The Dividend Cafe - Dividends Under the Tree and a Lump of “Gold” in the Stocking

Episode Date: December 21, 2016

Dividends Under the Tree and a Lump of “Gold” in the Stocking by The Bahnsen Group

Welcome to this week's Dividend Cafe podcast. We are near the end of the year going into holiday weekend. We're putting this out a little bit early this week because we know that obviously come weekend you're going to have your holiday insanity going on. And so we just want to kind of get this out there and then let you go enjoy your weekend. But in the meantime, markets never sleep and let's see what Dividend Cafe has to serve. While we're always prepared to be surprised and even disappointed, we do believe that the area in which we could see the quickest priming of the economic pump, if you will, may be in energy, particularly through the approval of a whole host of stalled or denied projects that the incoming Trump administration is likely to approve. From the various tax reform bills being discussed

to what may happen with a repeal or replacement of Obamacare to increased defense spending and changes in financial regulations, investors are out scrambling to predict what these Trumpian policies may impact, what parts of the market, and in what ways. And through all this, we actually see energy being the area most likely to benefit the quickest. You know, part of it is when you see the CEO of Exxon being named Secretary of State, and you see a longtime energy expert and advocate like Rick Perry, the longtime governor from Texas being named the Secretary of Energy, you see a glimpse of this administration's priorities. They have plenty of priorities, but we're highlighting energy

because we think it's low-hanging fruit to act quickly through approving some of these projects and other such capabilities the executive branch would have. Municipal mayhem. I've lived through several periods of pronounced and traumatic disruption in the community bond market, but none that I can remember when there was not a sniff of fear about defaults or busted financial performance. In this case, interest rates blew higher when Trump was elected and supply-demand technicals were all negative for the muni market. Then investors faced the end of the year, and quite frankly, there was little to sell this year for doing tax-loss selling besides municipal bonds.

And then all that distress led to snowballed investor response, and so we got the muni route we got. But none of it was related to any credit fears about the financial wherewithal of the municipalities. We see greater value coming into intermediate maturities instead of longer-dated, and in higher yielding, less credit worthy instruments we think are more valuable than even the high grade side of things. The modern history of dividends, you know, since 1960, there's been 14 out of 56 years

where the S&P 500 generated a negative return. And in that there's been 11 times where the S&P 500 generated a negative return. And in that, there's been 11 times where the S&P generated less earnings than the year before. So you can do the math. That means that if the market went up when earnings went down, it's because the P.E. ratio expanded. Investors were paying more for less earnings, generally because interest rates were declining. And then, of course, the inverse is true. If the market went up when earnings, excuse me, if the market went down when earnings went up, it's because the PE ratio was going the other way. But how many times did the dividends themselves decline for a pure S&P 500 investor? Seven out of 56, significantly less, just half of the time of a negative return in the market.

Now, how many times have the dividends themselves declined for a pure dividend growth approach? Nada, never. Stock prices have advanced per annum right in line with earnings growth on average, not year by year. But there's a lot of volatility in earnings of an index and even more volatility in the valuation of those earnings. But dividend income doesn't go negative. And we believe it can be invested in to grow always and forever.

And so that is what we work for. Bond yields have gone higher because of fears that increased debt and spending would drive inflation higher. Well, that's the party line, but isn't gold supposed to be the world's greatest perma hedge against inflation? The reality is that either the market is not worried about inflation as the bond yields say it is, or that gold is not really an inflation hedge whatsoever. We believe it's the latter. There are inflationary pressures, and those fears have pushed bond yields up. But gold's gotten pummeled in the last six weeks, like the worst six-week stretch since 1982, because gold has turned into a simple anti-dollar play and the dollar is rallied behind higher rates and yields. We do not know where the

bottom in gold may be found, but we do know that there's no way to square this circle. If the fact that gold is currently down about 60% from its inflation-adjusted price level from 1980, so a mere 36-year period of not even remotely providing an inflation hedge, does not convince you, please consider just the last six weeks. edge does not convince you, please consider just the last six weeks. Gold has responded to fears of higher debt and greater inflation by collapsing. As June goes, excuse me, as January goes, so the end of the year doesn't go, I'd love 2016 to be the year that once and for all kills silly, trite, mindless expressions of superstition and investing. January was a bloodbath in markets and voices proclaimed this bodes poorly for the rest of the year. There used to be an expression, sell in May and go away. And September, I think,

is always supposed to be bad. And December is supposed to be bad for part of the month and good for part of the month and good for part of the month and so forth and so on. It's hard to keep it all straight. The idea of developing investment policy around calendar occurrences is insane. 2016 proved it repeatedly. We've written a lot in recent weeks about the declining correlation in the markets, the tendency for stocks to move in concert with one another. We consider this a very, very healthy development that this correlation is totally broken apart, especially for tactical, fundamental, active managers like us. When everything's going up and down together, it's hard to add value. The environment we're now

appear headed towards a period of divergent results across different stocks and different sectors. And that makes selectivity and discernment much more important. And we have a chart kind of illustrating exactly how low these correlations are from one sector to the next and across the whole market in this week's dividendcafe.com entry. So I'm going to go ahead and leave it there now. I purposely kept it short this week because we really want you to get into your holidays and we hope that you will have just an absolutely fantastic Christmas weekend with your loved ones. We do plan to come back at you again next week and then in the early part of January

do a full 2016 recap in the meantime though thank you so much enjoy your holiday merry christmas