The Dividend Cafe - Daily Covid and Markets Podcast - Monday, May 11

Episode Date: May 11, 2020

The S&P was flat today, the Nasdaq was up, and the Dow was down 100 points, so let’s call it a flat day overall. We will cover our normal categories and take a few detours as well as we launch another market week in the midst of this COVID pandemic … As for health data, the 1.5% case growth over the weekend is what we have been waiting for – the smallest case growth in the U.S. since all of this began. And all analysis indicates we will see new cases and case growth % really decline from here. If the new cases had declined with a substantially lower weekend testing number that would be less noteworthy, but the testing stayed quite elevated all weekend. The positive ratio to total tests was just 7.8% yesterday, and our trend level for total tests is right around 300,000 per day now. 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 missive. This is David Bonson and this is brought to you by the Dividend Cafe here at the Bonson Group. Monday, May 11th, a kind of flattish day in the market. You have the S&P totally flat. You had the Dow down 100. You had the NASDAQ up a bit. So you average it all together and it's a big,

fat, flat day. A lot to go through in the health data and some of our normal categories. So let me dig into it as we launch a new week, continuing to march through this COVID pandemic. As far as health data goes, first of all, I'm going to skip ahead to today's data that literally just got posted moments before I'm recording. As we set a new record for testing, 400,000 new tests today, 394,711 to be precise, but an absolutely stunning positive ratio of only 4.4%. So we had a record number of new tests done and a record low of positive tests. And then I also would add that the total death count today and yesterday, Sunday, was way less than 1,000. So again, you could have a reporting lag over the weekend, but we seem to be really, really headed in the right direction.

The smallest case growth in the U.S. since all of this began, 1.5%. So we are encouraged by a lot of the empirical data that is showing up here in the U.S. showing up here in the U.S. If you look to the average positive ratio, not counting today's of the trend line, and this is, again, me not yet factoring in today's extremely low case growth. And by the way, why do I not want to include today's? Because I like to do it the next day, because there is always more reporting that can come in overnight. And I just prefer to have as much accurate information as possible. So where we do have the sort of final affirmations, we're looking at 7.8% positive. That trend line is just really, really encouraging. And again, the trend level for total tests has been right around 300,000 per day, and we were at 140,000 per day a few weeks ago. So

we've now more than doubled the amount of tests being done per day, and we have, well, the decline of positive ratio is well more than half. I mean, we are headed in the right direction there. That's good. In terms of things that may not seem like they're particularly significant to markets or the health pandemic itself, but more just symptomatic, no pun intended, of what's going on across the culture. I would argue, by the way, that it is more than that, that it is actually directly relevant both culturally and economically. But a little rundown real quickly on the major sports leagues. The MLB, Major League Baseball today, did finalize amongst the owners their plan for a 2020 season and they do need to still pitch it to the Players Union that has now been presented and there'll be negotiations tomorrow. Much like dealing with

congress i don't expect that the players union is just gonna you know eat it up as is i gotta figure it's gonna be a little bit of a fight however um a 50 reduced regular season meaning that they'd play somewhere around 80 regular season games beginning in early july with the goal to to play ball before j July 4th and then focus on regional games only a couple different sites and there would be no cross-country or interleague games and they'd get into playoffs by normal time in the fall. The NBA is still working on a plan for their 2020 season to be salvaged, some sort of playoff schedule over the summer and they're looking at one or two locations to house

all of it they've had a conference call amongst the players and we're looking to get more information from that in the days ahead as well then the nfl presented their planned uh fall season schedule and it was pretty much business as usual uh not not planning on the same fan capacities but a september 10th launch to the season which is normal and then there's actually uh the first announced pga golf tournament on the schedule right now which is scheduled for june 11th in texas that's a month away we'll see if that's able to happen obviously it's not going to have uh that that fan level but again if they figure out how they can get these PGA tournaments going, largely a television audience, you could end up with a real salvaged pro golf season as well.

So of course, directly speaking, if you're a fan of one or more of these sports, you may be encouraged. But I do think, as I said, kind of socioeconomically, there's a lot on the line there. But I do think, as I said, kind of socioeconomically, there's a lot on the line there. In market technicals, there's a couple of things that I think help kind of explain this extended market rally, which got another leg up last week. First of all, that continued persistence of short positioning has helped. There's a pessimistic sentiment that I think provides a certain contrarian bullishness. And then again, as long as there's a pretty high level of short positioning with speculators, that means that there's some forced buying in the either present or future when and if covering has to take place. So that higher, more elevated bearishness in sentiment and that higher elevated speculative short position are both, I think, good in the short term for equity markets. I would add that the steepening of the 210 yield curve remains an

important bellwether for risk appetite. 50 basis points is hardly wide, although with as low as rates are, 50 bps is pretty wide. And it's certainly wider than we were about 35 or so maybe three weeks ago, four weeks ago. The two-year might be, well, I don't know. I mean, I imagine it stays pretty anchored to the Fed funds rate. If it trades below the Fed funds rate, that's not really very good. That's a problem. But I think that the Fed funds rate should stay between zero and 10 basis points. Obviously, the Fed has set their zero bound target there. And so to see the 10-year break higher than 60 basis points where it's trading now would reflect greater risk-taking and I think it would be a bullish technical indicator for equities. Assuming that the short end of the curve stays level, you'd get more steepening of that curve, indicating a better format and platform for risk-taking.

indicating a better format and platform for risk-taking. One other technical factor I'll note, the utility sector is trading at an 18-month low relative to the S&P 500. Reinforcing this equity rally has not been just a mere fight to safety. It's, in fact, been a pretty solid move for higher beta. And obviously you've seen that in a lot of the high PE tech names as well. On the public policy front, House Democrats are bringing to the floor apparently soon a $1.2 trillion stimulus 4.0 bill. Again, I don't mean to sound partisan here. It's certainly not my intent in this case. They're not serious about it becoming law. It's been done without any consultation at all with the White

House, the Treasury Department, the House Republicans. So I take it as more kind of a negotiating tactics at the table for what they're going to end up wanting. Secretary Mnuchin himself said today he doesn't think formal negotiations on 4.0 will take place till the end of May. So you have to sort of interpret the House Democrat action here as kind of jockeying for what they're going to end up wanting, which appears to be from reports that have been released, large additional funding for states, localities, even the U.S. Post Office. They're asking for $25 billion for those good lads. More funding to Medicaid, unemployment insurance, another round of direct payments to taxpayers.

And they do not have liability protection, let alone a payroll tax cut in their bill. So I don't think it's meant to be a serious swipe at legislation, but more positioning in the eventual negotiations. The oil world today was kind of interesting. There's an announcement that came that, oh, this must have been about five in the morning or so, that Saudi Aramco was making additional production cuts immediately. And the price of WTI had been down about one to 2% and ended up going up one to 2% after that announcement. And even as it's closed here today now, getting ready for the overnight markets, it has been pretty flat for most of the day, stayed in a pretty tight range. I would add something that I read in a research report this morning that kind of intrigued me. The midstream space last week saw $4 billion of issuance of new debt.

And that's not just MLPs, that's also some corporations, but it's all midstream pipeline companies. Some of those yields were a little higher than past debt as it's rolled. But the point being, the fact there was an appetite for that level of midstream debt, I really do think you have to take as an encouraging sign. midstream debt, I really do think you have to take as an encouraging sign. In terms of housing, it's definitely way too early to be calling a bottom or even assuming things are about to turn. And frankly, the data lags so much here. We haven't even really seen the bad data yet. I mean, let alone calling a bottom. We might not even be in the middle. We might not be in the middle, but I do want to let you know of a couple of things.

I think that there most certainly continues to be that brokenness in the mortgage market I've written quite a bit about. And yet, I don't know, when you look below the 600K space, conforming loan market, things are pretty healthy. And when you see mortgage applications for new purchases pick up quite dramatically in the last week or two, as well as home purchase confidence showing pick-me-up, you kind of have to wonder if, in fact, there does continue to be an appetite for new home purchases, particularly in the right price spot. I'm not going to go into any Fed action today. I do want to leave you with the delta between consumer confidence as measured by present circumstances and consumer confidence measured by near-term expectations.

It's one of the highest deltas we've seen since the financial crisis. In other words, we've seen a pretty significant drop in consumer confidence in present circumstances, but the drop in consumer confidence for near-term expectations has been very minimal. And by the way, the drop of overall consumer confidence, including present circumstances, has been nowhere near as low as it got at the financial crisis. So both of those deltas are worth watching as we continue to evaluate what parts of this economic downturn we believe will prove to be transitory. Paying very close attention to a certain fight in Alameda

County in California with the country's largest electric vehicle manufacturer and their county's instructions that they cannot reopen despite the absolutely overwhelming amount of health guidance and criteria and policies and protocols have been put into place by one of the most technologically savvy companies. This could end up becoming a very interesting precedent, this fight for the battle to reopen the economy. I'm watching it very, very carefully. I'm going to let it go there for today's COVID and markets. Look forward to bringing you another missive tomorrow, Tuesday. Please reach out to us at the Bonson Group anytime with any questions. Thank you for listening to COVID and markets here at the Dividend Cafe. Securities are offered through Hightower Securities, LLC. Advisory services are offered through Hightower Advisors, LLC.

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