The Dividend Cafe - Daily Covid and Markets Podcast - Tuesday June 23

Episode Date: June 23, 2020

Well this was one of the crazier 24 hours in quite some time, more so for what happened last night than today. Futures opened up about 100 points last night, and slowly inched higher for the first couple hours into the evening. Around 6:30pm pacific/9:30pm eastern, my devices starting blowing up that futures had collapsed 400 points (so a net swing of over 500 points) after “White House advisor, Pete Navarro, announced that the phase one China trade deal was over.” Well, it turns out, not for the first time, Navarro was speaking hyperbolically. Within 30 minutes futures came roaring back to even. President Trump took to the airwaves to say that the trade deal is “fully intact.” I decided to watch the replay of Navarro’s Fox interview, and it was rather obvious that it was a long-winded question and the answer was disconnected from that portion of the question. Regardless, by 3:30am this morning futures were up 300 points. 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 in Markets brought to you by Dividend Cafe of the Bonson Group. My name is David Bonson. I'm the Chief Investment Officer here at the Bonson Group and we have quite a few things to go through with you today. What a weird 24 hours. It started right, yeah, literally about 24 hours ago as the futures market was opening going into Monday evening.

I think we opened up about 100 points in the Dow futures, and it kind of inched higher a little bit for the first couple hours and then around 6 30 pacific time last night so well you know past nine o'clock eastern all of a sudden my devices are all blowing up I'm getting texts and tweets and pop-ups and all the things saying that futures had collapsed 400 points and so a net swing of over 500 points that White House advisor Pete Navarro announced that the phase one China trade deal was over. Well, it turns out that that isn't what he said. And to the extent that he kind of said it, there was a little combination of hyperbole and an awkward sentence, but I'll get to that in a minute. It was not even 30 minutes later, futures had come roaring back to even.

And so I put a chart up at covidandmarkets.com just showing how those lovely algorithms worked last night where they printed down so dramatically in just seconds and printed right back up. And it done the same thing with bond yields and Dow futures, S&P futures, the whole thing. President Trump came out a little bit later to say, no, the trade deal is fully intact. And as a matter of fact, I had this Fox News interview on in my office and I was sitting at my desk working and heard it live. And it was such a profound moment that I didn't even hear it when he said it. It

wasn't even anything that kind of stuck out. So I went back and listened to it again. And I would just simply say it was a pretty long-winded question. And then that answer was kind of disconnected from the initial part of the question. So it was all sort of confusing mumbo jumbo, but I got up this morning at three 32 futures that were down, oh, excuse me, that were up 300 points. So we went from up 100 to down 400 to up 300. And at that point, we're all within 12 hours. Okay. So those, by the way, are not really all that big of swings relative to the world we've been living in, but they're big swings compared to a normal world. We haven't been living in a normal world. So I do think that if I'm going to try to come get some takeaway from this, besides have an interviewer ask a coherent question or don't

let Pete Navarro do interviews or don't trust futures algorithms, you know, those are all, I guess, fair enough points. But perhaps a bigger one for you and I would be that there really is a susceptibility to volatility around U.S.-China trade realities. You do have the possibility and I think the probability of China adopting a pretty hostile situation against Hong Kong over the weekend. The sources I'm talking to believe that it is going to go through and that the U.S. is going to retaliate in some small measure. So I expect some real volatility around real developments, but I do not know what to tell you about last night's futures action other than it was a pretty weird series of events.

So as far as today's market action goes, the market did end up opening up 200 points and it bounced around all morning, kind of stayed flat for a little while and then lost momentum late in the day, closed up 130 points on the day in the Dow. Now, all this is happening as clearly the case growth is continuing, particularly in those more vulnerable states. The Florida and Arizona numbers are what we're watching most closely. California and Texas numbers are higher as well, but there are some reasons why those numbers are perhaps not quite as concerning as Florida, Arizona. But let me tell when you see the market so resilient against this case growth and against these numbers that, you know, God knows the media certainly wants the whole world

to know about. And the market is sort of shrugging it off. And I will add, as I've been adding for three weeks now, even on that day when the Dow dropped 1,800 points, that to the extent that we're supposed to believe some of this is related to fears of the overall economy going back to a kind of shutdown mode where we were March, April, the credit markets are not even blinking. The residential mortgage, the structured credit side, still very much day by day and positivity seems to be very contradictory to the notion that there's this macro fear around a reshutdown.

And, of course, the reason why I don't think the market's that afraid of a shutdown is I don't think it matches up to the medical evidence that what we're facing right now is a byproduct of reopening. And there's a lot of reasons for that that force one to really understand the health data. But no matter how you slice it, we are talking about now three days of over 30,000 case growth going back to the weekend into Monday and Tuesday. And I want to read a quote from Jim Paulson, who's a chief investment strategist, formerly at Wells Fargo. I followed him for many years. He said, the message, it may be that the virus and the bull market can coexist. Despite back to our days of COVID-19, about 30,000 over a weekend, ongoing reports of hotspots, stock market managed to post a strong gain.

Market action seems to suggest investors expect the economy to continue improving in the months ahead, even though the country's experiencing spotty or temporary spikes in the virus. I think he's exactly right. I think that we are in a very different correlation of events. Now, is the market simply just doing a better job of ignoring media headlines? Are they looking beneath the surface of the data? Is the market stupid and just flat out missing something in the health data? Or is it what I'll suggest?

Possibly. The market doesn't see the data of the last week as particularly problematic. And B, where there is bad virus news, such as Florida, Arizona, there's broader acceptance of the reality now that there will be infections. There will be something between 98 and 99.6% recoveries from those infections. And there will be an economy that has to plug along regardless. I suspect the market is signaling that. I'm certainly open to allowing more time for there to be greater clarity still. There is a phrase about a Memorial Day wave,

including from economists. I frequently use some of his charts that I read his daily economic missives and find him to be a very credible economist and so forth. But I flat out disagree with the terminology just on a factual basis. Memorial Day was four weeks ago, okay? No increase in any state besides Arizona was detectable until two weeks after Memorial Day and adjusted for testing. There's still only a handful with case growth after that testing adjustment. And that's all in the last week. COVID is something that

spreads quickly. It doesn't hide away for three to four weeks. So I think you have more recent events and that those are actually idiosyncratic in the different states. And now there's a spread and so forth. You had over 511,000 tests done today, positivity rate of about 6.4%, higher than that 4% to 5% range we'd been in but still very low. But then again, you have significantly improving data, declining case growth in North Carolina, Alabama, Arkansas, Louisiana, and Tennessee. I think that bolsters the case that Arizona and Florida are outlier states in terms of case growth. And I also would add, I put charts up

of each one of these countries today at covidandmarkets.com. You have to look at Italy's reopening, France, where there's very few problems at all, Spain, again, very, very minimal new cases. And even the UK now, a really dramatically declined death toll and new coronavirus cases. And by the way, even Sweden, which everyone loves to hate on, has now seen a pretty sustained drop in new case growth and has been experiencing for about a month now a drop in deaths per day, very positive numbers. Dr. Fauci today did respond, did, the market responded favorably, I should say, to comments from Dr. Fauci about a promising vaccine entering stage

three trials next month. He had a number of things that you could certainly describe. The rhetoric is very upbeat. That was coupled with the news that Novio has received Department of Defense funding. Remember, this is the company that had developed a successful Zika vaccine previously. So you have a number of good things happening on the vaccine front. In terms of the chart, I guess I would most like to call to your attention that is at covidamarkets.com today. It's the weekly median age of people who tested positive for coronavirus in Florida. And you will simply see that that number had been in the mid-50s all through mid-March. It was in the 50s all through mid-March all the way through early May and has since on a week-by-week-by-week basis,

the median age of those testing positive for coronavirus has gone much lower, all the way down to 35 last week. That's the median age. Now, what is the relevance of this? Because positive is positive, right? Well, no, it is not. And this is really important. All things being equal, from a purely statistical, medical, mathematical standpoint, you'd far rather 35-year-olds be testing positive than 65-year-olds. For the very obvious reason, 35-year-olds are less likely to die.

They're less likely to be hospitalized. They're less likely to require intubation. They're less likely to suffer from comorbidities, which is the real story, the fatalities of coronavirus. So what you have is a much younger population right now that you look, I cannot speak with any medical authority at all as to whether or not the report from the Italian epidemiologist yesterday is correct or not, that the bite of the virus itself is diminishing. I, you know, I have his white paper suggesting that and there's a lot of you know interesting anecdotal evidence around that but what i think is more conclusive and equally hopeful is that to the extent we have

less vulnerable people testing positive not all positive testing is created equal will not have the same strain on the medical resources of the society and therefore dramatically diminishes the need or possibility of economic constrictions around it. Okay, moving forward, market technicals. Really interesting to just look at the biotech sector over the last 10 years, a virtually straight line up for five years and a total flat up and down kind of choppy little flat line range bound period for five years. Now starting to break out of that. And we think a lot of reason for the good quality companies, of course, we favor certain dividend growers in the biotech sector.

A couple of things we would be concerned about with where the market leadership has been, biotech sector. A couple of things we would be concerned about with where the market leadership has been, absolutely stunning level of new flows into the NASDAQ, suggesting, we think, not only is this relative outperformance of growth over value that, you know, it had been trending the other direction a few weeks ago, that reversed. We think from a contrarian standpoint, these things are not bullish indicators for those high growth, high beta spaces of the market. On the public policy front, I yesterday heard President Trump in an interview joining the fray promising, I quote, a very good and very generous stimulus check. Further, he predicted it would happen in the next couple of weeks and that it would be bipartisan. So it sounds like they're ready to cut a deal with Democrats and

that a direct payment to taxpayers will be a part of it. Also sounds to me that they're optimistic that a bipartisan deal is getting done. And we know the number one thing on the wish list of the Democrats is direct support to states, that there may be further along to agreeing to that. I did see that New York's tax collections are down 40%. I think that there's just almost inevitability that the federal government will be providing direct support to states and localities in the days or weeks or what have you ahead. Oil closed over $40. WTI crude had reached $41.50 this morning. Also read a pretty lengthy report that the cancellations of LNG cargo orders have dramatically decreased, meaning more and more ports are taking delivery of liquefied natural gas, suggesting an increase in demand.

This, to me, is a virtuous cycle. It obviously indicates a pickup in demand, but then it also creates economic activity because the energy infrastructure of LNG is itself such an important growth engine in our economy. I mentioned the structured credit side, particularly residential, doing very well. And I think you look at the housing data and see not only expectations of substantial volume of activity, new home sales, but also that because of very low inventory, prices should be able to maintain a firmness and perhaps even escalate through this period of time.

I put a chart up at covidandmarkets.com of the Federal Reserve's balance sheet right now. It's fascinating not only to see something in the range of $3 trillion be added to the balance sheet in just a matter of months, but also to see the composition of the balance sheet. You know, we never in our lives had heard of a mortgage-backed security being on the balance sheet of the Federal Reserve until 2009. And now you can see the escalation and pickup of those mortgage bonds. And then this other little category called other.

Primarily right now in the COVID era, the other, besides treasuries and mortgage bonds, is corporate bonds, ETFs, munis, asset-backed securities, and who knows what else they'll get to. At COVIDMarkets.com, I'm not going to read them all now, but I did provide eight kind of forecast predictions from the great Byron Ween, who's a Wall Street legend. He's 87 years old now, an economic advisor emeritus at the company Blackstone. He published his view of the recovery yesterday, and I shared with you all his kind of aid forecast. I'd say six of the eight I agree with. Two I would be a little more nuanced on, but either way, interesting read just for your perusal. As I was wrapping up the recording today, the futures markets have opened and are basically dead, complete flat right now. And so, you know, we'll see what happens overnight. You know, the normal story. We'll be back at you again tomorrow on Wednesday with another edition of COVID and Markets. In the meantime,

be well, be free, and be safe. Thank you. The Bonson 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 other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice. This document was created for informational purposes only. The opinions expressed are solely those of the Bonson Group and do not represent those of Hightower Advisors LLC or any of its affiliates. Hightower Advisors do not provide tax or legal advice. This material was not intended or written to be used or presented to any entity as tax advice or tax information. Tax laws vary based on the client's individual circumstances and can change at any time without notice.

Clients are urged to consult their tax or legal advisor for any related questions.