The Dividend Cafe - Daily Covid and Markets - Tuesday July 7

Episode Date: July 7, 2020

I woke up this morning to an overnight Nikkei that had dropped a tad, European markets down a tad, and U.S. futures down 100 points or so. Futures eased lower throughout the morning (which I might add, now total about six hours before the market opens, versus three hours on west coast – and I love it!) … The market opened down 200 and stayed in that range most of the day before petering out in the final hour of trading and closing near the low (in fairness, this would have been five days in a row of the market being up) … 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 the COVID in Markets podcast brought to you by the Dividend Cafe of the Bonson Group. This is David Bonson. I am the Chief Investment Officer here at the Bonson Group, bringing you my daily missive on COVID and markets. I woke up this morning and the overnight Nikkei was down a tad. European markets were down a tad. U.S. futures were down a tad. They eased low without the morning, actually. So they were down about 200 points going into the open and

they kind of stayed there really uh we were down basically right around 200 points most of the day um it might have rallied a little bit here and there going down only 100 and then falling a little beyond that but then in the final hour of trading uh we petered out and dropped another 200 points. So we closed down almost 400 on the Dow. Now the S&P and NASDAQ, this would have been five days in a row up. So really nothing surprising at all in market action today, but a lot in the health data I want to talk about. I think one of the most important charts that I have put into the covidmarkets.com since we began is the first chart in the health data section today, visualizing the three data points that are most intensely monitored. And when you look at the

chart, you will see the positive test cases that have grown pretty much in concert with our explosion of testing capacity. But then you will see another line representing the seven-day average of mortalities, which as you know from listening to me or reading me each day, has been continually declining. And that has kept up even through this entire four or five-week increase in cases. And then you have another line being the ICU headcount, which had steadily declined and is now sort of flatlined. So still down by 65% or 70% the ICU count from its peak. 65 or 70 percent, the ICU count from its peak. The mortalities, daily mortalities, are down nearly 80 percent from the peak, even as cases have continued to grow. Now, I would point out that hospitalizations have increased, as cases have increased, but on a far, far lower scale than case growth itself.

But the hospitalization to case ratio has collapsed. Hospitalization is only two-thirds of what they were. But when you dig deeper, I think there's an even more profound development. deeper, I think there's an even more profound development. And that's that with these modestly higher hospitalizations, you have a collapsed level of ICU cases relative to hospitalizations and a profoundly collapsed level of equipment utilization, meaning the use of ventilators and PP&E. So I think that the really crucial data right now around severities and mortalities around hospital resource utilization continues to be incredibly ignored by the national media, incredibly misportrayed by almost everybody, and it explains why the market has shrugged off so much of the headline

stories around increased cases. Now look, I can't say with certainty as to why this is, but when you look at the highly reduced death rate from even hospitalized cases, so it's one thing that the overall death rates drop compared to total positive diagnoses, which we know is largely because the cases themselves have just been with younger people and much less severe, not requiring hospitalization. But another metric that I myself have not paid enough attention to that I do chart out in COVIDMarkets.com today is the ratio of deaths from hospitalized cases that that number has dropped. And I mean, highly reduced rate.

rate, you really have to conclude either that the treatments have substantially improved, that the case severity, even on a relative scale within the hospitalization level, is much less, or that the hospitalizations are including people who are not hospitalized because of COVID. I happen to personally believe it's a combination of all three, but again, it's very difficult to empirically substantiate any of this. Circumstantially, I think it is very easy. Okay. What else do we want to go through? What else do we want to go through? As of the recording right now, I don't yet have the daily testing final results, but we will have that in the covidamarkets.com. A couple little tidbits I'll share with you.

The distinction between hospitalizations with COVID and hospitalizations from COVID has begun one of the biggest discussion items in Arizona and Texas. I'd have to do more research to see if it's become as much of a factor in other key states, but I just can't imagine why it wouldn't be. That we receive new case totals that include cases from weeks and months ago, totals that include cases from weeks and months ago, and that we receive hospitalization totals that include people being hospitalized for a pregnancy or for any number of other non-COVID medical matters, in the COVID hospitalization data is maddening. It's not maddening because it makes the data better or worse per se. It's maddening because it distorts it. I would have the same frustration if something was offering the numbers, altering the numbers the other direction.

The point of the data is not aesthetic, cosmetic, or even theoretic. It's for the world of application and practicality. And inflating hospitalization data with those who are not hospitalized because of COVID dilutes the practical benefits of the data. On the vaccination front, another front runner has entered the fray with Novavax far enough along to warrant a $1.6 billion federal grant today. That's the largest contribution yet from the federal government's Operation Warp Speed program. The intent with the funding is to accelerate production capacity of 100 million doses if their clinical trials go well. A final stage study this fall will take place with 30,000 subjects. This treatment strategy is to provoke the production of antibodies that block the spike protein the coronavirus uses to infect host cells. The overall sense of optimism around vaccinations is palpable. It does appear to me that the story of July is going to end up having a lot to do with herd immunity,

what the concept means in practical terms, where we stand in various states and as a country in the process. I'll try to share as many papers and useful contributions to the subject as possible in the days and weeks ahead. I'm reading a significant amount about it myself, is possible in the days and weeks ahead. I'm reading a significant about it myself, a significant amount about it in my research time. The debate mostly centers around A what percentage of exposure is necessary for herd immunity effect to be a play and B what percentage of exposure do we actually have and then will that number by the way way, vary state by state, etc. When you look in our fact column, Florida, Arizona, California, Texas,

there is a chart that I believe is really useful showing the seven-day average deaths in each of these four quote-unquote problematic states and comparing it up against the New York numbers. And it shows you, A, where mortality stand against the data point of positive cases, because the chart includes the big escalation of positive cases. But then it includes where mortality stand on a relative basis to the disaster of March and April. And I would challenge you to look at that chart and tell me if you believe that we are facing another New York moment in Arizona, Florida, etc. right now. By the way, speaking of Florida, it was revealed today that they included antigen test results in their daily results. So positives were inflated beyond normal standard PCR test cases, which coincides exactly with when their numbers began increasing at another level last week.

So substantially and artificially boosting positive test results. It also turns out that there are at least some counties that were not reporting negative results. So that could distort numbers, I think. Last I checked, maybe someone can correct me if I'm wrong. By the way I'm not. Arizona today reported 117 deaths, but 53 of them were backlog reporting, covering days as far back as two months. This is, again, back to that issue of just really odd, acceptable record-keeping practices, distorting the data and distorting the truth and practicality of headlines. Rather than focus on Orange County, California today, I went up to Los Angeles County, where there's a far more vulnerable data set, and just wanted to show you in a chart, again, at COVIDOMarkets.com, the utterly declining case fatality rate that California has,

and also making very clear in L.A. County, the ICU capacity, the 1,226 available ICU beds, 37% of total ICU bed capacity is being used. bed capacity is being used. It's worthwhile to note in Texas that the surge in Texas has been met with a reasonably flat hospitalization level. It had run into some capacity questions in Harris County. The numbers have improved. There's ample ICU, ample hospital bed capacity. Positive rates have begun to decline, but we got to keep watching it. But I put a chart up showing the hospitalization rate now versus the last month and the month before. And you basically see a pretty flat level on a percentage basis. Finally, again, one of the most important statistical points I'll make for you today out of Texas, the average daily death total in Texas right now at 35 is, first of all, not even in the same stratosphere of the New York levels that were around 1,000 back in April.

But I did not know until this morning at about 3.15 a.m. that Texas's average of 35 is not even at the same level of where Texas's own peak was in those peak months of late April and early May, which itself was at 39. Okay. Texas is at three or 4% of what New York's level was. And it's below what its own level was. Market technicals real quickly, just a few quick takeaways from the good folks at Strategas Research. Semiconductors are pretty strong technically across the board right now. Semiconductors are pretty strong technically across the board right now. I mean, bottom to top of the whole sector, very strong technicals in the semiconductors. It's pretty hard to find a technical weakness up and down the pharma and biotech space. The weaker dollar, we think, will continue to boost the material space would point out that the airlines hotels casinos had their crash then they had their rebound and now they seem to be flatlining

and they could very well do so for many years which would be a similar pattern to what the financial stocks did post 2008 a major crash then a pretty good little rally rebound, but then years of flatlined underperformance. And although today was a bit different with consumer staples, thus far the utilities and consumer staple space have not necessarily been very defensive sectors. We'll see how that plays out. Public policy, Senator McConnell, if you haven't heard his comments, it's very clear the GOP Senate is capitulating, ready to make a deal on stimulus 4.0, conceding the House Democrats have more leverage, talking about direct payments to taxpayers. They're still holding out for liability protections for businesses. But my expectation, even though McConnell is acknowledging bipartisan rifts at play, my expectation is that we're looking at a deal getting done in another three to four weeks with a lot of ugly sausage making along the way and that the Democrats are going to love the final deal.

In oil and energy, WTI crude exceeded $40 a barrel. It actually briefly hit $41 yesterday, but it stayed steady. It wasn't really affected with the Dow sell-off today. Something that came to mind regarding midstream energy pipelines, when you look at the judges' blocking of Keystone and Dakota Access yesterday, is it seems to me that this might bid up the value of legacy pipelines in light of the unlikelihood of new pipelines being able to get approved and built. On the housing side, reach out to us, covid at thebonsongroup.com if you'd like a copy of the new AEI housing report. Wonderful data. Two points I want to make. One I think is positive. One I think

others think is positive, but I find negative. A, purchase rate lock up 62% versus a year ago. It's up 18% of where it was last year, year to date. So what I mean is purchase rate lock is up 62% this week versus where it was last year, this week. And then the 18% is year-to-date. Now, purchase rate lock is up versus a year ago, which is really just stunning that there's that much demand and appetite for new home purchases. The negative data point to me is that cash-out refinance activity is up 101% versus a year ago.

I know a lot of people think that's healthy, reflective of a good dynamic in mortgage markets. I don't agree. Fed news. I read a pretty extensive report this morning from my manager, I respect, wondering if it was even necessary, what problem the Fed's trying to solve by their interventions in the corporate bond market. And I remain very much aligned with this money manager that there's a lot of moral hazard going on with what the Fed is doing in the corporate bond market. But I just want to make clear to my listeners and my clients in particular, that the Feds aid in corporate credit markets may seem unnecessary

now because of how much credit markets tightened after the fed announced they were coming so it's sort of a a um important point that the reason the action may seem unnecessary is because of the words that came front running the action. The words became the action. And had the action not followed the words, all of a sudden we'd be talking about wider credit spreads. So it's kind of a catch-22. That doesn't mean I support it, or the better way to put it is it doesn't mean I believe this can happen without cost.

However, I think it's important we understand the Fed's motivation is to try to get in front of what they see as problems that will starve liquidity out of risk assets. This provides a framework for understanding the Fed's mentality in capital markets. I don't know how an investor could even survive right now without understanding the Fed's mentality about risk in capital markets. Okay, a lot covered here today. Please read COVIDOMarkets.com. Sign up for our bi-weekly national video call, which will take place this coming Monday. Share COVIDOMarkets.com with anyone you'd like. We hope you're enjoying what you're hearing.

And we very much encourage you to reach out to us with questions or comments anytime. Thank you for listening to The Dividend Candidate. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, and 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 Groupon 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 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. 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.