The Dividend Cafe - Daily Covid and Markets Podcast - Wednesday May 27

Episode Date: May 27, 2020

First of all, please note our bi-weekly national video call this coming Monday, June 1, at 11:00am pacific time. I plan to address some things Monday I have not yet addressed through this COVID period, and invite your presence on the call. The market exploded 550 points higher today and is now up over 1,100 points in the last two days and ~2,500 points in less than two weeks. Without any direct news or events to explain the increase, broad-based optimism about the economic re-opening is certainly the most logical explanation. I would definitely read today’s Market Technicals for more color here. 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 Missive brought to you by the Dividend Cafe of the Bonson Group. This is David Bonson. I'm the Chief Investment Officer and I guess it's Wednesday. It feels weird these holiday, the Monday holiday weeks throw things off a bit. But we through it, you know, we're halfway through the week because it's only a four day week and two days in a row the market up 550

ish points, about 1100 points now in two days. So big market rally we're going to walk through health data we're going to walk through all our normal categories of things but let me just quickly address the market move higher today look there isn't a particular headline there wasn't a particular announcement the very best interpretation when the market has this kind of positive movement is that first of all we know of the technical factors that, first of all, we know of the technical factors that undergird all of it. We know the liquidity story. We know the low interest rate story.

We know the TINA story. All of those things I think are legitimate and are the macro backdrop to why markets are doing so well. In the very particular daily catalyst to events, I think the most logical explanation is just a broadening optimism about the economic reopening. We saw today, just as I was getting ready to go to print here today, that even Los Angeles County is now opening up for in-store, in-restaurant dining,

in-store shopping up to, I think it was 50% capacity, may have been 25%, but it was something. And worship services at churches in LA County has widely been, you know, they've been saying, oh, they're not opening until August or whatever, and here we are in May. And all that is changing. And so my point being that there is just a broadening optimism about reopening and the markets capturing that to the best that they can on that health data side that is obviously going to be very integral to how markets continue to absorb the um the reopening and the potential for economic recovery we did see new lows in case

growth yesterday tuesday at 1.2 percent and an absolute case growth a little over 18,000. But I'm trying to be tempered about that because I do suspect that there's going to be some reporting abnormalities or maybe even just lags because of the holiday weekend. I've seen so many funky things coming out of weekends in early week data in the time period that I've been tracking all this analytically, that holiday weekend having a sort of exacerbation of abnormality would not surprise me. So let's wait till the end of the week to kind of get a feel for where normalized rolling averages may be kind of free of more distortive, potentially distortive reporting. Now, that said, the numbers look very good.

Expectations are that new cases, case growth, and even reported mortalities are really lower than had been expected. There was a lot of expectation things would be picking up, possibly tomorrow versus yesterday. They will, just in light of the reporting lags that I'm worried about. I don't know. But even with that, the numbers are reflecting a declining trend, and that's highly likely to stay that way, even if the numbers move up a bit from here. And that improved trend line is mostly evident. It's evident in every category. It's mostly evident. It's most stand out-ish in mortalities,

which is where you'd want it to be. And so what I mean by that is even as cases are declining, they are not necessarily declining as quickly as a lot of us would like, but those cases seem to be staying in a very mild category and you're seeing a decline in the severe and critical category. And then that is connected to the fact that the mortality number is declining quite rapidly. So very good trajectory in the curve, and we'll keep you posted as we go through the rest of the week. Speaking of that serious critical cases, we right now have 1,145,000 active cases in the United States. The total serious or critical cases are 17,158.

That's below 1.5%. That's the first time we've been below that number. And I would suggest that with a complete and total sympathy and thoughts and prayers for the 17,158 people that out of a country of 33, excuse me, 330 million people, that 17,158 in a currently serious or critical case, you know, is a much more encouraging data point than many had feared we'd be at right now. The total recovered number continues to skyrocket, and I've been frustrated by a lack of clarity. I've done everything I can to better understand what it takes to get coronavirus positive cases categorized as recovered, because there is not really clarity as to how that number shows in the official tracking data. And because of my own empirical observation,

just from the now up to a couple dozen people that I've known or know of that have had COVID, the recovery sometimes have taken place in three days, sometimes in seven days, but 100% of the people I've known with COVID have recovered. And I'm just curious what that process is. There clearly is a pretty severe lag from the time there's a positive test to the time that one ends up in the data as a recovered case. But those recovered cases continue to grow. I won't go through here on the podcast everything I did at COVIDMarkets.com today to summarize where we are with baseball, hockey, and basketball,

largely because some of you may not be into any sport and some of you might care about one of those sports and not the other two or something like that. A reason I put that in COVIDMarkets is not for sports fans, although I would hope that most of you are sports fans and have some interest in it, but it is more because I think there's a lot of market sensitivity in the general category of normalization and economic reopening. And I've made the comment before and stand by it that there's both symbolic and substantive significance in the fate of our professional sports teams. And Major League Baseball is the biggest question mark right now. They've made an official proposal to their players union to salvage the 2020 season. And you have to remember, Major League Baseball is the only one that has not played a game yet.

OK, so there's a there's pretty significant amount of compensation that would be owed to players that right now is not owed. They did a little token thing back in March, but these guys haven't gotten paid. token thing back in March, but these guys haven't gotten paid. Where, as I'm going to talk about in a second with NHL and NBA, both those seasons were really, really close to being done. They were just games away from wrapping up the regular season and going into playoffs when COVID broke out and they had to suspend their seasons. As it pertains to Major League Baseball, they have probably the most powerful players union of the three major sports we're talking about. The major proposal that MLB has put forward calls for shortening the season to 82 games, half of their normal games. And yes, it does have reduced salaries with some sort of a kicker for the players connected to how they end up doing,

how the league ends up doing with TV and other revenues and so forth. The union is not going to accept it, but are they going to flat out reject it or counter it in a way that shows some good faith negotiation? We're going to know that within a day or two. And I suspect that there's a risk that we'll miss a major league baseball season here just because of the difficulty in getting the owners and the union on the same page. Whereas with hockey, what they did is did all their negotiation between the board of governors and the players union behind the scenes. And then they didn't make an announcement until after there was an agreement.

And then they didn't make an announcement until after there was an agreement. And so their return to play plan, interestingly, has now been signed off on by the league, the board of governors, the owners, the players union. The only thing we don't have approval on is the authorities as to when they can actually trigger it, you know, from a health standpoint to start playing their games again. 24 of the 31 teams are going to go to a playoff bracket. They'll pick two cities. They have a list of cities that you can find online if you're interested. But they're going to pick two of them, and they'll put half the teams there, half the teams of the other one, do like a playoff bracket.

And the final 15% of the regular season that they never got to play is just declared over. Those bottom seven teams will just obviously not go to the playoff bracket. And it looks like they're aiming at training camp starting in early July with these kind of playoffs officially commencing late July, maybe early August, depending on city, state, and things like that, you know, the stipulations, all that. So then with basketball, they've sent a survey to general managers. They hope to present results to their board of governors in meetings this weekend when they have these discussions, and then we'll know kind of next week what the lay of the

land looks like. Are they close to some agreement to, again, finish up that NBA season, likely sometime this summer. Okay. Moving out of that category, the stat I want to share, which I consider to be tragic, mind-numbing, and I think very informative, is that 43% of all COVID mortalities have now been in a nursing home or assisted living facility. 0.6% of the U.S. population lives in a senior care facility. And then we have put a chart at covidmarkets.com as to what that percentage is state by state of mortalities that have taken place in nursing care. Really a tragic and telling number that maybe feeds some of the policy response in the future and provides additional data point for your digestion.

Moving into markets. Look, yesterday was interesting. The S&P 500 broke through its 200-day moving average, but didn't hold it. It ended up closing a little below 3,000 after getting above it just in the final hour of trading. And then today, it comfortably broke through the 200-day moving average, and it didn't do it easily. Even though the Dow was pretty much up all day today, the S&P was down for quite a bit of the day and all three market indices rallied near the end of the day. So you do now have an S&P 500 that is comfortably broken through its 200-day moving average.

And I'll give you more color on the breadth of today's movement in tomorrow's podcast. But regardless of what one thinks about technical analysis, there's certainly many who save their entry level into any investment, any index, any what have you, for when something is above its 200-day moving average. And I suspect that from a technical standpoint, this would draw more people into the present rally. Very, very powerful chart at covidandmarkets.com today on the direction of the markets from fourth quarter last year up through when the COVID moment broke and what the kind of numbers look around all that. I encourage you to check it out.

My view, by the way, not inconsistent with anything we've been saying for quite some time, is that surpassing the 200-day moving average will not mean a parabolic rise higher above the 200-day moving average. I still anticipate a sort of sideways range around it for the immediate future. Coming into today, a stunning percentage of companies have participated in the rally of the last two months. And yeah, it's very possible short-term things are ahead of themselves. I don't have any way of knowing. But when you see over 90% of stocks within the index above their 50-day moving average, that is historically a very bullish indicator for the kind of conviction firming that is underlying markets right now.

The equal-weighted S&P 500 is performing mostly in line with the market cap-weighted index. That, again, speaks to strong breadth of the rally. The pro-cyclical names have pushed the market higher on a relative basis. You have industrials outperforming utilities, consumer discretionary performing, uh, better than consumer staples. The industrial copper is outperforming the more monetary oriented gold.

Uh, the big story today for us was the banks have really caught a bid as of late. And that has a lot to do with the yield curve steepening. You have the 230 curve at the highest level it's been at since, geez, 2017. So really significant spread, a steepening of the yield curve in the two-year versus 30-year treasury. Very bullish, by the way. It's a kind of bond market confirmation of what the stock market's already been saying. Not a lot on the public policy front. McConnell is now talking about a timeline for stimulus 4.0 being in the next month or so. He had before been a little bit more lackadaisical about when those conversations would begin.

I think mid-June will be the epicenter of discussions and negotiations. I could see a vote in maybe early July. The GOP is talking about $1 trillion of stimulus. The House Dems had put forth $3 trillion. So I guess if you want to bet that it will end up being in the middle around $2 trillion, that's a pretty smart bet. But, of course, maybe it will be $5 trillion.

I mean, who knows? You can't put a cap on what they may spend. I do hear from a couple people now that I believe to be reliable, that there's an increasing amount of support for the GOP idea, well, within the GOP for the White House idea of a back to work bonus. So instead of extending the 600 week unemployment supplement, and instead of getting rid of altogether, they would, when it expires, allow for a back-to-work one-time bonus to folks to give proper incentive for people to go back to work and not let that generous unemployment benefit keep them from working. So we will see where they net out on addressing the disincentive to work, possibly extending benefits. Crude oil was down today.

WTI, we haven't had very many down days lately it was down about two bucks there was a bloomberg report that didn't have any sources saying that russia was maybe looking to ramp their production up next month um back to pre-opec plus levels and and reuters had a report that they were looking to do the opposite extend the production cut so who knows what to believe there but But we do have API inventories coming tonight and Department of Energy data coming tomorrow. Continued data around our housing situation, 1% increase for new home sales month over month in April.

Pretty remarkable. I mean, you were in the middle of a lockdown and you ended up getting more home sales in April than you had in March. The mortgage apps for new purchase, I think we talked about this yesterday a little, but again, suggesting some of those sales increases are not an anomaly. Everything I'm reading is more or less suggesting that the healthy volume of activity in housing is primarily around lower-priced homes and suburban environments,

that the high-end houses that require jumbo loans and then certainly urban and high-density areas are where there's a real slowdown. And it certainly makes sense. I have no reason to believe it isn't true. It seems very logical, very intuitive. It's just that when a narrative becomes consensus too quickly, it usually takes a few weeks for me to find out what may be wrong with the narrative. Pedestrian consensus can be quite dangerous. So I'm going to keep looking at every angle I can. What else do you want to go through? Fed news, great charts that I found to put in today on the commercial paper market, the spreads, just this big mountain higher of wide spreads back in March, and then a collapsing spread in the commercial paper market now really kind of referencing the liquidity and normalcy that

Fed operations brought back into the commercial paper market. And a similar chart of our investment grade corporate bond supply, we're getting close to $1.1 trillion of new supply in the investment grade market. That's about double what we've seen year to date each of the last five years and much more than double for when you go before that. So no question that there's been effective policy response to getting more liquidity in the corporate bond market. The CoStar Group estimated that $7.4 billion of retail rent remains unpaid, and that's 45% of what was owed. This is shopping malls, shopping centers, things like that, retail rents. I guess, again, I've done this quite a bit throughout the COVID experience, but I've always – sometimes when you hear a bad data point, I've wondered

about the inverse of it. Like, does that mean 55% paid their rent? That seems kind of high to me, but that's, I guess, a byproduct of whether or not you're a half full or half empty kind of person. I do think the data speaks to a question in the CMBS marketplace, particularly more with single asset, single borrower CMBS than conduit CMBS. But it also speaks to the state and local sales tax collection. And I think all these things are things the Fed's looking at that will potentially affect

what they end up doing to support some of these more esoteric parts of the marketplace. Really need to monitor Europe and France and Germany taking the lead on the idea of jointly issued debt from the European Commission, particularly now a proposal out for a 750 billion euro recovery fund, which I think translates to just in between 850 and 900 billion US dollars. U.S. dollars. There's a big meeting June 18th. There's plenty of time for some of the European countries. The mucky mucks in Austria, Holland, Denmark, or Sweden are the countries that have expressed concern. Any one of them could mess this up. When I say mess it up, it doesn't mean I think it'd be a great idea. I'm not taking an opinion on it. I more mean mess it up from the vantage point of the French and Germans who very much wanted to happen. A quasi-mutualization of European debt. Profound implications for currency, bonds, global market liquidity.

And the reason why I'm not addressing it in a whole lot of detail right now is that there are still three weeks to go and I want to just thoroughly unpack it before I do. right now is that there are still three weeks to go and I want to just thoroughly unpack it before I do. And then finally, you may have heard bankruptcies were up substantially in April, and it's true. Chapter 11 filings were up 26% last month from April of the prior year. But I actually just want to be clear that I don't think that has anything to do with the COVID moment. It's very unlikely that companies were able to go through a Chapter 11 bankruptcy filing that quick. But also, Chapter 7 filings were down 35% from a year ago. And I'm not sure why a reorganization bankruptcy would have elevated dramatically that quickly, but a liquidation bankruptcy would not. It just suggests to me that there's some noise in the data.

And yeah, I do expect there to be higher bankruptcy filings out of this awful period, but I don't think we're seeing that yet. Okay. All right. I got to leave it there. I do understand equities feel to be at the higher end of their anticipated trading range. I'm agnostic, completely agnostic on short-term moves. We're focused on multi-quarter, multi-year positioning. We're encouraged by the health data

and we're encouraged by any investor making good behavioral decisions. And right now, the best behavioral decision is to not allow anticipated things in three days or three weeks to drive your portfolio decisions. But play for a longer term outcome based on longer term goals. And let the shorter term things affect what we're doing as we continue every day to monitor COVID and markets. 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. Thank you. research, analyses, prices, or other information contained in this research is provided as general market commentary and does not constitute investment advice. The Bonser Group and Hightower

shall not in any way be liable for claims and make no express 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 referenced. Such data and information referenced herein. 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. Thank you.