The Dividend Cafe - Daily Covid and Markets Podcast - Tuesday, May 19

Episode Date: May 19, 2020

The market was down 100 points or so in pre-market at 3:15am today, and stayed close to flat or modestly down until the open. It bounced a round a bit, then found the flat line and stayed there most of the day, before then seeing a substantial sell-off in the last 45 minutes of trading (see chart below). A report circulated just before the market sell-off that yesterday’s positive report on early phase vaccine trials may have been incomplete in some of its data. If that was indeed the reason for the sell-off, then these markets are a lot more susceptible to pops and drops around [silly?] vaccine headlines than I would have thought. 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 the Dividend Cafe. This is David Bonson, Chief Investment Officer here at the Bonson Group and kind of an interesting day in markets, you know, coming off of that massive rally, nearly 1,000 points yesterday on Monday. And then today, the market, when I got up about 3.15 this morning, the market futures were down 100 points and they kind of stayed there, went flat, down 100, right in that range for a few hours.

And we dropped a bit at the open and then kind of came back and really stayed pretty close to the flat line most of the day. And then in the last 45 minutes of trading, markets started selling off and closed near the lows of the day, down about 350, 400 points. And I believe that most of that has got to be related to this report that came out right around that time indicating that some of the positive indications of a vaccine yesterday may have had some incomplete data and that although the numbers are the data points and testing results from this phase one trial don't look bad. There are still possibility, there's still, you know, work to be done. I read the report that came out today and it didn't say anything that I thought we didn't

already know, but I don't know. I'll reiterate my point that the market doesn't need a reason to rally, doesn't need a reason to sell off because markets are markets. And if it is true that the lion's share of that 1,000 points yesterday and the lion's share of today's 350 points or whatever is related to vaccine headlines, then I guess just expect the market to be more vulnerable to short-term headline moves around vaccine than I would have thought. That may settle at some point here.

As for overall health data, though, case growth was 1.45% yesterday, and that's still very, very low from where we are. But we're still kind of waiting to see that number decline even more. On an absolute basis, new cases were over 21,000. So getting that number to get below 20,000 and decline from there is still stubborn. But some of the increases yesterday were from a couple states that did not report on Sunday. And I'm having to remind myself every Monday and Tuesday, and I guess I need to do the same for you all, that the numbers are weekly pretty lumpy at the beginning of the week because of the way in which weekend data is compiled from various registries. Florida's data, though, is definitely worth watching because they did have an increase in cases. They're one of the states that had reopened.

And so a lot of people are watching that. I'm expecting there will be some new cases in these states that reopen. The issue is just whether or not, I mean, obviously there's sort of the cost benefits analysis around that. But then you look at Georgia and Tennessee, which were leaders in the reopening effort, and they have not seen case growth. It's been quite benign. And even Texas, which I wrote about recently, they were down 9% yesterday versus the Monday prior. So we're going to watch Florida and anywhere else where it seems relevant. One of the reasons that I've been optimistic about the states here in America

reopening economically in terms of what to expect from their health data is that I followed it so closely where there's been a head start from European countries. And again, that data continues to look very positive. Germany, France, Spain, particularly Austria, Denmark. Really good foreshadowing to what we hope will be the case in the United States as well. On a different note, it hasn't been a reopening, but Mexico and Brazil are certainly seeing increases in deaths and case growth. They did not have a significant exposure per capita to COVID early on. So it stands to reason that some of this case growth would be late to the party, so to speak. But I am interested to watch how this case growth spreads because of both Brazil

and Mexico being warmer weather climates. It will be interesting to see if there's any detectable data that we extract out of these sort of equator-centric countries that may tell us something about the virus's susceptibility to warm weather. The outlier concerns some have had, by the way, around COVID being able to be reacquired, someone could have had it recovered, then reacquire it and even be able to transmit it with a second bout is really kind of dead and gone now as a theory. There's a study that was done by the Korean Center for Disease Control. I think it was 285. Yes, it was 285 patients that tested positive after their disease had been resolved. And in the ongoing testing, they found no infectiousness from those and no ongoing symptoms or discomfort.

So very encouraging there. As of the time I'm recording here, I do not yet have the new testing data from Tuesday and what the positivity rate is. So I'll share that with you tomorrow. But again, we've been on quite a robust growth rate of new testing being done in the States. And so we hope that trend will continue today. Moving to market technicals, yesterday's massive market rally was an 8 to 1 advance to decline ratio. Yesterday's massive market rally was an 8 to 1 advance to decline ratio. It's the eighth time now since the March 23rd bottom of the market that you have seen breadth in the 99th percentile.

A quote from a technical analyst that I follow on a daily basis. Clusters of these days are historically rare and are reflective of the acceleration wall often found coming off a major market low. So there is a bullishness certainly in seeing these kind of high breadth days. The internals overall have been very good. Yesterday was sort of remarkable. The delta between high beta stocks and low beta stocks in a single day, it was the highest delta

between the two groups in 11 years. So very positive market internals in the rally yesterday. And of course, we'll see what kind of technical information we can extract from the sell-off in the last 45 minutes of today's session. But the worst performing quintile of stocks from the February-March drop was by far the highest performing yesterday. And then it kind of just reverses from there, you know, each quintile going down. So when you see those stocks that are most beaten up give the biggest performance in a given rally, that indicates a setup for some pretty strong recovery and strong market internals to consolidate around hopefully a higher low and bottoming process in the markets. The 210 curve is now 55 wide.

That means basically that there is 55 basis point, 0.55 percent of spread between the yield on a two-year treasury and the yield on a 10-year treasury. That would be wider than we have seen and relatively close to breaking out into kind of a new level. That further steepening in the yield curve would be very bullish for equities and indicate some setup for greater risk appetite. Speaking of setup for risk appetite, the bearish sentiment from retail investors, I think, continues. I've talked in the last couple of days about heavy short position from futures speculators, often which are not retail investors.

Those are more sophisticated investors. And when they end up having to cover shorts, it produces a lot of force of buying in the market. And that speculative short position has stayed very high. But now today, I got the report on monthly equity ETF flows. And to see the net outflows from stocks in the month of May so far is very encouraging from a contrarian standpoint that net-net over $8.25 billion has flown out of equity ETFs. You say, how is that encouraging? Because contrarians work off the general rule of thumb that the sentiment of the crowds is always a better reflection of yesterday's news and not tomorrow's news. better reflection of yesterday's news and not tomorrow's news. Then finally, on the market technicals, copper, for the extent one believes, it's kind of an old school belief and it's had moments of being quite apropos and moments where it hasn't held up as well. But to the extent one

believes that copper is a leading indicator of industrial activity and therefore economic activity, copper has made quite a bit of a run here, just recently got back above its 50-day average, moving closer to its 200-day average. And you see pretty significant percentage moves higher in copper, indicating what it indicates to you. Okay, public policy. I did speak with one of my White House sources this morning, and I've continued to follow the story of whether or not the Treasury Department is indeed open to further modifications in the PPP program. I have written over the last couple weeks how Treasury Secretary Mnuchin was somewhat

opposed to the idea. There's been increasing pressure, though, that a couple of the points of the program could be considered a glitch or maybe just, you know, not reflecting all the information that we now have. Well, I'm now convinced that the White House and Treasury Department will support these modifications, primarily centered around flexibility and the scope and the timing of the loans taken, meaning that people may have a little less requirement for use of funds around payroll and that they will have more time with which to use the funds based on how the lockdowns themselves have lasted longer. Trying my best to get a feel for what is likely to come out of the next stimulus program when you look at the House's program that was voted over the weekend and what some of the pushback may be from the White House, from the Treasury Department, from Republicans in the Senate.

I'm of the guess, and some of this is based on pretty good information, that the direct payment to taxpayer program that was a part of the first stimulus will end up getting renewed. They'll do another round of direct payment to taxpayers. And I don't imagine there'll be a lot of Republican support for it, but I think there'll be enough Republican votes to get that into the bill. And then I think the way this is being set up is pretty basic, that the number one priority of the Democrats is direct support from Treasury to states, and I guess local governments have been included there as well, and that the number one priority for Republicans is liability protection for businesses, and that each party will end up giving the other party what they want in exchange for the other. Those two things will be the major quid pro quo of the deal. Does that mean that the Republican or White House interest in payroll tax holiday will get sacrificed? Not necessarily, but that's my read on it now, is that there's

going to be one big ask and one big get from both sides. And I think it's going to come down to support for states for the Dems, liability protection for the Republicans. The issue that would be most open-ended and probably have the most significance to the jobs recovery will be financial incentives embedded in the unemployment insurance supplement, this $600 a week extra that the feds are paying out on top of the state unemployment benefit. I think that what's going to happen is a have your cake and eat it too, that the Republicans will end up agreeing to extend the $600 benefit, but allowing it to be paid to those who go back to work. So in other words, it will maintain as a payment and stimulus, but it won't serve as an

incentive to not go back to work. And that will be interesting because on one hand, Republicans will be getting something very important to them out of that. And that is, you know, eliminating an incentive for one to financially not go back to work, which is bad for the productivity of the economy. But then on the other hand, they'd be voting for an even greater expense. So I think that's going to be very interesting to see how that plays out. You probably didn't notice because it wasn't on the news at all today, but the forward contract for oil rolled today. The next month's forward, we rolled from the June expiration to the July expiration. And the reason you didn't notice is we didn't go negative $40 a barrel or all of that

kind of drama that we experienced almost a month ago. And in fact, WTI prices have held up rather firmly right above $30 a barrel. That contango from the June to July, July to August, August, September, you know, has really that front month contango has really largely come in. And a lot of it has to do with the fact that U.S. rig count is down so much. It's now down 66% year over year, which rigs are at a lower level right now, active rigs, than we were even at during the 2015-2016 debacle. And so I suspect rig count has bottomed and that some balancing act of supply reduction and generating adequate productivity to meet the cash flow needs of some32 a barrel, but there are more companies that can survive at $32 a barrel.

And $32 gets closer to $40 where you have an awful lot more financial equilibrium available to shale producers. So we're headed in the right direction there. Um, but you know, I don't, the field production, it's fascinating. You look at 11 and a half million barrels that we're producing nowadays. It was over 13 million barrels at the beginning of the year. Okay. So that's quite a bit of production that's come offline, but 11 and a half million was what we were doing at the beginning of 2019. So most of our market-driven organic decrease in oil supply in the last month and a half has really just come from the added production capacity that we've put on since a year and a half ago. Something to think about. I'm going to talk a lot more in

Dividend Cafe Friday on the overall state of the oil sector. Okay, housing data, 891,000 housing starts. We were estimating 927,000. We've been averaging about 1.3 million. So a few hundred thousand less housing starts in April than has been the trend. Building permits were a little bit higher than expected. I mean, by 7,000, it was supposed to be around a million. It ended up being a million plus 7,000. I have a couple charts at covidandmarkets.com because it really did cover every geographical region. And it's not a huge surprise. But again, I think that the pent-up demand, I mean, evidenced by the fact that you see more builders pulling permits than you see housing starts.

And this is in both multifamily and single-family residents. I think there's a lot of pent-up demand from builders to go facilitate building a new product. facilitate building a new product. Fed News, both Chairman Powell and Secretary Mnuchin appeared via Zoom before the Senate Banking Committee today. You know, it's interesting. I thought Chairman Powell, when I was listening to his testimony this morning, sounded a little more hawkish, a little more anti about further support to the municipal bond market than I was expecting. And it was Senator Menendez in New Jersey who was kind of asking him about this, teeing it up for him, and he kind of wasn't having it.

He was reminding him that they are there to be aggressively supportive of short-term liquidity, including in the muni market, but as far as the idea of extending maturities in bonds that they may come by and providing support to that part of the market, that that got more into funding support, not just liquidity. And he saw that as outside the Fed's mandate. But here's the thing. The muni market rallied quite substantially today. potentially today. And so I believe that the muni market may have heard what they needed to hear, which is when Powell did affirm that they could and would expand the municipal program if needed. So the fact that he then he said that and then went on to talk it down, I guess I'm not supposed to read too much into that when the market had meaningful movement higher today. He affirmed

that the Main Street lending facility should be ready to go in June. And I continue to be of the mindset that that's a pretty big wild card in our economic recovery. Because on one hand, if there is really substantial bank buy-in for the program. Remember, the banks have to keep 5% to 15% of the risk of these loans on their balance sheet. That's, on one hand, not very much. That's a substantial amount of Fed support the banks are getting. But on the other hand, it is still some. And so we're going to get a chance to really see what the bank's appetite is, We're going to get a chance to really see what the bank's appetite is, their view of the overall economy by what kind of traffic of activity we see in the main street lending facility from banks. But I got to say that it could very well crash.

It could very well get no takers if the banks don't really want to go near it. So it's not like the free money sometimes people talk about getting from the Fed. There's question marks as to what the response to this will be. And I think it could be a very potent tool to small business in the economy, and it could be a whiff. So we're going to have to keep watching it. Okay, Fed, housing, oil, technicals, I think we covered it all today, public policy, and obviously the health data. There'll be a lot more to bring to you tomorrow, Wednesday, May the 20th. But in the meantime, for tonight, Tuesday, thank you for listening to COVID and

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