The Dividend Cafe - Daily Covid and Markets Podcast - Wednesday, May 13

Episode Date: May 13, 2020

Futures were down last night, then up this morning, then went flat just as the market opened this morning. By the time the market open was catching steam downward pressure was on stocks, and that downward pressure accelerated a few hours after the open, and then stayed down but level the rest of the day. Stocks actually closed 180 points off their low of the day, but still down 500 points on 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. Hello and welcome to today's COVID and markets update brought to you by the Dividend Cafe of the Bonson Group. This is David Bonson, Chief Investment Officer. Pretty busy day today and there are a lot of charts, and so you'll miss some of this on the podcast, which is why COVIDandMarkets.com enables you to see visually some of the things I'm referring to.

Listen, last night futures were down, and then when I was up this morning, bright and early, they were up, maybe 100, 150 points. And by the time the market opened, they had gone flat. There was some downward pressure on markets into the morning. And then by, I don't know, about 9.30 Pacific, we were down 500-ish points and stayed down there through the end of the day. there through the end of the day. Now, actually, by 1230 or so Pacific, we were down near 700 points and the market did come back 180 points in the final, let's call it half hour trading. And so you had an interesting chart today, open down, then go down, take another way down for a

couple hours into the morning, stay down, kind of just sort of choppy throughout most of the day, and then a little leg up at the end of the day. As I'm sitting here talking now, futures are pointing up for Thursday morning, but I don't really care about any of that. And by the way, I really don't care about that. I do this because I'm doing a daily missive, and I think I'm supposed to talk about it. And I think a lot of you are listening to this because you want the day-to-day action. And I don't think there's anything wrong with being updated on the day-to-day occurrences to the extent, though, that anyone's ever listening to any of it. And under the impression that I believe day-to-day movements and price are relevant, I just would rather you not even listen.

I'm sorry if that sounds harsh. I really do believe that, though. I want to continue talking about this stuff daily. I just do not want to do so giving any impression that we think there's day-to-day significance or long-term significance in day-to-day price movements. Now, there's a lot of things happening that I really believe are important right now and a lot of it comes down to the fed chairman powell uh probably if you watch media reports they're going to say market volatility today was related to his comments i guess that's probably the best excuse we have i just don't know that we need an excuse for this kind of up and down volatility the dow is still sitting above 23 000 um it's it you know to me 20 i think you can go 2,000 points lower from here and 2,000 points higher and still stay in that kind of range that is on the low side and high side of reasonability around present conditions.

If you go much lower than 2,000 points lower than here, I think you get into some pretty good bargains. And if you go 2,000 points higher than here, I think you get pretty stretched for the foreseeable future. So all that to say, it's very possible Powell's comments that they need to do more referring to Congress, that the economy is going to be under pressure for some time. Is it possible there's people out there that didn't know the economy is going to be pressured that they said, I just heard Chairman Powell, I better go sell my stocks, I guess. I don't usually find that to be the case. When we get to peel it back a little further, we usually find more to it. But as I said, in any environment, up, down, flat, there need not be a reason. Markets don't work that way. They're too large and they're too complicated to be able to identify a specific

reason as to what makes it do what it does on any given day. Let me go through the health data because then I want to unpack some more things for you. Case growth was only up 1.6% yesterday. Absolute case growth at 21,000. It had been 24,000 on the same day the week prior. So we really like seeing that absolute case growth decline and certainly like seeing the percentage case growth decline. Ultimately, the case growth percentage has declined dramatically. And that's what the curve bending and so forth has all been about. Now, though, to just kind of get the sort of upside down V that Italy and certainly South Korea and other countries have enjoyed, that's where the absolute case growth decline comes in and where New York is going and where we want to see the whole country grow. By the way, the only case growth that was in Tennessee, which Tennessee is one of the states that's led the way in economic reopening,

was in a prison. I don't think that the economic reopening would be real pertinent to the prison, but I don't know exactly what their amenities are like. I'm going to assume I'm correct on this. And so there is a map I've put into covidandmarkets.com today that basically shows the activity of each state. And I kind of circled the ones. You see decreasing of cases in Tennessee, Georgia, Florida, New Mexico, Oklahoma, Louisiana. You see real steady cases in South Carolina, Mississippi, Texas, that region that has had the most robust economic reopening so far, and it is still early, but you actually have very positive data coming out of the reopening versus some of the doom and gloom about there being surges of new cases. So the South and some of these states that have reopened, their numbers are kind of showing what we've seen already in Denmark and Austria and other European countries that reopening has not yet proven to be a catalyst to case growth or, God forbid, growth in mortalities. As far as the Wednesday testing data that just came right before I was sitting here to record, another 336,000 tests were done today and only a 6.4% positivity ratio.

So day by day, really dramatic improvement in total tests being done and a continued decrease of positive tests coming back. For those who would say yes, but you're still getting absolute cases, that's right. And of course, that's what you expect out of more testing. And that's a good thing because it means that more testing is leading to more recoveries and more recoveries, more people with antibodies and a greater sense of being on the other side of this wave of coronavirus. I also have another map, by the way, at covormarkets.com, showing the percentage of COVID deaths that occurred in nursing and residential care homes. And I put it there because we have 1.6% of our population in residential care facilities. I actually found that number to be kind of high, but I don't know why. I didn't really have a reference point as to what would have sounded right to me. But 1.6% of our population is a lot of people. But 39% of all COVID deaths

have been at nursing care facilities, senior care facilities. And that's nationwide. facilities, senior care facilities, and that's nationwide. Ex-New York, it's actually 49%. So outside of New York, half of all COVID deaths have been at nursing care facilities. And I find that stunning. It's depressing to the extent that we value the lives of our seniors and elders. And yet I also believe it's very actionable as it pertains to reopening strategies and procedures, that more focus can be provided to said nursing facilities and less stringent requirements imposed on the less vulnerable segments of society. I think this data is important that just goes through the major options for vaccine development and who the company or partner is, the name of the vaccine, if there is one assigned, what stage they're in in terms of clinical trials, and then current status. And I'm going to update that every other week, let's say, just to kind of stay in tune with the various developments towards the vaccine. And we just continue to hope and pray that that will move along quickly.

And I'm very optimistic that normal federalized bureaucracy will be highly diminished here as the country and the world awaits successful vaccine development. vaccine development. Very encouraging news in terms of the largest electric car manufacturer in the country winning their little tiff out in California, Alameda County to be precise, regarding the reopening of their primary plant. So you do see areas in which there's been some resistance to economic reopening, the private sector kind of winning some of those arguments, or at least making their cases for a safe and productive reopening. And what could have ended up being perhaps a much bigger news story has largely subsided. And a lot of people are able to get back to work and a model being set for some, you know, safety protocols out of a really efficient and scientifically progressive company. Quickly to go through market technicals, the put-call ratio right now, it's a sign of market complacency.

When you have a lot of high puts and low calls, it really means a lot of fear. And when you have low puts and high calls, it means that people are a bit more or less driven by protection and defense. know, driven by protection and defense. And so to me, it's a contrarian play, but I look at a low put-call ratio as a sign of complacency. And I know that may be counterintuitive to people. Some think, well, everything must be really bad when everyone's buying puts, which is a bearish, you know, bet in the market, and very few people are buying calls, which is a bullish bet. But again, the history has not been kind to consensus. That contrarianism helps indicate a level of complacency in the market. I would also argue that the high breadth in yesterday's sell-off, and I haven't

got the breadth data today, although looking at my screen, it certainly feels like the advance decline line was highly favorable to the declining stocks, obviously. But yesterday's was about six to one declines over advancers, and I expect today would be the same or even more breadth. And so that would be a sign of modest technical weakness as well. But the percentage of stocks above their 50-day moving average is still very high, and we'll see what held throughout the sell-off today. Healthy and consolidating momentum is not a contradiction in terms.

Credit spreads, if they do not widen here, both investment grade and high yield, I take that as a very bullish sign. I believe that we do have stabilized fundamentals. The spreads are still plenty wide to reflect the ample amount of risk that does exist in the corporate economy. But there's no question that if we see further deterioration, that's got to be a negative indicator for equity markets as well. Let me move into the structured credit space, where there's a little update asset class by asset class in COVID markets.

The liquidity in the asset-backed securities world is a mixed bag. You see a lot of conventional products that have seen their spreads tighten significantly since the trauma of March, but some of the more esoteric aspects of asset-backed aircraft leasing, there's been definitely areas where spreads have remained very wide and frankly pretty broken. But even like BBB rated tranches, the subprime auto are now trading near par. Those were spaces that were highly dislocated and we liked the price action we're seeing. And keep in mind, this is before the Fed has been buying anything and the Fed, of course, is only buying in the AAA space.

In residential mortgage-backed, there's still significant uncertainties around forbearance allowances and disrupted cash flows in the residential mortgage-backed securities have kept things technically broken, although I don't think fundamental deterioration is a part of that. You got to remember some of these tranches have to see just massive dislocations and defaults and including in the underlying collateral value. I mean let's not forget that the senior holders of this debt, if worse comes to worse, they still have the underlying asset out of a foreclosure process. And so I do think RMBS continues to be the area where there's probably the most irrational price dislocation. A lot of it, though, is just simply that buyers and sellers in March were totally imbalanced. And now in non-agency RMBS, the non-Fannie, non-Freddie, even though spreads are still pretty wide, you do have a lot of matchup now between buyers and sellers, indicating at least a little bit more technically healthy market. Commercial mortgage back, yeah, I mean, that forced selling and the

margin calls in March are well behind us, but spreads remain wide because uncertainty still exists around the economy. And again, up till now, and I don't know that this will change, but the Fed's only support into the CMBS market is through AAA conduit CMBS, and they may not expand that at all. But the underlying quality of these commercial mortgage-backed securities, the credit enhancements that exist, and that underlying collateral is going to matter a great deal, and we think that present prices still do not reflect some of that. I did talk to a portfolio manager today who indicated that they, and they're heavily invested in the space, but they don't expect to see those spreads tighten

and prices move higher towards par value for another month or two or three because they think you need to see capital formation first that comes together to be big buyers of the space. And so you'll sort of get special purpose vehicles, some of which we may be looking to invest in at the Bonson Group, that are coming together for the purpose of buying a lot of this paper. And that'll help create a bid in a lot of the structured credit.

And I think that makes a lot of sense. So we're looking to see more capital formation that will come in and provide liquidity into the marketplace. But all aspects of structured credit that have already incurred or have announced the existence of direct Fed support through their TALF program, they're really very well bid. They're not suffering in that liquidity pinch from March. It's the non-Fed supported aspects of structured credit where prices, I think, are still dislocated from fundamentals. But of course, we really would hope that fundamentals do not substantially deteriorate right now. And just as there remains so much uncertainty in the economy and jobs data and the stock market, there's plenty, and I guess you would add housing and real estate to that,

there's plenty of uncertainty in the structured credits that underlie a lot of these assets as well. But we're pretty committed to these opportunities. tailoring a structured credit positioning client by client where we think it's appropriate, depending on risk appetite and their loss aversion particulars. Public policy front, look, I do believe that there is an issue that we have to be cognizant of as it pertains to the CARES Act and the $600 a week federal subsidy into unemployment. Apart from the state unemployment insurance benefit that unemployed folks are entitled to, the additional premium of $600 a week, more and more as I read a few different studies this week, few different studies this week, believe that it could very well be what does boost up unemployment into the future for the percentage of population, largely people who make under $60,000 a year, which is obviously a significant amount of population. There will exist a pretty, especially

if they extend that $600 a week, there does exist a pretty significant incentive to not return to work. And I'm not making – for these purposes, I actually assure you I have my own personal opinions, but that's not my context right now. Apart from any social or political argument that can be made, my only real point is economic, that we don't just want more jobs. We want a productive economy, and any disincentive to work would not be in the best interest of the holistic economy. And so I believe we're going to have to pay attention to what Congress ends up doing with that. By the way, the Treasury yesterday sold $32 billion of 10-year U.S. Treasury bonds at an all-time record low for new issuance of 0.7%. So you had an April budget deficit of $738 billion,

which, by the way, was the entire national debt when I was in high school almost 30 years ago. And so the budget deficit in April is $738 billion, and we sold $32 billion of bonds at 0.7 percent, where people will not get paid back for 10 years. So that's not Fed demand. I mean that's real investors buying that paper, giving you an idea of how brutally low interest rates are. Today, after the market closed in the oil and energy world, the Department of Energy announced they're buying one million barrels of oil, not a lot, for the Strategic Petroleum Reserve. They will be buying from small producers and they're going to store it at one of their three approved federal sites either June or July.

Oil prices continue to sit around $26 a barrel and the WTI accrued for June delivery. The reason I bring this up, by the way, is this is a pretty broken correlation now. Oil prices and stocks were obviously heavily correlated, like 100% correlation back in March. And it's been at least a few weeks now that stocks and oil prices have not had any correlation together whatsoever. On the housing front, big jump in home borrowers that went into forbearance from the week of april 5th to april 12th that was where we had a 59 increase week over week as the total amount of mortgage loans went from 3.74 percent to 5.95 percent that were in forbearance i mentioned yesterday that last uh week it only went from 7.54 to 7.91.

So that was only, what, a 4% or 5% move week over week. And that encouraged me. But then it occurred to me that the big jump up last month was the second week of April. And we haven't got the reporting yet for the second week of May yet. So I want to do apples to apples comparisons before I get encouraged that we really are seeing this forbearance slow. It's already higher than we need it to be, wanted to be, can really stand it to be, much higher than I wanted it to be. But that rate of growth has slowed, although I want to confirm that with additional data. I mean, I have a lot more to say about the Federal Reserve tomorrow.

The only thing I just want to say today is that I felt Powell's comments this morning, excuse me, Chairman Powell, to the Peterson Institute, where he kind of alluded to normal talking points. The economy is going to be weaker than we thought for longer than we thought and more aides needed from Congress. So it's fine if that's sort of the angle as to why the market went down today. And certainly I agree with all that he said. But I would say it's possible there's more to extract from the comments than just merely the surface level interpretation. It may be not just that he's sort of jawboning Congress for additional fiscal support. setting the table for why he may want a more liberal allowance in the monetary side, in the interpretation or flexibility that they bring to monetary tools. I just want to point out $500 billion facility for municipal bonds has not yet been opened. Their $600 billion facility for Main Street lending has not been opened. Yet the 750 corporate bond facility just opened yesterday. $100 billion facility for asset

back purchases has not been launched yet. So they still have well over a trillion dollars that they're committed to spending that they've already announced and teed up. The market knows it's coming. They have not yet engaged in open market transactions in any of these facilities yet. So I just sort of wonder if some of Powell's comments are setting the table that the need for more doesn't just apply to Congress, but applies to the Fed as well. And that would go hand in hand with the biggest piece of news I have for you today, which I purposely saved the best for last. It may not ever happen. It may be a good thing in your mind. It may be a bad thing in your mind. But I am positive you're not reading about this anywhere in the media, and I find it to be very significant. Somewhere buried

in page 200 of the 100, 100, 100 page document from the House, Democrats, their so-called Stimulus 4.0 bill is an actual amendment to Section 14 of the Federal Reserve Act so that the Fed can purchase municipal debt of any duration by citing their unusual and exigent circumstances, the kind of emergency provisions. Right now, the Fed can only outright buy muni debt of up to six months, and that's helped, but it's limited. Six-month duration, you're basically talking about money market liquidity, not real municipal debt liquidity. They are allowing in this bill for the Fed to alter their municipal lending facility, to keep it open an extra year, and to allow maturities up to 10 years in what they'd be buying there as opposed to the three years. This is the facility, by the way,

that's being funded with treasury money from the CARES Act that the Fed would be levering up. This provides a much wider allowance for the Fed and a significant, not just wider allowance in the credits, but the durations and the amount of time they'd have to do all this. So I don't know it's going to get through. I do know that Senator Menendez in New Jersey is really pushing for this, a Democrat. I very much doubt that that many House Democrats care about this or know about it. So there's someone driving it through as an agenda. And I really don't imagine that the White House or Department of Treasury or the GOP Senate will push back either. So the fact that something like

this is in the bill already, and they're not even going to seriously start negotiating for a few weeks, I suspect it could end up staying in the bill. This is one element that it would surprise me if 24 and 48 hours later, there's still no one talking about it if they intended to make hay about this. So again, a broader empowerment of the Fed and the municipal bond space, I think, is a very relevant aspect to COVID and markets. With that, I will leave it for the day and come back to you tomorrow, Thursday, to talk more and more about public policy, ongoing developments, the Federal Reserve, where equity markets are, market technicals, depth, breadth, all those good things. But in the meantime,

thank you for listening to COVID Markets. Be well, be safe and be free. 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 Thank you. The data and information are provided as of the date referenced. 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.

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