The Dividend Cafe - Daily Covid and Markets Podcast - Thursday June 11

Episode Date: June 11, 2020

The market declined 1,800 points today behind a conflation of factors we will unpack below. Futures were pointing to down 200 at bed time last night, were down over 500 at 3:15am, and dropped more than 850 points from then until the market open. We opened down that much, and then throughout the day saw new intra-day lows hit, as the yield curve flattened and some of the recent high flyers sold off a great deal 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, welcome to today's COVID and Markets brought to you by the Dividend Cafe. This is David Bonson. I'm the Chief Investment Officer of the Bonson Group. And we had one of those days again today. It's been a little while and I'm going to try to unpack it all for you. Markets were down about 1800 points on the Dow.

Obviously, it's a little different when this market drop comes after such violent moves to the upside over the last 10 days. The reality is the markets today got down to the level they had been literally 10 or 11 days ago. So obviously, you know, we want to interpret it in context, but I do think it's important to kind of understand what took place. I do have a chart at covidamarkets.com of the intraday movement. It was pretty much a straight line down throughout the day. And the VIX exploded higher up about, let's see, it was a 48%. The VIX got back above 40. So that's traders putting on fear, putting on defense and protection. It's not as fundamentally driven. And really, there isn't a particular headline. I think it's a conflation of headlines. My belief, and I've

said this so many times, I just can't stop saying it. The markets don't need a reason to drop, but 1800 points is obviously pretty significant. And I believe that you have today both the kind of consolidation event that many have been waiting for, just based on how much markets have moved, combined with a pretty heavy repetition of media headlines around a so-called second wave. And I'm going to talk about that here in a second. So you kind of already were overbought, technically speaking. You have very skittish investors that had all kind of poured in at the wrong time and into the wrong things, by the way. By far, the biggest losers today were these airline stocks, cruise lines, more higher beta, riskier things that I think are more

tradable and gamble-oriented than they are long-term investments. And so it was just all these events put together, I think, made for a big sell-off. As I'm speaking right now, futures are pointing to an up open tomorrow, but we're very likely back into a period where even the futures are going to be quite volatile. I, um, had, uh, last night right before bed looked at the futures as I do every night and they were, they were down about 200. And then I got up this morning at three 15 and they were down, uh, what was it? I don't know. Maybe, uh, maybe 500. We, we opened down 800 and then it just sort of, you know, continued that way throughout the day. So I do believe that we'll get a better feel for whether or not this is a sustained sell-off or not and it becomes a really attractive buying opportunity or if it just sort of stays in this

range. But that remains to be seen. So in terms of the health side of things, the second wave talk, Texas reported 2,500 new cases yesterday. California has seen an increase in hospitalizations. Florida as well. Arizona's case percentage has increased. It's very selective states. Now, all states have had the restrictions lifted, and some states have not just not seen an increase, which you would have expected there'd be some increase in cases with restricteds coming off, but you have states like Georgia and Colorado and Wisconsin where the numbers are really quite benign, if not significantly improved. where the numbers are really quite benign, if not significantly improved, I think you just have to unpack it case by case. As I've been making the point at covidandmarkets.com for several weeks

now, you cannot have the vast widespread data confirmation in a lot of the European countries and in so many US states, and then look at a couple other states that have different trends and numbers and use those minority cases to set the the normative. In Florida's case, they've had 67000 cases total in a state of twenty one and a half million people. And their per capita is 3000 per one million people. That's one of the lowest per capita infection rates in the country. And now yesterday they had 1,300 new cases, but over half of those were in South Florida, specifically Miami, Dade County, Broward, Palm Beach. And yet their positive percentage test has not moved higher. It's sitting right there above 5%, meaning that testing in these

areas, which are highly populated with senior citizens, has doubled in recent days and weeks. So you kind of look under the hood to understand the data a little bit more. In Texas, new cases, largely isolated to hotspots, nursing homes, jails, the meatpacking plant. Now there's a concern in Houston, Texas area that there isn't necessarily a particular nursing home or jail type explanation and yet move higher in new cases. So the Texas numbers have to be watched again, relative to their overall population. We're still talking about very small numbers, but no question as a percentage, those new cases have increased. California, Texas, Arizona, Florida, all different circumstances and different ways in which COVID data is being reflected. But I think that there is a certain amount of disingenuity in the way a

lot of it's being reported that I prefer to be able to see through. So Johns Hopkins did describe this elevated case data as small and distant. But look, we don't know. It could very well pick up from here in a way that it did not pick up in a lot of the European countries. And frankly, one of the things holding the overall national numbers down is even as a couple states have seen some increase in case growth, many other states have seen this really, really steady and significant decline, including those states where the bulk of coronavirus existed to begin with, New York, New Jersey, et cetera. So my take, just real quickly, four facts I'll summarize. There is an uptick in cases in a few states. It's tiny as a percentage of population, but it's meaningful relative to case levels a couple weeks ago. Keep in mind, this is all pre any reporting we might expect out of the protests and things of

the last week or so as well. Media rhetoric and descriptors might be somewhat disconnected, though, from an objective analysis of the data. The CDC, the FDA, and the White House COVID Task Force have all described these data points as random, with no relationship to reopening. Number three, there will be more case elevations in the days and weeks to come. You know, not only I mentioned last week's protest, there's always the possibility of some spreader, you know, being in an event or whatnot. The question is not if we see more cases, but how much and how serious. That's the really interesting thing so far, is that for the most part where there has been case growth, there has not been hospitalization growth. There's a couple

counties with exceptions to that. I presume that is based on the age of the population, but overall, a lot of containment on that severity. Personal hygiene, safety remains the most effective abatement strategy. And of course, protection of the vulnerable is the most important societal strategy. Should we get to a point where policy restrictions become necessary again, they will this time be much more laser focused, not broad based sheltering of the entire economy. I'm quite certain of that. So we did over 420,000 tests today, a positivity rate of again, just 4.8%. I did provide a chart that I've never done before at COVIDMarkets.com from Johns Hopkins that has each state in a kind of quasi map of the countries.

You can find the state relative to where it would actually sit on a map, and you can see where their case growth is getting better, staying the same, or the couple states where things are getting worse give you kind of a national picture of things. Then finally, Moderna's final stage clinical trial for their vaccine. They announced to begin in July. Uh, Regneron is progressing quickly with their antibody treatment. Um, the NAI ID is collaborating on the, uh, final clinical trial with Moderna on the vaccine. So government is right there hand in hand collaborating with some of the various company and think tank endeavors here. And of course, we remain optimistic and hopeful as this

is certainly moving from a vaccine development standpoint much quicker than anybody could have expected. Overall market technicals, I'm going to share more of what deterioration took place in market momentum today. I'll share some of that more over the weekend. But as far as the, like mentioned before, consumer discretionary, airline, gaming, retail, travel, auto stocks, these are obviously more cyclical, higher beta. A lot of these things got hammered today. And we see that consumer staples area, I think, very much underpriced relative to consumer discretionary. And that, of course, happens to be the type of domain that we swim in a bit more, more stable companies, more cash on hand, lower debt ratios, more dividend growth. Public policy-wise, I did put a chart of COVID markets of the sectors that have received PPP loans so far. Really kind of interesting and sort of underreported part of Secretary Mnuchin's testimony yesterday. It's the first time where he said that those recipients of the PPP loans are

not going to be disclosed. Up to this point, the PPP loans are not going to be disclosed. Up to this point, the SBA has been saying they would be disclosed once they get the manpower to assemble all the data. So we'll see what happens with that. I don't know if they'll be pushed back there or not. I don't know how many people really care, but I certainly was expecting we'd see that list. It is something like 50 million businesses, so it's a lot of reporting. in businesses. So it's a lot of reporting. But in terms of the sectors, it's just interesting that you have kind of about the same level in healthcare, in professional and technical services and construction. And then it moves down quite a bit to manufacturing and it moves down a lot into accommodation food services. And accommodation food services you would think would be the sector

that would have been in most distress. And so I think a lot of that has to do with the kind of rules that came around the PPP loan around payroll and so forth. And we'll see if any of that picks up. Like I mentioned, there is still, what is it, 120 to 150 billion still untapped in the facility. So we'll see if they're able to get some of that out. 130 billion remains, excuse me. W-TAC crude was down today. It stayed above $36, though, but the upstream sector just got pummeled, stockpiles at their highest level since 1982.

More on the Fed at covidmarkets.com. I have to jump now, so I won't get too into this now. Yield curve control control all they really said yesterday is that governors have received a briefing discussions are continuing i remain in my position i've held for over two months now that that will happen it will happen later in the summer fall not in the short term so look we are have raised quite a bit cash here at the bonson group we did it well in advance of this sell-off We do not have any plans to rush into deploying that dry powder. We want to deploy it in a very periodic and very systematic and very disciplined manner over the months ahead. But this volatility,

if anyone had money in the market yesterday and planned to pull it out today, then of course this is very unfortunate, but that is not the way money is to be invested. As far as our projections in the short term, midterm, we expect trading range, volatile times, a lot of various factors in the new cycle, and we're going to continue to keep our heads down, grind through, make the best decisions we can along the way. Please, if you have any questions, any concerns, reach out to us at the Bonson Group. We are very happy to engage with you directly and help through this time. Thank you for listening to COVID Remarkets.

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