Good Morning on this Fantastic Friday,

Yesterday was brutal for stocks with the Dow dropping some 1800+ points. We had some nice gains in the Treasury market and Mortgage bonds early, on but those gains in Mortgage Bonds were gone by the close. Overnight stocks tried to recoup some of their losses and even opened +800 on the Dow, but that has since walked back to +400. I suspect with the European markets closing in about 15 minutes, stocks could pull back further. In spite of some improvement in stocks, Mortgage Bonds are doing well this morning and thus far remain above yesterdays close. The 10-yr at .68% is promising. The supposed concern in the market is the large uptick of new Covid cases in many cities across the nation. I think the economic damage is still unknown and with a second wave of cases sure to come, who can predict what corporate earnings will be in the future? Stock should be and will be lower. During the Fed speech earlier this week, Mr. Powell stated that he intends rates to remain at 0 into 2022. Why would he do this if he sees a rebound in 2020 or even 2021 for that matter? We are also entering a season of deflation and this will keep rates extremely low and I would not take negative rates off the table. As for the lock float question, the odds favor locking until equities fall further.

You know I like my infographics and the WSJ is a great source. The first great graph is a realistic look at what the recovery will be. The double hit scenario is troubling… what if there is then a third wave?

US corporate debt is approaching 50% of GDP, a new record. While this chart is through Q1, the ratio likely climbed further in the current quarter. Please take a moment to think that through. 2020 GDP is 22 Trillion. 50% has corporate debt at 11Trillion. Mind blowing. How do you service that when rates rise? Corporate earnings will be depressed for years to come. See the second graph below. Debt service outweighs profits and that is with rates at zero. Please tell me why stocks are trading where they are.

The share of US companies whose debt service costs exceed profits continues to rise.

Please remain safe and healthy, enjoy the weekend and make today great!