The Dividend Cafe - Covid and Markets - Thursday August 27

Episode Date: August 27, 2020

The market rose 160 points today, perhaps from a mix of reasons (Fed talk, hurricane control, and COVID testing news – see below). The S&P was up just a tad, and the Nasdaq was actually down on the day. I do feel like today’s missive is a meaty one, so I hope you will enjoy reading it as much as I enjoyed writing it. I confess, this “every other day” missive schedule has been much more manageable for yours truly! Okay, let’s go around the horn … COVID Health Information • Confirmed new cases are now down over 37% from the July peak of a month ago, and are down over 12% on daily average basis from last week. The case decline is rapid, and while I am of the opinion it must be hospitalizations and case severity that drives public policy, not merely the existence of cases, the actual decline in cases adds ammo to the arguments for greater freedom of movement and activity (an economic plus). • The only states not seeing rapid decline in hospitalizations are Alaska, Hawaii, Montana, and West Virginia – more or less the overall national trend and data reality where there is a real COVID presence is in overwhelmingly declining COVID hospitalizations. • And even apart from the dropping hospitalizations, and dropping cases, the hospitalizations-per-confirmed cases has dropped substantially from the spring levels, unambiguously supporting the notion that the recent infections affected a less vulnerable and more healthy group, and lending support to the idea many epidemiologists have proposed that the virus is losing potency. Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Hello and welcome to today's COVID and markets podcast brought to you by Dividend Cafe of the Bonson Group. Today is Thursday, August the 27th, and we are going to walk through the whole deal, market today, big updates in the Federal Reserve, the housing market, policy front, energy sector, and of course, all of the up-to-date COVID health information, particularly the more America-centric impact of what's going on with coronavirus. As far as the market today, the Dow rose 160 points. It fell off about 100 points in the final hour. It had been up over 250. But the S&P was not up much, and the NASDAQ was actually

down on the day. So it was one of those days where the names that have been out of favor were doing better. And then the big tech stuff was not doing as well. And the overall market was just kind of choppy. And nevertheless, the Dow itself had a pretty good day. In terms of where we are on the COVID front, you know, for me personally, I'm really enjoying now doing this every other day or whatever the new schedule is versus every day. And one of the reasons is not only is it obviously a bit of a relief to just the massive amount of reading and writing and data mining and so forth I've been doing for four or five months. But also it is the fact that there's less COVID information now, less COVID relevant news. And I can't stand writing with a mandate to kind of go find news or create it or make up information that will

sound relevant or interesting. And I think it's one of the great flaws of the 24-hour news cycle, and particularly in financial media, that there's not 24 hours of information. And so you have to go create it. It's not really their fault. It's the necessity of filling in that time. And then you end up often filling it with things that are really not newsworthy. And as it pertains to COVID, there is plenty of stuff going on, but every day I think becomes a bit redundant and it risks the temptation to manufacture news and make it more appetizing. And I just don't want to do that. I will tell you this, as far as where the news, the overall direction of our fighting with COVID in America goes, we have one state in the country.

There's 50 states in the United States. One state, Georgia, has more than 20% of their hospital beds being used by COVID patients. 45 states are under 10% of their hospital beds being used by coronavirus patients. 27 states, over half, 5% or less of their total beds are being used by COVID patients. Our confirmed new cases are down over 37% from the July peak of a month ago nationally. They're down over 12%, by the way, on a daily average basis just from last week. The case decline is rapid. And again, I believe it's hospitalizations and case severity that has to drive public policy, not merely the existence of cases. I've said that over and over. I think the market agrees, the economy agrees, more and

more of the country is agreeing that having to live with the reality of cases is part of our deal now. But when the actual cases themselves, that for right or for wrong have been the subject of much controversy, are declining, it really does add ammunition to the argument for a greater freedom of movement and activity, which of course is an economic plus. Now, the states not seeing a rapid decline in hospitalization still don't have a high level of hospitalization, but those five states are Alaska, Hawaii, Montana, West Virginia, excuse me, that's four states. And more or less, the national trend, as I mentioned, 37% from the peak, is reflecting an overwhelmingly declining COVID hospitalization.

I would suggest that it's somewhat logical that if you're not getting increasing hospitalizations, and in fact, you're getting decreasing hospitalizations, that you're going to get decreasing deaths because very, very few people die of COVID that weren't hospitalized first. I hope that's intuitive to you. And even apart from the dropping hospitalizations and the dropping cases, the hospitalizations per confirmed cases has dropped substantially from the spring levels, meaning March, April, at which unambiguously supports the notion that our recent infections have affected a less vulnerable and more healthy group in society. And then I believe it is lending more support to the idea that many epidemiologists, not all, have proposed that the virus is losing potency as it continues to mutate and work its way through infecting the society.

There is a new study, by the way, from a team of researchers. I believe it's 26 PhD immunologists, epidemiologists, research scientists from the La Jolla Institute institute of immunology providing support to the notion and it is more and more becoming a consensus scientific view that prior exposure to the coronaviruses that cause the common cold may be providing some protection against covid the question though i think is not whether or not this is true, but how reliable and long-lasting these protections are. I would certainly agree that that science is not settled yet. And then also whether or not it is just simply lending itself to a weaker case versus no case at all.

Cross-immunity, though, is an important part of T cell protections and an important part of evaluating our understanding of where the whole herd immunity threshold may be. And obviously, it could very well be explaining some of the less symptomatic and severe cases. But like I said, there are conflicting studies. And so this study from La Jolla Institute was quite interesting. I'll quote from that paper, this potential pre-existing cross-reactive T-cell immunity to SARS-CoV-2, which is COVID-19, has broad implications as it could explain aspects of differential COVID-19 clinical outcomes, it could influence epidemiological models of herd immunity, or it could affect the performance of COVID-19 candidate vaccines. So big study, big subject at the heart of where

we go with COVID. The chair of Harvard's Department of Immunology, Sarah Fortune, says clearly there is some cross-protection from other seasonal coronaviruses. So, you know, this is a story that needs to continue to be understood and may very well result in improved and enhanced understanding of herd immunity and a lowering of the threshold expectation. You may have heard the news today. It may even be part of the market's movement up today, although I doubt it because the market was so kind of sporadic. But I do think it's very, very good news that the FDA gave emergency use authorization

to Abbott Labs for their $5 rapid response antigen test. The test is tiny, it's cheap, it's fast, and it uses similar technology to a home pregnancy test and results are expected in 15 minutes. You may not be surprised to know that I don't know anything about the technology of a home pregnancy test either. But tens of millions of these tests will ship in September now. They will not be sold directly to consumers.

They're intended for use by medical professionals. But that could include school nurses and others. And the accuracy levels are estimated to be roughly 97%. Well, let's see here. I've got to kind of move this along. I did read a study this morning. There's a data scientist from MIT who I followed really closely for the last several months who went through and analyzed whether or

not, because see, we're trying to look at where second wave occurrences may kind of contradict herd immunity thinking, all right? But a lot of the states this summer, as I pointed out, didn't really have a second wave. They had a first wave. So saying, oh, well, you know, Arizona went through March, April, but then it got all of these new cases in the summer. So maybe herd immunity doesn't exist, but really it doesn't argue against herd immunity because Arizona never got it in March, April. It was very, very minimal exposure and very little penetration. very, very minimal exposure and very little penetration.

Louisiana, though, had a pretty widely penetrated infection in March, April, and then Louisiana did participate in the summer surge of cases. And so there was some questions as to whether or not Louisiana argued against the herd immunity dynamic. But what this data scientist from MIT did is just study in detail the situation in Louisiana and really concluded that they had a high number in certain counties and precincts or parishes of Louisiana in March, April, and then a high number in totally different areas in the summer. So he's arguing that actually Louisiana's quote-unquote second wave is an affirmation of herd immunity that went to such a different geography

and did not spread into some of the same areas second time around. A quadrant of charts exist at covidandmarkets.com showing the declining deaths, hospitalizations on national level, showing the fact states and their just utter collapsing of cases on a seven-day moving average basis, where we are with testing and positivity ratios, encouraging stuff all around there, and obviously our standard about the positivity rate and total testing done and so forth. Okay. Let's see here. We'll move on into the state levels in Florida. Emergency room visits for COVID-like illnesses, which I believe has been the most reliable

meeting indicator to see where then hospitalizations, mortalities, equipment use end up going. It's down 75% in Florida from its July 7th peak. And listen to this, the per capita mortality rate for Florida seems to have peaked out at just 28% of what New York's per capita mortality was, despite all the concerns this summer that Florida was headed to a New York March-April level of lethal COVID. So we thank God it never got to that point. But really at just 28% of that level, it's a data point that analysts really probably can do a lot with. There were 135 deaths reported in Florida today, but over half, over 70, were for the month of July.

That's how long that lag of reporting and whatnot and death certificate surveillance has been. I'm not going to be talking about Arizona anymore, Lord willing. And there's three charts at COVID markets that explain why. And you can just look at them visually and see the inpatient bed use for COVID people, the ICU bed use for COVID positives, and then the available beds in their hospitals. And when you look at these three charts visually, I think you'll quickly get an understanding of why Arizona is no longer in need of my coverage. Orange County, California is getting to the same

point. I just want to keep the countdown going. We're now five days on the county monitoring list with all the metrics being successfully overcome, and Riverside County, by the way, hospitalization is down 60 percent from their July 14th low about five or six weeks ago. Texas, their hospitalizations are down 32% in the last two weeks. So we're moving in the right direction. And some good links and all the normal things we have at COVIDMarkets.com. Quickly on the stock market, okay? Top five companies in S&P 500 versus the bottom 495, a 42% differential in performance since March.

By far, biggest ever. It was 36% back in 1999 in the final innings of the tech boom. Stunning. And there's more on this in Dividend Cafe this week that'll come out on Friday. Nothing to report on the public policy front other than the Speaker Pelosi said she did actually talk on the phone now with White House Chief of Staff Mark Meadows, but that her conclusion from that call was that we're in a very bad place, a tough impasse and not moving at all. So that either is no news at all because you expect everyone to, you know, refer to nothing getting done

or it's reinforcement that nothing's going to get done. We'll see. Oil and energy, huge declining stockpiles, allowing prices to firm up so much. Oil sitting comfortably has been climbing above 43 a barrel. Refining capacity has been closed at 84% of Gulf of Mexico oil output because of the hurricane. Inventories fell another 4.5 million barrels last week. That's on top of the 3 million barrels from the week after.

So there's a chart we put up just showing the declining inventories that followed the massive increase of inventories throughout the month of April, really started in March and then accelerated in April, stayed kind of flat May, June, July, and now second half of July all through August has been declining, which is providing quite a robust support, quite a favorable support to crude oil prices. On the housing market, you really got to read COVID markets to understand it. But I'm really grateful to one of the great housing research intellectuals in this country, Edward Pinto,

at the American Air Prize Institute's Housing Center, who did a report this week that I was going to skip over, and I just decided to jump into it and really learned a lot from it. 40% of all loans Fannie and Freddie have done now are receiving a waiver of appraisal. Okay. And that is stunning to me, but the number started off the COVID era at 25%. And last year, you know, going in 2019, we're at 5%. So something caused them to give going from 5% to 25% of loans a waiver on getting an appraisal done, and something else caused that number to go all the way up now to 40%. Now, there's a lot of reasons people could say appraisal is not necessary or whatever, but my point is they're doing two-thirds of the mortgages in the country, and this seems to me

to be a pretty significant risk mitigation that's gone away. I also have some data on refinancing. 67% of all mortgages done in Q2 were refinancings. That's neither positive or negative. It just sort of is what it is. Rates got very low, and there weren't a lot of new purchase apps to do in the first half of the quarter because the economy was shut down. But I just want to point out $513 billion was refinanced in the second quarter alone. That's up 130%

from last year. That is 1.69 million borrowers refinancing. So if they're just simply getting a lower rate, improving the mortgage product they're using. That's a great thing. But if they're doing cash out refinances, I just want to remind you of Bonson's law. Falling home prices did not create the 2008 crisis. A lack of protective equity did. We're going to be watching it very closely. The Fed, you may have heard by now, did indeed formalize that they are adjusting their 2% inflation target policy to allow for an average of 2%, which basically allows them to run above 2%. I don't want 2% inflation, let alone 2.5% inflation. But this upping the ante doesn't bother me because I don't see them being able to create the 2%, let alone, quote unquote,

run hot. All this does is rhetorically formalize what they've been doing or committed to doing or wanting to try to do for a long time anyways. But as you can see from two charts I put at covidandmarkets.com today, if it were just as easy as announcing that they want to create higher inflation, then they would do so. But they can't do it. They've been unable to do it. And I think that's the key here, that the velocity of money needed to generate inflation is not coming. And that velocity is very positively correlated with our unproductive debt.

That's the problem. That's what the Fed's battling. Okay? So we don't quite yet have futures for tomorrow. We'll have our weekly Dividend Cafe commentary to you tomorrow, but I hope you got a lot out of this, today's COVID market submissive. Please reach out with any questions. Please rate us on your iTunes player or your chosen method of listening to the podcast, subscribe, share, do whatever you want to do. But more than anything else, reach out to the

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