The Dividend Cafe - Daily Covid and Markets Podcast - Wednesday June 10

Episode Date: June 10, 2020

The market was all over the map today, with futures up last night at bed time, flat this morning, then up, then down, etc. This is today’s intra-day chart for the Dow – a snooze fest compared to March volatility, of course, but rather substantial up/down movements as far as normal market days go, closing near low levels of the day. 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. Well, hello and welcome to today's COVID and markets missive brought to you by the Dividend Cafe of the Bonson Group. It's Wednesday, June the 10th, and we had a really rollercoaster kind of day in the market. I almost feel guilty saying that because if I will forever make things relative to the month of March, then nothing's going to

feel roller coaster-ish. But certainly by normal market standards, I put a chart up in covidandmarkets.com today showing the kind of up and down intraday movement. And it was a roller coaster day by normal standards, just not by March standards. But the futures were up last night when I went to bed. They were flat when I got up this morning at about three o'clock in the morning. And then before 6.30am when markets opened, they had gone kind of up and down a bit. And they did that throughout the day. We went straight down in the markets and then kind of came up and sort of held a low level, flat level for quite a while. Then when Chairman Powell came to address the Federal Open Market

Committee kind of post-meeting summary, do his monthly press conference, the markets dropped a couple hundred points, then went up a couple hundred points, and then bounced all around for the next two hours and finally closed pretty near lows of the day, then went up a couple hundred points, and then bounced all around for the next two hours and finally closed pretty near lows of the day, but not without a really interesting roller coaster for two full hours. Now, I don't think there's anything relevant to that up and down volatility other than just that the people sitting there trying to trade around a Fed press conference are not the brightest folks in the world,

and so this is not something easily tradable and you get a lot of uncertainty and a lot of stupidity and markets bounce around and so forth. But let's unpack some of the Fed stuff in a moment. For the health data, just quickly, case growth yesterday was less than 1%. quickly case growth yesterday was less than 1%. And absolute case growth was 18,400, which was down 21% from the same day a week ago. But if you recall, same day a week ago, we had a spike from that Massachusetts reporting anomaly. So still down, but you know, adjusted for normalcy if such a thing with this data reporting exists. It wasn't quite so significant.

Here's the key takeaway. This is the fourth straight day of slower case growth than a week ago, and that is the case despite 8.7% increase in testing over that same period. And so there are multiple charts at COVID markets that are reflecting. You can see where there's a little bit of an increase in cases in Utah and Nevada. You can also see what that means. 150 new people here, 200 here. The numbers are very, very low. But then most importantly, you're seeing the decline, hospitalizations, decline in mortalities, and the positive case growth collapsing, even as the testing continues

to skyrocket higher. And as I'm recording the podcast right now, I don't yet have the new testing data from today, Wednesday, but we'll get that plugged into the COVID markets. And we also, of course, we'll have you updated tomorrow. I think the following tidbits about Europe are helpful based on the questions that exist about our stateside economic reopening. The average daily new infections in Europe are down over 80% from their April highs and still declining. They're not the most significant countries in Europe, but to the extent that it is telling the story of what's going on

across the continent, Croatia, Hungary, and Cyprus have all had zero new cases, none over the last several days. Now, more significant countries, Germany, France, Spain, and Italy, all had different levels of magnitude in their peak COVID exposure, but in all cases, the daily new diagnoses are the low hundreds, not the many, many thousands per day that we saw a couple months ago. And so this is a post reopening data point. There's no doubt that risks remain and large events with a super spreader contagion event should not be dismissed as impossible. I don't know that there's much that can be done about it, but I certainly understand the fact that that risk exists. But the markets believe, and frankly, I believe that they are right about this, that A, the worst of COVID is far

behind us, and B, where there are various pockets of resurgence, which we hope to prevent and or mitigate, they will not allow for a second shutdown of the economy. Europe and Asia are providing more and more support for both of those views. By the way, reach out if you're interested in, it's a very high level read, but the Europe-based study and there's other reporting out of 23andMe and some other data, well, conclusions from various studies about the role that blood type plays, both in the susceptibility one has to COVID and then the severity of one's COVID one may have. In a nutshell, there seems to be a growing belief that type O blood is particularly protective against COVID and that there are

variations in the ABO gene that really play heavily into one's susceptibility and also the severity that one may get. So I have a copy of medical report that I read this morning. It was a tough read for me, but I'm happy to share that if you email COVID at thebonsongroup.com. Then just in terms of where the health data interacts with the economy, and I'm using professional sports leagues as an analogy there, Major League Baseball's players union has countered the owner's proposal. The players union is asking for an 89-game season, slightly higher than what the owners were projecting,

which was half of the norm. But then they're demanding contract level pay with pro rata number of games played. Look, it's a very thin thread right now, holding on to having any major league baseball season. This is what I kind of suspected could be the case with their union. But I don't know if this is going to get done or not. We will know in a couple of days, I think. But I don't know if this is going to get done or not. We will know in a couple of days, I think.

From a market technical standpoint, you certainly should not be surprised if a little bit of steam were to come out of the equity buying pressure relative to where levels have been in recent weeks. But I will say this. Aside from various short-term momentum indicators that technicians clearly care about. It's the fate of credit spreads that I think tells us more about both economic fundamentals, but also risk appetite. Probably more than anything a technician may be watching on the equity side. The lower the credit spread, the healthier the environment for risk. At various moves higher in spread since the March peak, the highs have consistently been lower than the prior high. And a sort of ceiling was formed in earlier mid-April around the time the Fed announced the details of their support to the corporate credit market.

So if we're about 500 to 550 basis points wide right now over Treasury, I can only say that for me, that represents what I think high yield should always trade out. I think that when it gets to 250 or 350, that's too thin. It doesn't recognize enough risk. So if we were to settle at 500, 550, I think that sounds like a very healthy new normal. But 250, 350 was where we were before COVID. But the fact of the matter is back at $900, $800, $1,000 at those high levels in March, April, we're well, well better off now. That indicates some path to normalcy for equity markets to the extent that it speaks to the overall appetite for risk. I also put a chart, by the way, at COVIDMarkets.com showing the consumer staples sector

relative to the S&P 500. And I'm encouraged to see consumer staples underperforming the S&P. Their level is at a very low mark over the last nine months relative to the overall market. And the reasons I'm happy to see it is it indicates to me that one may not be overpaying to invest new money in the consumer staples sector right now, an area we like a lot, great dividend growth opportunities there, and generally pretty middle of the road risk and reward characteristics. Public Policy Front, a lot of people speaking these days, panels and committees and things like that. So Secretary Mnuchin and the SBA Administrator Jovita Carranza, and I follow Jovita on Twitter heavily, but I am not familiar with seeing the verbal articulations and whatnot. So forgive

me for the name pronunciation. But again, just kind of a standard reiteration of the efficacy of the PPP program and their plans for implementation of the new flexibilities that have been signed into law. Labor Secretary Eugene Scalia did come out saying he opposes extending a $600 a week additional federal unemployment supplement. It's set to expire at the end of July orweights out to kind of set the table to push back on that extension, which would probably be very good for the unemployment rate to not see that extended and maybe try to address the social aspect in a different way. Then finally, FHFA had Mark Calibria came out supporting extending the ban on foreclosures and evictions, I think probably just for another month. I can't imagine he was envisioning much longer. But again, the Federal Housing and Finance Authority has done a lot in the last few weeks to try to bring some clarity around that whole issue of mortgage forbearances and what it means to investor pools.

Speaking of which, Ben Carson was also asked about that. He's the secretary of HUD. And I think this speaks to a lot of our thesis around the structured credit space that he said, and I quote here, Ginnie Mae expanded its pass-through assistance program to help address potential issuer liquidity challenges caused by borrower forbearance requirements implemented by FHA and other federal mortgage insurance programs. We provide last resort financing to cover the difference between available funds and scheduled payment to mortgage-backed security holders. This timely payment of principal and interest to MBS holders is consistent with Ginnie Mae's guarantee. It's essential to liquidity of our mortgage market, confidence for investors, blah, blah, blah. One of the great reasons we had such a bullish thesis on structured credit a month and a half,

two months ago as that space was so dislocated, is that we did believe policymakers would have to address the fact that they left a hole in this part of the market that seems to have been progressively getting filled in more and more. I still think it has more room to go. so we're getting filled in more and more. I still think it has more room to go. Speaking of housing, another record, not weak in terms of new mortgage applications, up another 5% versus the week prior.

And we're now actually up 13% where we were a year ago. And that's with a three-month shutdown of the US economy in between. Average 30-year fixed mortgage right now at a conforming level is 3.38%, pretty near the lows we've ever seen. Eighth straight week of increased new purchase activity, obviously pent-up demand from the shutdown is part of it, but also the fact that national housing inventory, for-sale inventory is down about 25% from where it was a year ago, is down about 25% from where it was a year ago, providing a lot of firm bid in housing prices.

I need to let it go there for now. There's other areas that we cover at covidmarkets.com today. Come back at you tomorrow, Thursday with another COVID Markets and of course our Dividend Cafe on Friday. Thank you as always for listening. Share this with anyone you please. Have a wonderful evening. advisory services are offered through Hightower Advisors LLC. This is not an offer to buy or sell securities. No investment process is free of risk. There is no guarantee that the investment process or investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors. All data and information referenced herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, Thank you.