The Dividend Cafe - Daily Covid and Markets Podcast - Wednesday June 17

Episode Date: June 17, 2020

Market futures pointed down 100 last night, up 200 at 3:00 in the morning, and eventually opened dead flat. The market was quite boring most of the day, and closed down 170 points, dropping in the final hour of trading (just minutes after I told the Wall Street Journal how nice it was to be up or down less than 50 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 and markets brought to you by the Dividend Cafe of the Bonson Group. This is David Bonson and I am bringing you our daily missive here on Wednesday, June the 17th. Market futures were pointing down about 100 points. I went to bed last night. When I woke up, they were up about 200. And that was about 3 o'clock in the morning where for the next three hours, the futures kind of stayed about flat, went down a little.

And then finally at 6.30, the market opened totally flat. And then it was really quite boring throughout the day. The Wall Street Journal at one point today had called me for a couple of comments on things. I made the comment that it was our first boring day in the market. And then just a few seconds later, the market dropped about 170 points all in the final hour of trading. So, you know, down a bit on the day, not much. S&P only down 0.3%. NASDAQ up a tad. So, you know, reasonably uneventful, but still on the Dow, 170 points on the downside all in the last half hour of trading.

Let me make a few comments on the health data today, and I'm going to spend a little more time than normal on the public policy because I put together a little recap in this week's, excuse me, in today's COVIDinMarkets.com missive of the various stimulus bills that we've already had and that we anticipate getting that I think is a helpful kind of cheat sheet that I'm going to walk through us here on the podcast. But on the health side, absolute case growth yesterday was a little over 23,000. Testing Testing rose by 11.7% week over week.

The positivity rate was 5.1%. It ended up being exactly 5.1% again today. And new deaths remained under 1,000. And again, that's 700 or 800 each last couple days. And something under that level all the way since June 1st. And for a big portion of that, we were between 300 and 750 days. Earlier on, it was a little higher. Median state increase for new cases is 228 per day, which is down almost 7% from last week. Now, because the cases are higher and the

median state growth is so much lower, we know that the concentration really is in a few states that's causing a little bit of case growth. And I'm going to focus on that. I'm going to start doing a little daily section called Fact for Florida, Arizona, California, Texas. And those states will end up changing. But for now, they seem to be the four states that are generating the most attention. We have a seven-day trend in hospitalizations continuing to fall. Obviously, that could change. We're watching that. And you look at the charts I put up at covidandmarkets.com. I marked up a couple of them just to sort of highlight the very consistent

and sort of defiant decline of hospitalizations. A number of possible explanations for that. Where there is case growth in some states, I circled for you the log scale so people understood how many new cases per 1 million people some of these states are seeing. The numbers have moved from 75 to 125 or something like that out of 1 million people. Just to give you a context for the per capita growth that we're seeing. New York, by the way, on a seven-day average is at something in the range of 37 total new cases. And of course, they were at thousands just a couple months ago.

All right. And then, yeah, that daily hospitalization per million, even in the states that people are really paying a lot of attention to. You're talking about somewhere around 50 to 100 people in a number of these southern states that are seeing some hospitalization movement. So it's important to have that context. We tested over 488,000 people today. We've now passed the level that the Harvard Global Health Institute said we needed to be at to safely reopen in terms of rolling average of testing or to optimally reopen. And the positivity rate, like I said, was again at 5.1% today. I would recommend an article at nationalreview.com going through all of the nuances in Arizona's data where cases have picked up in a particular county where Navajo Indian Reservation plays into things, but where the hospitalizations have come up, but then the ventilator use is significantly less constrained.

So there's just kind of a mixed bag of data that people can interpret how they want. In terms of the data today, Texas's new cases were down about 40% from yesterday. They had been seeing a little bit of a pickup. Arizona's cases today were down about 20% from yesterday. Arizona's cases today were down about 20% from yesterday. And California's new cases are up a smidge, and Florida's new cases are down a smidge. So there is the fact of the matter. You see what I did there?

From a market technical standpoint, I'm becoming a little bit less swayed by the very low put call ratio, which normally is a concern to me as a bearish indicator because of the contrarian perspective. But when I look at the bull bear survey, I see something that is just not very compelling in terms of indicating a whole lot of euphoria building up in the market. I don't see it. You have a historical average of about 38% of people who identify as bullish, and it's right now about 34%. You have a historical average of people identify as bearish, about 30, and it's right now at 38. So these are kind of neutral numbers. And then you look to the money flows. And so then I talked about yesterday with all the money going into bond ETFs and not that much

going into stock ETFs. And you really have a pretty benign situation overall. There is a chart at covidmarkets.com that I'd really love for you to go see. And I want to emphasize that it is not shared because I believe it's predictive or it establishes some sort of normative. But I just think it's interesting to see the big market drop in the late portion of 08 and early part of 09. Then the big market increase. in the late portion of 08 and early part of 09, then the big market increase, and then how we just sort of traded within about a 10% range for 60 trading days throughout June and July of 2009. And obviously, we had the big drop from COVID, and then we had the big rally up, and then now, you know, I've thought that we'd be in some sort of a trading range,

and that's indeed where we've been so far. Market's dropping a lot. Market's going higher. But again, that kind of, you know, I think 10% sounds about right. It could get stretched a little more than that. But it becomes just sort of a consolidation for a couple of months. I see that as being sensible in the given environment. Emerging markets debt by the way, you may think it doesn't affect you or it's

something to just fall asleep listening to, but what the cost of credit default swaps are in the EM debt space, meaning the amount of money people are paying for insurance against a default, it's a big deal. It speaks a lot to investor confidence. It speaks to risk appetite. It speaks to anxiety. And there's a lot of systemic risk where people may be concerned about a sovereign default in an emerging market. But now what we see is that the cost of that insurance has just totally collapsed. So the CDS spreads have come in so much. That's the credit default swaps indicating more comfort level in the emerging markets universe. On the public policy side, just a quick reminder, OK, phase one or stimulus 1.0 was a whopping 8.3 billion.

And it was passed on March the 6th. And it was basically just funding some vaccine development and a little bit of public health funding. It's really hard to even comprehend that there was a time that they were debating between 22 billion and $8 billion, because we're now debating between $2 trillion and $8 trillion, you know what I mean? Then 12 days later, obviously all hella broken loose from March 6th to March 18th, and stimulus 2.0 came out. Again, only $104 billion, which relative to where everything would go, is a pretty modest amount of money. And that was called the Families First Coronavirus Response Act.

And basically all the money went towards sick leave, a little bit of coverage into unemployment, and more health insurance coverage requirements. The Big Daddy was March 27th, Stimulus 3.0, the so-called CARES Act, and that came at a cost of over $2 trillion. So we went $8 billion, $100 billion, $2 trillion in the first three acts, and then they added another $480 billion to CARES Act later, so you can kind of call that Stimulus 3.5. CARES Act later, so you can kind of call that stimulus 3.5. My forecast is that 4.0 will not be the $3 trillion the House Democrats want entirely centered around direct support to states and cities, nor will it be the $1 trillion that the Trump administration wants primarily geared around tax cuts.

I think that they'll end up doing a little bit of both, and it will meet somewhere in the middle on the total cost, but that one of the big asks of stimulus 4.0 and infrastructure coverage will get punted into stimulus 5.0, and that they'll end up presenting a fifth stimulus to focus around infrastructure spending and to focus on potentially incentivizing companies to move their supply chains back on shore. And I expect that to be a much more comprehensive and difficult area to get across finish line. So we're three stimuluses through, three and a half. There's two more still projected and a lot of unknowns along the way.

Okay, oil WTI crude closed right around 38 a barrel. Really didn't move much, not super affected by the events of the day. Housing market, mortgage demand, again, an 11-year high, record lows in rates. New purchase applications were up 4% last week. In terms of this time a year ago, they're up 21%. In terms of this time a year ago, they're up 21%. So, you know, yeah, I mean, what COVID, right? It's just surreal. The mortgage application volume for new purchases increased for the ninth week in a row. I just think you have significant pent-up demand and historically low rates that feed together.

Fed-wise, nothing new or special really came out of Powell's speech today, day two. I did read the transcript of a speech that Vice Chairman Richard Corita is presenting to the Foreign Policy Association. overwhelming focus on trying to create some inflation and going overboard to express their total lack of concern around deflation speaks to where they are right now, where they'll be for some time, in my opinion. Well, we know that there was significant amount of forced selling in the market back in March, and I've been trying to create a deeper dive looking at all those that did just flat out have to sell just to get an idea of what they may have done to their own balance sheet, what they've done to their company, and where in fact it may have affected some of asset managers, if at all. And I don't know, it's interesting to see the level of treasury bond sales in the marketplace.

$118 billion sold in March, $66 billion sold in April from Cayman Islands investors, which is, of course, a popular respite as a tax haven for various hedge funds. So when you get this kind of surge, there's me using the term surge correctly, in treasury bond activity. And you can piece two and two together, we have good reason to believe a lot of this Cayman Islands activity is from the hedge fund industry. So there's a chart there to that effect and another chart about how risk parity, which got walloped and had a lot of delevered force selling in the middle of March,

has been maintaining a lower weight to equities, decreasing the risk of that happening again, and increasing the possibility of future upside in the future when they come back in the marketplace. Okay, I'm going to let you go for now. I know we've covered a handful of things pretty quickly. Look forward to coming back to you tomorrow, Thursday, with another COVID and market submissive. Thank you so much. Reach out anytime. COVID and markets. Misa, thank you so much.

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