The Dividend Cafe - Daily Covid and Markets Podcast - Tuesday June 2

Episode Date: June 2, 2020

Early on in the COVID affair my general feeling was that the most ignored yet needed data point was the recovery rate, as first three people I knew tested positive and quickly recovered, then eight, then twenty, then ~thirty, etc. The key timing issue was that a significant portion of the people I knew early on that tested positive were already recovered by the time they got their test results, as back then getting the test, and getting the results, had a nearly ten day lag from the time one initially had symptoms bad enough to warrant getting tested. Here we are nearly three months later and I am sure we have less of a percentage who already recovered by the time they get test results (because of improved testing), but I still strongly suspect “recoveries” are rampant (we intuitively know this, and empirically know it), yet the data has either no way to capture it, or a big lag in capturing it. 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 missive brought to you by the Dividend Cafe of the Bonson Group. This is David Bonson, the Chief Investment Officer at the Bonson Group. It's Tuesday, June the 2nd, and we're giving you our daily missive. And it's another day of, I think, a lot of people just perplexed at the market, bullishness market, forward movement.

And we're not perplexed by it here at the Bonson Group. it's surprising in the sense of normal intuitions about headlines and about news events. But in terms of how markets work and what markets are actually doing mathematically and economically, despite the really severe distress of the headlines and the TV screens, it actually is not a surprise that markets are somewhat divorced from that activity. So last night I went to bed and literally all that was on the TV was more coverage of property destruction and vehicular attacks on police and all the different things that we're all seeing on our TV images. And yet futures were up about 200 points. And when I woke up this morning, that is, futures were up about 200 points. They stayed up throughout the day as the market was open,

not necessarily that much all day, but then in the final hour, it rallied and closed at the high of the day up 270 points. And so we're getting even closer to that 26,000 then in the final hour, it rallied and closed at the high of the day up 270 points. And so we're getting even closer to that 26,000 mark in the Dow. And all this is happening behind the backdrop of the things I've been talking about, which is in the very short term, the market's responding to the juxtaposition of improved health data with improved economic data expectations as the economy reopens and phases into its reopening with the ongoing thus far benign health environment relative to expectations. And I'm going to share some of that data with you momentarily. Second issue with markets is the monetary stimulus having worked its way through credit markets,

brought in high yield and investment grade credit spreads, brought in mortgage spreads, and provided a lot of liquidity into the system that works its way into risk assets, into the system that works its way into risk assets, provides a kind of lubricated capital markets that allows people to search for their most rational and optimistic, or excuse me, opportunistic use of capital in a time when interest rates are 0%. And then that third is the TINA. There's an alternative. Another way to put this is a none of the above market where international or fixed income or credit or cash in particular just simply don't cut it for a lot of investors, both institutional and retail, are looking for. So I'm going to keep saying it because it's important. And I do think it's my job. But forgive me if you're tired of hearing it. It's just that I think the repetition will be important as we go through the various things we're going to go through in the days,

weeks and months and quarters ahead. We may very well be at the higher end of a short term trading range. It'd be impossible for anyone with any authority to state that, but that certainly seems like a reasonable expectation to me. But nevertheless, we would anticipate that there will be some grind through the economic recovery. We do believe there will be an economic recovery. We hope it will be on the more optimistic end of speed and magnitude, but we do not know. And so in that second phase, this quote-unquote grind, we think things will require a bit of patience and work.

And in the meantime, there's really not much the market can do that's going to surprise us because markets are in the surprise business, and you can't be surprised when you expect a surprise. Think about that one for a little bit. Let's talk health data. Case growth was again, just over 1% yesterday. Now, absolute case growth was not declining. And I woke up at 315 this morning to a report of over 20,000 cases yesterday. That's been about the level we've been at. So you're just kind of tired of seeing a 20,000 number. You'd like to see that get even lower. But as I looked under the hood this morning, I found out

that there were about 3,000 cases that Massachusetts added to the data in one day based on probable data, which they did not define, going all the way back to March 1st. So really, apart from this data dump in a single day from the state of Massachusetts, we actually were at about 17,000 case growth yesterday. So the death data and case data that Massachusetts recorded was based on those who they believe probably died from COVID and probably had or have COVID. And I am not really clear on what the criteria is for a probable classification when a test itself was done. In the death cases, a lot of times the test wasn't done and they go to symptoms. But when they do a test that gives either a positive or negative and then have a probable classification, I confess to being a bit confused what that means.

So again, case growth about 17,000 when adjusted for the data dump in Massachusetts yesterday. But regardless, I'm increasingly convinced that even with case growth being stubborn up and around that 20,000 level, it's not bothering markets because that flatlined absolute number does represent a smaller and smaller percentage as testing continues to increase, but also because the recovered rate is advancing at a higher pace. The delay in classifying a case as recovered is leaving the active cases artificially high. I'll give an example of some language that appears on some of the actual tracking websites that I periodically review. I'm quoting here,

while every case of the new coronavirus that causes COVID-19 is reported to HCA, there is no practical way to find out if they've recovered. So I've been wondering for months how they go about tracking the recovered, and then I look at official data tracking saying there isn't a way to notify. So I suspect, I don't want to be overly optimistic, but I think this is a reasonable conclusion that you have a very artificially high active case number and a very artificially low recovered case number. It was early on in my kind of tracking of all this that I sort of determined that it wasn't just that there were people recovering, that it wasn't getting tracked that way, but that in fact a lot of the positive cases that were coming back because early on, you recall, we were so behind in testing and so selective about who

we were testing. And it was taking so long to get testing results that my little theory was that there were a significant amount of people who had recovered by the time they got their positive test. It was actually overlapping from the positive tracking to the recovery that the recovery in some cases was coming before the positive had come. And that was based on just several people I literally knew that that had been the case for. And I just found it hard to believe that I only knew outliers. But nevertheless, I think that, you know, the society has determined policymakers, maybe not the media, that's a bit different of a story, but I think the market, I think just kind of rational actors have more or less said that based on all the different

factors out there, the one they seem to be looking to do the most is death declines, serious case declines, hospitalization, capacity, PPE capacity, things of that nature. And all those things have moved in a positive direction, thank God. We hope they will continue to do so. Okay, in terms of today's results, we've got another 400,000 tests done today with a positivity rate of 5.4%, remarkable consistency of the numbers right now on a day-by-day basis. Just sitting pretty much right at 400,000 tests a day with a positive rate of those tests coming in about 5% or so, and then a very, very low and in fact, declining percentage of severe cases.

I did do a little Sweden update. There's a chart at covidandmarkets.com today, just because their average daily death count has declined by half now since late April, even as they've largely kept their economy open throughout. Let's be clear that them keeping their economy open is a reference to the governmental mandates that in this case largely did not exist. It is not a reference to the free actions of their free society. A significant amount of their population obviously chose to sort of shelter in place. And so no one is suggesting, I don't think, that Sweden was literally out spreading around with each other. I think that it was just simply that they left it more up to the population. And we'll have to see kind of what

that looks like versus the way other countries handled it over time. The final analysis of the data will require a relative comparison to the economic damage done in other countries versus their own economic damage. But in the meantime, the health and mortality data and stuff is still a work in progress. The country I'd look to right now, just if one wants a very optimistic model of things, it'd have to be Japan. I mean, I don't think I've used this language yet to say that a country is actually essentially beaten Japan. I think the mission accomplished moment, for those of you who recall George W. Bush, has caused a lot of people to maybe hold back on some of the would-be victory claims.

And I've always felt the same, even with the way I talk about markets and certain investment things. Nothing worse than a victory lap before you finish the race. But for me to say this, you know, there's data behind it. Over 90% of the total cases they ever had are now fully recovered. Right now, the country has 127 million people. They have 115 cases that are classified as serious, 115 serious cases out of a population of 127 million people. So I think that the world can celebrate that Japan has essentially beaten COVID-19. that the world can celebrate that Japan has essentially beaten COVID-19.

From a market technical standpoint here in the States, look, the Russell 2000, the prominent small cap index, is now up over 40% since its March low. That's the second biggest percentage gain in a 50-day period in history. First would have been the 2009 market bottom in the rally that came off of that. Over 90% of small cap stocks are above their 50-day moving average. And I would add that $1.5 billion came out of small cap ETFs last month. So this is not flow driven. This is contrarian friendly, which I love. On a volume front, I make the here in coveted markets with another chart

that you know those looking for something to try to talk down they could point to the fact that in the very recent part of market recovery the volume in the smps has been lower than normal it's a pretty flawed argument but i'm just trying to cover all my bases. Okay, public policy. Senator McConnell has indeed verified the Senate is set to approve the House adjustments to PPP that will add that flexibility to guidelines for getting loan forgiveness. As far as the bigger picture, stimulus 4.0, McConnell had sort of made reference to the late June timeframe. uh mcconnell had sort of made reference to late june time frame uh secretary mnuchin president chump had referenced something happening in mid to late june uh senator john thune is a senior gop senator of south dakota has indicated today for whatever it's worth he's actually thinking it's going to be into july before they have another bill so we're watching that timeline

and again just expecting it to be not imminent, but not all the way through summer at some point, you know, mid-summer-ish. Oil close today, WTI crude at $37, another four and a half percent higher. You got to figure some U.S. shale companies are pleasantly surprised to see that Saudi Central Bank was pumping $13 billion into its banks to protect against damage to their economy with the collapsing oil market conditions of the last couple months. A wave of debt restructurings are certainly likely there. And so to the extent that, you know, U.S. shale has had to deal with some of the same, perhaps misery loves company, I know, U.S. shale has had to deal with some of the same. Perhaps misery loves company.

I don't know. A lot does appear to be riding in headline risk around Russia's agreement to this next batch of OPEC plus production cuts. But it would feel to me that based on oil price action as of late that somebody knows or believes something about fait accompli with that deal. Of course, we'll have to see. As for housing, and this really could be discussed in my Fed comments, prepayments on 30-year Fannie mortgages in April were up 26% year over year. They were up 42% in March. So this obviously encapsulates that borrowers are refinancing mortgages to lower rates. It has nothing to do with paying mortgages off. That prepayment risk affects investors in the mortgage-backed securities because then

these mortgage pools get principal back prematurely, and then they have reinvestment risk around lower rates because that's the whole issue going on with the rates being lower. It is reported that Fed purchases were only $101 million in May of mortgage-backed security purchases in April followed by virtually nothing in the month of May. And I basically suspect that there wasn't the need to support the mortgage market in May, that they really liquefied the space with their bazooka in March and April. with their bazooka in March and April. What we know is that mortgage markets are dependent right now on Fannie and Freddie. And then we know that Fannie and Freddie have become dependent on the Fed, at least as far as smooth or optimal functioning of the bond pool markets, the Fannie and Freddie world. Where things go with rates, prepayments, and overall mortgage conditions in the months to come will indeed have a profound effect on the overall housing sector.

I don't even like this call. I don't like calling this next section Fed news. But look, this is so interesting. The Fed invested nearly $1.5 billion, as I covered yesterday, in bond ETFs last month. They're direct purchases of exchange-traded funds and fixed income last month. Very good portion of that going into junk bonds, high yield. Now, we also know that investors directly poured $4.3 billion into one junk bond ETF alone and another $10 billion into various other bond ETFs that the

Fed was buying. So that's $14 billion of retail bond ETF purchases. Pretty much the most classic case of front-running the Fed, I can imagine. Very predictable, but it actually shows me investors learned from the lesson of the financial crisis. When the Fed tells you what they're going to buy, go buy it first. As far as central bank news, we do expect that the European Central Bank will be expanding its bond buying program. Another 500 billion euros worth of quantitative easing this Thursday morning. They'll be making that announcement. Quick economic sidebar and I'll let you go. Six of the 18 sub-industries in the ISM manufacturing number actually reflected positive growth in May.

Overall, manufacturing obviously was still in contraction mode in the month of May, not as much as it had been in April. Durable goods orders in particular are still very soft. But inside baseball, the report was less bad than I had anticipated. And I actually have read now two reports from analysts I respect forecasting ISM manufacturing back in positive territory, meaning net-net expansion versus net-net contraction by the end of the year, which would be really phenomenal. Okay, go to covidandmarkets.com to get the link to my appearance on Fox Business today, talking briefly with Charles Payne about free markets and what the pretense of this market rally really means.

I'm going to leave it there for today's COVID and markets. I look forward to coming back to you tomorrow, Wednesday. Please be well, be safe tonight and be free. 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. Thank you. in this research is provided as general market commentary and does not constitute investment advice. The Bonser Group and Hightower shall not in any way be liable for claims and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and

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