The Dividend Cafe - Daily Covid and Markets Podcast - Wednesday June 3

Episode Date: June 3, 2020

The market exploded 527 points higher today, now well past 26,000 on the Dow, and in the high range of our general short term target. REIT’s, financials, and energy names led the way today. And while the question of, “how can markets be going higher when ___” are completely understandable and reasonable, the answer(s) remain no different regardless of how you fill in that blank. First, markets need no reason to do what they do in either direction, ever. Second, they are forward-looking and have incredible knack for shaking off what they know will be out of the news in days if not hours. Third, the Fed. Fourth, the economic re-opening is going very well. And finally, fifth, the Fed. 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, brought to you by the Dividend Cafe of the Bonson Group. This is David Bonson, Chief Investment Officer of the Bonson Group. It is Wednesday, June the 3rd, with our daily COVID and markets missive. The Dow exploded 527 points higher today, now well past 26,000 on the Dow and in the high range of our general short-term target. REITs, financials, energy names led the way today.

But REITs, financials, energy names led the way today. And so the general question, which I assure you I get asked somewhere in the range of 10 to 20 times a day, which is totally fine. It's an understandable and rational question. But the question of some version, how can the markets be going higher when blank? The answer remains no different, regardless of how you fill in that blank. First, markets need no reason to do what they do in either direction ever. Second, they're forward-looking, have incredible knack for shaking off what they know will be out of the news in days, if not hours. Third, the Fed. Fourth, economic reopening. And I'll add that with that, the health data is going very well. And fifth, the Fed. If I was going to add a six, it would

be the economic reopening is going very well. And a seventh would be the Fed. I don't know if that joke is funny or not, but I'm just sitting here by myself so I can say whatever I want. The health data, when I refer to going well, let me kind of give you some context on the numbers today. Case growth of just above 1% is where our daily pattern is right now. A new case number right now is averaging somewhere around 20,000. It's been there. right now is averaging somewhere around 20,000. It's been there. Yet that number is staying in place even as the rolling averages for new testing numbers is beginning to go much higher. And so new cases are declining when you adjust for the rolling average of testing numbers.

numbers. What numbers do not have the same degree of lumpiness and data anomalies and reporting hiccups and things of that nature is pretty much hospitalizations. So you're reliant to some degree on various imperfections, or I think lumpy is a good word because even those things smooth themselves out. But, you know, the case reporting, meaning positive cases of coronavirus in a particular geography or nationwide or whatever the country is, death, that has lumpiness in it because of how often they're reported. And also there is some states that are reporting projected COVID as a cause, not necessarily COVID. But hospitalizations are what they are. And when you look, there's a chart at covidmarkets.com that I put up today.

The decline of hospitalizations is not noisy. The case growth, the deaths, that might have more hair on it, but all the trajectories are going down and the hospitalization declines have been really quite steady. And so I think that that helps reinforce the belief that the noise around even the other categories like deaths and cases is much more methodological than anything else. We are at another 400,000 test today. We are still sitting in a positivity rate. It looks like below 5% for the day. And those are the numbers that I think the market's responding to combined with economic activity,

a lot of which I'm going to have summarized at the end of the week in our dividend cafe. But there are cases indicating, I think, outperformance in the activity. I don't want to read into the ADP number, but the payroll number today reflected 2.7 million job losses in the month of May in the private sector, and they were projecting 9 million losses. Now, there are some hiccups in that, too, because of how furloughs are treated. So we'll get the BLS number, the Bureau of Labor Statistics number, on Friday and see. statistics number on Friday and see. But I think what the market's looking at is the possibility that you may actually get better health data than expected and better economic data than expected. Good doesn't help. Bad doesn't hurt. Worse than expected hurts. Better than expected helps. That

is the way the market works. There is a study underway in London. I don't know. I've kind of given up on believing that some of the various reports of potential therapeutics and treatments and vaccinations are necessarily market moving. I think they're market volatility enhancing, but this was a pretty substantive rally today. So I'm going to assume that this is not in our factor, was a pretty substantive rally today. So I'm going to assume that this is not in our factor, but a pretty credible group, a coalition out of London, looking at a derivative of common ibuprofen that would theoretically be used to help COVID patients avoid respiratory failure and the need for a ventilator. They're in clinical trials now that have followed pretty compelling preclinical

data that a particular derivative of ibuprofen has been very effective as a respiratory therapeutic. I read the whole report very early this morning, and from what I understood about it, it looked fascinating. The big issue, though, is that if this were to come through, you really can't imagine something that'd be more shovel ready in terms of distribution. The distribution mechanisms for something ibuprofen related and also how cheap it is. You know, it's one of the most commonly used painkillers on the planet. So this could theoretically be a very democratized treatment if it is proven in, and I reiterate, if it is proven in clinical trials to be efficacious. Another anecdotal, I guess, question rather than comment, it does

seem legitimate though, that with the various large gatherings of this last weekend, if you will, and throughout the week, if indeed, first of all, there's a risk that it creates, obviously, a flare-up of some cases. But if it does end up not producing a significant tick-up, I mean, it would really have to be kind of significant because that's what the numbers were in so many different places that clearly were not reflecting some of the various safety guidelines. With all the visual evidence of inadequate social distancing or protective measures, it may give cover to pertinent authorities to loosen restrictions even more around public gatherings.

I don't know what the lag would be in positive testing, if there is to be a surge of surge in positive testing. But I assume we would start to see evidence in the coming days. As far as market technicals go, I'm going to have more tomorrow on the breadth of today's rally. I'm recording just after the market's closed. And so there's a lot more information I want to digest. But one of the things that I was working on this morning several hours before the market opened is how much catching up has taken place from the average stock relative to the overall index. That even weighted index has finally begun to move higher relative to the cap weighted index, which is kind of an implied way of measuring average stock moves versus the aggregated index. You've seen a big move higher there rewarding individual stock selection, so to speak. I do want to continue obtaining data here.

I'm trying my best to get more and more information on technical factors that are driving the market higher where I think it is stemming from what might be an undesirable risk or behind an unsustainable characteristic. An example would be significant long equity positions being formed with leverage by quant funds and CTAs, you know, quantity trading advisors, futures exposure. Don't see a lot on the risk parity framework coming in yet, but again, that was a big part of the meltdown in the month of March. Look, these players have all been there forever. They're part of the market. They're not new. But if directional posture

were to become too extreme one way or the other, it does escalate risk. And so if a large volume of a directional trade comes in one way or the other, it does escalate risk. And so if a large volume of a directional trade comes in one way or the other, it escalates risk and something I want to be aware of. A fascinating chart, by the way, at covidandmarkets.com about the otherwise great month of May. I mean, it was up four and a half percent in the S&P in the month of May. But if you took out the last hour of trading every day of the market, whether it was up or down, just simply close the market

at three o'clock Eastern time every day, the S&P would have been up 6.9%. So you took out about a third of the market's return when you took away the last hour of trading. That's how much the market sold off on average, 12 different times in the month of May in the final hour. It didn't do any such thing today, by the way. Finally, on the technical side,

because I barely ever talk about emerging markets in the context of technical analysis, and I do have quite a bit of fundamental EM discussion in this Friday's Dividend Cafe, but I would just point out that the correlation right now amongst all emerging markets is very high and that you do see the emerging markets index getting back above its December 2018 lows. It's rallied substantively above its 200-day moving average. Generally speaking, the construction that active EM advocates like us would have would be very different than what the index would look like.

But I still think that just the broad index technicals have moved meaningfully higher. It's something a lot of people thought they wouldn't see for some time. By the way, in May, the market saw, and this is the highest ever, which just fascinated me, over $65 billion of secondary offerings were closed in public equity. There was over $22 billion in April. I got to say that that kind of action in capital markets does not speak to a broken financial system. On the contrary, it speaks to one where there's an awful lot of liquidity. And so very healthy ability to finance public equity between debt markets and secondary equity in the post-COVID hysteria.

And then finally, the 230 yield curve, the two-year relative to the 30 year, the spread in between is now, we're setting new highs for steepness over the last four or five months. This is a very good indicator. It's now that curve steepening is well above its 50-day and 200-day moving average, and that's been a key risk indicator we've been trying to follow. On the public policy front, there really wasn't much today to comment on from COVID, stimulus, DOT, Congress. One thing, though, I did read this morning I'll share is that a political analyst at Strategas Research that I respect a great deal, follow religiously, did indicate that there's going to be certain criminal justice legislation that is very likely to be presented out of the events of this week

and of last week and the death of this George Floyd and all the things that are going on. So they're expecting some House resolution condemning police brutality, probably a commission appointed to study the impacts with race and things like that, some federal coalition of sorts, possibility of legislation put forward that would create a federal ban on the use of police chokeholds, and then maybe even some federal funding that gets thrown into stimulus for law enforcement training, things like that. Hard to make an argument any of that is necessarily market relevant, but I share it just because I think it's probably pertinent to the current news cycle and relevant policy developments.

The oil and energy world, we kind of stayed flattish today with WTI right above 36. I think there is real headline risk right now because certainly everyone seems to be pretty dependent on this idea that OPEC Plus is going to agree to an extension of the current production cuts. around 11 million barrels a day. And I think that was about nine and a half to 9.7 million barrels that they were actually in agreement to cut. And then they went above and beyond just sort of with their own additional verbals between Saudi and Russia to get that extra 1.3 million barrels up to 11. As things stand now, the cuts are supposed to be eased down to just 7 to 8 million per day in July. And they're looking at extending the 11 million a day for either one or two or maybe as much as three months. I suspect that an extension of this production cut is already baked in.

And we shall see. Now the other thing that of course has dramatically affected the supply side of oil is U.S. production which is not part of a treaty or agreement to or quota guaranteed to force lower production but rather market circumstances and market forces have taken our 677 oil rigs that were operational at the beginning of the year down to 237. And by the way, we were at 797 a year ago. So basically, we were at 800 a year ago. We were at 700 at the beginning of the year.

We're at 250 now to use round numbers in all three cases. Dramatic decrease. And then in natural gas, the numbers are similar from a percentage standpoint. We're right now at 79 rigs. We're at 125 at the beginning of the year. So you do have a higher price in oil and gas coming from a lower production volume. So on one hand, you get a higher price. On the other hand, you have an E&P upstream industry that has had to give away a lot of its volumes, and those things are hurting. Brent oil has broken through its 100-day moving average, clearly broken through downtrend resistant spots on the chart. But as far as the fundamental aspect that we would care about of economic demand resuming in the appropriate speed and magnitude, we're going to keep watching that.

Okay, housing purchase rate locks in the mortgage market up 19% versus a year ago. So let me restate that. There were 19% more rate locks for new purchases done in the month of May 2020 than there were in the month of May 2019. If it seems staggering to you, it's because it is staggering. We're even running 12% higher year over year through the end of May. So the first five months of this year in aggregate versus the first five months of last year in aggregate. And in those five months, half of them were shut down like this completely unprecedented Great Depression level type event. And yet through the first five months of this year, we have 12% higher in terms of new purchase housing activities, not necessarily closed escrows, but new purchase rate locks. So it's a meaningful indicator.

I do have a pretty extensive, it's a 27-page housing market report, email covid at thebondsongroup.com if you're interested in getting a copy. From a Fed News standpoint, I believe the most pertinent issue in front of us right now is this Main Street lending facility. They're trying to be able to use their balance sheet to help small and medium-sized businesses in need of capital where the banks would do underwriting. The banks would keep anywhere from 5% to 15% of the loan on their books, the banks would keep anywhere from 5% to 15% of the loan on their books, but they'd be able to,

at pretty favorable terms in terms of the interest rate and the four-year maturity, get a significant amount of capital extended to companies that have fewer than 15,000 employees and $5 billion in revenue. And when we say Main Street, the intent here is these are companies that are bigger than the PPP program, but smaller than public markets. The Fed would receive $75 billion of equity capital from Treasury. That $75 billion would be loss absorbing. And then that money would go into a special purpose vehicle that the Fed could lever up to $600 billion. And again, the purpose of the loans would be to try to drive hiring, to preserve payrolls, but they would not be getting forgiveness on those loans. The minimum loan amount is right now set at $500,000, the maximum at $200 million, but Chairman Powell did indicate he'd be open to both lowering the minimum and raising the maximum at $200 million, but Chairman Powell did indicate he'd be open to both lowering the

minimum and raising the maximum if need be. There's some criticism out there, and I've heard this from clients of mine directly, that it would exclude a lot of hotel chains, restaurant chains, certain types of businesses that maybe for various factors don't hit their criteria exactly, even though that's where a lot of the pain in the Main Street economy is. So perhaps they expand the criteria. Perhaps the banks don't want to touch it because they just don't see the process as being worth it. If you think about it, they have the inconvenience of underwriting.

And then the whole thing right now that I don't think people appreciate is the risk of public perception, that they get accused of doing too much of this or not enough of that or what have you. And all of this, by the way, is without much profit incentive. So the Fed did remedy some of that because they're going to pay the banks for servicing on the entire loan amount, not just the 5% to 15% the bank holds on onto. But again, some question as to how this is going to go. I don't see a middle ground spot here. I think this is either going to be a total strikeout or a total home run. And I don't really see it as very likely to be somewhere in between.

One possibility is that it ends up being both, that it's a strikeout that then goes back, hits a reset, gets revamped to some degree after a flop at rollout, but then gets modified and has a huge surge in round two. So we shall see. Closing up with an economic comment in line with some of the data I'm going to share on Friday as to why there's this sort of economic optimism in the reopening. But withheld income taxes straight from payrolls had dropped over 20 percent and they have made half of that back. They're now down around a little over 10 percent. So again, what you see is a bad number that is much better than people expected and has a trajectory going in the right way. So with all that said, please do reach out with any questions you may have. We will be back to you tomorrow, Thursday, with yet another COVID and markets.

Thank you for listening. Share with anyone you'd like. Write us up a nice review at the Dividend Cafe podcast player of your choice and have a wonderful Wednesday evening. Be safe. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, with Hightower Advisors LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities LLC. 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 Thank you. is provided as general market commentary and does not constitute investment advice. The bonds to group and Hightower shall not in any way be liable for claims and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date reference. Such data and information are subject to change without notice. This document was created for informational purposes only. The opinions expressed are solely those of the Bonson Group and do not represent those of Hightower Advisors LLC or any of its affiliates. Hightower Advisors do not provide tax or legal

advice. This material was not intended or written to be used or presented to any entity as tax advice or tax information. Tax laws vary based on the client's individual circumstances and can change at any time without notice. Clients are urged to consult their tax or legal advisor for any related questions.