The Dividend Cafe - Covid and Markets - Tuesday September 1
Episode Date: September 1, 2020The extraordinary drop in new cases has slowed down, as expected. New cases seem to have flat-lined even as hospitalizations and mortalities continue declining, pointing to the increasingly less symp...tomatic and lethal nature of COVID cases currently being tested. Color me confused by analysts and experts who are confused by the low mortality metrics coming out of European countries in their late summer increase of new cases. I would think everyone would have expected the low mortality rates Europe is seeing based on the experience of the U.S. this summer (better treatment, healthier infections, less severe virus, etc.). The CFA Institute published a provocative article last week from Laurence Siegel (Director of Research at the CFA Institute Research Foundation) and Stephen Sexauer (CIO at the San Diego Employees Retirement Pension) looking at the dangers of COVID that are not specific to COVID (Bastiat’s law of the unseen versus the seen). This chart in particular grabbed me. Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com
Transcript
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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.
Today is Tuesday, September the 1st, and we enter a new month, the final trimester of the levels, maybe a little bit off of peak levels
in terms of COVID infections and hospitalizations and daily mortalities. About the month of April
had been, you know, utterly disastrous. And it's been adventurous four months, not just in markets,
which is my primary focus, but it's been really informative, I think,
around our country's digestion of the coronavirus.
And so I'm going to talk about some of that here today and give you our market info.
And then, again, my commitment through this missive and my communication has been also
cover some of the kind of directly, even if peripheral, still directly connected subjects that touch COVID markets,
such as the Fed, public policy, housing, and things like that.
And I have a few comments on that today as well.
So the market started the first day of September today up over 200 points.
The percentage return in the Dow and the S&P was exactly the same.
It's been a little while since we've seen that.
Uh, NASDAQ was up a bit more.
Um, and some of the markets kind of increase, uh, came in the final half hour trading and
even more of it in the final hour and a half of trading.
So, um, you got, you got some buying action later into the day.
Uh, but let me, let me get into some of the COVID stuff.
I think the drop in new cases has slowed down, meaning cases had dropped quite a bit.
And that dropping of cases, the rate of drop has slowed.
That's expected.
New cases may be a flatline, but hospitalizations, mortalities continue
declining. And I think that that points to the idea of a case level that is functioning with
different math than the hospitalization and mortalities, both on the way up and the way down,
and both in a favorable sense, by the way, point to the less symptomatic and less lethal nature of the cases that are currently
being tested. There is growing, you know, discussion about the testing itself,
how many false positives are out there, how many barely positive, meaning very low symptomatic and low risk of transmission.
But, you know, resource utilization,
equipment utilization, and of course, the ultimate tragedy of the loss of human life has to be the
things that drive us here. So therefore, debating in the weeds about the cases and some of those
things is a little less, I guess, relevant. But I do think it's interesting,
as we look at the American dynamic this summer
and how you had a big increase of cases in some of those states,
a lot of the forecast for just skyrocketing mortalities
and things that did not happen,
that now an increase in Europe in cases has followed pretty much along the same
percentage lines. And there hasn't been a lot of talk about it. And I guess there's different
reasons that that could be. I'm not sure. But there are some that are predicting this. At least
they're not so much predicting, but they're confused by why there's such a low mortality metric out of the European countries as they've
experienced now a late summer increase. And I'm a little confused why they're confused because
you would think that the low mortality rates would be the expectation based on the U.S.
experience this summer and that the various factors, whether you think it's one,
two, or all of the above, of better treatment, healthier people being infected, and perhaps a
less severe strain of virus, regardless of which of those are all of those that you might subscribe
to, you would think that you would apply that to the European cases as we have in the U.S.
But either way, the dynamic has played out in Europe.
You probably haven't heard a lot about it.
New cases and most of these cases now are in a total subsiding phase.
Some are still seeing growing case growth, but most are seeing it rapidly declining
and, again, are not seeing that increase in mortalities hospitalizations so
great news for our friends across the pond um i do have a link in in covid markets.com today a
really provocative article at the cfa institute uh specifically from their director at the research
foundation and it's co-authored with the chief investment officer at the San Diego Employment Retirement Pension.
That looks at the dangers of COVID.
And then because we do economics here, it looks at the dangers that are not specific to COVID from COVID. And it gets into the old economic principle, Frederick Bastiat's concept of the law of the unseen versus the seen.
Henry Hazlitt popularized it when he wrote additionally about the broken window fallacy.
But essentially, they look at all the things we can see from COVID as health risks, primarily coronavirus deaths.
And I would like to put a price tag in both medical and life, human, and then economic terms around some of the side effects of everything else that is going on.
And it's fascinating and I think a good read.
So I'll encourage you to look at that.
But by way of chart action, you can see the ongoing trend line for new cases rapidly dropping, the trend line for new deaths dropping, and then of course the trend line for hospitalizations has been dropping for some
time. Hospitalizations are, excuse me, positive rates are right now down around the 5% range
or so. And so that's just really, really encouraging. And yesterday was the first time that we got a number into the fours in the positivity rate. And then let me see here. As we're doing this, I'll give you,
well, something's off in the numbers being published because they are right now publishing that we have 18,000 tests done today
and 41,000 positives out of 18,000 tests. So let's just hope that Johns Hopkins has not got
accurate information right now. But anyways, in terms of a few other quick issues on the data,
as I mentioned, 4.4% positivity rate yesterday being the lowest we've seen.
And I did put a chart up just as far as where that most rapid decline in cases has taken place.
And you'll see those hotspot states in the summer and just that we've called the fact states.
And right now, the 13% week-over-week decline in Texas, the 13% week-over-week decline in California, 22%, 23% in Florida.
It's just something to behold.
So COVIDMarkets.com for that information. On the market front, quickly, you really, really have to look to the equal weight S&P 500 index right now for a good indicator on the breadth in the market and whether or not there's a declining reliance on big tech in market leadership.
The even weight S&P 500 is not back to its highs.
500 is not back to its highs. However, it has moved up dramatically, which is good news.
It's showing a more democratized leadership in the market. It had hit a higher level in June and then had dropped from there, even as the overall market was going higher around the
strength of big tech. And then it spent the month of August kind of regaining back towards June level was.
And so from here, I think to really get an idea
about the health of the broader market,
the even weight S&P is a great little metric to do so with.
The dollar today dropped to a two year low.
Again, adding to that thesis on a lot of the reflation,
export, multinational names.
As far as the cyclical signals pointing to continued economic improvement,
a resurgence of economic activity,
the copper prices are also now at over a one-year high
and looking to continue going.
And you just simply could not have.
I mean, yeah, the weak dollar, by the way, is somewhat to blame or credit,
depending on your view, for this reflation that we're seeing,
but it could not be happening to this magnitude without some pro-cyclical conditions and backdrop.
The two-year, 10-year Treasury curve has widened out a bit.
It's still kind of in the middle of the range.
And so I would just continue to look at those metrics to get an idea for whether or not that risk-on environment is there
and what it will mean to some of the non-participating sectors, the REITs, the financials, the MLPs.
As those yields spread, the yield curve widens, I think that that bodes well for those other sectors.
And it's held them back in the meantime.
But some of the most important stuff I have in COVID markets today
is related to the housing market,
related to the unbelievable price appreciation percentage
in the lowest tier of the market, lowest-priced homes,
therefore lowest-income owners,
and how significant their price appreciation has been, speaking to right
now a perfect storm of awfulness for affordability for people that are both in lower wage segments,
therefore probably more impacted by the COVID dynamic, and yet have more expensive barrier to entry in the housing market.
And I make an offer to send you a report from Edward Pinto,
runs the Housing Center American Enterprise Institute,
one of the great housing research analysts in the country.
I read him religiously every day and just have to say a new report I'm happy to send.
It's really staggering where he basically shows
how mortgage rates are down significantly from January.
And I think everyone knows that.
But your monthly cost of ownership now
is actually the same, maybe even a couple bucks higher
because prices have moved up so much
to compensate for that lower rate.
And it just perfectly and mathematically and symmetrically reinforces
how tied to interest rates housing prices are.
And I think that we have to be extremely cautious about that.
This is, as textbook, a definition of a seller's market in residential real estate
that we've seen in 15 years.
And then in terms of the Fed, a couple comments there.
It ties into mortgage.
I'll share it here, and then I'll be quiet.
But over $1 trillion, $1 trillion with a T of mortgage bonds have been bought since March.
the T of mortgage bonds have been bought since March. They now own 30% of the U.S. mortgage agency mortgage market. Okay. 30% of the mortgage bonds in the country, Fannie, Freddie, et cetera,
owned by the Federal Reserve. Absolutely staggering. So I'll bid you adieu here. Futures
are up just a couple of points, barely up at all.
They just opened a few minutes ago.
So plenty of time for there to be
a little more action overnight,
but I don't have any reason to think
there will be or won't be.
But in the meantime, I welcome all your questions.
And we continue to look to the ever-changing
policy dynamics from various governors
and policy leaders around what's happening. That is the story
right now of COVID. The story of COVID is not about health-related issues in the United States.
It's all about what the policy response is and will be from those who are in charge. And we
will continue monitoring as closely as we can to give you the best information we can here at COVID and Markets. Thank you for listening.
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