Dear Valued Clients and Friends –
Futures overnight dipped 400 points by my bedtime, were basically back to even at 3:15 am, and then dipped a tad before the 5:30 am release on jobless claims. That number came in at 1.5 million, and the market didn’t respond. We opened down and reached down -270 before reversing. It was a bouncy day but never was the range of movement very wide.
* FactSet, DJIA, June 18, 2020
Ultimately we ended flat: S&P up 1, Dow down 30 – a flat day with choppiness in between.
I offer a bit more qualitative perspective on the COVID data today, and of course, go around the horn of our normal categories.
As for health data, I started the day before the market open offering my perspective to Varney’s Fox Business audience…
… on market and economic exposure to the discussion of new COVID cases. I so appreciate the research provider that has prepared the quadrant of charts I use each day in this missive, and I pay their firm (a lot) for some really stellar macroeconomic research. The compilation of data on COVID is vast and wide, and I rely on a dozen+ sources to get the level of nuance and raw data I want and need. But I believe the data is as good as the eyes, ears, and minds of those interpreting it, and I am at a loss as to how to understand the current COVID data in our country as:
(a) Extremely positive
(b) Expected, but actually much better than expected
(c) Totally and complete non-actionable in an economic sense
The decline in positivity rate of those tested is incontestable, and there are a couple of states with particular events and reasons for an increase there. Some increase in select pockets of California, Texas, Arizona, and Florida (all four states that had been really, really sheltered from COVID in March/April/May compared to most of the country) has happened. The absolute number of new hospitalizations, mortalities, etc., certainly have to be watched, but it defies logic to portray them as systemic catastrophes or disruptive macro events. The numbers are, per capita and contextualized, very small, and the events are, thus far, limited. I would not ignore it – there is always the chance of it breaking out further – but we have seen no such thing in countless other states that have re-opened, or other countries that have re-opened.
Every medical expert I speak to believes it to be the natural, expected, and unavoidable migration of a virus that is a pretty infectious spreader (not new news). The case growth, hospital capacity, and mortalities have to be watched. But I believe the idea that this is headed towards a “second lockdown” status is so cartoonishly dishonest, I have been fired up about it all week. Will some particular areas see enhanced restrictions and monitoring and attention? I would always have assumed so. But mass, systemic economic impact ramifications? I not only don’t believe so, I don’t believe any of those click-baiting their way to coverage of all of this believe so either.
As an aside, note the case growth in those states that had the most populous protests of 2-3 weeks ago has been completely minimal. There are a number of reasons for this that should be quite telling. There really has to be SOME spread that took place there, but the lack of any meaningful outbreak in those areas should be a huge indication of confidence in the economic re-opening ahead.
NONE OF THIS is to say there is not an ongoing need for caution, hygiene, distancing, safety, and common sense. Sick people or symptomatic people staying home is tied for first place with hand-washing as the #1 thing that contains spread. The virus has died off in a lot of places and clearly moved south as well. I am as curious about the different questions or theories the experts are struggling with as the next guy (it sure appears to not like the outdoors much). I do not believe COVID has gone away. I do not believe we are without risk as a society whereby ignoring it or avoiding safety measures is advisable. But I do believe the various pockets of data we have reflect more good news than concerning news, and where there is concerning news, it is not, in context, catastrophic. This is an objective interpretation of raw data. Economically, we have plenty of challenges ahead of us. I will be laser-focused on that economic data and tuning out click-bait sensationalism along the way. I hope you will, too.
First and foremost: NY hospitalizations back at COVID peak daily average) vs. the states (or state) seeing an increase now … These two charts at the top here are basically why markets are not buying into the hysteria in the media.
* Pantheon Macroeconomics, June 18, 2020
There is data that warrants monitoring and ongoing vigilance – but understanding it in context – and for our purposes, economic context, is important.
* Pantheon Macroeconomics, June 18, 2020
- Today’s testing data shows over 465,000 tests done today, with a positivity rate of 5.7% (up from the last couple days’ 5.1%.
* The COVID Tracking Project, June 18, 2020
- If you are interested, I did read this morning a really interesting report from the Hospital for Sick Children out of the University of Toronto – a leading research institute that created a substantial white paper on the COVID implications of schools opening. Reach out if interested.
- The league commissioner for Major League Baseball, Rob Manfred, has said that he has reached an agreement with the players union for a framework that will save the 2020 season. Others have suggested they are not quite so close to a deal. We shall see. Time is ticking.
FACT (Florida, Arizona, California, Texas):
California’s case growth appears to have dropped a lot today versus yesterday but that may not be a final number yet. Florida and Texas have finalized reporting and saw big decreases versus yesterday. Arizona is up 700 cases from yesterday.
* Worldometers.Info, June 18, 2020
In market technicals, I have had an increasing number of inquiries lately wondering if the airline sector was grabbing our attention as stock prices in the sector have bounced off bottoms and credit spreads have stabilized.
* Strategas Research, Daily Technical Strategy Report, June 18, 2020, p. 10
The fact of the matter is that the sector has never been attractive to us and is less so now, and that has nothing to do with the COVID hits to their top-line revenue, per se. In fact, if that were all we were concerned about the sector could very well be relatively attractive, because one always has to remember that you are not the only one who knows about bad news in a company or a sector – the whole market knows, too. So in fact, bad news gets priced in and therefore becomes immaterial to weighing the direction of a stock price – and in fact, as we see in the chart above, often gets over-priced in. However, we are dividend growth investors, and the sheer cyclicality of this sector, the leveraged balance sheets, the heavy labor union obligations, and the extrinsic exposures they inherently have, all point to it as a bad place for stable dividend growth. And then now, post-COVID, we believe the terms of government loans and such and public perception even a couple of years out will suppress or eliminate dividend payments for a long, long time. It’s just not for us.
In the Oil and Energy world, WTI crude opened up +2.5% ($39/barrel), as supply cuts are combining with demand resumption. We did get the data from the Joint Organizations Data Initiative today verifying that Saudi went from 7.39 million barrels per day in March to 10.237 million barrels in April. This ~3 million barrel per day flooding warrants a response, and I believe will get one. It also validates my prior theory that after the production deal with OPEC+ was reached, Saudi flooded the world in advance of the production cut becoming effective in May.
As for Housing, the new American Enterprise Institute’s housing market report is out. I am happy to send to anyone who requests it, but a few takeaways:
- The heavy new purchase trend we have been talking about, evidenced by new purchase mortgage applications, is actually quite a disparate region by region. The south and southwest have seen the heaviest activity, with the northeast, midwest, and west lagging.
- Metropolitan areas are, indeed, seeing the trend they saw pre-pandemic resume. In other words, markets that were slow pre-COVID are still slow, and markets doing well before have resumed their activity levels.
- Non-urban areas have seen 39% growth where urban areas have seen 29% growth (in purchase rate locks) – good in both categories, but a significant delta in the suburbs.
On the Structured Credit side of mortgages, spreads in the MBS space but have come in plenty from March insanity, but remain quite wide to pre-COVID levels. This speaks to the agency side of RMBS, but spreads remain much wider in non-agencies, CRT’s, and CMBS. It is that lovely combination for investors, where it has gotten a lot better since we started, and it still has plenty of room to go.
* Strategas Research, Fixed Income Strategy, June 17, 2020
And in Fed news, there is an increasing …
- … pressure on the Fed to expand its municipal bond lending facility. A significant group of Congressmen and women are arguing to the Chairman that the current conditions in the municipal facility are too stringent in their requirements around credit rating, interest rate, and penalty rates. The arguments are now being made that to not accept these credits in the program will damage the underlying municipalities, a potentially potent argument politically when the Fed is buying lesser credit quality in the corporate market.
- The Bank of England (all central banks deserve attention in this section) added another 100 billion sterling pound to their bond-buying program today (British QE, if you will). They held their overnight rate basically at 0% (they were 0.75% before COVID). I do not expect negative rates out of BOE but it bears watching. Their balance sheet is now near 750 billion pounds.
- Elsewhere across the pond, the European Central Bank extended loans to 742 banks on Thursday totaling $1.5 trillion (with a “T”) – 1.31 trillion euros. The interest rate on these loans is below zero. So to really spell this out, the ECB is paying banks to lend money to their clients. The idea is obviously to stimulate credit and provide liquidity. So far policymakers have been pleased with the positive response of banks to the offer of being paid to lend out printed money.
The weekly claims number continues to be too high to feel good about the economy (1.5 million this week), but continuing claims did come in at 20.5 million, down from the 25 million of about six weeks ago. That 20 million getting down to less than 10 million is going to be the key to the labor aspects of the economic recovery.
Futures are pointing up a tad for tomorrow. More to come.
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.