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Market Snapshot October 29, 2020

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Good Thursday AM,

 

Lots to talk about today especially since we get to celebrate Nevada becoming a state tomorrow (the actual date was Oct 31, 1864, I remember it well). All state offices (including the recorder’s office) will be closed. Today though there is plenty to mention. First and foremost the two most important data sets today were strong. Unemployment claims dropped to 751k from expectation of 775k. Yes, 751k is still enormously high, but that it is less than expected gives markets a sense of an improving economy. The bigger beat was in the GDP. Q3 GDP expanded at 33.1% which not only beat expectations of 31% but also has wiped out the losses in Q2 completely thus taking us out of a recession. I am sure you will be hearing all about this from Mr. Trump and less about it from Mr. Biden. With this, while the Dow has lost almost 1900 points during the previous 4 sessions, it is up 100 points today. The bigger loser though is the bond market. The 10-yr, after hitting resistance yesterday at .75, has backed up to .81% today. No Bueno… Mortgage bonds sold off the afternoon yesterday and are back to unchanged today. Keep in mind that as big a beat on the data as we had, could have and should have done more damage to the bond market. We are not out of the woods on that yet. I suspect traders are being cautious heading into the election, but it feels like a coil being wound up, ready to spring at some point. All I can say for now is buckle up buttercup, it is going to be a wild ride for the next week. Tomorrow is another important new day and I expect continued and in fact growing volatility, which may lead to larger risks and bigger price swings.

 

Some big industry news yesterday was that the Fed will buy 1.5% securities. I know it is easy to gloss over this but for a moment, let me share the meaning as it has big implications.  Mortgage pricing is primarily determined by supply and demand, and with the Fed buying/opening up a new coupon, acceptance and liquidity increase and helps prices, which in turn fosters lower rates. The mortgages that fit into the new 1.5% security are likely to be 2% and higher, due to both the cost of servicing (roughly 25 bps) and the conventional guarantee fee charged to securitize the mortgage. 2.5% and 2.625% 30-year mortgages are currently heading into 1.5 percent MBS. While these rates are not the most quoted currently, that the coupon now exists indicates that there is sufficient demand (and less supply of loans) for them leading to the thought rates will decline.

 

So on to other news…

 

Redfin reported that Redfin.com users are leaving more expensive states as the COVID-19 pandemic continues. California and New York are the two states seeing the largest increase in folks looking to leave the states since last year. Massachusetts, Washington, D.C., and Illinois are also seeing an increase in people looking to move elsewhere. Close to 53,000 more Redfin.com users looked to move out of California than into it in the third quarter, according to the Redfin report. That is a 62% increase since the third quarter of 2019 and Redfin also notes it’s the highest rate since it began tracking migrating in 2017. As for New York, the report revealed that 47,000 more Redfin.com users were looking to leave the state in the third quarter, 35% more than those looking to move into the state. Close to 22,000 more Redfin.com users were looking at Florida as their new destination which happens to be twice as many entrants as the third quarter of 2019. Other states seeing the biggest increase in people looking to move in include Texas, Tennessee, North Carolina and Nevada. Should we be advertising in California and New York, might be worthwhile..

 

U.S. states are facing a massive cash crisis.

 

After lockdowns devastated local economies and tanked tax revenue, state budget deficits are set to hit about $434 billion from now through 2022, an amount greater than the combined 2019 K-12 educational budgets of all 50 states. Nevada, Louisiana and Florida are projected to have the biggest gaps as a percentage of their 2019 budgets, and other states such as New York, which is projecting a $59 billion shortfall through 2022, are considering slashing essential services such as public transportation. Congress has disbursed more than $150 billion in aid to local governments to help buy medical gear, among other requirements, but that money isn’t allowed to be used to cover revenue shortfalls due to shutdowns. Further aid to states has been a key holdup in the stalled stimulus talks between the White House and House Democrats. Here are two infographics to show where the shortfalls are.. The darker the orange the bigger the deficit.

proj annual revenue shortfall

So you ask what are the equity market returns after a presidential election? Here’s a quick snippet to consider.

s and p

 

Covid news worth sharing as Europe has been about 3 weeks ahead of the US regarding outbreaks.

 

Germany and France are going back into lockdown.

 

After seeing confirmed coronavirus cases double in the last week, and intensive-care-unit patients double over a span of 10 days, Germany’s 16 states agreed to enter a partial lockdown beginning Nov. 2 that will shut restaurants, bars, gyms, concert halls and theaters for a month. Schools and daycare centers will remain open. Germany’s Covid-19 cases have been lower than in France and Spain, which are emerging as new epicenters, but Chancellor Angela Merkel said the latest curbs are necessary “to avoid an acute public-health emergency.” On top of the nation’s already robust economic stimulus plans, the German government said it would cover up to 75% of lost sales for businesses with fewer than 50 employees during the new restrictions. In France, the president announced a national lockdown, beginning Friday and lasting for at least one month. People must remain in their homes, and restaurants and nonessential shops will close.

 

And last, I am saddened to share that as many as 100 underperforming IHOP restaurants in the U.S. could be closed over the next six months, their parent company said, as they have taken a blow from Covid-19 indoor-dining restrictions.

 

Please remain safe and healthy, make today great!