The Dividend Cafe - Daily Covid and Markets Podcast - Tuesday, May 5

Episode Date: May 6, 2020

The market was up 300+ points most of the day today, and just as the sell-off faded yesterday, the rally faded today, with the market closing up 133 points (though the S&P was up 34 bps more than 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 in Markets podcast brought to you by Dividend Cafe here at the Bonson Group. This is David Bonson giving you the update on Tuesday, May the 5th. The market was up over 300 points. Most of the day actually got up 400 points early on. And just as yesterday's sell-off faded, the rally faded today. The market closed up 133 points. And in fairness, the S&P was up 34 bps more than the Dow, but the market did give up about 250 points in the end of the day.

And at dividend, excuse me, at COVID and markets dot com, we have the chart of yesterday's Dow action intraday all day long being sold down and then rallying to the end of the day. And today's market action all day long being up and then selling off into the day. and today's market action all day long being up and then selling off end of the day. Now, needless to say, these kind of late day moves make people wonder what exactly was behind them. But from the intraday standpoint, yesterday through where we closed today, the market is up 500 points from its intraday low on Monday. I would guess largely responding to rising oil prices, which I'm going to talk about more in a moment, but also just definite increasing optimism around various states' reopening plans.

From a market technical standpoint, we wouldn't overread the comeback late yesterday or today's resilient action. I don't think that there is a clear message technically in either Monday or Tuesday's movements. But I do think that there's a rather clear signal in the technical strength within the energy sector in recent days and even recent weeks. First of all, just on an absolute basis, it having passed its 50-day moving average and being able to stay above that level, not yet, of course, close to reaching its 200-day moving average using the energy sector ETF as a bellwether, but also just energy relative to the S&P 500. It's been quite an impressive move here after lagging the index so substantially throughout March and early April. I think our

theme that finding value within the market is more important than finding value in the market index itself right now is enhanced by a chart I have at covidandmarkets.com today, where you can see a great deal of financial, energy, and REIT companies that have not moved right now past their December 2018 levels. And so you have the highest percentage of stocks in those sectors that are still beneath December 2018 levels, where you have a very minimal percentage in some of the other sectors, just pointing to dispersion of results and relative value on a sector allocation standpoint. On the health front, yesterday being Monday was the first day we've had less than 2% case growth since the health pandemic began. Very encouraging.

Two things I would note is that Germany's case growth, which was 2.9% daily when they began easing lockdowns, and that, by the way, that 2.9% is higher than ours is now as far as daily growth percentage of new coronavirus cases. But their case growth after this easing that they had done, and it was reasonably modest easing of their lockdown restrictions, but it's now less than 0.5% per day. And so the lack of case growth where restrictions have been eased is an overwhelming argument for easing the lockdowns. from Pantheon Macroeconomics available at covidandmarkets.com showing rising test numbers, declining positive tests, just utterly collapsing New York City hospitalizations than God, modest decrease in the daily U.S. deaths.

We still want to see that number get lower. And again, the daily case percentage and absolute cases on a day-by-day basis subtracting quite a bit. The testing level for today Tuesday appears to be a little over 259,000 so you know much higher number over the last week or so than we had seen in the couple weeks prior to that still below where we want to be which is somewhere around 300,000 per day. But there is sometimes a reporting lag. So as I'm recording here now, it's possible that number will go a little bit higher. But then today we did get another low on the positivity ratio,

meaning the number of tests that were positive divided by the number of tests that we did total. That number was 8.6%. It had been 9, it had been 10, it had been 11 in recent days, but for weeks it had been somewhere between 18 and 22%. So we've seen that positive ratio coming way down. The controversy around various models that have consistently gotten various conclusions wrong is fair, particularly if one entered the fray having a higher view of models than, for example, myself would have had. It's been more on the financial side than health models, but doing models and analyzing models for a living, I have a very high understanding, I think, of how embarrassingly bad most models are at predicting anything.

And so the fact that right now there's a lot of dispute and conversation around some of the rather substantial revisions and misstatements and so forth, the different models seems reasonable. As far as some good news, there are indications, and again, it's very early, if you reach out to And again, it's very early. If you reach out to us at COVID at the Bonson group dot com, if you'd like to request this study. deletion that took place in SARS in 2003 has been evidenced in some genome sequencing that they're doing here on coronavirus of COVID-19. And that same deletion pattern that existed in SARS, it was something that dramatically weakened the strength of the virus previously. So even now in this case, where this mutation has been evident, the people were still somewhat sick. But if this deletion is evident in more genome sequencing, it will be reason to feel encouraged that the virus may be weakening, as was the case when this was detected in SARS in 2003. But again, reach out to us if you'd like a copy of this study. Moving to the public policy front,

I am increasingly bullish on the impact that the Paycheck Protection Program is having on the economy. There seems to have been a lot of media attention on the less than 0.3% of the funds that went to publicly traded companies, not the 99.72% that has thus far gone to small businesses. But some analysis that's been done that I've studied tooth and nail and I find very cogent

is indicating a preservation of 30 million jobs, if not more than 40 million jobs, from the Paycheck Protection Program efforts. So we're watching that closely and hoping for the sake of those individuals and their companies and their customers and their vendors, and of course, the overall macroeconomic assessment, we're hoping that this will soften the blow of the damage that's been done from these four shutdowns. When we talk about a potential for stimulus 4.0, I am in daily communication with policymakers, administration officials, to try and get a feel for what may be coming, what the strategy might be to see it actually get enacted. The administration is revealing more of a plan later this week, and that plan has been primarily constructed from my sources and media reports that it's been primarily constructed by Chief of Staff Mark Meadows, Special Advisor Kevin Hassett, who is formerly the Chief of the Council of Economic Advisors, and then Larry Kudlow, who is still the National Economic Council Director. What's pretty clear is that a suspension of the payroll tax is the centerpiece of their plan, and this does align with plans I discussed at the NAC two months ago before COVID lockdowns

had even elevated. Apparently, they do plan to push for additional business deductions, acceleration of equipment expense, things like that. And then the tax credit idea for onshoring manufacturing is something I thought might be later on in the plans. We're hearing more and more that it's going to be put into phase four, as opposed to kind of a phase five type item. But again, what we do know, at least from Senator McConnell and others, is that liability protection for businesses is the sort of sine qua non that

they're going to build their plan around. That will be the red line. And so I think it's very important. I think it is likely to happen, but we of course have to see this whole process. It's going to be a long time. I am surprised that Secretary Mnuchin is firming his stance against loosening initial criteria of how the PPP loan funds are spent to achieve forgivable loan status. There's been a lot of effort from the hotel and restaurant industries, I think rather compelling effort, to loosen the 75% payroll requirement to provide flexibility for certain sector use of funds. And I think Secretary Mnuchin has publicly reaffirmed the requirements as presently mandated by Department of Treasury. I think he's done it because they believe that they need to keep the pressure on that the funds be used for maintaining payroll,

which is certainly the primary funds. But I think you can make an argument hotel and restaurant industries will long term be able to employ more people with other financial priorities right now. All that to say, we'll see how that plays out. I was not surprised that he is supporting the IRS ruling that expenses paid from PPP funds should not be tax deductible because again, the money in from the Paycheck Protection Program, even if the loan becomes forgivable, is not going to be taxable. So it doesn't seem to make a lot of sense that the expenses paid from it would be deductible. I think it would be one or the other, and that was the position Secretary Mnuchin had.

Oil prices were up over 20% today. They had been up over 10% in the overnight futures. The firming up here for both June and July contracts speaks to some degree of normalization in oil markets. We'll see if that lasts through the June settlements. But the theme of reversion as the worst March performers continue to show signs of life, I think makes a lot of sense here. Oversupply concerns are abating to some degree. Weekly inventory increases were reflected their smallest weekly gain in two months. So there's some charts at COVID markets, again, kind of reinforcing this basing pattern that

we see in both the June and July forward contracts. The normalization of the oil curve is very encouraging. And by that, I just mean that contango from month to month as these forwards roll, it had been the most severe in history. And now you still have contango each month, uh, is a little bit higher than the month before, but that's the way you'd expect it to be. But there's about a dollar gap in oil prices, not $40 or, you know, eight, 10, 12, as there had had been month over month. And then when you get all the way to going into 2021 and later out,

you see it move up into the 30s. But as of right now, the forwards are pointing to something into the mid to high 20s month by month. Pretty healthy looking forward curve. Just want the whole curve to be higher priced than that as demand comes back. I do believe that the evidence is rather crystal clear at this point that Saudi and other OPEC countries took advantage of the production cut agreement to flood the market with oil as it left a little free period in there by the time the contract was signed or the agreement was agreed to prior to it kicking in on May 1st.

And we now know there was 18.9 million barrels per day produced in April after the agreement was signed by Saudi, Iraq, Kuwait, and the United Arab Emirates. That is 2 million barrels per day more than had been produced in the month of March when we initially went into this whole debacle. So there seems to be clear more and more capitulation day by day of some of the draconian measures around the beaches and even plans around job opening. There was encouraging news that they are expanding some of the decision making at the local level as far as some of the businesses that will be allowed to reopen here in what they're calling phase two. In Arizona, salons, barbershops are opening any day now. Elective surgeries have resumed. Non-essential retail will be reopening any day and dine-in restaurants will reopen next week. Florida will have their stores reopen, including restaurants, to a 25% indoor capacity

next week. And we'll see. More and more states make these announcements. Of course, there's already about 15 states that are into that phase already. So ongoing acceleration of plans for states to reopen. I will leave it there for this week, excuse me, for today. I do hope that you found this useful information. We always want you to go to COVIDandMarkets.com because that's where a lot of the visual reinforcements can be found. Reach out to us at the Bonson Group with any questions you have. And please have a wonderful evening. Be safe, be well, and be free.

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