I wanted to start with wishing all the Dads a Happy Father’s Day.  There has been a lot of interesting data coming out, including an incredible jobs report for May, and then a shockingly good retail sales number last week.  As we continue to reopen and resume a semblance of normalcy, things should only keep getting better.

On a National level, hospitalizations, ICU occupancy, and deaths are all in a solid downtrend.  There are some hot-spots around the Sun Belt, but there is still plenty of hospital capacity, which was the biggest reason for the lock-down.  While infections have been rising along with testing, the skew is shifting to a younger and healthier demographic.  Much of this can be explained by employers testing their employees, particularly if they are working in the massive food service industries. Many of these people are asymptomatic and haven’t been tested before.

We will see if deaths and hospitalization increase to worrisome levels in some of these states or not, but sadly we have so many infections, there isn’t a whole lot we can do except focus on protecting the most vulnerable.  50% of the deaths are in nursing homes, so not repeating some of the same mistakes we have made early in the process should pay big dividends.  Doctors, nurses and hospitals, seem to be doing a better and better job at treating the virus.

Cyclical value stocks go on a fantastic run when optimism on reopening occurs, but do terribly on the days when people are panicking about the virus.  While it is frustrating, it does bode well for the future as things are reopening and the data will work in our favor.  From a portfolio management standpoint, we have adjusted the positions we needed to and are poised to really benefit over the next 12-18 months as these positions develop.  It is very different than when the world changed so abruptly and we needed to navigate the downturn and make those adjustments. Our portfolios have never been cheaper relative to intrinsic value and we don’t own any securities that don’t have 50% upside potential at a minimum, and most pay outstanding dividends.  Volatility has remained high, so there is a ton of option premium we should capture between now and the end of January 2021 as these options expire.

This coming week, we should see the CCAR and DFAST stress test results from the banks, which I expect to be quite good.  Then, over the next month, we will start seeing 2nd quarter earnings results, which are going to be the trough numbers.  The market should look forward from there and we should start to see growth again.

We are in a very bifurcated market, with many stocks and industries trading at bubble levels and other areas being left for dead.  It is tempting to chase things that are hot and follow price movement, but historically that has ended very poorly.  Think about during the last major recession.  If you had bought the financials and real estate companies that had gotten so hurt, you made an absolute fortune over the next decade.  We have that type of opportunity right now to set ourselves up for the next 5-10 years.  We are buying stocks at a material discount to their liquidation value.  While market pundits love quoting the market price to earnings ratios (which are high), the stocks we own often trade at 4-5 times normalized earnings.  These are exceptionally cheap, implying a 20-25% earnings yield.  It is hard and mentally taxing to go through all this economic and political turmoil, but time is a great healer.  By owning strong businesses at great prices, the earnings dynamics work in our favor and we should see that strong recovery.  Incremental progress will eventually lead to dramatic progress.  We have the right players, so now we need to let the companies operate and the economy to keep healing from this unprecedented disaster.

Below are a few new research reports I’ve put out on mortgage insurance companies Radian and MGIC that you might find interesting.