The Dividend Cafe - Daily Covid and Markets Podcast - Tuesday June 16

Episode Date: June 16, 2020

Market futures last night were up 400+ points and the Nikkei in Japan soared over 1,000 points (+5%) overnight. I woke up this morning to a +520 in the Dow futures, and an hour later a report popped that futures were up “amid reports that Trump is preparing a $1 trillion infrastructure proposal.” There is one little problem with the reports that the market futures were up on reports of this infrastructure proposal … they had been up for 13 hours before that “story” broke. And of course, it is no story at all, as we shall see in our public policy section below. On the day markets closed up 527 points. The VIX dropped a bit over 2% – not a lot – but is down 23%+ from the high level of Thursday. Markets were up 800 points, and at one point were back to even, but again, closed up over 500. Intra-day volatility is alive and well. 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 podcast brought to you by the Dividend Cafe of the Bonson Group. This is David Bonson. You know my story. I'm going to jump right into it. Market was up 527 points today. Let me give

you a little background of what took place the last 24 hours. Market futures were up last night about 400 points as I was going to bed, but the Nikkei in Japan was up over a thousand points, closed up 5% overnight. And then when I woke up at three o'clock this morning, the Dow futures were up 520 points. An hour later, a report popped up that futures were up amid reports that Trump was preparing a trillion dollar infrastructure proposal. But the problem with that report was that the market futures were up far before that report had come out. So the reality is that that story, which had no quoted sources and had no new information at all, I don't know anyone in America that doesn't know that Trump is trying to get a big infrastructure proposal done, was trying to get a big infrastructure proposal done, had nothing to do with why markets had moved higher, nothing whatsoever. And basically, I'll get into in a moment a couple of possibilities

as to what ended up happening. But as far as the market itself, the futures ended up going up as much as 800 points. The intraday at the very open was up in that range, 800 to 900 points early. The intraday at the very open was up in that range, 800 to 900 points early. At one point, we gave all of it back and then rallied again. So like I said, closed over 500 points to the upside. Intraday volatility as opposed to just day-by-day volatility, meaning from a Monday to a Tuesday where a lot of that action could be overnight. Within a trading session right now, we're seeing quite explosive volatility. It's very interesting.

As you will see in a moment, the housing data was a big issue in its release. I don't know how much it would have affected equities per se, but my little theory is that what's driving equity sentiment a little higher is not the data per se, like the fact that retail sales were up 17.7% in May. That's a good number, but they were rebounding from a 14.7% drop in April. The issue is that the economists were, and consensus expectation was for an 8% increase and it ended up being 17.7. It's how wrong the consensus is that is providing, I think, market confidence to the trajectory of upside surprises. Same thing in the homeowner, the home builder sentiment data. I'll get into that in a moment. Markets like it when expectations are being continually outperformed,

even if that outperformance is coming off of numbers that had been muted or recalibrated, et cetera. All right. I'm going to try to go through the health data as quickly as I can. All right, I'm going to try to go through the health data as quickly as I can. We have now had a few days in a row where the total national deaths have been in between 300 and 350 people. That was three days in a row. It is a bit higher here on Tuesday, by the way. Let me see if I have that number in here. I don't have it in front of me.

Forgive me. But I did notice the number when I was looking at it about a half hour ago was higher, but still well below 1,000. And so what I'm getting at is that you have to go back to June 1st to find a day where we had over 1,000 deaths. And this is a very sudden and very substantial decline in day-over-day mortalities. And this is a very sudden and very substantial decline in day-over-day mortalities. It's great news on the health front. But to me, I would like to kind of unpack a little what I think it infers, which is that ongoing case growth has been a result of wider testing. And even where the case growth, like Florida and Texas, is very modestly higher than the testing growth.

like Florida and Texas is very modestly higher than the testing growth, it's because the testing is picking up less sick, less symptomatic people in the positive cases. And that's pretty logical when you think about that as a reference to the types of cases, the people, the level of their sickness that were getting tested earlier on. So I think the conclusion one might logically draw from that is you're going to see less mortalities because it's less serious COVID cases that are showing up in the testing. More serious COVID is declining. We're now down to 1.38% of all active U.S. cases have a severe or critical classification. I apologize if I'm on a kick about media coverage here, although frankly I believe I have every right to be on this kick. If you can find one major headline or report or story, like a substantial story coverage from a substantial media outlet that is talking about the U.S. deaths falling to these new lows and staying there for over a week, I'd love to see it. literally blow up with texts and tweets and alerts and pop-ups and bulletins and breaking stories and

blah, blah, blah from all the normal cast of characters about surging cases and catastrophic developments and a second wave crisis and so forth. And I think one has every right to question the objectivity and the accuracy of the reporting when the sensationalism is out of proportion on one side and the basic presentation of facts is so lacking on the other. But I digress. Testing was up 12.4% over the weekend, by the way, versus the prior weekend. So there is absolutely cases of outbreak going on in select pockets, a couple in Arizona, Florida, Arizona. I think I meant to say Texas. But listen, I'll share more details on the Arizona cases tomorrow. I got some very interesting information at the end of the day here today. I want to be able to unpack a little better.

There are cases, situations now in a very, very few spots where hospital bed use has gone up and intubator and use of equipment is going down. Basically, there is less respiratory severity in a lot of the cases they're seeing. And I'm getting this straight from some of the medical experts I'm talking to. I find it fascinating and, of course, encouraging. And by the way, the studies you can see when they talk about bed capacity of hospitals and especially ICU, that's not just COVID cases. They're showing the data of all bed use to show you the available capacity. But back in March, April, there was nobody in the hospital that wasn't there for COVID for the most part. They weren't admitting a lot of these ICU cases or people weren't going to the hospital is a better way to put it. So the numbers are really quite apples to oranges.

hospital is a better way to put it. So the numbers are really quite apples to oranges, and yet still, for the most part, without the outliers that I refer to, reasonably benign data. 465,000 tests done today, positivity rate of 5% yet again. So the beat goes on, and then all of that ends up taking the oxygen out of the room from what I think is the biggest story of the day, which is the University of Oxford announcing that they have found the first proven life-saving COVID treatment as the clinical trial for their steroid treatment cut the risk of death by 35% for patients on ventilators. And they ran the treatment on 2,000 hospital patients and compared it to 4,000 patients who they ran it with who did not take the treatment. 4,000 hospital patients who did not take the treatment, 2,000 hospital patients who did, a major mortality reduction. And the reason why it's significant, there's other therapeutic treatments out there. This is steroid treatment. It's $5. It's $10. It's extremely cheap, able to be democratized

for distribution very quickly. So conclusion, I'm expecting pockets of case increases around the country. This is a viral spread. It's unavoidable. But I expect the coverage of where those outbreaks take place to be highly disproportionate to the reality of the situation. And I'll leave it there. capital markets through a chart I put up at covidamarkets.com, whereby you see that $13 billion has flowed into stock ETFs since the March bottom. That's all equity-oriented exchange traded funds, $13 billion of net inflows. I assume the gross is quite a bit higher than that, and the redemptions and sales are pretty high as well, but the net number, 13 inflow, but then that's compared to bond ETFs that are five times higher, net, net $67 billion. So your gross inflows minus your redemptions equals a net number of $67 billion versus $13 billion for stocks.

The idea that the retail investor has become euphoric about equities is just absurd. And the data proves it. And I think that provides a very supportive sentiment backdrop in terms of our contrarian perspective. Public policy front. So this was the quote from Bloomberg Media. The Trump administration is preparing a nearly $1 trillion infrastructure proposal as part of its push to spur the world's largest economy back to life, according to people familiar with the plan.

That President Trump has had his eyes on infrastructure bills been reported about 10,000 times in the last year or so, including throughout the COVID period. He frequently talked about himself. This report claims that the Department of Transportation is preparing a preliminary proposal and that most of the money will be used for traditional infrastructure work like roads and bridges, but will also include some allocation to 5G and rural broadband. It does strike me as pretty odd that any real administration official would only speak off the record about something that is so on the record and so public and well-known. But, you know, nothing in the media report indicated how they think they would get something like this to be agreed to by the Democrats in the House. I do think there is some bipartisan consensus about an infrastructure bill. But the

House Democrats 4.0 stimulus bill from last month had called for 500 billion in infrastructure spending, not quite the trillion that allegedly the president's asking for. But that was out of a $3 trillion bill that the House Democrats wanted. Look, I'm talking to my sources all the time. I reached out to several folks today. My instincts, frankly, just don't see how House Democrats would agree to give the administration anything that might look like a victory here. So I know there's a lot of people want infrastructure bill. I know there's some things in it that will end up being good for markets, and I think there's some things that will be bad for markets. But I'm skeptical as to what it will end up being and when and how, so we'll just keep watching.

Real quickly before I move out of the public policy side, I mentioned yesterday that I was confident Secretary Mnuchin will lose in his effort to not be disclosing all these things around the small businesses that got PPP funds. He is now already saying that he will negotiate with lawmakers that are pressuring him to release information. I am still steadfast that he will capitulate, but I could see some sort of compromise release where maybe some information is protected and some is released. An example might be the names of the companies and the status of the loan are released, but not the dollar amount. I think there's some people worried about the proprietary, because the dollar amount of PVP loans was based on two and a half times their payroll. And I think there's some that view that that could be considered sensitive information

to effectively backdoor a release of what the various companies' payroll amount is that could be considered a violation of privacy or something. But I don't know. We'll see where it goes. It looks like it's already moving towards the vantage point of greater transparency, which is probably a good thing. In the oil and energy world, the International Energy Agency did issue their report. They're forecasting a pretty substantial resumption of demand in 2021,

but still predicting it will be 2022 before demand is back to pre-pandemic levels. Their claim that there would only be 2.5% reduced fuel use in 2021 seems optimistic to me, but even that was entirely driven only by a reduction in aviation. So we put a chart up of the anticipation for demand from pre-crisis through post. from pre-crisis through post. Saudi production cuts, by the way, seem to be going forward in good faith, a 40% reduction to Asian buyers. Iraq cut orders to European refiners in recent days.

So it does appear that there's been greater compliance from the OPEC Plus countries about the supply cuts. The only thing I would add to it is that if anyone believes it's only been OPEC plus players leading to production cut in terms of the efforts to balance world oil markets, I got a bridge to sell them. U.S. rig count is now down 71% year over year. So obviously that reduced supply from market forces is going a long way towards pushing oil prices up as well. I mentioned the home builder sentiment, its biggest monthly surge ever. It had dropped in April from 72 to 30. 50 is considered like the baseline level. So anything above 50 is a positive sentiment. Anything below is negative. And it went massively to the negative in April, but then now positive and then

some well above expectations from current sales conditions to sales expectations to buyer traffic. All three of the major categories moving up meaningfully. This is what we call pent up demand. You had a very healthy market for buyer sentiment before COVID. Then everyone got stuffed in their house for a few months. And then now you get this. Mortgage applications, by the way, jumped 10.9% for newly constructed homes in May. And then another issue pertaining to housing, I have more work to do on, but that is Fannie and Freddie each hiring investment banks to help them raise fresh equity capital in preparation for a spinoff from government control. The FHFA, the regulator to Fannie and Freddie, has also hired its own investment bank to advise it. The plan that Colibria at FHFA has released is that these companies would be spun off from government control in 2021 or 2022 based on

spin-off into public equity markets. And it's very hard to really understand where you think these things will be going without some kind of clarity around the election. I think that the election is going to have an impact on this. I told you yesterday about the Fed coming into corporate bond market. I think we kind of debriefed all that. Please look at covidmarkets.com for more information. And then last night, Japan coming out with more of a anything it takes approach and their central bank just reinforcing low rates or zero rates all the way through 2023, you know, offering more support to their corporate bond and commercial paper markets as

well. I'm going to leave it there. We'll have more for you tomorrow, Wednesday at COVID and markets. In the meantime, reach out to us with any questions and we will continue. The futures are kind of flattish looking into tomorrow, but you know, three days in a row, a healthy market move higher. But, you know, three days in a row, a healthy market move higher. And after the big drops of last week, but intraday volatility high, a lot of work to do. VIX didn't come down all that much today, even with the Dow up a bunch. So the beat goes on. Thanks for listening to COVID and markets at the Dividend Cafe.

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