The Dividend Cafe - Daily Covid and Markets Podcast - Thursday June 18, 2020

Episode Date: June 18, 2020

Futures overnight dipped 400 points by my bed time, were basically back to even at 3:15am, and then dipped a tad before the 5:30am release on jobless claims. That number came in at 1.5 million, and the market didn’t respond. We opened down and reached down -270 before reversing. It was a bouncy day but never was the range of movement very wide. 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. This is David Bonson of the Bonson Group. The COVID and Markets brought to you by Dividend Cafe And this is our Thursday, June 18th missive. And we ended up with one of the boringest conclusions here for the market. The S&P was up one point. The Dow was down, I think, 20, 30 points. But a little more action in the last 24 hours to get there. The futures last night were down about 400 points by my bedtime.

And when I was up at 315 this morning, they had dipped back. They had come back to about even and then dipped a little bit again when the jobless claims, right before the jobless claims number came out at 530 in the morning, we lost, there were one and a half million additional jobless claims last week, which was a little higher than expected, not much. Market didn't respond much to that. And by the time the market opened, we were down 270 points, maybe 10 minutes into trading. And then from there, it did go higher and just kind of bounced throughout the day. And so you had this kind of intraday volatility. I wouldn't say it was really severe, certainly not like some

of the days we've been having. But again, at COVIDMarkets.com, we put a chart in to just kind of see the up and down movements took place throughout the day. And then ultimately we ended, like I said, we're just Dow down 30 and S&P up one. So a totally flat day with this choppiness in between. And this is kind of, I think, where we're at when there's not a whole lot of news catalyst there right now. I'm going to talk about in a moment the health data, but the market seems to be totally unwilling to buy into some of the silliness that is being promulgated out there. So the lack of a major Fed announcement, not a whole lot of economic data, nothing surprising. Obviously, the market would respond if some of the quote-unquote COVID surge conversation intensified.

But I think right now the market is more or less seeing it largely the way I do. And so let's go ahead and get right into that. And then we'll talk a bit about housing and the Fed and our normal trip around the world. Here's the way I would put it. The compilation of data that one has to go through to be thorough in interpreting and understanding and analyzing everything that's out there is vast. It's wide. There is a lot of information and a lot of the sources that present data require some nuance and there's such a rawness to all the data that it requires some interpretation and application. But no matter what, at the end of the day, the data is as good as the eyes and ears of the person interpreting it,

how they choose to go about viewing it. and ears of the person interpreting it, how they choose to go about viewing it. And I don't believe that it's very easy to justify a fully objective and thorough analysis of present American COVID data in any way that is not very positive and that is not very expected or at least better than what was expected. And that is not very expected or at least better than what was expected. And then finally, non-actionable in an economic sense. And so that's where I want this distinction to be very clear to people who follow the Bonson Group's investment perspective on COVID markets. investment perspective on COVID markets. The decline in the positivity rate of those tested nationally, all the way through the reopenings that have been phasing in here for over a month now, is incontestable. Now, there are a couple states with particular events and reasons for

an increase. The positivity rate as a percentage has gone up in Florida the last couple days. Not a ton, but it's gone up, and there's no need or reason to deny that. Certain increases in select pockets of California, Texas, Arizona, Florida, which by the way, are all four states that have been very sheltered from COVID in March, April, and even May, compared to the rest of the country, especially. So now they've had a bit of an increase in select counties in those states. And yet the absolute number of new hospitalizations, mortalities, that has to be watched. It just cannot be described as a systemic catastrophe

at this point. And by systemic, I mean what that word actually means, a disruptive macro event. Per capita and contextualized, the numbers are very small and the events are very limited. I wouldn't ignore it. There's always a chance of breaking out further, but we've seen no such thing in countless other states that have themselves reopened and other countries that have themselves reopened. Every medical expert I speak to believes this to be the natural, expected, and unavoidable migration of a virus that's a pretty infectious spreader. It's not new news that there would be some case of this spreading. The case growth, hospital capacity, and mortalities have to be watched. But the idea that this is going to a second lockdown status is just dishonest. I, again, reiterate the need for monitoring and attention.

But I think that what you're seeing in markets right now does not reflect the concerns of this so-called second wave and surges and the way a lot of these things are being described in some of those key states. There will be measures taken. There will be some restrictions added here and there. We'll continue watching those data day over day, see where those things go. Probably day over day. I got to watch it day over day because it's my job. I doubt it's really as important as more week over week,

but that's what we're going to do. I doubt it's really as important as more week over week, but that's what we're going to do. And in the meantime, you would think that two to three weeks later, it's only three weeks since the protest in mass began. Two weeks ago, there was, you know, other states that were participating. dissipating, but that opening weekend of the protest, Minnesota, New York, Washington, D.C., pretty significant, you know, crowds that obviously for anyone who saw there was not masking and distancing and some of those measures going on. Those states have all seen case growth decline. And again, I said I wanted to watch it throughout this week to see if that changed. It is not. Here we are Thursday. So, you know, you have to think some spread took place in some of those places, but the lack of any meaningful outbreak in those areas, I think, has to be an indication of confidence in an economic reopening ahead.

Okay. So I don't want to continue repeating myself, but I do want to point you to the fact that there are a couple of charts you just simply have to look at in COVID and markets today. One showing the hospitalization averages in New York back at their peak compared to these states that have seen a very, very tiny increase in hospitalization, Arizona, Texas, Arkansas, here this week. To just get, appreciate, and again, this is adjusted per capita. It's hospitalized per million, and you saw about 1,000 per day that were being hospitalized in New York, which is just awful to think about back in late March. And you're sitting here somewhere around 50 per day in Texas and Arkansas right now.

And that's with this little modest increase this week of a few people per day. I don't know how that could not speak to something. Obviously, that can change. Those numbers can go higher. But it would take something rather extraordinary, wouldn't it, for those hospitalizations to jump up to that level. They're not rising explosively in Alabama, Oregon, South Carolina, Arizona, Arkansas, Georgia, North Carolina. These are all states in the chart I'm looking at. So, again, you've seen some case growth and you have not seen the hospitalization growth, and that's even a few days later.

So normally when that case has been diagnosed and then the severity warrants additional hospitalization, that's happening in a matter of days. And we're just simply not seeing that. Where we are seeing a bit of hospitalization increase, we're monitoring it. It's in Salt County in Florida, Salt County, Arizona. And hopefully those people will be on the way to recovery, God willing. So all that to say, I believe that market technicals are continuing to point to a period of consolidation. And that shouldn't be a surprise. One of the things I did at COVIDMarkets.com today is focus on the airline sector

because I got a lot of charts of the credit default swaps and just the stock charts itself within that sector index. And certainly it hit a really, really, really low bottom. Credit default swaps had hit a really, really, really high top. And now those numbers have all improved. And I want to reiterate the reason why that sector is not something I'm speaking to a lot, even though there seems to be a lot of activity in the airline index. It's because even before COVID, this is generally an area that is not particularly attractive to dividend growth fundamental investors like us.

The sheer cyclicality of that business, the leveraged balance sheets that most of the major companies have, heavy labor union obligations, various extrinsic exposures that they have inherently. You think to some of the risks that have hit them hard over the years. They were not so much intrinsic business problems, but extrinsic risks that existed. It makes them a bad place for stable dividend growth. And then now post-COVID, forget stable dividend growth, there will be no dividend just in terms of the terms of government loans. And not to mention public perception around the idea of them paying a dividend for quite some time, a couple years minimum,

just from the legality of the government loans, but potentially much longer. So I did get some data today that just kind of was verifying the joint organization's data initiative. By the way, I moved conversations here to oil, which was up 2.5% today. We're at $39 a barrel on WTI crude. The supply cuts are continuing to work their way through.

Demand resumption. You're seeing a little bit of drawdown of stockpiles. All kind of moving in the right direction. But they verified Saudi had gone from 7.3 million barrels a day in March to 10.237 million in April. So more or less just rounding 3 million barrel per day flooding. I think it warrants a policy response. I think we will get one.

I don't think this whole thing gets left under the rug. Even with oil prices stabilizing, even with the OPEC plus deal that came about, I'm not so sure this thing's going to get forgotten by the State Department or the Energy Department or the White House. And that theme, whether one believes it's a risk or one believes it's a good thing or whatever, but that concept of a difference in the relationship between the U.S. and Saudi going forward is very much out there. On the housing front, reach out to us if you'd like to get a copy of the newest housing market report from American Enterprise. Interesting to see that even as I keep reporting about how the new purchase mortgage applications are continuing to rise, about how the new purchase mortgage applications are continuing to rise. I got to look in this report under the hood and it really is kind of disparate region by region. It's much stronger

in the south and the southwest, noticeably weaker in the northeast and modestly weaker in the midwest and the west. So it's not really, and this is what I think is a sign of a healthy real estate market when it is very local and it is not so much nationalized. Metropolitan areas are largely seeing the same trend that they had had pre-pandemic. So markets that were slow pre-COVID are still slow, maybe even slower like New York and Boston, but markets that were doing well before have resumed their activity levels. That speaks to a post-COVID normalization as well. Non-urban areas have seen 39% growth in mortgage applications coming out of COVID. Again, this is new purchase loan apps. Urban areas have seen 29% growth. Okay, so everywhere you're seeing growth,

and yet it's a pretty significant delta between suburbs and urban area. It's too early to call that this detectable trend a lot of people are talking about. I'm quite sure it'll come to some degree, at least in the short term, but 39% versus 29% illustrates it, but doesn't necessarily hit it out of the park. On the structured credit side of mortgages, I would just point out a lot of spread tightening has taken place in the residential mortgage-backed securities of agencies, of Fannie Freddie. Those spreads have blown out quite a bit. They've come in, but they still remain quite wide over where they were pre-COVID, which almost kind of speaks to a little bit of free yield pickup because these are essentially obligations of the United States government still trading wider than treasuries.

And if that's true, the spreads are wider than pre-COVID in the agency RMBS, the non-agency RMBS, credit risk transfers, and commercial mortgage-backed market continue to see even wider spreads, not obligations of the U.S. government, but nevertheless, I think still ongoing dislocation. One of my favorite things you get to say is for an investor, it's gotten a lot better and it still has plenty of room to go. Sometimes when things are not starting to get better, you wonder where it bottoms. And sometimes when it's gotten too much better, you think you don't have any more room.

In this case, there's still plenty of room towards normalization. And it's certainly all structured credit been moving in the right direction over the last few months. Maybe let's call it six to eight weeks. A lot of pressure right now coming on the Fed from select members of Congress to consider expanding its municipal bond lending facility. I'm starting to see political pressure building that some of their standards for the muni bonds they'll buy around credit rating, interest rate, penalty rates assessed are just too stringent and that it's discriminatory against certain municipalities, which normally the Fed can just say, look, we can't take that kind of risk exposure. This isn't a political thing, blah, blah, blah.

However, the Fed has taken lesser credit quality on their balance sheet through the high-yield corporate bond market. So I do wonder if there's even more Fed intervention into the municipal bond market coming. Definitely following that behind the scenes. It's not going to get any press coverage. But there are members of Congress, bipartisan, making this appeal behind the scenes. It's not going to get any press coverage, but there are members of Congress, bipartisan, making this appeal to the Fed. By the way, just quickly on central bank action, European Central Bank extended loans to 742 banks,

about 1.3 trillion euros worth, where the interest rate they're charging banks is below zero. So essentially, for those of you that are thinking through this, they are paying banks to lend money to the bank's clients. And their goal, of course, is to stimulate credit, provide liquidity. Policymakers there are happy that banks seem to be willing to get paid to lend out printed money. I don't know why they'd be surprised by that. The Bank of England added another hundred billion pounds to their bond buying program, sort of the British version of quantitative easing. So you saw more stimulus going there as well.

OK, so I mentioned weekly jobless claims, one and a half million again this week. The continuous claims did come in at 20.5 million. So we're down from the peak of 25 million. That's good. But getting that number down to about 10 million is going to be key to a lot of the labor aspects of the economic recovery. And so that $600 a week issue continues to be the elephant in the room. What the Congress is going to do about that is that looks to go away here into July at the end of the month. So that's my COVID and market submissive for the day. Please reach out with any questions.

Thank you, as always. And we look forward. We will not have a COVID podcast tomorrow because tomorrow is our weekly dividend cafe. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, with Hightower Advisors LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities LLC. Advisory services are offered through Hightower Advisors LLC. This is not an offer to buy or sell securities. No investment process is free of risk. There is no guarantee that the investment process or investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced

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