Dear Valued Clients and Friends –
Futures were modestly positive all of last evening and into my morning wake-up. They turned negative a few hours before the market opened and bounced around pre-market. The market opened up a bit, then dropped a few hundred points, then bounced around throughout the day, and rallied into the close to end up +177 points on the day. Not a huge day one way or the other, but some intra-day volatility (as usual).
* FactSet, DJIA, July 8, 2020
As for health data, it is clear that the issue of schools re-opening is becoming the newest political fight on the COVID front, and with that the newest conversation topic on the COVID front. I have no interest in engaging it as a political issue whatsoever, and frankly think that will end up complicating what really should be a very simple issue. I am watching it very closely, because I see a high correlation between schools re-opening and the trickle-down effect to mom & dad returning to work, and other societal functions normalizing in concert with that overall virtuous cycle.
Some interesting resources worth noting on the issue of kids returning to school:
- The Brookings Institute did some really solid work in evaluating the benign experience in Denmark and Finland in re-opening schools
- 1,500 doctors in the Royal College of Pediatrics & Child Health have signed a letter making the medical case for children returning to school and pleading such with the UK authorities.
- The National Institute for Public Health in the Netherlands has been a leader in making the global case for school’s re-opening
- The American Academy of Pediatrics has really intensified their research in support of school’s re-opening and produced more material making the case for such, and providing “how to” support for their position
- Belgium was quite outspoken in their views of the subject as well
- And finally, I previously made available the position paper from the Hospital for Sick Children (out of University of Toronto) arguing for safe re-openings as vital to the holistic health of children.
As I say, there are quite significant economic and social implications that go along with this issue, so I will continue to follow it in the weeks ahead.
As I predicted, the coverage yesterday gave way to disingenuous reports of deaths rising, with no mention at all of (a) Weekend reporting lags, or (b) Catch-up reporting like the data from Arizona that added 88% more deaths to the total (117 instead of 62). But overall, the trends of slowing case growth are visible to all, and even the chart below talking about “rising deaths” shows in its own log scale that we are talking about 5-10 people – something I am pretty stunned anyone is even willing to report on as if it were a real trend.
* Pantheon Macroeconomics, July 8, 2020
- Today’s testing data shows over 666,000 tests done today, with a positivity rate of 9.3%.
* The COVID Tracking Project, July 8, 2020
- Cases were up 31.2% yesterday vs. the Tuesday from the week before. That sounds pretty bad, right? Well, testing was up 33% from the Tuesday before. Be very skeptical of any outlet reporting case growth data when they neglect to report testing data. And just so I am clear – that is not because the data will frequently show that cases are not growing relative to testing growth – in some states they certainly have (i.e. higher positivity rate). It is simply that one data point is irrelevant without the other, so regardless of where the pitch lands, no one can really evaluate it without an understanding of the strike zone (sometimes I make up my analogies while I am typing and just run with them).
- I thought this update on the progress in Sweden would be useful (both cases and mortalities)
- I can’t imagine reading this chart with anything other than incredible gratitude for how COVID-19 has spared young people, especially children, and especially babies. It also drives a stark contrast that is just horrifying to think about regarding the 1918 Spanish flu.
F.A.C.T. (Florida, Arizona, California, Texas):
- From the website of Houston Methodist Hospital:
- So the Arizona death number of yesterday (117), with over 50 being backlog reporting, came in at 35 today – right in line with 7-day average
* Arizona Department of Health Services, July 8, 2020
As for why the deaths have stayed so low despite the case growth in Arizona, the age distribution of COVID positivity there in Maricopa County is perhaps even more stunning than in Florida, and I believe closes the case as to why mortalities have been so incredibly contained. They had a record 543 hospital discharges yesterday alone, bringing the total discharges of the last seven days to over 3,100 people.
- So how close are Texas (and these other states) to the peak levels of distress that we saw in the peak? I will let you interpret the data yourself.
- Georgia isn’t in my “F.A.C.T.” states, but some would like it to be. But some medical professionals say Georgia is doing just fine, thank you very much.
** Worldometers.Info, July 8, 2020
In market technicals, the internal strength of the market has certainly broken down in recent weeks as the percentage of stocks in the S&P 500 trading above their 50-day moving average is now 65%, vs. the incredible 98% that were at the peaks of June.
* Strategas Research, Technical Strategy Report, July 8, 2020, p. 2
If there is interesting internal momentum to note right now, it may very well be in the Emerging Markets …
* Strategas Research, Technical Strategy Report, July 8, 2020, p. 15
I think one of the most interesting dynamics in market technicals right now is the tension between the belief that stocks are ahead of themselves/there is too much euphoria/confidence, and the reality of a still-elevated VIX. The fear indicators suggest an elevated level of anxiety, not euphoria, and that sets the table for some real uncertainty (and possibly contrarian moves) in the months ahead.
On the public policy front, I spoke to two sources today who said they believe Congress is going to now put more strings into further rounds of relief and support (a la PPP). Though the vast, vast majority of PPP loans and PPP-extended funds went to very small companies, the optics around certain lobbying firms, large name-brand companies, and so forth receiving PPP support has provided an incentive to tighten the criteria. With $130 billion of untapped PPP funds, the idea of letting truly troubled companies get a second bite of the apple makes sense, yet the optics issue will have to be dealt with before Congress will act.
In the Oil and Energy world, crude inventories today came in 5.2 million barrels. Yesterday the American Petroleum Institute reported inventories were up by 2 million barrels last week. Initially WTI prices dropped but immediately rebounded and rallied to close at $41/barrel, as despite the excess supply, gasoline supplies fell and crude oil imports were determined to be the reason for the inventory build. But refining activity is heavy and demand really does seem to be re-building.
As for Housing, we see the 30-year mortgage making new lows (conforming rates), and it stands to reason that a big part of this is significant cash being made available to issue new loans as agencies buy out loans (prepayment effect). New loans means lower rates (competition).
* Strategas Research, Daily Macro Brief, July 8, 2020
- By the way, new purchase mortgage applications were up 5% this week versus last week, and 33% higher than this week a year ago (passing the numbers I reported yesterday for the prior week). Home prices are moving forward (particularly in the low to mid range of product), more or less in concert with the dollar equivalent that lower rates represent to a monthly payment.
And in Fed news, Cleveland Fed president, Loretta Mester, was in the news yesterday forecasting a long, drawn-out need for Fed accommodation amidst a troubled, slow-recovering economy. Other fed governors, Randy Quarles and Richard Clarida, echoed that sentiment. It appears to me to be part of a concerted effort to democratize Fed communications beyond Jay Powell and across a gamut of officials, yet with messaging consistency and discipline.
On a separate note, to the extent you believe that liquidity is a driver of risk asset pricing (if you don’t, I have a bridge to sell you on your way to counseling), it is interesting to see these two indicators of the last week, and where a slowing of liquidity injections is taking place.
* The Macro Scan, Prism, July 8, 2020, pp. 4-5
It was not an easy read, but I digested a 10-page paper from J.P. Morgan’s Fixed Income Strategy Team this morning that really, really unpacked the liquidity crisis we experienced in March. Their argument, one they substantiate rather irrefutably, was that ground zero of the liquidity starvation was the Treasury Cash/Futures market, and that regulatory changes since the financial crisis caused a massive build-up of a net short treasury futures position that was intended to be non-economic/operational, but basically caused incredible market dislocations that forced Fed intervention. I know I am losing most of you, but the cash basket long and futures basket short ended up in mark-to-market strain. Unwinding this mess while hedge funds were de-levering served up a perfect storm of about $1 trillion of forced sales (they believe it to be more). And that number could have been far, far worse as the drain on liquidity was messing with bank’s leverage requirements and making their role as a liquidity provider futile. The Fed’s repo operations, swap lines, QE, and emergency provisions added to monetary base and stopped the de-levering negative feedback loop that was swallowing markets.
In English: a levered financial system can regularly find a new and surprising way to present an ad hoc systemic crisis right when you least can tolerate such happening. Liquidity is back now as are normal market operations. And the Fed played its role as lender of last resort to stop the madness. But are investors ever immune from the effects of a rapid de-levering brought on by idiosyncratic and complicated factors? I think not.
Futures are up 80 points or so – first tick out of the gate so who knows where we go into the night.
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.