The Dividend Cafe - Covid and Markets - Tuesday August 25

Episode Date: August 25, 2020

The market dropped 60 points today but the S&P and Nasdaq were both up. It was a pretty mixed day across sectors and market categories. I am going to write more about it in Friday’s Dividend Cafe but the news today that Secretary Mnuchin and Trade Representative Robert Lighthizer spoke with Chinese Vice Premier Liu He yesterday, and that all commitments of the phase one trade accord were reaffirmed, is substantial (at least for now in containing potential tail risk). One of the advantages in this new schedule to my missives is that it gives me the chance to better broaden the scope (not ignoring the other categories besides COVID health data). Today we cover all the bases, and they are worth your read. 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 the Dividend Cafe of the Bonson Group. This is David Bonson. I'm the Chief Investment Officer of the Bonson Group. And I have our daily missive for you, which is not so daily anymore, but I have to say, I think we've packed quite a punch today.

And it's kind of nice having the new revised schedule for me because it's enabling me to delve into a lot of the other categories that I think are really pertinent right now for investors outside of the daily health data. There's plenty to focus on right now with the coronavirus, but honestly, so much of the data has gotten to be redundant. And I think that as you see things playing out, out of the lockdowns, out of the COVID moment, and seeing ramifications in public policy, in housing, in our energy markets, what the Federal Reserve is doing. Those types of things are much more relevant to the economy, to markets, and obviously more in my lane. And so we are able to focus more on some of those things now with a lot of the COVID data settling down. Now there's still plenty of new news that is coming and has come

and will come around vaccine, around the policy front, around data, school reopening, individual states, all those things. We're going to keep focusing on all that as long as we need to, but in the meantime if you notice a bit more diversification of the content that's very much on purpose. So anyways, let me get into it here. Quickly on the market today, Dow was down 60 points today. It had been down worse. First, it gapped up quite a bit at the open.

Then it kind of dropped. Then it stayed flat throughout the day and then rallied a little bit off those levels into the end. S&P and NASDAQ were both up today. But it was a pretty weird day in the market, kind of mixed bag across different sectors and market categories. I'll write more about it in the Dividend Cafe on Friday, but the news today is Secretary Mnuchin

and then U.S. Trade Representative Bob Weidheiser had spoken with Chinese Vice Premier Liu He yesterday. And again, there had been a meeting scheduled, it had been canceled. Marcus didn't respond a lot because there was no real bad news that came with it. But I think a lot of people are just wondering what the status of that phase one trade deal is. We know there's a lot of tension between the U.S. and China right now. And the word that both parties reaffirmed their commitments out of the phase one trade accord, I think is substantial news and at least contains some of the tail risk that might exist out of the U.S.-China dynamic. That can change anytime. I do believe that it's going to come to a head, whether it's before the election or after the

election. But as far as the phase one trade deal, those things continue to at least be verbally committed to it. I think that's a relief to markets. On the COVID front, there's a few things I'll get into here, all of which I think are quite interesting. Listen, to kind of recap of what our focus has been all the way through in the attempt of a finance and portfolio manager and economic guy like me to be getting into the realm of science and epidemiology, ideology, it was always driven by being able to try to assess what the economic impact, market impact may be, what different things did and didn't mean to markets. And I'll be very candid with you. There was a point in time in which I found the media to become an unreliable source. And not because I think that I'm not really speaking to an agenda when I say that. I'm not going there. I'm just referring to the business model of sensationalism that I think really clouded the ability of people to interpret the data. And so my goal was to try to develop a thesis that was rooted in science, rooted in the data, rooted in the numbers, and share it with you.

And when there's bad news, share bad. When there's good news, share good. And what happened was numbers started to get very, very good, and the lockdowns ended at the end of May, and our testing dramatically increased, and our positivity ratios collapsed. And then whether it's a combination of the protest, of states reopening, or what I really do think actually is the most plausible explanation, which is probably to the chagrin of some on both sides of this, I think is probably a much bigger factor than either the protest as a cause or the reopening of the states is a cause. I think the primary factor is being proven to be that those states had not been infected to begin

with. And viruses are going to virus. And so you did not get a second wave in those key states, you got a first wave. And not everyone would necessarily agree. And it's not something I would care to argue about with anyone. but I think the data is quite clear. And so as those first waves or summer waves of new cases made their way through the states, it was really interesting to be able to see that the data was not tracking at all with how it had tracked in March, April. It was not as lethal. It was not creating as much hospitalization. It was not creating as long of hospitalization stays. It was not depleting resources in ICU units or PPE equipment. And we were trying to follow why that may be. There were different papers or scientific hypotheses put out that maybe the virus itself had mutated to a less lethal or less severe strand. That wasn't really, I think, ever verified necessarily.

However, what was clearly and empirically demonstrable was that it was a younger demographic of people who had contracted coronavirus in some form this summer, and therefore were healthier, less comorbidities, and less severe situation in terms of those two categories that matter most, which would have been hospital resources and, of course, the tragedy of mortality. So I think that the reason I'm bringing this up now is because I'm still in the same framework that what I want to be able to do is find ramifications around COVID that matter to the economy, to the normalization of American life, to the resumption of both industrial production activity and consumption lifestyle activity. I want that both as it pertains to my analysis as an economist and as me being a human being who likes to go to football

games and go to dinner and church. Okay. So there's a couple of categories going on here, but listen, the part that's impossible to forecast, it's not evident in the data. It's not something you can extract from trends of positivity or trends of hospitalizations or any of that. The part that matters is what policymakers will end up doing out of the data, and that part has proven to me to be totally unpredictable. Some states that appeared to get a more severe situation did not go as stringent in some of their economic slowdown, and their economic activity has stayed more stable than people would have expected. And other states that have virtually no detectable coronavirus left whatsoever still have gyms and restaurants and churches and things shut down.

still have gyms and restaurants and churches and things shut down. And so I don't have, for our purposes here, I don't have anything to say about what these governors or mayors should or shouldn't do. I'm just telling you why it's very difficult for me to be able to make predictions when there's such a disparate response in the economy. My own view is that you're going to see a lot of changes throughout the fall. The virus will continue to be tracked. I have no doubt that if there is an increase of cases in certain pockets, that that will get an awful lot of media attention. We're very skeptical that it will get a lot of attention from the economy, from the market itself, as I do believe that there is a widespread interest

in being able to live with a non-lethal coronavirus. Now, to the extent there's still lethality, there's still a need to protect our vulnerable, that can't go away just because we must be a society that protects the safety of human life. So I think economically, the market throughout the summer and economic metrics have continued on this theme. I've said it over and over and over again. Everything is much better than been expected and still pretty bad. And we hope for the sake of those lower decile income earners, that there will be some restoration. With that said, in terms of the FDA, their approval of convalescent plasma

treatment for coronavirus, they published their approval on Sunday night. It's really out of a lot of Mayo Clinic research. The Mayo Clinic studies were invaluable getting to this point. And I think a removal of bureaucratic delays and barriers to provide another vital part of COVID policy has a lot in the scientific community very upbeat regarding, you know, new optionality in treating those who are infected with COVID with the blood plasma, the convalescent plasma of those who have been cured. Very interesting that there were 77 false positives from the NFL lab doing player testing the last few days. Over 100,000 tests have been done on those in the NFL training camps since they began. And obviously there's nowhere near 100,000 players in the NFL. So you have to assume that they're

getting tested every day or multiple times a day and with all the coaches and trainers and all that stuff going on too. And out of that over 100,000 tests in the NFL, you've had less than 1% positivity. So May, September 10th and an NFL football season come quickly. We're ready. There was federal approval given from the EPA for the SurfaceWise 2 product from Allied Bioscience. You may have read about this. It's being used for, it's been approved by EPA for use of American Airlines.

It's a surface coating that kills coronaviruses for up to seven days. The product will supplement, not replace, other antiviral cleanings processes already in place by the airline. It takes a little time to be implemented. There are 1,400 airplanes in the American Airlines arsenal. So kind of interesting development and that'll get implemented. So nationally, cases are falling. Hospitalizations are collapsing. Deaths are starting to fall as well. They've been falling, but they're obviously, they lag a bit. But as we've said over and over and really benefited from data to help verify this, COVID-like illnesses showing up at hospitals are the number one factor that are leading indicator to where ultimately hospitalizations

and of course mortalities go. And as those COVID-like illnesses showing up at hospitals have totally collapsed, so has all the other metrics. And we have a chart at covidmarkets.com today showing the collapsing hospitalizations in Arizona, Texas, California, Florida, positivity rate dropping. It's not going to likely go much lower. It's in that 5%, 6% range now, just simply because testing is dropping. And so you're going to get a lower denominator, which holds the ratio in place. And I think some people worry, and I get it, the denominator is dropping because we're failing to do enough testing. But the fact of the matter is it's very difficult to get asymptomatic people to go take a test. And that's why I believe the testing is dropping is because there's less people who are sick. And if you're not sick, you don't have much motivation to go get a test for something

that you don't seem to think you have. In terms of Florida, down to 2,600 new cases today. It's been averaging in that level a few days, down about 80% from high levels. We need to let a little more time bear out before we say 80%, but even on a seven-day average, it's down 60%. Hospitalizations in Arizona are down 68% from their peak. By the way, Maricopa County, their public information office yesterday confirmed they were, in fact, counting those who died in car accidents and motorcycle accidents with COVID as COVID mortalities. They had previously denied it and yesterday admitted it. So that with COVID,

but not from COVID deaths, it's probably not a huge number. I don't want to overstate this story, but it most certainly distorted the summer data. By the way, Governor Cuomo in New York, there's five states that came off of the New York quarantine order. You recall he had put like 39 or 31 states or something on a list that if you came from those states to New York State, you had to quarantine for 14 days. Arizona being the leader of coronavirus case growth this summer was obviously one of those states, maybe the first state on that list of his. It's maybe the first state on that list of his, and they came off of the list today. So do with that what you will. Arizona's improvement just stunning to a point where even New York has taken it off its quarantine list. One, two, three, four, five, six, seven counties in California have come off of their monitoring list.

Orange County, of course, is one of them. We printed all their numbers for you Orange County residents at our covidamarkets.com. By the way, Florida didn't even make the top three as far as case growth yesterday. You know, Arizona's been off that list for a while. Georgia was in there, but that was because there were 778 old cases from Bibb County, Georgia, that got reported in electronic backlog, many of which or most of which were from the month of June. So do with that as you will as well. Stock market, I have a chart at covidmarkets.com I'd really like you to look at just showing the tracking of the 2009 recovery rally coming out of the financial crisis and the COVID rally coming out of that COVID teardown

back in March, April. It's really interesting to see that kind of tracking. Look, history of markets tells you nothing about the future, but I just think that it would be helpful to get a historical context of what these things have looked like in the past and give a framework to understanding where we are now. By way of public policy, a number of House Republicans voted for the post office bill that was put forward by Speaker Pelosi. I do think that if, and I don't know this, but if what the White House wants is a stimulative effect from a new stimulus bill to be felt before the election, checks and going into people's hands directly, funds from a second round of PPP going to businesses,

that all really has to get distributed by September 30th, if not sooner. So I could be wrong. I don't see how that can happen if they don't have a deal done by Labor Day weekend, which is obviously next weekend. So I think, and I'm saying this to both parties, both sides, I really think it just comes down to it accruing to someone's political benefit for a deal to get done. And I think that window is closing. One of my hedge fund sources I talk to quite regularly worded it this way for me. At this point,

you're looking at either a $0 deal or a $2 trillion plus deal, but not in between. I tend to agree. I commented last week about natural gas prices that October, first of all, they've been on fire lately on a percentage basis. And October, November, historically strong months for natty gas. And I put a chart up today showing that in crude oil, it's opposite. October, November, historically not strong months for crude. I don't think there's any predictive value on either of those. Another chart, though, that's really important to look at on the incredible

disparity right now between how oil prices have moved and how energy stocks have moved throughout the summer. By the way, oil today hit a post-COVID high, $43.50 a barrel, as the Gulf prepares for the hurricane to hit. But the energy stocks mostly were down because a lot of them were having to close refineries in anticipation of the hurricane hitting in the Gulf. Further evidence of really, really big pent-up demand after the spring shutdown in housing. The prospective buyer's index is making new all-time highs. Check out that chart at covidandmarkets.com. Futures are not open yet, so I can't tell you what they're doing,

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