The Dividend Cafe - A Week Not to be Forgotten by Any Investor - July 1, 2016

Episode Date: July 1, 2016

A Week Not to be Forgotten by Any Investor - July 1, 2016 by The Bahnsen Group

Thank you. But we ended up writing an entirely new piece last Friday, which meant we didn't get to do the podcast version. This was in response to the incredible market response to Brexit. By Brexit, of course, I refer to the British vote to exit the European Union that took place a week ago. Union that took place a week ago. Hopefully you also received the piece that we did on Monday of this week after a weekend of digesting the Brexit aftermath, and we did do a podcast version of that as well. In those first two days after the British vote, we saw the market drop nearly 1,000 points, and in the next three days we have seen seen the market essentially rise a thousand points, rounding up a bit. We're now one day here into the month of July. The first half of this 2016 year is over. And I believe this week was perhaps one of the most shameful weeks we have ever seen

from a press hype machine and other leftist pundits who, suffice it to say, do not have the best interest of individual investors in mind. With that said, let's get into it and I'll start with an executive summary. Point number one, there's little on the minds of investors and market participants this week besides the aftermath of Brexit. Let's review what happened. The Dow got as low as 17,470 on Thursday, June 16th. The next week, the markets went up 500 points, largely as investors believed the betting markets that Brexit was going to fail. In the middle of the night, June 23rd, going on June 24th, Brexit won by a vote of 52% to 48%. On Friday, June 25th, the market dropped 600 points. A lot of other markets and currencies and commodities declined as well.

on Monday, June 26th, the market dropped another 250 points. And then Tuesday, Wednesday, Thursday of this week, the market has rebounded over 900 points. So what is my summary of all this action? The market right now is 500 points higher than it was two weeks ago before the Brexit vote. It is only 60 points or so below where it was the day before the Brexit vote. With all due respect, the fear-mongering done around this vote was largely politically motivated and at a level of inane, dense cluelessness I have truly never seen. Many more developments will come in the days, weeks, months ahead around the European Union, Britain, and global economics at large. But as far as this particular Brexit aftermath, we hope you can appreciate the priority we place on discernment and steadiness in times of media hysteria.

Obviously, number two, obviously the story of the week was the equity market round trip, the U.S., but also overseas, particularly stocks in Britain. But the close second is the bond market story, where we're looking at a Japanese 10-year yield a quarter of a point below zero. A German 10-year bond that is 13 basis points below zero. Italy and Spain both have 10-year bonds barely above 1% and even the U.S. 10-year treasury is barely holding a 1.4% yield. The bond market is pricing in an unbelievable fear of deflationary pressures, of low or no growth, and obviously a flight to safety. Something is going to have to give one way or the other. Number three, we buy bonds because they diversify the effects of stock market volatility.

That volatility may be much higher the next five years than the last five as deflationary pressures persist. And even at very low yields, which reflect deflationary pressures, as we've said, we believe bonds will look sketchy as it pertains to their duration risk, the fear of interest rates going higher. as it pertains to their duration risk, the fear of interest rates going higher, and yet we hold them because of the diversification and safety benefits they provide. So number four, we buy stocks on the other hand, both for the long-term growth benefits of rising earnings and rising dividends, but we also buy them for retirees who flat out need cash flow. Stock market volatility has to be managed, but bond yields around the globe are not paying people's bills. The stocks as the new bonds theme, certain dividend names being used as a surrogate for bonds is a big theme and we

think will be here for quite some time. Number five in our summary, natural gas, natural gas infrastructure investments remain something we're very bullish on and the thesis is being substantially validated as natural gas surpasses coal as a source of U.S. power generation. On the more bearish side, municipal bonds have a lot of froth around them right now. Excess supply, very low interest rates, and a constant flow of new funds coming in suggest there's at least a need for caution and selectivity. suggests there's at least a need for caution and selectivity. In the news this week, Boris Johnson announced he will not seek the position of Prime Minister in Britain, and David Cameron will be stepping down as Prime Minister, most people know, in October.

So the timing and the mechanics of how Britain will activate their exit from the EU are somewhat unknown. Interestingly, former President Bill Clinton spent 30 minutes on the private plane of Attorney General Loretta Lynch this week, reportedly to speak about their grandkids and golf. commentators have expressed concern about the optics of this in light of the fact that the Department of Justice, which Lynch heads up, is currently investigating presidential candidate Hillary Clinton regarding her email and server activities. When we look at our core issues, China, oil, recession fears, and the election, it may not be that people want to hear that I'm forced, as I'm kind of laughing off the idiocy of this market response to Brexit, but if there were to be a surprise to markets in the second half of the year, I still believe it would be a round three of unexpected Chinese

yuan depreciation. Round one was in August of 2015, and the markets bounced back, but it was a really ugly month. Round two was January of 2016, and again we bounced back, but it was a really ugly month. Round two was January of 2016, and again we bounced back, but it was a really ugly period. I don't think that the China story is gone by any means. And by China story, I mean the impact of their declining growth on world markets and the potential for more unexpected surprises. surprises. But I will say that it is the threat of tighter Fed monetary policy that then rallies the dollar that then makes China respond that I would be concerned about. As long as the Fed is frozen in place, we may not hear a lot about China. Oil seems stuck between a range of $48 and $52. And despite the Brexit fears, didn't dip much below that this week, but hasn't been able to get much meaningfully above 50. We continue to believe that the really, really global recessionary

kind of fears of a $26 oil of a few months ago seems to no longer be in the cards. The Saudis have gone out of their way to say that supply demand forces are better in balance here around $50 a barrel. I don't know for sure, but it does appear stabilization has taken place. And that has been a major, major story here in the first half of 2016. By way of recession, we would put the odds of a 2016 recession below 20%. We'd put the odds of a 2017 recession above 40%. We want to elaborate on this process in the weeks ahead, but really right now, when you look at where yields are, you have to conclude that there's some fear of a recession in the cards.

some fear of a recession in the cards. In terms of the election, we'd point you to a recent article we wrote on Forbes about the healthcare and biotech ramifications of a major ballot initiative here in California that could have a big impact on investors around the country. So with all that said, let me go ahead and leave it there for the week. We certainly know it has been a very tumultuous time.

We would really encourage you to go to DividendCafe.com to read further. We have a lot more elaboration on some of these things, some really important charts. To say I'm disappointed in the media and how they responded to Brexit is not really fair. I would have to be surprised to be disappointed. I don't want to pile on more than I already have, but there's very little attempt at a rational explanation as to why Brexit would literally have been that disruptive to markets, even if we uphold that the uncertainty of it justifies a little short-term ripple,

which we certainly can understand. But no, the politicians, media pundits, and others, all with an agenda, succeeded in scaring people, and some significantly consequential behaviors resulted. And it's one of the major reasons we want to get out and tell our clients what we believe. And we want to tell you, if you're listening to this, that behavioral modification is one of the major value propositions we explicitly state we're offering. We want to make good investment decisions, good security selection.

We do believe our particular investment philosophy, both philosophically but also in the the execution of it is very important. But I just think it is very important that we reiterate the importance of perpetual behavioral modification, avoidance of big mistakes in the way that we handle things. So please enjoy your 4th of July weekend. Enjoy the families and the fun and the sun and all those good things a holiday weekend represents. We will be enjoying those things this weekend because 240 years ago, the greatest political document in world history was written and the greatest nation on God's green earth was born. Have a happy 4th of July.