Dear Valued Clients and Friends –
Futures were down last night, then up this morning, then went flat just as the market opened this morning. By the time the market open was catching steam downward pressure was on stocks, and that downward pressure accelerated a few hours after the open, and then stayed down but level the rest of the day. Stocks actually closed 180 points off their low of the day, but still down 500 points on the day.
* FactSet, DJIA, May 13, 2020
The press reports that stock pressures were related to Chairman Powell’s comments this morning strike me as the best excuse we have but I don’t actually believe the market needs an excuse for this up and down volatility. I expect markets to move within a range a couple thousand points lower than present levels and a couple thousand points higher than here for the foreseeable future.
There is so much to cover today, I may push some into tomorrow’s missive … Read all the way through – the policy and Fed material today is particularly important.
As for health data, case growth only rose +1.6% yesterday. Absolute case growth was 21,000 yesterday, whereas it was 24,000 the week prior. The only case growth in Tennessee (which led the way in re-opening) has been in a prison, and case growth and deaths in Denmark (another model for re-opening) continue to collapse.
* Pantheon Macroeconomics, May 13. 2020
- Another 336k tests today, with a 6.4% positivity ratio.
* Daily COVID Tracking Project, May 13, 2020
- I do believe there were two egregious examples of media sensationalism yesterday distorting facts on the ground. One was Dr. Fauci’s comments on the risks of re-opening, and the likelihood of schools re-opening in the fall. One widely distributed article said in its click-bait headline “Fauci says schools re-opening is a bridge too far.” When you clicked into the article, it pointed out what I heard with my own ears during his Senate committee testimony – that having a vaccine by the fall is likely a bridge too far, so schools should not count on a vaccine, but rather social distancing and preparation and so forth. He never suggested schools not open in the fall. The other example was the widely distributed headline that “Los Angeles County to extend its lock-down through the summer.” And far be it for me to ever defend anything the supervisors of LA County say or do, but the reality is that the context was very clear that the quote referred to a phased re-opening, with some aspects and phases still playing out throughout the summer (not that the entire quarantine order would still be in effect). I cannot comment on why it is so hard to find comprehensive and accurate news reporting these days, but I can tell you that there are ample examples of spin and distortion out there from all categories of news outlets. The “headlines” are not matching the substantive reality.
- Residential senior care facilities represent 1.6% of the U.S. population, yet 39% of all COVID deaths. And ex-NYC, they represent 49% of all U.S. COVID deaths. This stunning and depressing concentration will likely drive a lot of the re-opening strategies and procedures, where more focus can be provided to said nursing facilities, and less stringent requirements can be imposed on the less vulnerable segments of society.
* Strategas Research, Policy Outlook, May 12, 2020, p. 3
- I have been thinking about assembling an active tracking tool of the various potential therapeutic and vaccine treatments in development, but then I saw my friends at Strategas already doing such:
* Strategas Research, Policy Outlook, May 12, 2020
- In one of the most encouraging news bits of the day, the fight over the re-opening of the primary plant of the largest electric car manufacturer in the country was won by the car company, as the county capitulated to the reality of the company’s preparation and safety protocols. Easing of business restrictions are taking place all over the country, just easier in some places than others.
- And finally, the mapping of new cases and other COVID data by state, relative to where states have most loosened restrictions thus far, is quite important. The data remains steady and supportive of ongoing economic re-opening (note the circled regions below).
In market technicals, the low put/call ratio right now is a sign of market complacency, and the high breadth in yesterday’s sell-off (80% closed at the day’s low and the advance/decline ratio was 1:6) are both signs of modest technical weakness. The percentage of stocks above their 50-day moving average is high, and we are watching a healthy, consolidating momentum.
* Strategas Research, Daily Technical Strategy Report, May 13, 2020, p. 3
I am assuming credit spreads will not be widening from here, not just because of Fed interventions but also because of stabilized fundamentals. But there is no question that if we see IG or HY credit deteriorate from here it is likely a negative indicator for equity markets.
* Strategas Research, Daily Technical Strategy Report, May 13, 2020, p. 6
A quick diversion into structured credit …
Liquidity for Asset-Backed Securities (ABS) is a mixed bag. Conventional products have seen a lot of spread tightening, whereas more esoteric lanes of ABS are still very wide. BBB-rated tranches of subprime auto now trade near par, yet other sectors have barely nudged.
In the Residential Mortgage Backed space (RMBS) the uncertainties around forbearance allowances and disrupted cash flows has kept things technically broken, even though fundamental deterioration does not seem part of the equation. Buyers and sellers are more balanced now in non-agency RMBS, but we have a ways to go to see spreads meaningfully tighten.
In the Commercial Mortgage Backed space (CMBS) the forced selling and margin calls of March are well behind us, but spreads are wide as uncertainty persists around the economy and the utility of so much commercial real estate. The quality of the credits matters, the enhancements matter, and ultimately, even the underlying collateral may matter for some tranches.
All aspects of structured credit that have direct Fed support through TALF 2.0 are well bid now, and no longer suffering from the liquidity pinch of March. It is the non-Fed supported aspects of structured credit where prices remain dislocated from fundamentals, assuming of course that fundamentals do not substantially deteriorate from their current point of already significant deterioration.
We remain very committed to the opportunities in structured credit where appropriate for given clients, and welcome these conversations where there is interest. We are not taking a one-size-fits-all approach, but rather tailoring each structured credit positioning on a client by client basis depending on loss aversion and risk appetite.
On the public policy front, I have almost exclusively used this daily missive to report health and economic developments, and I have minimized my own personal commentary on such other than to provide investment application. I fear that some may believe this next comment will be an exception to that but the fact of the matter is I am not saying it ideologically or politically, but rather in a spirit of objectivity and thoughtful analysis.
The $600/week unemployment bonus under the CARES ACT is at risk of becoming a real problem economically. Lest it sound like I am suggesting an austere stripping of their benefit when they return to work (the standard way unemployment benefits work), I would be fine with workers getting to double dip – receive the unemployment benefit (not their standard state benefit but the federal $600 weekly subsidy) along with their employment wages – if it helped avert what I fear is about to happen. And what I fear is – a really embedded incentive for a significant part of the population to stay out of the work force. Apart from the various social and political arguments that could be made on each side, my only point is economic here: We benefit from a productive economy, and any disincentive to work is not in the best interests of the holistic economy.
The Treasury did sell $32 billion of ten-year U.S. Treasury bonds yesterday at an all-time record low (for new issuance) of 0.7%. The April budget deficit was $738 billion, and we sold $32 billion of bonds at 0.7%. That is not Fed demand – that is real investors.
In looking at the Oil and Energy world, the Department of Energy announced today that they are buying one million barrels of oil for the Strategic Petroleum Reserve. They will buy from small to medium producers and will store at the SPR sites this summer. Oil prices are sitting around ~$26/barrel. It is noteworthy that it has been some time since the big down days in equities also correlated to big down days in oil prices. The correlation between oil and stocks was essentially 100% in March, and has been quite low the last month or so.
As for Housing, huge jump in home borrowers who went into forbearance from April 5 to April 12 was where we first saw this would not be a small phenomena (+59% increase in a week). Last week’s increase of only 4.9% greatly encouraged me, as I wrote about yesterday, but it does occur to me that the second week of the month is where we may be most likely to see a change in data. I wait with baited breath for the data next week, praying that we are near a peak in mortgage forbearance. The trickle down effect through the economy is a big problem, and as this is forbearance, not forgiveness, it does mean a greater “catch up” effect later. All things being equal it is best for the national housing market and financial system to see these forbearances minimized.
* Strategas Research, Daily Macro Brief, May 13, 2020
And in Fed news … Powell’s comments this morning to the Peterson Institute were mostly seen as the reason for equity weakness today (the economy is distressed, more aid is needed from Congress, etc.), but I would argue that there was more to extract from the comments.
The $600 billion Fed facility for Main Street lending has not been opened. The $500 billion facility for municipal bonds has not been opened (and see the below update on this). As mentioned yesterday, the corporate bond facility just launched yesterday. And the Asset-Backed (TALF) $100 billion facility has not launched, either. There is a lot of room for the Fed to still implement, and Powell comments about “the need for more” can be interpreted as prodding Congress for more fiscal support, but they also can be interpreted as setting the stage for the Fed’s more liberal interpretation of its own intentions.
The House Democrats’ proposed economic-relief bill amends Section 14 of the Federal Reserve Act so that the Fed could purchase municipal debt of any duration by citing “unusual and exigent circumstances.”
Currently, the Fed can buy outright muni debt of only up to six months (which has helped, but is limited).
The Dems bill would also force the Fed to alter its Municipal Lending Facility (the leverage they create off of Treasury equity funding) to:
-Keep it open for another year (to 12/31/21)
–Allow maturities of up to 10 years (currently the max is 3 years)
-Set a MUCH lower rate by charging the same interest rate as on discount window borrowing
Now, the Dems’ bill is going nowhere. But I don’t think anyone is paying any attention at all to the fact that these things were in the Dems’ bill. My belief is that there will not be WH or DOT or GOP push-back on these things when they do get a final bill done in several weeks. And I don’t believe Speaker Pelosi came up with this on her own – I am told someone at the Fed is driving this, and we know Senator Menendez of New Jersey is a big advocate for this.
Munis may get their chance to catch up to corporates still.
The submit deadline came today and I had much more to unpack, so expect a big load tomorrow. The Fed and policy issues are top of mind right now. Reach out with any 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