The Dividend Cafe - Daily Covid and Markets Podcast - Thursday, May 14

Episode Date: May 14, 2020

The market closed up almost 400 points today after an intra-day session that was surely one of the weirdest I have seen in a couple weeks. Futures were down 100-200 all morning pre-market, and went down further after the initial jobless claims number came in at 2.98 million (the number had been expected to be closer to 2.7 million). The market went down as much as 450 points before rallying back and really zigging and zagging (with no apparent news) throughout the day, closing at the highs into a rally. 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 brought to you by Dividend Cafe here at the Bonson Group. This is David Bonson. I am the managing partner and the chief investment officer of the Bonson Group, bringing you the Thursday, May 14th COVID and markets update. First, I want to remind you, we do have our bi-weekly national video call via Zoom on Monday, 11 o'clock a.m. Pacific time. Please check out our website for any information, and we'd love to have you participate

on the call. And of course, we'll be sending out after the call a replay. You also can send questions in that you'd like us to address on the call, anything related to the market, portfolio, economy, COVID, anything you'd like addressed. Email us at COVID at thebonsongroup.com. Well, the market closed up almost 400 points today after an intraday session that was surely one of the wildest things and weirdest things I've seen in a couple of weeks. Futures were down, I think about 100 points when I woke up this morning and stayed down about 200 most of the morning pre-market and then kind of accelerated to the downside when the initial jobless claims

number came out. And this is one of the first times I've seen this through the seven or eight weeks of atrocious weekly jobless numbers that have come that the market actually went down after the number came as the number that came was, first of all, they've all been awful. But most weeks it's been just somewhat, I guess, less awful than consensus expectations had called for. And today the number for initial jobless claims on the weekly last week was at 2.98 million, and consensus expectations were around 2.7 million. So the downside market movement picked up a little. And then once the market opened, we actually went down as much as 450 points. So keep

in mind, we were down 550 yesterday. So you're talking about being down 1000 points last couple days, all in all pretty rough week there for the market. But then it just came rallying back and thought the day kind of zigged and zagged. And again, without much apparent news, I got a chance to hear in financial media, a couple different explanations as to why it was moving up or down. And let's just say that these were not particularly persuasive opinions as to why it was moving up or down. And let's just say that these were not particularly persuasive opinions as to why the market may have been moving up or down. Someone suggested it moved higher because President Trump expressed confidence that we'd have a vaccine soon. And I'm just going to tell you as clients of mine that I care about that I don't think that's probably why the market moved higher

today. But yeah, certainly within the kind of worldview we espouse daily that we do not believe the market needs a reason to go up or down when it does. But my point being that then for the market to close up 377 points today, that means that you did have an intraday move of over 800 points and closed near the highs, you know, into a pretty impressive rally at the end there. So interesting day. There's a lot of real positive health data today I'm going to go through, and then I do have a longer treatment I want to give to the Federal Reserve. And so bear with me, but hopefully you'll enjoy all I have to say in today's COVID markets. The health data case growth percentage, one and a half percent yesterday, continuing the significant downward trend in the rate of growth of new cases

here in America of COVID-19. We had 25,000 new cases last Wednesday. We had 21,000 yesterday. So the absolute level of new cases on a week-over-week basis, and keep in mind that absolute level is still averaging about 98 points, almost 98.7% that are non-critical and non-severe cases. that are non-critical and non-severe cases. But that absolute number is declining too, despite the big increase in daily testing. Now, one analyst I follow is projecting 17,000 new cases on a daily basis by next week. Another that I follow is projecting 15,000. So either way, really headed in the right direction of getting those new case diagnoses on the down low. And these per capita levels are far lower than they were in other Asian and European countries that began reopening their economies. Our seven-day average now for new

testing is 313,000 per day. The positive ratio has been staying somewhere between 6% and 8%. And just so you know, today's numbers were 366,000 new tests done and a positivity rate of only 6.8%. So I really love seeing all those numbers. The decline of hospitalizations, deaths, and new cases in New York continues to be a sight to behold, very encouraging. Now, I've been pointing this out all week. I'm going to continue doing so. Because of all the focus on what COVID data looks like in the states that are reopening or taking down some of their restrictions, sheltering in place orders, things like that. We've got to continue in our monitoring of global comparables wherever possible. And I think Norway is a very interesting example. as they began reopening three weeks ago. And you see them making new lows three weeks later

in number of new COVID cases and number of deaths per day. Very encouraging. We're also watching Japan very closely. They have almost entirely reopened now. And they're an interesting case because not only is the post-COVID, the kind of post-economic reopening so far going well, and we're very curious to see how it is sustained, but they also had during COVID numbers that were really quite remarkable as far as deaths per capita and cases per capita, very low compared to a lot of other places. And they did not do as draconian of a shutdown, although they certainly had some stay-at-home orders. But we're going to look more at some of that data in the weeks ahead. I really do want to assure everyone listening that if there is negative health data that comes in areas where restrictions have been eased,

where economic reopenings have begun, I'm going to talk about it. I'm not going to sugarcoat any of the data. I strongly suspect I won't need to. But I want to say this. I do not believe that where there is good, positive, encouraging data around economic reopenings, you can count on hearing about it from the media. I simply have not seen any precedent for objective and holistic reporting from the press where it does not fit a sensationalistic and gloomy narrative. I did provide a tweet from, yeah, at COVID markets today from Dr. Scott Gottlieb, one of the national leaders in terms of his presentations throughout this whole virus affair,

former FDA head, and he tweeted, national data from this past week suggests that the U.S. is starting to experience a sustained and sharper decline in new COVID-19 cases after a period of plateau. So some encouragement from someone who's been reasonably hawkish on COVID throughout. Also put up a chart of all the states that are having a declining trajectory in new cases, and then the states that are having a flat trajectory, and the states that have an increasing trajectory,

which happens to just be Minnesota, South Dakota, Virginia, pretty much at meatpacking plants. But it's interesting for you to get a chance to see it. What states are having what level of economic reengagement and then where they stand in terms of their COVID trajectory. Plans for a safe reopening of the American economy are crucial. The largest chain of fast food restaurants in the country has provided an update on their process changes and endeavors. There's some links at covidamarkets.com for you to ensure safety as they prepare for rolling reopenings. Other large casinos, hotels, car manufacturers have gone public with their detailed planning, too.

Not just for the planning logistics of it, but as an expression that's intended to create public confidence, you know, to see their customers and so forth kind of re-engage. So definitely a couple of links you want to look at there. Really positive development on plasma transfusions, blood plasma transfusion as a potential treatment method for COVID, getting approval. There's a medical report that we have posted as well that may be of interest. And I don't know if you're going to find that story anywhere. All in all, very positive day in the health data. And so we'll continue to update you as we get more information that we find to be pertinent. In market technicals, the sell-off yesterday saw 32% of the market

trade to new 20-day lows. I would say that once that number were at 50% to 60%, you'd have a more technically oversold condition. So I wouldn't get too excited just yet. And then where the reversal today plays out, technically speaking, is going to be very interesting. The S&P had been off more than 5% from recent highs. That would have probably come in a little bit today. But the average stock in the S&P has been off closer to 9% from recent levels and recent highs. And that speaks once again to the great dislocations and opportunities that exist within the market. I'm always hesitant to share historical averages of drawdowns that follow market rebounds because the range is so wide. It's kind of unhelpful to say something has been down either 5% or

as much as 17%. That's a pretty broad range. But that said, some drawdown after the market rally that follows a major market low is extremely common. It generally lasts a few weeks if you look at a median average, but what we've done is print a chart of the last 10 times that this has happened, what the initial rally was after a market low, number of days that that took place, then what the percentage level of the first drawdown was after that recovery rally, and how many days that took. And I think you'll find the data to be quite

interesting. The VIX had unsurprisingly surged higher these last three days. It reached $39 this morning, but closed at just 32, close to 33. So fear has not moved much below the high 20s, but it stayed within the 30s. This range seems about right to me. On the policy front, I am more and more convinced that the onshoring of many American company manufacturing efforts is going to be a major focus in the months to come and will not be confined to a protectionist or partisan thread, but rather will be pursued from a national security and domestic health foundation. Bob Lighthizer is the U.S. trade representative.

He's not a health advisor, but had an op-ed in the New York Times the other day, which I think is a telling indication of where policymakers want to bring this conversation. It is very hard to imagine that it will ever have more public support than it does now. Pharmaceutical manufacturing could be ground zero in the debate, but again, whether some sort of effort around American onshoring is a priority in phase four or becomes the heart of phase five, in stimulus efforts, I believe we are likely to see a paradigmatic transformation in the years ahead. Quickly looking at oil prices, closed up 9% today in WPI, above $28 a barrel. That's up over 100% since April 28th. And April 28th, I used as the date because it was a good, you know, almost week

past all that kind of technical roller coaster stuff happening with deliveries. And so since that level, we've increased over 100%. As for housing, it's surreal to report this, but the data shows what it shows after a total collapse of new home purchases when COVID shutdowns began. The purchase index has risen four straight weeks. And so new homes are being bought, even in economic collapse. I would say that the mortgages used to pay for them are almost exclusively in the conforming category. Things are approved for Fannie Freddie under $510,000.

But my point being, there is still a lot of purchase volume in that space in the market, a combination of interest rates being low and the Fed providing plenty of liquidity to that RMBS marketplace. In Fed news, there has been no comment from the chairman on potential plans to implement yield curve control. And again, he was testifying yesterday before Congress. And so you would think there could have been an opportunity there. He also had, in addition to recent testimony before Congress, he also spoke to the Peterson Institute, and that's where some of the things were quoted from yesterday. So look, my thesis is that yield curve control is almost inevitable and that all things being equal would be a more potent policy tool than some of the other Fed interventions that Fed is likely to consider. And so I am not really

casting any kind of opinion as to whether or not they should be doing it. I'll lay out the upsides and downsides, but the fact that I do believe they will be doing it is important. Powell's references to the economic risks that exist in the various data points that they're watching all suggest that he's willing, if not eager, to push the envelope further. And while this has caused some to wonder if negative interest rates are on the table, And while this has caused some to wonder if negative interest rates are on the table, my view is both that, A, it's a god-awful idea, and, B, it's not a tool the Fed is going to be inclined to use. Now, you know, I could be wrong about that, but that is certainly the way that we're reading it. Now, I do believe that the Fed is likely to take pretty bold action. And so if we're saying they're not going to go to negative interest rates, what do you think they're going to do big things? What are we referring to? So number one is yield curve control, which is the explicit

targeting of certain desired interest rates at various points of the yield curve, short, medium, and long maturities, and then the subsequent buying and selling of bonds to achieve those targets. It's essentially manufactured manipulation, not just to the short end of the curve, but the entire curve. It's a hyper-interventionist tool. It's not been used in our country since World War II, and one could argue that quantitative easing itself and Operation Twist are minor versions of it, certainly in the sense that they're distortive and manufacturing of a monetary outcome. But I believe that yield curve control will happen

because it will be an aggressive policy tool, yet not to the level of some of the things they want to avoid doing. It will give assurance to the market that the cost of financing the post-COVID recovery interventions will come with hyper low interest rates in perpetuity as opposed to right now where the Fed is only able to kind of assure that on the short end of the curve. Now, number two is credit risk and support, which is basically expansion of the various facilities already in play to support lending and capital markets. I wrote yesterday of congressional efforts to expand the Fed's support to the municipal bond market. And I would simply add that I'm not at all convinced that the Fed is stuck in place with their current plans for Main Street lending, let alone TALF and other forms of capital market support. The issue is that the Fed is not allowed to take losses. They've used their printing press

legally by citing unusual and exigent circumstances, the 13.3 provisions of the Emergency Act. And then they have set up special facilities for lending that are first funded with protective equity from the Treasury Department, loss-absorbing protective equity. And what do I mean by expansion of these efforts? Well, the Fed could always go back to Congress and ask for more money. That's not easy to do. But one very trusted source of mine has expressed the idea that the Fed could use $900 billion of remittances to the Treasury post-financial crisis. And so if you recall, the Fed was engaged in certain projects to be that liquidity lender of last support. And they ended up taking on some of that risk, again, from behind Treasury equity.

But they made $900 billion in profits and had to legally pass those on to Treasury. Some are suggesting that they could count those profits in calculations of future losses, which would really free up a lot more capital to be put to work. I don't know that they will do it. I certainly know that they could and have to believe that that is being discussed.

So in addition to more aggressive posture with their risk-taking, and of course we talked about yield curve control, negative interest rates I guess belong on the list, but I don't believe they're going to do it and I certainly don't want them to do it. The real issue is not just what negative interest rates would mean for the COVID era, but even what it would mean for risk assets

we as investors most focus on. We must analyze in the months ahead the long-term implications of what this 21st century Fed looks like. It's a bigger deal, I believe, than most investors have yet realized. I will go ahead and leave it there. I encourage you to check out Dividend Cafe tomorrow. We'll have our weekly podcast video and written market commentary at DividendCafe.com.

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