The Dividend Cafe - Daily Covid and Markets Podcast - Wednesday May 28

Episode Date: May 28, 2020

The market pointed to a modest up opening this morning in the overnight futures, and it did just that. And the market stayed up ~100-200 points throughout the day, until the final hour of trading where it went from +150 to -150. The media has reported it as a combination of news that POTUS was signing an executive order trying to reign in social media companies as well as news that the White House would hold a press conference Friday to discuss some aspect of the China relationship. I believe it was entirely the latter and not at all the former (the social media flexing was known to be coming all day, and surely the market does not see it as having a lot of teeth). The uncertainty around the China announcement was surely worth a couple hundred points … The weekly jobless claims came in at 2.1 million, down from the 2.5 million level of last week, and way down from the 6.9 million high level in late March, but still extremely high, and extremely sad. The number had been just 212,000 per week on average in January and February before the economic shutdown. Continuing claims, though, tallying the unemployment benefits of state programs, fell last week for the first time since the COVID moment began. 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 missive brought to you by the Dividend Cafe of the Bonson Group. This is David Bonson, Chief Investment Officer. And we have closed out Thursday, May 28th in the market. The futures were pointing to about 100 point open or so. And the market did indeed open about 100 points. And it kind of stayed there throughout the day, actually, you know, 100 to 200 points. So modestly up on the day. and in the final hour of trading it went from about up 150 to about

down 150 at the close and and that all happened in the last maybe 45 minutes and so uh not a huge you know check back and keep in mind we're up 1100 points prior two days but that 150 point in the downside um the media is reporting a combination of two events, POTUS signing executive order to try to rein in social media. And there's a whole kind of political thing around White House actions against some of the prominent social media companies. But then also a report that came out that the White House would be holding a press conference on Friday to discuss some aspects of U.S. relationship with China. I don't think it has anything to do with the former. And I think it has everything to do with the latter. You know, as far as that social media presidential flexing or whatnot, it was known all day that it was coming.

And I don't really believe the market sees it as having a whole lot of teeth. And so that would very much surprise me if it was a big factor in market movement. I think uncertainty around the China announcement tomorrow is certainly worth a couple hundred points. The weekly jobless claims came this morning, 2.1 million new claims down from 2.5 million of last week and way down from the 6.9 million high level that we experienced in late March. But it's still extremely high and extremely sad. You know, the average number, just to put into context, is I don't think people were really paying attention to initial jobless claims numbers week over week until COVID, right? I mean, this is sort of a data point that we get every week as long as I've been in

economics, and yet it's become much more pertinent to the national conversation in the last couple of months, obviously. But we had averaged through January and February 212,000 initial jobless claims per week. And now today we're at 2.1 million, 10 times that. At the kind of worst point, we were at 6.9 million. So you can see just how severe that number is. Now, the continuing claims which tally the unemployment benefits to state programs fell last week for the very first time since the COVID moment began. So there's some optimism there. claimed unemployment that are now not. And the question becomes whether or not they just decided to give up looking for a job, left the labor force, went to work under the table somewhere.

You know, there's different possibilities, but the most common is that they did end up finding work or getting rehired. So we hope that number is high or not low or continuous claims that indicate that there's been some movement in the right direction there. So as for health data, I read in three different sources this morning, frustration over the lumpiness in the data that I've been talking about over the last couple of days. It caused some data reads to be understated, some overstated. I take all these analysts at face value. They're just calling balls and strikes, which is exactly what I'm trying to do. They're not attempting to talk up or talk down certain data points. And so with a fair amount of object,

by the way, plenty of analysts are, I read them as well. I don't mind analysts that have certain biases or points of view, particularly when they're real transparent about it. But my point is these analysts that were complaining about the lumpiness in the data happen to be pretty honest brokers. And so I think when you see really, really low case growth yesterday, but testing data that was much, much lower than we've been getting, I think that in both cases, the positive number and the negative number was very likely skewed. As some states on the testing side, they had been combining antibody tests with their PCR tests. And so the removal of those antibody tests throws off the comparative data, like a week-over-week type comparison. Look, no matter what interpretive lens one uses and how you're

processing the current data complexities or irregularities or whatever, the relevant data points in any sort of context and framework are moving in the right direction. The contrasting data for the phased reopenings in Western Europe are providing reaffirmation of the positive direction. And I would point out that just as I began to record this podcast today, we got the weekly, excuse me, the daily testing data at 453,000 plus change, the highest number we've had, with a positivity rate of only 5.1% near the very lowest. So really good improvements today as we start to kind of level out from the anomalies of the holiday weekend. By the way, Chicago release plans for opening up the restaurants beginning as early as June

10th. It was kind of, uh, encouraging to see that as far as one of the first really big American cities with pretty detailed plans on restaurant reopenings for inside customers. Um, New York has said that they're targeting a reopening in the city for the first two weeks of June. But again, they haven't really identified yet what that, what that means, what will be open, what won't. Um, I assure you, I'm looking at that with bated breath. We have talked a lot for a lot of different reasons about remdesivir, the intravenous therapeutic from Gilead Sciences that's been used

with success in severe cases. The FDA granted a kind of fast-track approval. And I did find out this morning that Roach Holdings and Gilead Sciences are initiating a late-stage trial. So it's, again, only going to be a trial for now, but we'll see. They must have some reason why they are optimistic about a possibility of a two drug combination where they take Roche's immune suppressor. I wasn't familiar with it before, but it's called Actemra and then remdephazir from Gilead as a sort of two drug combination. We'll monitor that closely, see what's going on there. nation will monitor that closely, see what's going on there. The discussion levels as to whether or not we're going to have a second wave of COVID largely involve vocabulary, meaning what will count as a second wave. And I put a chart in at covidmarkets.com to illustrate the point. And this is just sort of a boutique independent research provider in capital markets, very, very elite one. But my point being that they did a chart of Korea's trajectory and their track record since March of confirmed new cases, and they referred to that initial first wave. And then they have

like a tiny little move higher that they call a mini second wave. And then they have an even tinier move in May that they call in this chart a third wave. And so I circled those things at covidmarkets.com to make a point because both of them are just like mountaintop lower than that initial first wave that I'm not accusing them being dishonest. I'm just I'm accusing them of being sensationalistic. But regardless, I'm accusing them of using vocabulary that I think is going to be at the heart of semantics that get divorced from context, data and proportionality. It's entirely possible that we will have a second wave by some people's use of the word, and we will not have anything close to second wave by many other people's use of the word. I think it's going to be very interesting to see how those things play out,

both with the English language and the math. Okay, and then finally, I just thought it was interesting. I mean, I guess I sort of mean it to be a little humorous because it would be great to have this be the case. But I'm trying to illustrate how tricky it is. You have on one of the daily dashboards I track of all the data out of New Orleans. And the reason I picked New Orleans is because there was a huge surge early on. There was a huge surge early on, and then it had just a simply unbelievable reversal, very, very positive reduction in cases and deaths and so forth. But they're now reporting today that they had negative one deaths. So there you go.

I do assume, of course, it's just a correction of a prior day reporting error. But if indeed someone has come back to life from a coronavirus mortality, we'll be the first to break the news for you. Market technicals, real quick. As I suspected, the breadth of yesterday's market rally was extensive. 95% of S&P 500 companies above their 50-day moving average. 92% of Russell 2000, which is the small cap stock index, also above their 50-day moving average. They have a very far and wide market recovery. It's not mere rotation, but overall breadth. Put simply, the market momentum and the trend is very positive, and that's reinforced by this broad participation. It's very positive, and that's reinforced by this broad participation.

We put a chart up at COVID and markets to put in context when breadth has been this high, the performance of the market 20 days, 2 months, 4 months, 8 months later, anywhere from 79% to 83% of the time it's been very positive, and on average it's been very nicely positive. And then we compare that against S&P 500 moves in those same intervals. You get a chance to see that delta. So it's worth looking at from a technical standpoint. The high beta names are leading this market rally, and that's one of the reasons it's important to technicians

because sometimes low beta driving a market just speaks to a buildup of defensiveness. But when the rally that we've seen since March has the underperforming stocks lead the way, cyclical sectors beating non-cyclicals, high beta outperforming, it speaks to an underlying transition. an underlying transition. Now, if I were to be concerned about anything in technicals or flows, it would be this massive increase of flows into NASDAQ ETFs, generally retail products. Again, I'm not invested there. It isn't something that's within the kind of investment strategy of the Bonson Group. But as a contrarian, I don't like seeing that. You know, from the vantage point of a lot of money from maybe not the best indicators of good decision making pouring into a particular product or approach. And the other thing I'd point out from that sentiment standpoint is that across the entire S&P 500, between the very bearish indicator in the investor surveys that measures the ratio of bulls versus bears, you have kind of a bandwidth on the downside of very bearish and you have a bandwidth on the upside of very bullish.

And we're right in the middle of that. bullish and we're right in the middle of that. And we prefer it when we're much closer to very bearish because again, as a contrarian, look, you don't generally get a huge performance out of starting off at the very bullish level, but you usually don't get a big, you know, sell-off at the middle of the pack either. And then in reverse of that that you don't usually have a higher highly opportunistic level um but uh it's you know middle of the pack same thing so both both way right now we're watching that to see which direction it goes okay public policy front uh house did pass uh the flexibility supplements to the pvp legislation today it's big news it 417 to 1, so the Senate's not going to fight them, and obviously the President's not going to fight it.

The threshold for PPP loan forgiveness will be lowered from 75% to 60% of the money that has to be spent on payroll, and the time threshold will be expanded from eight weeks all the way to 24 weeks. The companies have to spend the money. They also have all the way to December 31st now to hire employees back. The House has voted. Done deal. Oil was up about 4% from yesterday afternoon.

I have a lot in tomorrow's Dividend Cafe. The homebuilders are now up on the year, 55% down during the COVID sell-off in March, and a 75% rally since, chart in COVID and markets. Two major Fed governors, the New York Fed president and Richard Corita, the vice chairman of the Federal Reserve, both now commenting about how hard of a look they're taking at yield curve control, thinking very hard, historically analyzing. We remain of the position that the Fed picking or targeting specific yields on treasuries at different maturities is the next policy tool coming.

Finally, another chart at covidmarkets.com today showing yet again that there has been no move in the market all year during market hours that the big sell-off in march was all uh net net net if you just took only the market movement from the point it opened to the point it closed was pretty much even but the 30 something percent down was basically all from where a market closed to where it opened the next day and now in reverse if you only take where a market closed to where it opened the next day. And now in reverse, if you only take where a market closed to where it opened the next day, since then you're up 25%. But if you just take from where the market opened to where it closed each day, you're flat.

You may be up like 1%. So really hard to market time when all the action you're trying to time is happening when you're not able to trade. Sorry for going fast today, jumping on to another call right now, but I think we've covered the basics. Go to covidandmarkets.com, reach out to us with any questions, and we look forward to coming to you tomorrow, Friday, with our weekly Dividend Cafe. Thank you for listening to COVID and Markets.

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