The Dividend Cafe - A Normal Dividend Cafe

Episode Date: April 28, 2025

Today's Post - https://bahnsen.co/4lSzNBG Monday Dividend Cafe: Market Recap, Energy Updates, and Economic Insights In this episode of the Monday Dividend Cafe, David provides a comprehensive market recap, including recent stock market fluctuations and sector performance. The discussion covers the Federal Reserve, the economy, energy sector updates, and public policy developments. Key topics include President Trump's tariff policies, potential market impacts of international trade deals, budget reconciliation prospects, trucking activity declines, housing and mortgage trends, and oil supply dynamics. The episode closes with a preview of an important earnings week and an encouragement to revisit the content from the previous Friday's episode for further insights. 00:00 Introduction and Overview 02:23 Market Recap and Analysis 04:01 Policy and Economic Updates 07:19 Global Affairs and Public Policy 10:52 Energy Sector Insights 13:03 Midstream Energy Explained 14:49 Conclusion and Upcoming Events Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Well, hello and welcome to the Monday Dividend Cafe, back here in our Newport Beach office and not only back in normal surroundings here in our office, but kind of normal Dividing Cafe, believe it or not. I mean, you know, it was a volatile day in the market and there's a lot of stuff to go through today, but it was normal in the sense that we're actually going to be talking about today, the subjects we normally talk about in the Monday Dividing

Cafe, the recap of market, the standard stuff of where we are with energy, with the Fed, with the economy, with housing, et cetera, as opposed to there being some sort of particularly large and in charge intervening story in markets, in policy, et cetera, that kind of overrides everything else going on. So I don't know if you consider it boring or not, but compared to where we've been, and a lot of what these Monday Dividing Cafes have been for the last month, this is sort of boring and I like that a lot. And so it's interesting to close out the final Monday

of April with a reasonably boring Monday Dividing Cafe. All that to say, I really do want to encourage those of you who missed the Friday Dividing Cafe to check that out, whether you're a video watcher, podcast listener, or like reading the actual written commentary that I do. The Dividing Cafe on Friday went into three different topics, which is quite extensive for what we're normally doing. And what I mean by three is an analysis of where I believe we are with the president and his mindset around markets as we proceed through this trade and tariff matter. And then kind of five key things to be watching,

signs and issues and topics that will drive where markets go for the foreseeable future. And then finally, a little analysis of how to think about investing for the end of the world, those sort of panicky, horrible moments that many investors are sort of perpetually preoccupied with, but that we got a resurgence of emotion at the beginning of this month when we had those few days of market freefall in the aftermath of April 2nd's Liberation Day announcements.

So all three of those things were addressed in Friday's Diving Cafe. I'd love for you to check that out if you missed it. So last night, futures were down 150 points in the Dow and they basically stayed there throughout the evening, at least to the extent that I was monitoring it and Were there as I woke up this morning, but immediately started turning in the wee hours of the morning and then ultimately went positive and the market opened up about a hundred points and At some point a couple hours later, given all that 100 back, it was actually down as much as about 250 points in the Dow, and then closed back where it opened up 114 points,

a little over a quarter percent. So once again, you had some interesting intraday up-down movement, but you did have another up-day in the market. The S&P was technically up, but it was six basis points, after having been down most of the day, but the S&P was basically flat, and the NASDAQ was really basically flat as well, technically down 10 basis points, but very near the flat line. The energy sector, utility sector, real estate sector were all the best performing sectors for the day, all up right around 70 basis points. Technology was the worst today. It was down to 30, not a ton.

The bond market, again, was up. You had the 10-year yield down six basis points. So the 10-year back down to 4.2%. So for when people were panicking and around it being 4.4 to 4.5 a couple weeks ago, you've had a meaningful rally in the bond market since. From a current market assessment standpoint, I am not convinced that deals with India, Japan, Europe will be a big catalyst to markets.

I do think some sort of announcement will come with all those countries. I think a lack of announcement will hurt markets, but I think an existing announcement, the existence of announcement will not help. This is an asymmetrical risk-reward, not likely to be a big needle mover if and when something's announced. A larger deal for markets would be the announcement of a budget reconciliation. And it's worth pointing out that the big six who are in charge of that are meeting as I talk right now in Washington. That's the House Ways and Means Chair, Jason

Smith, the Senate Finance Chair, Mike Capo, the Speaker of the House, Mike Johnson, Senate Majority Leader, John Thune, the Treasury Secretary Scott Besant, and the National Economic Council Director Kevin Hassett. Those are the six largely driving this and working through right now some of the minutiae as to what the White House is going to be comfortable seeing in a final bill. So getting something better than expected in the budget reconciliation could be a market mover. Anything better than expected in Q2 or going into Q3 regarding the economy, company hiring plans, capital expenditures, business investment, that could create some upside

surprise because I think markets have largely begun to price in, that things will be worse than expected, not better than expected. I will say I would be quite surprised if the upside case surfaced. I would be more along the lines that the baseline case right now is not pessimistic enough. But if I'm wrong, I'll be happy. I think another issue I want to bring up, because I read something from Strategist Research this morning, the Fed having the ability on a regulatory standpoint,

and from what I hear, the regulatory people at the Fed being sympathetic to this, along with support from the Treasury Department, that the supplementary leverage ratio, which has a lot to do with just what kind of capital banks have to have and what assets they have to market for the consideration of their capital. It's a complicated formula, but they have the ability in that supplementary leverage

ratio to make it more favorable for banks holding treasuries. And if they were to do that, which they briefly did during COVID, I think it would represent a significant downward pressure on yields that could be an upside surprise to risk assets boosting valuations. So that lingers. And then of course, the biggest hanging, lowest hanging fruit for markets would be some really significant deal. You're going to get noise

in the markets in the weeks and months to come, but some significant and substantive deal with the US and China. So that continues to linger. It appears to me that China continues to be almost entirely unmoved by our tariff impositions. They do not show signs of backing down. So we shall see where that is headed. Okay, moving into the news. Canada holding its national election today. We'll know more who their new prime minister will be. I'm expecting it's going to end up still being Mark Carney, just recently replacing Justin Trudeau, but now up for the election. President Trump did meet with Ukrainian President Zelensky on Saturday, a little sidebar meeting at Hope Francis' funeral.

And all indications are that this week is do or die in a lot of ways for the possibility of a U.S.-led agreement between Russia and Ukraine. I'll get in front of our view. I'm not optimistic when it'll happen, and neither are the people I'm speaking to that I consider to be much more knowledgeable on this. I am more optimistic of a basic deal with US and Ukraine around minerals, but where that all goes, if no Russia-Ukraine deal comes together, who's to say? Let's move to public policy. Federal spending is up two hundred billion dollars in the first

three months of President Trump's term versus what was spent in the first three months of last year but higher entitlement costs have driven the bulk of this increase. It doesn't represent new spending per se but does speak to just the fact that if total spending has gone up that much, it is a lot harder to cut spending than we believe, especially just from regulatory watchdog type efforts like DOGE. On the economic front, there is a lot to say about trucking activity down 23% in the last several weeks and appears to be headed down around 50% from surveys.

The capital expenditure intentions coming through in company surveys are down to COVID lockdown levels. Shipments to the US from China are down 60% over the last week, according to Flexport. I think the big questions right now deal with not just the tariff-induced slowdown that we know is out there, but rather when the certainty does come back and then how much damage will have been done before. That's really the big question because that there is already some of this going on seems somewhat undeniable. On the housing and mortgage front, the average 30-year mortgage is at 6.93%. There was a brief dip last September near to the 6% level, but more or less, you're talking about a long time now that we've been somewhere between 660 and

700, 6.6 and 7% on a 30 year. It's been quite a long trend and very tight range there other than that brief period in September and really where we are right now at 6.93, let's call it 7%. That's exactly where we were a year ago. So not a lot of constructive move on mortgages and yet that being a big policy objective that lingers. And who does it linger with? Who's it a big policy objective with? The Fed. And speaking of the Fed, we are right now at a 0% chance in the futures market of a rate cut in May. We're at a 60% chance of a rate cut in June. So that's kind of surprising that there's still 40% in the futures curve of no rate cut in June. So that's kind of surprising that there's still 40% in the futures curve of no rate cut in

June. The odds though by the end of the year are basically even between five rate cuts, four rate cuts, and three. So you have this, let's just call it four, but somewhere between three and five cuts, 75 to 125 basis points by the end of the year. The oil and energy side crude closed right at $62 a tiny bit below down just a fraction on the day. Midstream energy stocks were up about 1% last week. They remain up 2% on the year despite the challenging backdrop, especially of the last month. And that's with oil down 12%, natural gas down 19%, the stock market down 7%. So, resilience in midstream energy with stock market issues and commodity backdrop really does speak to the relative non-correlation that this sector has with broader markets.

There's been a lot of talk about drill baby drill, President Trump's desire to see companies really pour on a lot more supply. Production has basically been dead flat since election day. It hasn't dropped, but it hasn't gone higher. And only two new rigs have been added in a hundred days. But that's obviously not due to a stricter regulatory environment from the Trump administration, because they've gone to great lengths to ease regulatory burdens on producers. It's basically just market reality, supply, demand,

margin, and what that does to pricing. Drill Baby Drill is a political line, but less so a market line. Markets are gonna respond to normal market circumstances, and cumbersome regulations are an impediment to new supply. But that's different than saying decreasing regulations automatically increases supply. It's a necessary condition, but not a sufficient one.

And the thing getting in the way now is $61 oil. There's just far less producers that want to activate a rig, put a well in the ground, or extract for sale at those prices. There's better margins, and so we need to continue monitoring that, but not expect only the regulatory apparatus to drive higher oil supply, it's not gonna happen. Our glossary today, the term was midstream energy, by the way, just because I use it so much,

I figure I may as well define it for anyone who doesn't know. And it's really just that sector of the energy market that sits in the middle of upstream and downstream. So upstream is where you're exploring, producing, drilling, getting oil and gas out of the ground, and downstream is where you're selling it. You're first refining it, that most of it has to come out of the ground, go to refinery, and then from there it's being presented for distribution. And so you have the downstream and the upstream,

but what is in between is the midstream, and that is generally transportation of oil and gas, sometimes storage, terminals preparing to ship offshore. But again, it's what is in the middle between the production of supply and the selling of supply, this transportation, and primarily pipelines, terminals, those are the companies we refer to as midstream energy. Great question about whether or not pain

in the US treasury market indicates investors getting out of US assets going to international, and me saying, hey, trouble in the treasury market could very well mean that there are brighter things going on in European markets, let's say, than US. I'm totally for that hypothesis in theoretical terms. It's just that's not what's happening factually. As I alluded to earlier, the 420 yield, a lot of the hand wringing over the bond market

a couple of weeks ago lasted a couple hours and has not really been the case in facts on the ground since. So it's important to kind of speak about what's happening as opposed to what people worry could happen. With that said, a big week for earnings season ahead. The highest amount of companies reporting quarterly profits will be reporting this coming week. So we'll see if some bottom up issues with company results and guidance drive markets more this week.

In the meantime, thank you for listening. Thank you for watching. Thank you for reading the Dividend Cafe. Looking forward to a good week as we finish the month of April, go into the month of May. For a lot of us, it will be nice to leave this particular April in the rear view mirror. It is one that will be in the history books. More to say in the days ahead. Thanks again.

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