Dear Valued Clients and Friends –
The market was up 165 points today, mostly on a flat/choppy day that simply escalated in the last two hours of trading.
* FactSet, DJIA, July 22, 2020
The general mood was that reports the Republicans are open to extending the federal unemployment benefit at a $400/month level through December drove the last day market move higher, but I am skeptical. It is certainly possible, but it strikes me as utterly incomprehensible that the market would not have known Republicans were going to do something like this.
COVID Health Information
The 7-day average for COVID deaths in the U.S. the second week of June was ~780/day. As of yesterday the 7-day average is ~720/day. The rolling average has stayed flat and even dropped a bit despite the increase in new cases of the last eight weeks.
* DOMO, Coronavirus Tracker, Daily Pulse, July 22, 2020
- An interview with Professor Sunetra Gupta, who is leading the epidemiology team at Oxford as they unpack herd immunity, is really informative in understanding what the threshold may be, what we know so far, and what else we need to know to draw policy conclusions from society’s true remaining exposure. I would read it over anything I have written here today.
- And if you really want more, reach out for the latest medical findings regarding seroprevalence estimates, and their findings that 6-24x more infections are estimated than the COVID positive testing data indicates (published by the AMA, authored by a plethora of doctors and scientists on the CDC COVID Response Team).
- I continue to monitor every day the correlation between Sweden’s case/mortality metrics, and New York’s case/mortality metrics. We know that any causation there can’t be policy-related because they both took (and still take) a drastically different policy approach. The idea that a Herd Immunity of sorts may have developed in both places is a leading theory that seems to make more sense than no theory at all, and I am not sure what other competing theories are out there on this.
* Worldometers.Info, July 21, 2020
- The positivity trend has peaked nationwide, stabilizing around 8.3%. A break below 8% in the coming days would be encouraging.
- The states where we see an increase in the rate of growth are Alaska, Mississippi, Nevada, Maryland, and Indiana.
- The U.S. is paying $1.95 billion to Pfizer for 100 million doses of its COVID-19 vaccine candidate if it proves effective in current human trials. The vaccine would then be offered to Americans at no cost. The agreement carries a kicker for an additional 500 million doses if HHS so wishes.
* Pantheon Macroeconomics, July 22, 2020
- Today’s testing data shows nearly 800,000 tests done, with a positivity rate of 8.7%.
* The COVID Tracking Project, July 22, 2020
F.A.C.T. (Florida, Arizona, California, Texas)
- Second day in a row below 10,000 new cases reported, but still in the 9’s (too high)
- New cases back below 2,000 today after the 3,500 report yesterday, further indication of backlogged reporting.
- Grateful to see the ICU occupancy declining in San Diego County. And the trend-line for positive ratio (of tests) is dropping in San Diego, too …
- And in Riverside County, things are moving in the right direction as well …
* Riverside County, EOC, Hospitalized Patients Rolling Metrics, July 21, 2020
- It is Los Angeles County where hospitalization data has not provided a clear trajectory the last couple weeks, and a more decipherable turn-down in hospitalizations and ICU is still pending …
- The positivity rate average has dropped from a way too high 17.43% to a much better but still way too high 14.18%
* Worldometers.Info, July 22, 2020
Stock Market Today
First let me keep you in the loop on the key U.S. dollar levels …
* Strategas Research, Daily Technical Strategy Report, July 22, 2020, p. 1
- Why do I believe this U.S. dollar breakdown (and potential further breakdown) is important? It is not unrelated to other equity market shifts and movements we see happening or potentially happening. A weaker U.S. dollar will positively impact energy (oil is denominated in dollars), multi-nationals, and emerging markets (in a short term sense).
- So Monday the S&P rallied but advance/decline was even, and yet Tuesday the S&P was flat, and there were four advancers for every one decliner (HUGE breadth in a flat market day). High beta outperformed low beta by 2.5% yesterday.
I do understand that all eyes are on the stimulus bill talk, but I do believe the chances are increasing by the day that President Trump takes some action on drug pricing (via executive order) before the election. Rebates are being discussed again per my source (supported by pharma, opposed by the insurers). Someone in the White House opposed it a year ago (I do not know who), but what I hear is that that person is gone now and there is more of an appetite for this. The indexing of drugs to an international price index is probably the worst idea on the table (European price controls), and many are predicting POTUS will do it. The mere re-locating of pharma supply chains would be the least problematic and provide the most political punch post-COVID, but the devil would be in the details.
As for the stimulus bill, I don’t intend to bore you every day (more than I already do) by repeating the day-by-day media reporting here that “both sides appear far apart” blah blah blah. When my sources provide me information that I believe is relevant and not captain obvious, I will be updating here. For now, I believe the consensus view is reasonably accurate – that a bill will happen, and it will likely be August, not July.
And I would bet my USC football season tickets that they will do some emergency measure vote to keep the unemployment benefit going until they have a longer term bill.
Oil and Energy
It is always tricky to suggest why something happened when so many things are capable of happening for no reason at all, and often do. And of course sometimes you get a real easy explanation provided as to why a certain sector or certain index did a certain thing on a certain day, but most of the time you don’t. On the surface, yesterday’s energy stock rally really does seem to be without explanation – just a random re-rotation and re-balancing into some of the downtrodden energy names. However, my suspicion is that the announcement Monday of Chevron’s $5 billion acquisition of Noble Energy sunk in, and more savvy market participants viewed it as, “oh, this is the new normal – where strong companies get stronger buying good assets at low prices, and weak companies survive and get value extracted by being bought at a premium by stronger companies.” I suspect that dynamic/mentality was applied across the sector yesterday. Of course, oil prices were also modestly higher, too, but not enough to warrant that big of a move.
Existing sales increased 20.7% in June, down 11.3% versus a year ago at this point in the year, but pretty darn good considering that 2-3 months of this year the world was locked down.
All market geographies participated in the increase and all product categories.
Prices are up ~5% from a year ago for homes with a Fannie/Freddie/FHA mortgage …
The U.S. closing of the Chinese consulate in Houston today is another example of escalation in the tensions with China, but mostly teetering around the edges as opposed to full-blown provocation, making it hard for the market to either ignore or actually react. It is not insignificant, and it is out there – no doubt.
Futures are dead flat at the moment.
Please join us Monday for our bi-weekly national video call on Monday …
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.