The Dividend Cafe - Daily Covid and Markets Podcast - Monday June 22

Episode Date: June 22, 2020

Futures were pointing down as much as ~300 points Sunday night (netted for fair value), though that number improved as the night went along. By 3:15am this morning they were pointing to a flat market open. The market traded down ~200 points early and closed up over 150 points, in a 400-point range today … 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 in Markets brought to you by the Dividend Cafe of the Bonson Group. This is David Bonson bringing you today's missive, Monday, June 22nd. Kind of an interesting day in the market. I mean, I guess I'm not supposed to say that a 400-point intraday move is a boring day, but relative to kind of where we've been, it was reasonably boring. Futures were pointing down

about 300 points last night, netted out for fair value and um that number improved a little throughout the evening at 315 this morning they're pointing to kind of a flattish market open maybe down a little bit and then after the market opened it traded down as much as 200 points and traded up as much as 200 and closed up a little over 150 so intraday from the low level to high level you had a 400 point move 350 to the close so you know it seems like a positive thing you you were down 200 and you closed up 150 over and then you know when you count the futures last night it was even better improvement than that but it's still kind of to me shows skittishness, not a lot of resolve. Markets not trading real with a lot conviction up or down. That's been true for a few days now. But let's just kind of go through and

cover our normal categories of things and we'll see where markets are headed throughout the week. In terms of the health data, we had 30,000 plus new cases reported Friday and Saturday nationwide. It went down to 26,000, 27,000 Sunday. And it looks like as of press time right now, if we're not at 30, we'll be just shy of it. Now, some of the southern states that had seen some case growth, that has reversed over the last few days. Arkansas, Louisiana, Tennessee, Alabama have all seen their case growth decline a bit. And then when you look to the kind of fab four, Florida, Arizona, California, Texas, the four states that are getting most attention, there's some different stories amongst those

four. And so I think we're getting to a point where those four states have to be differentiated from one another, even though they're leading the pack in new case growth. I'm going to unpack some of that here in a moment. On the day though, Monday, today, with the Johns Hopkins data closed for the day, we did see 475,000 new tests done, positivity rate of about 5.5%. So pretty strong day, you know, a lot of new testing still being done. It's interesting to me that with 400, well, we really were well over 500,000 tests done in the last few days, getting close to 600 on a couple of them.

California has been doing about 90 to 100,000 of those tests, which is a huge proportion of the national testing. And so when you look at the 3,000 and now 4,000, they're seeing this new case growth. As a percentage, their positivity rate is actually less than the country's positivity rate, which is very interesting. And the other data point that I was just studying here over the last hour before recording, 57% of the total positive COVID cases in California, going back from the beginning, are in the Latino Hispanic population in California, but it's 70% of the case growth over the last 10 days. And of course, that's way higher than the proportion of the Latino Hispanic population in California as a total demographic. So the reason I bring that up is to say that something is not, this is not explained by

the economic reopening. You don't have a broad economic reopening and then a heavy concentration of case growth in one particular demographic. The economic reopening thesis is pretty easy to establish when it's kind of pro rata and evenly distributed across the state. That's not the case here, not to mention the adjusted for testing data in California looks benign. Now, it does not look so benign in Arizona and Florida. And we're going to talk about that in a moment. Now, in terms of Texas, and I had to do a lot of this research myself, Texas makes a spreadsheet available online that shows their daily testing, county by county. And they were averaging 28,426 tests per day statewide when you aggregate all the county testing.

And then, of course, with this big surge in cases that we're reporting over the last few days, their testing was 46,000 on Friday, 67,000 on Saturday. And actually, I probably should have looked at Sundays as well before I recorded here, but didn't. But my point being, they, again, more so, more pronounced in California, would have a reduced case growth adjusted for testing over the weekend if all these numbers are accurate, which this is on the Texas Health Department's website. So you do see different stories in California, Texas, Arizona, and Florida. They're not all dealing with the same situation.

Now, in terms of Florida, for today here Monday, I wouldn't jump the gun yet. of Florida for today here Monday, I wouldn't jump the gun yet. It does look like their new cases dropped about 500 or so from yesterday, a little over 500. The most important thing, and obviously it would just be awful if this were to reverse, although perhaps some people wouldn't think so, but most decent human beings would think it were awful. But it's just undeniable that what has continued to be really, you know, thank you for this. I mean, it's a blessing, but stubbornly low is the new hospitalization data and obviously the new mortalities. and obviously the new mortalities. And you see the median age breakout in the counties that are giving that data, particularly in Florida. It just seems almost inescapable. The conclusion is that the new case growth we're seeing in the virus is dramatically less severe

and finding itself into much younger and indeed healthier people. And so that may be a really good explanation for why hospitalizations and deaths are trending in the right way, which is down. We obviously need to continue monitoring the case growth in those states. But as of right now, I do think that's a pretty logical explanation as to why the markets aren't responding worse. And again, that continued higher testing, the high recovery rates, the lower severity. It's a mixed bag of data, but we have to take it all the good with the bad. Okay. I just want to make a comment, okay, because it bugged me so bad. And it was like four in the morning and I was only on my first cup of coffee.

But I got this big headline that stated Brazil's caseload of positive coronavirus had doubled on Sunday. And it was from large respected media outlets, Brazil's doubling of cases. And so I clicked through, read the article. And so, you know, I clicked through, read the article and look to their credit, they said this, I guess they probably could have let it alter their headline if they want to do. But it said in the article that the three largest cities in Brazil, Sao Paulo, Rio de Janeiro, and forgive me, I'm forgetting the third, didn't report on Saturday. So the Sunday data was two days worth, which means forgetting the third didn't report on Saturday so the Sunday data was two days worth which means that the cases didn't double because it was up less it was up a little less than double

it included two days worth of data so by the way the situation is pretty bad in Brazil I'm not making light of their overall situation but this is just kind of the point I'm making that a headline referring to an almost doubling of cases in a day and then mentioning, oh, but that's not including Saturday and Sunday together. This is the quality of media reporting that we're getting right now. And I would suggest that we take these things in the context that they deserve to be taken. We take these things, you know, in the context that they deserve to be taken. There is pretty positive news, although, you know, I don't want to jump the gun on this because it is not yet even phase one. Right. They got FDA approval, but they still are soliciting volunteers for screening. And then and then it'll go to trials in August with COVID positive patients. But what I'm referring to is the maker of remdesivir,

which is the FDA approved version of a therapeutic that is primarily for more severe cases at a hospitalization level. And it is an intravenous therapeutic, which means it can only be administered by doctors in a hospital. It's having great results at reducing hospitalizations, reducing mortalities, meaning the days ones in the hospital have gone down dramatically after five days of treatment. That's how they got their FDA acceleration. But they have created an inhaler version. And to the degree that an inhaled formulation will end up, if it were to end up getting approval, it would be a really big step towards reducing hospitalizations and

hopefully creating some success at an earlier stage of the virus as opposed to right now, where it's mostly being used in more severe cases. So in conclusion, you saw more case growth today. I expect you'll see it for a few more days. I don't see the catalyst to what we'll reverse until later into the week. But of course, we'll keep watching it to see when some of these states have their numbers go ahead the other way as we've seen in some of the other southern states. But my kind of concluding health data points on the day, case growth in those states is a problem, should be monitored. It seems incontestable that the nature of the new cases are less severe and in younger, healthier people, and that hospitalizations and deaths are trending in the

right way. As far as market technical action, there is to me one particular contrarian indicator sticking out. I put a chart of this at covidandmarkets.com today. I think is most profound, and that is the street still on a speculator level. And obviously, some of these people are hedging, but there still remains a very large net short position in the futures market, both from a contrarian standpoint and just the technical reality of future covering. You have a positive indicator there. WTI crude closing above $40 today. of $40 today. It's somewhat symbolic, but I still think powerful in the sense that, you know, you can look at the last two months as being a short period of time or a long period of time. But in two months, you know, I cannot recall anything having as dramatic of a narrative shift

as where oil was two months ago to where it is now. In housing data, this frustrates me so much, delinquencies in May were up to 4.3 million, and that is 723,000 more than the month prior. That's 8% of all U.S. mortgages. Okay, that's a high level of delinquencies. But why do I believe that's unsurprising? Because that includes the forbearance numbers that, you know, basically Congress made legal to not pay your mortgage via the CARES Act. As far as non-forbearance delinquencies resulting in real traditional foreclosures, those numbers are not apparently taking up much at all. I do expect to see a V-shaped recovery in existing home sales volume. just pummeled obviously in the month of May when there wasn't a lot of activity, but we, as I've reported, you know, several times in recent days and weeks, the, the new purchase mortgage applications are so, um, much higher. It, uh, bodes well for actual home sales. Then we'll see it in that data with a month, one month lag, The annual stress test on the big banks are coming. We do

this every year in June, and it's a byproduct of the Federal Reserve regulatory apparatus post financial crisis, really to kind of measure the capital adequacy of our nation's banks. There's going to be a little more drama this year than normal, just obviously because of COVID. Randy Quarles, who's the head of supervision at the Fed, announced that they're basically stress testing under three scenarios, one, a quick recovery, one, a gradual recovery, and then one where there would be a recovery followed by a second drop. And they want to see how these banks kind of perform in their capital requirements after those different scenarios of stress testing.

So you can expect that some will have implications into their dividend and certainly share buyback policies. There is a chart at covidmarkets.com today I want to draw your attention that shows the decline in employment by each wage tier, the lowest quartile, middle, upper, and then the highest quartile of wage earners. where the biggest wage impact, excuse me, employment decline has come from is where wages were lowest and the least impacts where wages were highest. I think that's a lot of why housing has not been affected. The COVID economy hurt people who were least likely to buy a house the most, and it hurt people who were most likely to buy a home the least and everything in between. A lot of that's not surprising.

This is all straight, by the way, from the Fed's semi-annual monetary report of last week. But I think there's a lot of social and economic implications that need to be understood. So I'm going to leave it there. That's our round the horn today for COVID markets. Futures are pointing up about 80 points or so as I record. And obviously that will bounce all around. We'll see plenty going on in the world.

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