The Dividend Cafe - Even More Ridiculous than Negative Oil Prices

Episode Date: April 24, 2020

It has been a fascinating week in the markets, with oil tanking, but the energy sector way up; with the markets up and down every day; with some bond sectors rallying, and others selling off.  Some degree of non-correlation between asset classes seems to be sneaking back into play, and non-correlation is the hallmark of normalcy.  Now, we have a long, long way to go ...  but there were interesting green shoots this week in each But the various developments in the markets this week are not the full heart of Dividend Cafe this week.  The heart of this weekly commentary is how to think about portfolio balance right now, what diversification really means, and what government stimulus and Fed interventions do and do not mean for your portfolio. So shut down your Zoom, turn off your Netflix, and do your third walk of the dog for the day later.  And jump on in to the Dividend Cafe ... Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, financial food for thought. Welcome you to our weekly podcast and of course those watching on video as well. You can see that we are still here in quarantine. I'm working from my home library where I've been working for somewhere around 18 to 20 hours per day for what feels like about 10 years now. And in fact, it's been, I think, six weeks and we continue to plug away on a number of different things as a society, We continue to plug away on a number of different things as a society, preparing for what things will look like to reenter some degree of normalcy. Many states getting ready to enter their phase one of reopening. Some states not obviously so ready, but much closer to being on the other side of this extraordinary period of time of sheltering in place orders, quarantines, and various other synonyms of the same thing that have shut the American economy down and created one of the most interesting economic dilemmas that I would think has ever been imagined, certainly by people that would be in my shoes.

So our posture right now remains one of prudence, where we feel very strongly that it's going to be a choppy period for risk assets for the foreseeable months, but that the quote-unquote tail risk in the most extreme circumstances that were largely being priced in four and five weeks ago have substantially improved, and the outlook has largely taken off much of the possibility of those extreme situations. the possibility of those extreme situations. We can't say for sure where markets are going to bottom out at, where they're going to top out. This week, markets were down a little bit, but you had 500 or 600 points down Monday and Tuesday,

then close to 500 up on Wednesday. Markets were up about 300 Thursday, gave a lot of that back, but still ended up being up on the week, and then were up near 300 Thursday, gave a lot of that back, but still ended up being up on the week. And then we're up near 300 here on Friday. So with all of that movement, when all said and done, you ended up down just a few hundred points. You're up a couple thousand points on the month of April, and you're up 5,000 points from the low levels, which were achieved at the closing of March 23rd, just a month ago now. So it's been quite a journey, and yet I don't really believe

that what a lot of people are worried about, or talking about anyways, I don't even know that they're worried. I think a lot of the media coverage is intentionally sensationalistic. I'm not sure that there's any true worry behind it. I think that there's a possibility that some people are getting some of the concluding thoughts decently correct for wrong reasons. My prudence or pause in the way we want to approach risk assets in the months ahead is not based on the fact that right now unemployment's very high and the economy is shut down and airplanes are not running and cars are not running and gas and oil are not being used. Those things, I don't know anyone who doesn't know those things, and I find it incomprehensible that any bad economic news would be news. I think all of it is a, meaning financial surprise. I think all of it is well

known, and the questions that lie in front of us are ones that I don't believe anyone knows the answer to, and I most certainly know that I don't know the answer to. And that is how strongly things might pick up into June, which I assume will be reasonably weak. But then into July, and as you go later into the end of the third quarter, and certainly on into the fourth quarter, how robust that recovery may look like. I think that there's conflicting forces at play. A lot of the American people are very clearly anxious to get back to life. And yet I also am well aware that there will be some degree of modification to behaviors and

activities. There will be some degree of risk aversion. And how that is all going to manifest itself will probably be very different across different companies and different sectors. And all of this sort of landscape for economic trepidation for a number of months while we re-find our footing when they do reopen the country that they have shut down. It has to be interpreted in the context of unprecedented stimulus, some charts of which I put into Dividend Cafe this week to paint the picture that it cannot be understated that we are talking about multiples of levels of past stimulus. And so whatever we thought we had seen in the past, if those were bazookas, then this is a nuclear war. And that does not mean it will be effective. It does not mean it will be perfectly effective. More than likely, it means it will plug a lot of

holes and be effective in that sense, but not cover everything, you know, not be perfectly distributed as a stimulation plan, things of that nature. However, trying to interpret and apply investment around the already unknown economic landscape with the unknowns of the stimulus effectiveness, both on the monetary side and fiscal side, I think will be very challenging. And so the instinct that says, I want to be highly opportunistic and put the pedal to the metal has some problems. And the instinct that says, I want to wait for everything to play out has problems. And so that application of prudence needs to be done really in a highly tailored way, client by client.

The Fed will be meeting next Tuesday and Wednesday here, just a few days from now. And we'll get reports from those meetings at some point on Wednesday. And I think it has the possibility of being a very big catalyst to markets to the extent that they may potentially, again, we don't know this, fill in the blanks on some of their plans around the facilities that they've created. I don't think there's going to be any new facilities created. I think we're out of letters in the alphabet anyways, they've created quite a few different programs and, like I said, actual facility entities by which they can be lending out money that they digitally facilitate. And each facility is tailored to a different itch that they're trying to scratch from municipal bonds to corporate

bonds to money markets to commercial paper, but all centered around getting the economy moving again. And the meetings this week could potentially unpack some of what they may do in the levered loan space and some of the commercial real estate world, mortgage originations. There's a number of questions around that. So these things are pretty important. And I'm not sure that we have a lot of clarity in the weeds on some of the structured credit side and even some of the municipal finance side.

We have enough clarity to know, and markets have benefited immensely from this and credit spreads have tightened from this, that the Fed is taking the posture of being a lender, a supporter, and a kind of bazooka approach, do whatever they have to do type of thing. What I don't know is exactly how that will play out for a couple of these specific asset classes that I've mentioned, structured credit and so forth. And so next week could be interesting in that regard. Anything that is tightening credit spreads is facilitating the positivity in equity markets. Anything that widens credit spreads probably increases the possibility of equities

having further leg down in their volatility. And I couldn't speculate one way or the other which way they'll go. There isn't speculation for me around the general posture, which is Federal Reserve accommodation. But into those specific weeds, we'll have to see what the impact is in the credit markets next week. those specific weeds, we'll have to see what the impact is in the credit markets next week.

So other than that, the earnings season being such a non-event, I mean, that could change next week because you do have really the heart of earnings season next week, a substantial amount of companies reporting. But again, I reiterate my view that a company telling you that everything was going really well in January, early February, and then it started going not so well in later February, and then the whole kind of thing blew up in March. That's not really news to get excited about one way or the other. And then them saying that they don't have a lot of clarity as to how things will go into the next quarter or for the rest of the year. Suspending full-year guidance has become a non-event.

So that's really what earnings season has been company by company. A few have had better stories and reacted. Very few companies have had numbers that they came out and they were just awful and the market said, wow, this is shockingly awful and then seen a really bad result. So, you know, the things we're looking to in this earnings season have a lot more to do with management's posture about their balance sheet, about their liquidity position, about their commitment to dividend, you know, the things that matter to us as bottom-up investors. However, I really believe that the macro context right now is a tale of two cities. believe that the macro context right now is a tale of two cities. It is the tale of economic headwinds, as far as the eyes can see, caused by the shutdown. It is a tale of economic hope around the idea of reopening the country in the foreseeable future. And it's the tale of a ton of

fiscal monetary stimulus entering the fray to hopefully support risk assets and support economic recovery. And so we have to navigate through it and we have to do that according to planning-driven and goals-driven decisions. That's what we do all day, every day. So I'm very grateful for the opportunity and me and my partners and colleagues at the Bonson Group are all very grateful for the opportunity. And me and my partners and colleagues at the Bonson Group

are all very grateful for the opportunity to work with those of your clients. We hope you are benefiting from the material we're sending. We definitely solicit your feedback, questions, comments. And I'd just like to reiterate as you go into the weekend that to the extent that none of this is easy for us and not been easy for me, the stress and the workload, you know, nobody has to worry about me at all. I've got an awful lot of support and encouragement comments. I'll never forget any of it. I mean that the kindness has been absolutely incredible, but I'm fine and my team's fine. what I worry about is you all I want our clients to be okay I want our clients to be at peace we feel that we get paid to have your anxieties projected onto us and it's not always my favorite thing in the world but it is our job and we're going to continue

doing it whether this thing lasts for another few days or another few quarters. No matter what, this is what we're going to be here to do. And I certainly hope we'll be doing it from our own office and going out to restaurants very soon, as opposed to at home base. But in the meantime, enjoy whatever it is you're doing this weekend. Love your family, love your friends, be well, be safe, and with Hightower Advisors LLC, a registered investment advisor of the SEC. Securities are offered through Hightower Securities LLC. Advisory services are offered through Hightower 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 profitable. Past performance is not indicative of current or future performance. This is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors. All data and information referenced herein are from sources believed to be reliable. Any opinion, news, research, analyses, prices, or other information contained in this research is provided as general market commentary. It does not constitute investment advice. The team at Hightower should not be in any way liable for claims and make no express or implied representations or warranties as to the accuracy or completeness of the data and other information or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Thank you.