The Dividend Cafe - A Financial Education

Episode Date: June 15, 2017

A Financial Education by The Bahnsen Group

Welcome to the Dividend Cafe, financial food for thought. unspeakable tragedy. Thank God that good guy human life was not lost but just an utterly frightening moment. What it means to the rule of law, what it means to the the state of affairs in our society and our hearts, thoughts, prayers are with the families of those shot. Pray for their recovery and for a better period of time ahead in our political discourse. Moving into the Dividend Cafe and our commentary on this week's market action. There was some modest downside volatility in markets on Thursday. But besides the incident of Wednesday, there really wasn't a whole lot of news headlines that were driving anything market-oriented this week. We're going to cover a lot of ground. We do want you to check out DividendCafe.com as always, but let's get right into it.

The education and savings all investors need. And no, I'm not talking about the importance of saving, but I'm actually talking about the mechanics of savings. What is really taking place when a saver or investor goes about looking to save money, buying a CD, buying a bond, hoping to get a healthy rate of interest that they can use as income. But see, there's another party on that transaction. The other side of that is the entity borrowing the money. The saver buying the CD or bond is lending money, but then that means there's someone else borrowing money and the interest that you want to receive in loaning that money must correspond to the interest someone else is a willing to pay

and b can pay from the perspective of a total economic picture you as a saver investor lender may think it's a great thing to receive really high interest on the CDs or bonds you own, but the company, bank, government, city paying the interest may not think so. In this tension we find the realities of a debt market. There are borrowers and there are lenders. Interest rates have not stayed low because savers and investors like us are happy with low yields on our savings they've stayed low because demand for borrowing is low the willingness need and capacity to pay more has stayed low the borrower and the lender are intentioned we like it when a bank pays

us 5% on a CD but we don't like it when they charge us 5% for a mortgage. Our understanding of investing and interest-bearing investments like CDs, bonds, money markets, must always stem from an understanding of the lender versus the borrower, of supply and demand. The other side of populism, those that welcomed a certain right-wing version of populism, more rooted in nationalism, isolationism, and protectionism than its left-wing cousins, may very well be seeing a taste of the sociological angst embedded in the surge of global populism over the last two years, and they may find it as far more sociological than ideological. Bernie Sanders and Donald Trump do not have a lot in

common ideologically, but they both appeal to their respective constituencies for very similar reasons. The recent shocking results of the UK election, wherein Labour Party socialist Jeremy Corbyn far outperformed expectations and threw the balance of Parliament into a very shaky spot, point to the phenomena I'm referring to. We don't see much evidence in France, UK, or the US that the sentiments of the last two years expressing angst with the status quo are going away, but if the voter angle on this goes from a quasi-right-wing populism, if such a thing exists, to a left-wing populism, there could be profound impact on markets.

Are we okay in the UK? Theresa May's stunning reversal of fortune in the UK with last week's election results have much more than merely political implications. The lack of political capital in the hung parliament means the negotiating hand with the EU on the nature of Brexit is substantially weakened. The strong pickup of Jeremy Corbyn and the Labour Party is not an anti-Brexit reflection. They endorsed Brexit, albeit a softer version of it. The weeks ahead will tell us more on what direction the Brexit negotiations with Europe will take. Thus far, the sterling pound volatility since the recent election turmoil has not been daunting. The entire situation, though, warrants continued monitoring. Surprise of the week. That the Fed raised rates another quarter point on Wednesday was fully

expected, but that the market lowered the odds of another rate hike this year from 52% chance to just 38% is very surprising. We fully expect to see another rate hike before the end of the year unless economic data turns substantially softer than expected. The Fed futures market though, which means a lot more to us than the press release of Fed governors, has the odds of one more hike at just 38%. That warrants attention. of one more hike at just 38%. That warrants attention. Tech sanity. We are well on record as believing that many leading technology names in the investment universe are simply not for us. There's a recent CNBC appearance you could find in our YouTube channel about this. Either because we believe they're too expensive or because they don't meet the dividend growth

criteria that serves as the cornerstone for our investment philosophy. But let's not be unclear on the subject. The valuations of the year 2000 on companies that didn't even survive, pets.com anyone, let alone the valuations that were put on extraordinary businesses still thriving as enterprises to this day Microsoft and Cisco great examples have almost no comparison to the valuation stretches we see today just as we avoid talking about the housing market in any comparative way to the insanity of pre 2008 the tech bubble of 2000 was a story all its own in terms of well insanity the rationality of old tech. There's a lot of discussion, and for

very good reason, around e-commerce, social media, technology platform businesses. Around these trends and so much more, we find not merely a transforming economy, but one that is already transformed. The digital story is an old one, not a new one. It just keeps getting more exciting year by year. The digital story is an old one, not a new one. It just keeps getting more exciting year by year. So when we talk about the investability of old tech versus new tech, it is the reality that every single part of new tech requires some part of old tech to function. I read this week that $31.3 billion of semiconductors were sold in April, up 21% from this time last year.

were sold in April, up 21% from this time last year. No one talks about semiconductors anymore as being as exciting as the latest social media contraption, but since tablets, phones, and the internet itself do not function without semiconductors, you hopefully can see our point. Clarity on infrastructure, as cloudy as ever. Last week had been labeled Infrastructure Week by the Trump administration. A big part of their infrastructure announcements were to tell us that they'd be telling us more later in the summer. We effectively had an announcement about an announcement. But with that said, there was some meat on the bone worth digesting

and some clues offered that may be relevant to our perspective as investors. The call to privatize air traffic control, a welcome and desperately needed improvement to national infrastructure, perhaps gives us some clues to where other parts of the plan are going. The Paris Accord decision probably ties in as well as $50 billion of pipeline and terminal projects, export terminals that is, were canceled or delayed by the Obama administration after the US entered the agreement. We see these infrastructure dollars primarily residing in the private sector and the deregulatory

energy theme of this new administration as all pointing to significant focus in natural gas export terminals and oil gas pipelines. Significant and needed infrastructure investment will come out of these project approvals. Aside from a big focus on private sector energy investment, we believe the other big theme will prove to be broad privatization. Roads and airports are the most likely political play here, roads being a little more problematic politically than airports, where we have a lot of questions around the talk around public-private partnerships, a term that can mean so many different things, not all of them good. The bottom line is we do not expect this infrastructure program to be as

deficit-inducing as we previously feared. We believe it will have a strong energy focus and believe it will create a lot of ramifications for the municipal bond market if it ends up raising limits on private activity bonds and even possibly bringing back taxable municipals in the Build America bond complex. We sit and wait for the next announcement. Taking expectations to a whole other level, we're not quite halfway through the year and things could very well change in the second half of the year. We think they will as a matter of fact for whatever that's worth. But the largest drop in the market inside of 2017 so far has been 2.8 percent from its high point to its low point. This is cartoonishly silly levels

of low volatility. It has not been seen since 1995. Average downside volatility is tough to talk about because bad years of down 30 percent plus, not to mention 2008's drop, skew the averages. But the reality is that even with those recessionary bear market years excluded, totally normal downside volatility in a market calendar year sees 10 to 15% downside as a matter of regular course. This is true in years when the market is up, not just down. We're not talking about bad years. We're talking about normal fluctuation within good years. Should investors be distressed with any of the downside they have seen this year?

There is dramatic disconnect going on from historical reality that will make future disappointment far far worse. So should we wait for a correction? It would be easy to take the preceding section of our comments and assume we're talking about an imminent correction. We're not. Note the year in which downside volatility was last this low, 1995. In 1995 the market never even dipped 2.5% throughout the year, and even that didn't come until December. So investors who waited to buy the dip in 1996 benefited? Hardly.

It was 20% gains in 1996, and again in 97, and again in 98, and again in 99. Yes, there were fluctuation dips along the way, especially in 1998, but the low volatility in 1995 did not mean a bear market in the years to come. Rather, it meant an extension of the biggest bull market in human history. We're not coaching towards a market timing call. We're simply explaining that all temptations to believe one can infer a future market event around a past or present feeling or condition lacks any foundation and rationality.

History has proven this. This belies the need for intelligent asset allocating to let that process neuter the utter fallibility of such foolhardy endeavors. We do have in our chart of the week at DividendCafe.com an incredible expression as to why we just eliminated high yield fixed income from our tactical asset allocation other than in our cash flow oriented portfolio models. Low, low levels not seen in long, long periods of time indicate a very high apathy in risk markets. We'll leave you with a quote of the week from the incomparable Thomas Carlyle. Whatsoever of morality and intelligence, what of patience, perseverance, faithfulness,

of method, insight, ingenuity, energy, in a word whatsoever of strength the man has in him will lie written in the work that he does. Thank you for listening to Dividend Cafe. We look forward to coming to you next weekend with more timely market updates and we want to wish all of you dads out there a very happy Father's Day. Thank you for listening to the Dividend Cafe, financial food for thought. Tower Securities LLC, member FINRA, MSRB, and SIPC, and with High Tower Advisors LLC, a registered investment advisor with the SEC. Securities are offered through High Tower Securities LLC. Advisory services are offered through High Tower Advisors LLC. This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be

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