline ratio, and was the eighth day since March 23 where breadth was in the 99th percentile. My favorite technician says, “clusters of these days are historically rare, and are reflective of the acceleration wall often found coming off a major market low” (h/t Chris Verrone). Internals have been very good, and the delta between high beta and low beta stocks yesterday was the highest in 11 years!
* Strategas Research, Daily Technical Strategy Report, May 19, 2020, p. 2
- There really was no segment down yesterday, but the strongest performance came from those stocks whose performance was worst in the March sell-off.
* Strategas Research, Daily Technical Strategy Report, May 19, 2020, p. 4
- The 2/10 curve is now 55 bps wide and showing signs of steepening further …
* Strategas Research, Daily Technical Strategy Report, May 19, 2020, p. 10
- The bearish sentiment from many retail investors has created the contrarian backdrop necessary to drive this equity rally.
* Strategas Research, Daily Technical Strategy Report, May 19, 2020, p. 1
- Finally, for those who consider Copper a frequent leading indicator of industrial activity …
* Strategas Research, Daily Technical Strategy Report, May 19, 2020, p. 11
On the public policy front, I did speak with one of my White House sources this morning who indicated that the White House and Treasury Department do now support the modifications to the PPP program I wrote about yesterday (expanding its flexibility in both scope and timing). Secretary Mnuchin previously had talked down the proposed changes.
My analysis and discussions with both electeds and policy wonks is that more direct payment to taxpayers is likely to be a part of the next phase of fiscal stimulus. I am certain that support (directly from Treasury) to states/local governments is the highest priority for Democrats, just as liability protection for businesses is the top priority for Republicans. My forecast is that those two things will be traded for one another (each side gets what they want).
The financial incentives embedded in the Unemployment Insurance supplement is perhaps the most important piece that is sure to be heavily debated. Here, I think the Federal Government will end up maintaining the $600 weekly benefit, but even if the worker returns to work (i.e. having cake and eating too – it provides the benefit, and takes away incentive to let the benefit replace a return to work).
In looking at the Oil and Energy world, I really can’t say enough about this normalization of the oil forward curve we have seen in the last two weeks. That massive contango in the front end of the curve has largely flattened, and demand is both modestly returning (from zero), and expectation of demand pick-up is beginning to get priced. More supply cuts are likely. U.S. rig count is now down 66% year-over-year, a lower level than even the 2015/2016 debacle. Our view is that the rig count has bottomed, and the balancing act of supply reduction and producing enough to meet cash flow needs is finding equilibrium
* Strategas Research, Daily Macro Brief, May 19, 2020
- One of the things that fascinated me about our U.S. oil production is that, even with the utter economic debacle we have been dealing with, our field production is basically just back to the levels of the beginning of last year. We had escalated from 11.7 million barrels to over 13 million barrels, and are now down to about 11.5 million. One can perhaps be forgiven for thinking this is not as bad as expected.
* Strategas Research, Daily Macro Brief, May 19, 2020
A significant portion of this Friday’s Dividend Cafe is being devoted to treatment of the U.S. energy sector.
And I will note, the June contract has rolled into the July contract, all without a hitch.
As for Housing, new housing starts in April were just 891,000 (927,000 had been estimated, and 1.3 million had been the trend coming into the COVID crisis). Building permits were 1.07 million, just slightly above expectations. The slow-down covered all geographical regions, and really are not a surprise given distancing requirements amongst construction crews and obvious uncertainty for buyers in the midst of everything. Now, permits did exceed starts by the widest margin in over ten years (especially for multi-family), so there is pent-up builder demand, no doubt. There is not “good news” in the data – but there was not “unexpected bad news” either.
By the way, I address the issue of how to think about real estate investing in a COVID world in this 2-minute video here …
And in Fed news, Chairman Powell and Secretary Mnuchin appeared before the Senate Banking Committee today. A few takeaways I will share:
- I thought Powell sounded more stand-offish than I expected about support to the municipal market, reminding Senator Menendez that the Fed’s charter is to provide liquidity (short term mechanisms), not to aid in funding shortfalls (longer term maturities). That said, the muni market rallied substantially today, so perhaps some heard something or understood something differently than I did. He did affirm the Fed may need to expand its municipal program, which may be what the market responded to – he just seemed more hesitant than I expected.
- Powell did state that the Main Street Lending Facility will be ready to start lending in June. It is important to note that this plan is a pretty important wildcard in economic recovery. It represents quite significant liquidity and favorable borrowing conditions for hundreds of thousands if not millions of small businesses, and yet, we simply do not know what the appetite will be from sponsor banks to facilitate this lending. Unlike the PPP program, 5-15% of these loans have to be kept on the lending bank’s balance sheet (which is still quite low), so while there is “very little risk” for the banks making the loans, that is different than “no risk.” My analysis is that this program has the capability of being a slam dunk both in terms of creating economic recovery and signifying health in our banks, if indeed banks participate. It also has the potential to be a total whiff, if the banks do not. I like that no one is paying attention to this; we are.
- Powell was definitely there primarily to plead for more fiscal support for the economy from the Senate.
Allow me to share what the CFO of the largest brick-and-mortar retailer in the country said this morning in terms of what they are seeing: “As I look across sales every morning, it’s been kind of surprising that it’s been more consistent than I would have guessed. I think the stimulus money has probably driven in the last few weeks and at the end of the quarter, that consistency from geography to geography.”
The volatility continues. Range-bound. Choppy. And not going away any time soon.
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