The Dividend Cafe - Daily Covid and Markets Podcast - Wednesday May 20

Episode Date: May 20, 2020

The market rallied +370 points today, making back the points it was down yesterday, leaving the Dow through Wednesday with the nearly +1,000 point gain from Monday. Oil is approaching $34 after a +5% move today. It was a healthy day for risk assets across the board. And speaking of health, there is some truly good news to report on that front as well … 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 podcast. This is David Bonson. I'm the managing partner of the Bonson Group. And we are coming to you on Wednesday, May the 20th, with all things COVID and all things markets. The Dow was up 370 points today, so basically made back what it had dropped yesterday, leaving us with that roughly 1,000-point gain from Monday. It's still the net net move on the week, three days through the market trading week. Oil is approaching $34 a barrel on the WTI crude.

That's about a 5% move higher today. So across the board, very healthy day for risk assets. Then in terms of health, we're going to get into a number of different metrics here. of different metrics here. Well, first of all, the case growth yesterday was 1.3%. It had been 1.6% on the same day one week earlier. Absolute cases were at 20,000 plus change, so down from about 21.5,000 a week ago. I think there's still sort of symbolic significance in getting that absolute case number below 20,000 and holding there. That's certainly the projection very soon, hopefully by later this week, early next week. And then all projections still are that we will be below 10,000 in new cases by the end of June. Keep in mind, because I think 10,000 sounds like a high number, but that's 10,000 new cases from testing that we think will be to lower than 10,000 in a month. That's in a country of 330 million people. You're averaging about one and a half percent

of those cases. So that'd be 150 people that are more critical or severe. And, you know, from a fatality standpoint, right now, the recovery rate is so incredibly high that that really does put the numbers to a very, very manageable place. Again, just speaking macroeconomically, macro in terms of our medical care infrastructure, not in any way belittling the severity of those numbers for the individuals and families affected. And I hope that goes without saying. Nothing is more encouraging right now than the fact that even as our testing has finally and dramatically increased, we're 56% higher in total daily testing week over week right now. But that is happening as the positive cases are utterly collapsing. And at covidamarkets.com,

there's a wonderful chart illustrating that. So when you look to the New York City drop of daily cases and hospitalizations and mortalitiesalities when you look that the daily deaths nationwide are continuing to fall and you see the case growth percentage so dramatically less than it was a month ago. All of these things are very positive, but it's the X, the sort of crisscross in the chart of the testing going much higher and the positive cases going much lower. That simultaneous occurrence is what I think is most positive in the health data. And in terms of that testing data, as I'm sitting here speaking, I got the numbers from Johns Hopkins for today's total testing, and it is the highest we've had to date. Okay. So as we speak today,

Wednesday, May 20th, we have 414,000 daily tests done with a positivity rate of just 5.2%. I think everyone knows this, but I should reiterate this, these testing figures I've been sharing every day for some time. They're a combination of all the state reporting tests that then get channeled in, and they're kind of just manually aggregated into a spreadsheet. The CDC does not maintain its own direct database that's publicly accessible. So there's sort of a accumulation of data that then gets aggregated. And that's why sometimes there's reporting glitches or a kind of dump of data from three days because there was some sort of hiccup or reporting delay. But these tests do not include the serology tests that are done by individual approved labs. And so that number was

included. I believe I read this morning, don't hold me to this, that Quest Diagnostics was estimating they've done 900,000 tests themselves. If you were to include the serology test, obviously the total testing numbers would be even much higher. So a lot of positive direction there. I did get clarification on Florida's alleged spike in new cases. They had 75,000 tests all report just yesterday, 500 of which were positive. And so the positivity rate was less than 1%, 0.64% to be precise. That's the lowest I've seen in the country from any particular state on any particular day, yet that absolute number of 500 as a result of the big

spike of testing, and which really was more of a delay that had been kind of held back. It was a pent-up reporting, got all that media attention. There is a chart updating on Sweden Watch, which is really kind of a thing just because Sweden did not shut down their economy coercively, kind of did softer measures in terms of their avoidance. And so people are very curious to see what their data looks like with new cases and deaths. Very, very encouraging and continual decline in daily deaths. I believe a month over, let's call it the last three to four weeks, they've seen their daily death go down by about 40%. As far as new cases, it's definitely dropped and is leveled down.

So we'll just continue to watch it and see how that plays out. Email us, COVID at TheBonsonGroup.com, if you'd like a copy of the new CDC guidance. It's a 60-page report they just released. Happy to email that to you if you email us at COVID at thebonsongroup.com. They're comprehensive guidance for reopening. Market technicals. These numbers, by the way, do not include today's action. So the S&P was up 31% since the March 23rd closing low,

and that represents the second best 40-day period on a percentage basis in market history. So yesterday marked the 40th market day since the March 23rd low. And I guess my immediate response is, well, second best market percentage move in a 30-day decline into a bear market ever, even if what follows was quite a rapid market improvement. But as the world is awash right now with predictions about what is supposed to happen from here in equities, I just want people to be apprised of what the historical record really is here as far as what markets have done after various past occurrences. You never have an assurance about the future based on what's happened in the past, but to the extent that historical context can be useful, I've reprinted a chart for my friends at Strategas Research showing the one-month,

two-month, four-month, and nine-month performance in markets after the top 10 40-day rallies in history, the one we're in now being the second biggest ever. And across the board, more or less, these numbers are overwhelmingly positive. And you can look at the percentage average and the frequencies and all these different things. So from a historical standpoint, markets are not doing something utterly shocking. I do think there's plenty of room for disagreement around what markets will do next, but the historical context should be very agreeable. Look, we are not sector investors here at the Bonson Group.

We are bottom-up fundamentalists driven by dividend growth in individual companies. Yet, of course, you end up with some sector allocation when you're done doing that process. And so given times, it may seem that we're overweighting energy or underweighting financials or whatever the case may be. Utility sector is not one we have a big weighting in right now. We have one particular company there. But on a technical basis, the weaknesses in the utility sector are pretty universal. It's an 18-month relative load of the S&P. It's had a very stubborn struggle against its own 50-day and 200-day moving averages. And yet, I would say fundamentally that the relative yield premium to various stock and bond comparables makes the utility sector potentially attractive,

combined with the fact it's reasonably defensive as a sector goes. You would think that in this case, you're seeing fundamentals and technicals argue against each other. Now, the issue is timing the rotation, and that can't be done. Whenever the market might want to rotate into more defensive sectors or lower beta names versus higher beta, non-cyclical, look, I suppose utilities will get their turn at the front of the line, and I have no interest in guessing when that will happen. But I would say that many utility names are setting up for a very nice rally just based on how out of favor the technicals have been and how potentially attractive these fundamentals are. On the public policy front, again, reach out to us if you want a copy. There's a paper I read this morning that really took up the bulk of my research time.

It was quite a handful to wrap my arms around, but it was mentally stimulating. From the NBER on the total labor market impact from COVID-19, three different economists, all highly regarded in their field. Their estimates are that 58% of the current layoffs will have their jobs come back quite quickly. So obviously you can inversely infer that 42% are at risk of permanent job loss per this report. And then in terms of their kind of macro commentary as to what could improve the jobs picture, they say unemployment benefit levels that exceed worker earnings, policies that subsidize employee retention, occupational licensing restrictions, and regulatory barriers to business formation will all impede reallocation responses to the COVID-19 shock. So yeah,

email COVID at thebonsagroup.com if you'd like a copy of the full paper. But again, I think it gives a lot of great color around the challenges and potentials within the job market right now. In the oil and energy world, I think most people know this, you know, the natural gas production that we have in this country largely as a result of shale. A lot of people pointed out, well, why should natty gas be hurting just because oil prices drop so much and natural gas prices actually have not dropped a bunch? Isn't that production still reasonably profitable when you look at Marcellus and Haynesville and Utica and some of the other great opportunities for natural gas production. But it is 32%. It's a big number of our natural gas production that comes from oil well production. And since those rig counts on the oil well side decline so substantially, then that's a pretty significant amount of lost production in

natty gas. And then in turn, as commodity cycles go, that lost production should lead to higher prices in natural gas. And so that's kind of the process we're seeing. But there's plenty of collateral damage out there in terms of what is happening in the oil side. In housing, weekly mortgage applications for new purchase were only down 1.5% versus a year ago. You know, a year ago when the whole country was not shut down. Purchase volume was down 35% a month ago versus the prior year, but only 1.5% now. And that is just stunning recovery in the last month. I suspect largely driven by the very attractive low interest rates.

New purchase applications were up 6 percent this week versus the prior week. And all the, I mean, not I guess all, but virtually all of the pickup and mortgage apps is for conforming loan products. So government-sponsored Fannie Freddie-type loans that are under $510,000 in loan size. Major, major appetite for that loan product. Straight government loan apps like FHA and the VA, they're actually up right now for new purchases versus where they were a year ago. Refinance activity, the average mortgage rate is 92 basis points lower right now than it was a year ago. So it should not be a surprise that refinance activity is 160% higher than a

year ago. You probably have people wanting lower rate. You probably have people looking to extract some equity where they can. So there's a number of reasons why refinance activity would be healthy now. But it's the new purchase activity that is making a lot of us wonder if perhaps things are just better than we think. The number of mortgages in forbearance, something I've been talking about quite frequently, did tick up to 8.16%. It had been 7.91. So I reiterate that that move higher as a percentage move week over week is not that significant. But I do think that having over 8% of our mortgages in forbearance right now is a risk that will play out in a year or two and not something I'm looking forward to. I suppose this number is probably headed to about 10%. And again,

this is forbearance. It's not forgiveness. And so do I really think these lenders are all of a sudden going to demand a balloon payment from some of these distressed borrowers for six months of mortgage at once? They're most certainly not. And I don't think that forgiving the debt is an option at all. There's a knock-on effect to that that would be very disruptive to housing prices overall if 8% or so of people were given, you know, reprieve from their mortgage obligation permanently. So my concern is that you're talking about 4.1 million people. The benefit of forbearance is actually creating a risk. The benefit of forbearance is actually creating a risk, and that problem of dealing with that future risk is perhaps what is looming for us in the housing market.

From the Fed News standpoint, I got a chance to pretty much read over all the minutes today from their April 19th meeting. These FOMC minutes just came out today. My major takeaways were that there weren't very many major takeaways, but certainly they are spending a lot of time in conversation about what their next move will be by way of policy tools, and I think it will end up being some form of yield curve control, perhaps the forward guidance first,

and then out of forward guidance into a more formal yield curve control where they can feel that they are enhancing market opportunity by holding rates down across the full spectrum of the yield curve. Okay, we got weekly jobless claims reports coming tomorrow, Thursday morning once again. So we'll be praying for that number. And in the meantime, we will invite you to reach out to us if you have any questions whatsoever about anything we've covered here or will cover that you would like us to cover. Please give us a nice little review at Dividend Cafe, your preferred podcast player.

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