Dear Valued Clients and Friends –
Market futures pointed down 100 last night, up 200 at 3:00 in the morning, and eventually opened dead flat. The market was quite boring most of the day, and closed down 170 points, dropping in the final hour of trading (just minutes after I told the Wall Street Journal how nice it was to be up or down less than 50 points).
* DJIA, FactSet, June 17, 2020
As for health data, absolute case growth yesterday was over 23,000, testing rose by 11.7%, the positivity rate was 5.1%, and new deaths remained under 1,000. The median state increase for new cases was 228, down almost 7% from last week, so the national number increase was concentrated in four states. The seven-day trend in hospitalizations continues to fall, but perhaps that will change.
I took the liberty of making some marks on today’s “quadrant” charts, just so readers can grasp the numbers of what we are talking about when the terms “surge” and “outbreak” are used. I do not want to claim that there are no pockets of increase around the country – there certainly are. My claim is that there is not, right now, an economic challenge in the re-opening, a systemic threat to hospital and equipment resources, or anything of the kind. But the data can all be interpreted for what it is …
* Pantheon Macroeconomics, June 16, 2020
- Today’s testing data shows over 488,000 tests done today, with a positivity rate of 5.1%.
* The COVID Tracking Project, June 16, 2020
- The 7-day average for testing has hit its all-time high in America, and is not at the level recommended by Harvard Global Health Institute on a rolling-average basis
- There is some good information out there about the real lay of the land in Arizona, neither pretending there has been no increase in COVID cases, nor pretending it has become a catastrophe
- Governor Cuomo moved New York City into phase two today (effective Monday), opening up offices, in-store retail, real estate leasing, and outdoor dining of restaurants and bars.
- Deaths still staying below one thousand/day which is shocking even to me
FACT (Florida, Arizona, California, Texas):
- Texas cases seem way down today vs. yesterday (~40%)
- Arizona new cases down today too (~20%)
- California new cases up a smidge from yesterday
- Florida down a smidge from yesterday
*Worldometers.info, June 17, 2020
In market technicals, I am becoming less swayed by the very low put/call ratio, which is normally a bearish indicator from a contrarian perspective, as the AAII Bull/Bear Survey remains neutral if not bullish from a contrarian perspective, and the money flows are so defensive as to be downright bullish.
* AAII Survey, June 10, 2020
- I really, really hate to use a particular historical experience and present it as if it were normative, but because of the drama of the drop in the financial crisis and drama of the drop in COVID, and because of the drama of the initial recovery in spring 2009 and the the drama of the initial recovery in spring 2020, I thought this chart was at least noteworthy from 2009 as far as the May-July time frame … It is not predictive. There is nothing normative here. But take this for what it is worth:
* Strategas Research, Technical Strategy Daily Report, June 17, 2020, p. 4
- Finally, I know Emerging Markets Debt is the last thing anyone is going to be thinking about before bed, but the normalization in this space (note the collapsing cost of credit default swaps, insurance against default or EM sovereign debt) is a big, big deal. The disconnects that took place in EM debt (especially sovereign) were one of the most painful dislocations in March, and the normalization there is both indicative of a calmer environment, and creative of a calmer environment.
* Strategas Research, Technical Strategy Daily Report, June 17, 2020, p. 8
On the public policy front, I did get to confer with some of my sources in the last 24 hours, and I am very skeptical that infrastructure spending will be part of “stimulus 4.0.” There may be some marginal inclusion (i.e. highway spending), but I continue to believe (as I have since the CARES Act passed) that a sort of “5.0” is coming, and that it has the potential to be the biggest of all of these packages.
To recap, stimulus 1.0 and 2.0 are sort of forgotten in the early phases of March, mostly providing emergency federal funding around health costs and equipment, etc.
On March 6, stimulus 1.0 at a cost of $8.3 billion was enacted, basically just funding some vaccine development and public health funding. It is hard to even remember a time where they were debating about $2 billion vs. $8 billion in costs (since we now are debating $2 trillion vs. $8 trillion
On March 18, stimulus 2.0 came at a cost of $104 billion (the Families First Coronavirus Response Act), this time addressing sick leave, a tiny coverage on unemployment, and health insurance coverage requirements.
Then on March 27, the big one came – stimulus 3.0 – the CARES ACT. This had a cost of $2.2 trillion, though a subsequent amendment pushed that up to $2.7 trillion when they added to the PPP program (I have called that supplement to the CARES ACT stimulus 3.5).
So stimulus 4.0 is the one on the table now – the House Democrats wanting a $3 trillion package centered around support to states and cities as well as an extension of federal unemployment benefits. The White House reportedly wants a smaller package, but still $1-2 trillion in cost – more centered around liability protection for employers and a payroll tax cut, as well as some modified version of unemployment support extension.
What I am envisioning is a stimulus 5.0 that involves infrastructure and incentive for U.S. companies to onshore supply chain activity.
In the Oil and Energy world, WTI crude closed right around $38/barrel, basically unaffected by anything else today.
As for Housing, mortgage demand hit an 11-year high, undoubtedly behind record lows in rates. New purchase applications rose 4% last week, and were up 21% vs. this same week a year ago (what COVID?). Re-finance applications were also up 10% for the week, and are up 106% over last year (purely attributable to rate levels). This represented the ninth consecutive week of increases in mortgage app volume. The combination of pent-up demand and historically low rates is feeding the substantial activity.
* Strategas Research, Daily Macro Brief, June 17, 2020
More coming on the MBS/Structured Credit space tomorrow.
And in Fed news, I read the text of a speech Fed vice-chair, Richard Clarida, is giving to the Foreign Policy Association, and again am struck by how adamant the Fed is to communicate their lack of concern about inflation. They are explicit in their policy priority of fighting dis-inflationary forces, and if they are to be taken at their word, whether they are right or wrong in their diagnosis, I believe it must have a profound influence on portfolio positioning, assuming a very perpetual accommodative framework from the Fed.
I did want to make a supplemental point for those who like the deep dives (I assume that is all of you?) about the issue of leverage in the financial system … Those who have followed my talks and writings since the COVID period began know that I was (and am) deeply focused on the role that forced selling and deleveraging in a panic plays in adding to market sell-offs. I can’t exactly quantify it, but my rough estimates are that fundamentals and uncertainty drove markets down to 22,000 in the peak of the COVID moment, but a wave of forced selling drove the 22,000 level to 18,000 in those fateful days of March.
I think this is important to understand why future market volatility in the short term that we may experience should, should, should still look much different than those March crescendos … $66 billion of Treasuries being sold in the Cayman Islands in April (after $118 billion sold in March) refers to one thing and one thing only: carry trades of U.S. hedge funds being liquidated. Those leveraged carry trades were blown up and that indicates less leverage in the financial system, for now. I assure you, it will not last (once things are fully normalized). Hedgies will re-lever. But this is, to me, fascinating, and as indisputably clear as anything can be.
I have previously documented that $400 billion of equities came out of risk parity strategies alone in those fateful weeks. It is encouraging to see that risk parity remains with low exposure to equities, both because it speaks to less leverage and risk, but also because there likely is a re-leveraging to come that represents more points to the upside (when the time is right).
Plenty to chew on here, today. Futures modestly up right now as I hit send. Have a great 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.