The Dividend Cafe - Daily Covid and Markets Podcast - Tuesday, April 28

Episode Date: April 28, 2020

The futures were pointing down 80-100 points without a lot of activity last night, yet by the early morning were pointing to a +300 point move higher. The market opened up ~400, bounced around throughout the day, and closed today down a tad. But the big tech companies were down 2-4% all day. But on the other hand, some key REIT’s, materials companies, energy names, and industrials were all up today. Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, financial food for thought. Interesting day in the markets today. They were pointing down in the futures last night about 100 points. I woke up early this morning and they were pointing to about a 300-point move higher. And we did, in fact, open up and get up about 400 points at the high early this morning. We kind of bounced around throughout the day between 0 and plus 200 for multiple hours and then ended up closing down a tad on the day. It doesn't really tell the story, particularly in our own portfolio, just as a lot of the key REITs, materials companies, some energy names and industrials were actually all up on the day.

And a lot of the market pain was that some of the big tech companies, the FANG names and so forth, were down from 2% to 4%. And so a mixed bag in markets, but one of these days that have been desperately needed, we've now had maybe a couple of them in the last four to six weeks, where markets were, you know, the Dow ended up down 30, and not like a plus 400 or down 600 kind of day, a little more just normal day, some health in that. But speaking of market technicals, I do think that there are a few things happening underneath the surface that are interesting, worth paying attention to.

Primarily, you know, just for those who really follow the technical analysis side of things, Primarily, just for those who really follow the technical analysis side of things, all of the major market indices, the Dow, S&P, and NASDAQ, have broken above their 50-day moving averages. So there is certainly some sort of sustainability and momentum that is being reflected on that technical indicator. The higher beta names, the more cyclical sectors, have absolutely led the latest leg up. And I mentioned even just today, financials, industrials, materials. And I think it points to the reopening of the economy being sort of the most causative aspect here, that there's just kind of an excitement and that perhaps the economy is reopening both quicker than expected and and maybe at a better magnitude than have been expected now the the worst performing stocks of March during the big sell-off are the best performing stocks right now and the best performing

stocks in the down period are the worst performing now and that is what you would call a mean reversion and things right now kind of recalibrating is a healthy sign of breadth and sustainability within the market movement it's always subject to reversal but I think a broadening market leadership not being dependent on five names is a significant dynamic. I do want to comment on the VIX, the so-called fear trade, that kind of measurement in the options market of protection that people are buying out of fear of the S&P 500. Look, a 33, 34 VIX is not something to write home about.

It's a high number. It speaks to elevated tensions, still speaks to people paying up to buy protection against the market, but it was over 80 in mid-March. And so, you know, the 200-day moving average of the VIX is a bit over $22. We're sitting here a bit over 33 now. So by no means is the VIX utterly collapsed to a point of complacency. And I'm not sure that we're going to see a $10 to $18 VIX again for quite some time. But a VIX settling in the 20s would be a really good sign of more right-sized paranoia as opposed to the extreme functions that it's been in. That's a technical indicator that needs to be watched.

On the health front, U.S. yesterday, again, another new low for case growth at 2.3%. Testing numbers yesterday were, in fact, above 190,000. There were some conflicting signals yesterday. They're pointing over 200,000 a day, so wider testing, along with rapidly declining cases of COVID. That's what we're going for here. So still looking for the cases to die down as far as new case growth. Seeing that number move lower and the seven-day average is what has to sort of be bent down. But we are at, I think now, five days in a row of declining case growth. And again, there's two factors on testing. One being the really impressive increase in daily testing that we're able to finally get going. And two being the positive ratios dropping significantly.

So the testing that we're doing is pointing to less people that are testing positive for corona quote governor Cuomo's idea that 25% of New Yorkers are testing positive for antibodies the notion of an incredible herd immunity dynamic in New York Mortality rate that would just be dramatically lower than people expected That's the the key story we're watching. And I think another positive data point I would share today is the 1.8% ratio of those active cases of COVID in the United States. 1.8% are deemed to be serious or critical, by far the lowest number we've had to date.

are critical, by far the lowest number we've had to date. In terms of oil, note that the June contract is rolled over at one point hitting $11 today. It closed closer to $13. But something that I want to give quickly to podcast listeners and that I wrote about at greater length at covidomarkets.com is the just sickening function that the ETFs are playing in generating this. The technical factors around index construction, we have a lot of non-oil actors, non-physical actors that have gone and taken a sort of synthetic exposure as speculators in a price and have taken an instrument that doesn't match that and so they have decided that they need to move out of the forward June contract and and now something is meant to capture the price of the June contract is not going to own

any of the June contract so you saw massive selling in the June oil futures contract and massive buying in the July futures contract. So you didn't distort just one thing. You distorted two and created this spread arbitrage between the two things that has unbelievably distorted the markets. So I can understand why they're trying to avoid Apple last week and risking a negative commodity price when delivery is due next month. But by trading weeks in front of it,

they're distorting the front end and second month contract prices. They're making rational price discovery in the energy market impossible for those people that are actually, you know, interested in the price of oil. And of course, causing just unbelievable amounts of ridiculous media coverage. So more to say, by the way, from a national security standpoint and economic standpoint, oil prices in the days ahead. The new PPP program, the reload, I should say, is out and the SBA is announced. And this is stunning, but we knew there was a massive amount of pent up demand. But from a processing standpoint, 450,000 loans Monday and Tuesday from 5,100 lenders, about $50 billion, just a tiny bit shy of $50 billion of money that they have funded. And that's of the new facility, which was reloaded to $322 billion. So $50 billion is a lot to get

out in two days. And yet there's still ample powder there that will get spent up. But it looks like they still have plenty of room, gas in the tank, so to speak. I'm paying attention, by the way, on the policy front to a fight that appears to be building on Capitol Hill. Chuck Schumer was successful in getting this old aide, Elizabeth Warren, Bharat Ramamurthy, excuse me if I'm pronouncing it wrongly, to kind of sit on this oversight panel that the CARES Act created. And it's basically there to give oversight to the government support of these large and medium-sized businesses that are eligible under the CARES Act. And the statute listed some of the stipulations and some of the do's and don'ts, and now this particular aid is out asking for other strings to be attached,

and you have Senator Toomey in Pennsylvania pushing back. I'd be paying close attention to that because if the stimulative intent of the program is undermined by additional red tape of the program is undermined by additional red tape that is you know projected onto it post facto I think that that will be a pretty significant both political and economic story. Senator Mnuchin announced today that any company that took over two million dollars in PPP funds will be getting a full audit making sure of the loans validity And so we'll see if that sort of calms down some of the media dynamic around the big companies and public companies that took support. So, yes, Fed week in terms of a lot of things we're expecting out of central banks.

We know the BOJ already met earlier in the week, as I discussed yesterday. Fed should be making announcements on their deliberations tomorrow. I think that this is going to be a period of time, and I don't mean tomorrow, but I mean in the next several months, where yield curve control becomes, you know, a part of the Federal Reserve's toolbox. part of the Federal Reserve's toolbox. And I know a lot of people think that the Fed's saying, hey, we're going to keep the front end of the curve at zero interest rate as long as needed, is a form of yield curve control. And it is, but it's not full yield curve control, which we last did during World War II. But by stating where they want the yield levels to be up and down different spots on the curve it's a form of forward guidance

but it's forward guidance squared it's it's being applied across more than just the front end and it packs more punch as far as what their you know intent is which is to give the market clarity and confidence about what their intentions will be going forward uh certainly more it packs more punch than just quantitative easing um now i don't know that they'll ever call it yield curve control, and yet I believe some form of that is coming, which would just represent an additional accommodation from the Fed in the marketplace. Housing, not a lot of good things to say here. The new survey from MBA showing 3.5 million borrowers seeking forbearance on their mortgages. It jumped from 5.9% last week to just a tad short of 7% this week.

Very discouraging. Ginnie Mae loans are 9.73% forbearance rate. So continuing to put a lot of pressure on mortgage servicers. As far as home prices go, they were up 4.2% in February. You know, this report lags a month. And we had a 3.9% year-over-year price increase in January. So there was quite a bit of strength in national housing prices entering March and COVID. But it's also really interesting how relative it is to geography.

You know, Phoenix, Seattle, Tampa, Charlotte doing very well. A little more vulnerability in Las Vegas and Orlando, more dependent on leisure and hospitality. So we're watching that as well. I'm going to leave it there. Thank you for listening to the daily COVID markets update. And tomorrow you get Fed Talk plus so much more. Thank you for listening to the Dividend Cafe, financial food for thought. Thank you. herein are from sources believed to be reliable. Any opinion, news, research, analyses, prices, or other information contained in this research is provided as general market commentary.

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