The Dividend Cafe - Daily Covid and Markets Podcast - Tuesday May 26

Episode Date: May 26, 2020

The market was up 530 points today behind extraordinary optimism in economic re-opening and directional good news on a vaccine development (more on both below – a lot on the health side). Futures had pointed to a ~300 point move higher throughout Memorial Day,and the Nikkei in Japan surged over 500 points last night (now back above 21,000). Futures in the U.S. were +500 when I woke up this morning, and the Dow was at one point +700 on the day. We closed just a pinch below the 25,000 level on the Dow 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 brought to you by the Dividend Cafe. This is David Bonson of the Bonson Group, and I hope you all had a wonderful Memorial Day weekend. I think that our country had a much better Memorial Day weekend than had been expected as recently as just a few weeks ago. We're going to unpack a lot of that. The health data and the reason why I say some things seem to have gone better than maybe would have been expected just a short time ago.

But we're also going to talk about the market today. I guess it isn't technically Monday because of the holiday yesterday, but for the second opening day of a week in a row, you had a big move higher. The market was up almost 1,000 points last Monday and then up at one point almost 700 today. We closed up 530 points in the Dow. And I'm going to argue that the biggest factor behind it was overall optimism around economic reopening and the fact that the health data is thus far really strongly confirming the ability to continue safely reopening the economy, there is some tethering into the mere whisper of yet another promising vaccine situation.

I think those headlines have an impact both negatively and positively depending on the way the wind is blowing. But I think the much more logical explanation of today's market move is just that overall optimism on economic reopening. And by the way, the announcement on the new vaccine program had more color on it here this morning, but futures were up over 300 last night. The Nikkei in Japan was up over 500 last night. The Nikkei is backed above 21,000, by the way. And so, yeah, when I woke up this morning, futures were up 500. But again, I think that's just kind of the macro assessment of having more optimism and further confidence in the fact that A, reopenings are continuing, and B, they're happening with a reasonably benign health environment,

certainly relative to some of the more dire expectations. So there isn't a whole lot of negative news on the health side for me to share. And yet I'm searching for it every day because I want to give a very holistic coverage to the way in which we evaluate the health aspect of things. The gross absolute level of mortality in the U.S. is awful. to the way in which we evaluate the health aspect of things, the gross absolute level of mortality in the U.S. is awful. And whether or not we're already above the number or soon going to hit the number, that 100,000 person figure for U.S. mortalities COVID-related is coming.

And I'm very open to the idea that there could be more than that based on underreporting, or it could be less than that based on overly aggressive labeling of COVID. My point being, no matter what, it's just a really high and tragic number. And so that's going to maintain its place as the most distressing aspect of all the health issue. But right now, when I'm referring to more positive news, I'm referring to the trajectory of where we're headed. You had case growth yesterday of only 1.2%. Case growth was also below 20,000, which is the first time we've seen that. And if things hold for Tuesday's reporting here today, it looks like we're going to be well below 20,000 today.

The daily deaths were only 500-ish yesterday, which again, on a macro level, is by far a new low. The running daily average of new deaths has been cut in half over the last month. daily average of new deaths has been cut in half over the last month. Um, so it, you know, I look, I am skeptical of all the Memorial day data because you have holiday reporting lags and glitches and things like that. We got to kind of let some stuff play out. We're using averages on a rolling basis. We're doing that for every weekend just because we want to keep things, you know, um, I think you just get want to keep things, you know, I think you just get a more accurate read when you're running off of daily average, like trailing averages as opposed to, you know, daily numbers. But let me tell you this. New testing on Royal

Mallet Day came in at 441,000. Okay, so if there are lags or glitches, that number is going to be higher, not lower. And yet the new, so 441,000 was our new daily high for testing, and the positivity rate from that was 4.3%, which is a new low. So that's really the combination of data points, the gross testing, and the positivity ratio out of that testing that I think is primarily providing confidence. New York City, the daily new cases are down 96% from their peak level, which would have been a little over a month ago. Let's see, what else do we want to focus on? The spread in Indian Brazil, I think, is a negative. I don't see a substantial impact to some of the macro economic considerations from it. And I think there's a number of different reasons why we wouldn't be surprised about it relative to to population too, you know, that their spread is nowhere near what a lot of other highly

populous countries have experienced, but it's still a lot of people. And so there's reason to, you know, be sad for what is taking place in some of those countries. They're not, you know, experiencing the same level of containment that some of those countries, they're not experiencing the same level of containment that some of the other Western countries did. But when you look to Western Europe, for example, Denmark had aggressive reopening and their numbers are looking fantastic. The UK is actually quite behind Austria and Denmark in their reopening, The U.K. is actually quite behind Austria and Denmark in their reopening, but they really have had a substantial decrease in their case growth and their mortality growth and really a better outcome thus far than Germany and some of the other Western European countries. Germany, within Western Europe, has maintained its substantially better outcome than Italy, France, Spain.

And that's with quite a loosening of restrictions there. I do have a couple medical journals that I read through this morning, one from New England. Again, they've been just stellar. I mean, a lot of it is above my head medically, but as much as I'm able to unpack it and get some of my doctor clients to help me understand some of it, this concept about COVID being unique in its attack on blood vessels around the lungs as the primary cause of death, as opposed to more traditional mnemonic-like activity, I think has profound impact on how they treat it, but it also explains a lot about the virus. And so there is a report I

can share if those are interested around the pulmonary and vascular implications of coronavirus versus some of the more respiratory impacts that we have studied under SARS and H1N1. Then there's a study out of Princeton regarding why climate may not be as huge a factor in limiting outbreak, but understanding different susceptibilities might be, and that I thought was interesting. So again, these reports are available upon request. From the vaccine standpoint, Merck announced a large collaboration with IAVI. The reason why IAVI, which is a big research organization, is interesting is they were the ones who successfully created a vaccine for one of the strands of Ebola. And so with that kind of track

record, this kind of funding, and then that manufacturing and distribution capacity behind it, this would show a lot of promise if it gets successful. Okay, we're going to move to market technicals. Look, even before today's rally action, the S&P was right up there at its 200-day moving average, and surely today went ahead of that. It makes it very hard for the bearers who are technically inclined to reconcile the bearishness with continued short-term bearishness unless they just abandon their belief in technical analysis, which is generally what I think a lot of technicians do when the charts go

against their conclusions. I think a lot of technicians do when the charts go against their conclusions. The trading range thesis, which we hold to, that there's some level on the low end and the high end and that the market is likely to stay between for some period of time, kind of a sideways thesis, I think has really been playing out. I mean, it's subject to change any anytime on the high end or low end. But something between $22,000 and $26,000 has been our call. We got above $25,000 today. So the range itself is inched higher, which is technically very constructive.

But that sideways thesis, I think, is still very operative. Now, hedge funds are starting to buy long. I think is still very operative. Now, hedge funds are starting to buy long. The Goldman Sachs prime brokerage report this morning had leverage, net leverage up 3.8%. Fast money in the market does leave it susceptible to fast money leaving the market. And with leverage coming back in, you know, that's something we have to watch. But right now, I mean, the leverage isn't anything excessive. It's just reflecting more a sign of normalcy. Now, if I wanted something that I don't like from a contrarian standpoint, it's the report that, like, for example, Robinhood has experienced, which is a lot of smaller clients, less sophisticated, smaller size investors reporting a huge increase in accounts buying kind of big mega cap growth stocks, big high name tech stocks. You can guess who some of these names may be. And, you know, that's all well and good until it isn't. But I would just point out that there's something about that that leaves me a bit nervous. there's something about that that leaves me a bit nervous. By the way, as I'm sitting here recording, we did just get the update for daily test was at 302,099 today. So lower than the

last several days that we had seen. And then in terms of positive test from that, it looks like, wow, only, that's really low, only 16,000 out of 302. So I'm doing this right in my head, but I mean, you're going to have an extremely low positivity rate there. Let's see, 16, you know, something between five and 6% again. 16, you know, something between 5% and 6% again. So I'll get all those numbers plugged into the covidamarkets.com. But again, something between 5% and 6% is a positivity ratio on over 300,000 of tests today. So more good news there. Public policy, a few interesting things in the wind right now. I think this idea of the $600

a week federal subsidy on top of state unemployment is dead. I don't think that there's going to be the political will to extend it. And that's a good thing because I don't think it will be good for labor markets if they were to extend it. But I also understand that that is where there's a big hurting segment that is in need of some wage support. So one of the ideas that I had thrown out that I've heard from others that I think was heavily being discussed by policymakers was the idea of saying that they're just going to continue to pay it. Even if someone gets a job, they'll just let them still get their benefit through the end of the period that they would have gotten anyways. It doesn't cost the taxpayers any more money, but it doesn't give them an incentive to not go back to work.

Well, now I heard Larry Kudlow, who is a the idea of a back-to-work bonus where they would try to address that disincentive idea with a one-time payment but not the continued 600 a week. week supplement, so less money and for a lesser period of time, but keeping it going along with when someone does get a job. So it's not giving people this incentive to receive greater money to not work, and yet it is not actually giving people access to public treasury funds that were really intended for the unemployed. It's kind of a middle ground spot. As best I can tell, and I saw Senator McConnell say this is just not going to happen, they're not going to extend that 600 a week as is the way the House wrote it. My best guess is they're going to address the 600 a week, and one of these competing alternatives or supplemental substitutes will end up getting traction.

So you won't have the whole thing die and you won't have the $600 a week get extended as is. That's my best guess at this time. We're watching it closely. The SBA did publish the rules for forgiveness of the SBA loans. And again, they don't yet reflect the changes that we think are coming to the new bill including what the senate agreed to last week the number i had been given by a u.s senator was that they were going to extend the amount of time employers had to spend the money from ppp to 16 weeks it had been eight weeks i'm now um hearing that they're pushing for 24 weeks. So I will have to keep an eye on that.

24 weeks is almost half the year by which employers would have to spend the PPP money. That would probably go a long way for these small businesses and being able to figure, give them the flexibility and still maintain forgiveness of that money so they weren't having to pay those loans back. By the way, the payroll tax cut, as best I can tell, is still on the table. I mean, I know at least Larry is still talking about it and the White House is still talking about it. I just don't hear anyone else talking about it. And several people in the Senate are kind of speaking out against it.

So we'll see where that goes. Oil was up over 3% on the day. WTI crude closing over $34. The Russia energy minister predicting the world oil markets may rebalance as soon as next month, which is just extraordinary. I would love to hear a list of all the experts who were forecasting that over the last six to eight weeks. In the housing world, and I'll go ahead and get ready to wrap it up here. I do want everyone to go to covidandmarkets.com to read the whole report today. I need to do a little more work in the days ahead, unpacking some of this regarding Fannie and Freddie.

But I think that the post-COVID relationship between government and Fannie and Freddie is going to be really interesting because there was absolutely significant progress out of the Trump administration to kind of untether the taxpayers to these GSEs, which there had been no progress on that, you know, in over 10 years since financial crisis. But I think that movement towards this kind of quasi-privatization has taken a big step back from COVID and that a lot of media outlets and think tanks and others are saying, look, the heavier hand of government and housing is needed, as we saw from COVID, because it's one of the only policy tools they have available by their control over mortgage finance that gives the tool to

government to quickly extend support or relief to a lot of the public, which is fair enough. But I don't know. When they say we wouldn't have a mortgage market at all if it weren't for Fannie Freddie right now, on one hand, I think, okay, well, maybe that's true. Maybe it isn't. And on the other hand, if it is true, is that really a good thing? Or does it speak to a sort of moral hazard that really needs to be addressed? It's a complicated subject, but I definitely think it's worthwhile for us to see because, again, the relationship of housing and mortgage finance to the overall U.S. economy is still substantial. And that was something that we thought was going to change a lot after

the financial crisis, and it didn't. In a lot of ways, it was doubled down upon, albeit with very different risk and very different construction. But my point being, I think this warrants an important analysis as to where Fannie and Freddie are going to be after COVID. By the way, this is just crazy. New home mortgage applications application so new purchase were up 18 percent last week versus a year ago okay so and again that's almost entirely in fanny freddy type loan product meaning the loan amount would have been 510 000 or less so just a substantial um you know substantial strength formation in housing. The only states seeing substantive decline, by the way, were Massachusetts and Hawaii. Other than that, it was pretty much positive, or if it was negative, it was very modestly negative.

From a Fed standpoint, I think you really are baking in an expectation you had vice chair richard clarita um speak several times over the weekend about september later in the summer later in the fall being sort of a timeline let's call it three to four months out where they want to look again at what other policy tools may be needed. He is continuing to talk negatively on negative interest rates, but they are certainly talking about how yield curve control needs to be looked at and understood better. I do have at covidmarkets.com charts on some of the increase in airline travel, hotel occupancy, and restaurant reservations. And I think that the half full and half empty perspective is this. All the numbers are off of atrociously low numbers, and all of

the numbers are quite nicely off of those low numbers. So I'll use the airline as an example. In the last five weeks, domestic airline travelers have tripled from where they were five weeks ago. So that sounds pretty good. But year over year, we're still down 87%. But five weeks ago, we were down 96%. So half full, half empty. But again, I want all that data available to understood both the trajectory of economic recovery and the depths of economic distress. So we shall continue watching all of the above. I very much look forward to coming to you again tomorrow, Wednesday, with more daily COVID markets. Please, in the meantime, read COVIDMarkets.com.

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