Good Tuesday Morning,

This may be a holiday shortened week, but it is not setting up to be any less volatile. Lots of data coming out this week with much of it housing related. New home sales were better than expected, but at a dramatically low point. Consumer confidence, which was running north of 130 earlier in the year, came in at 86 today. You don’t need to be an analyst to understand that is an almost 40% drop in a few months. Last reading this low was 6 years ago. One truism is that Consumer Confidence is a leading indicator and economic output follows it. Stocks are defying any economic data and have created their own V-shaped recovery with the Dow up 660 points on hopes for a vaccine. It is a complete disconnect with the economy. Intuitively, that doesn’t seem sustainable, as stock prices must, in the end, follow corporate profits. Who knows where they will be? I reviewed a chart this a.m. identifying that the spread (difference) between S&P 500 company dividends paid vs. the 10-yr treasury yields are at the highest point. I’m wondering how that chart will look when companies cannot afford to pay the same dividends. As always, the economy is run by the supply/demand curve. The only way to keep prices up when demand drops is to limit supply. That is true in all industries. It becomes a game of musical chairs. Lots of companies will be challenged.

On our side of the equation, Mortgage Bonds are flat this morning but treasuries are under pressure. The “risk on” mentality is going to create drag on bond prices. Adding to the potential pressure in bonds, the Fed has backed way off their purchases of Mortgage Bonds and Treasuries, which will likely lead to price erosion and a tick up in rates. In a vacuum, rates would be 1% lower already, so I am not too sure we will see much of a jump should the 10-yr deteriorate. Regardless, the Fed will not let bonds run away. They will step in if needed to keep prices stable.

Please stay healthy and make today great!