The Dividend Cafe - In Defense of Market Bulls

Episode Date: April 20, 2018

This week, David and looks back at the week and looks forward to earnings season..... Topics discussed: lessening of trade related volatility reasons to be bullish Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, financial food for thought. Hello and welcome to this week's Dividend Cafe podcast. This is David Bonson, Chief Investment Officer, Managing Partner at the Bonson Group. And we are coming to you in our first week with tax season behind us. It actually ended here in the middle of this week. And it may seem as if it's not a big deal, especially if you're one who got your taxes done a couple months ago, or if you're one who isn't going to be getting it done until later in the year on extension. Anyways, from an investment standpoint, it's a big deal because the period

around tax season is always so hectic and there's so much that needs to go on in terms of final documentation and preparation and adjustment and not to mention potential contribution, you know, in terms of retirement accounts and things like that. So very glad to be through that and have some things to say this week about the market. At press time, so to speak, as I record sitting here with the market up about close to 400 points on the week. And again, that could be a very different number in just another few hours or another few days. But I guess that might be a surprise to some based on volatility that would have been expected from the Syria strikes from last weekend. Although you could argue maybe it's not a surprise because people expected the markets to do well based on the fact that the Syria strikes didn't prove to be larger or didn't prove to come with retaliatory impact or things of that nature.

Look, right now, the trade-induced, tariff-induced volatility, at least for now, seems to have subsided a little bit. now seems to have subsided a little bit. But I think that as we enter earnings season, the reflection on revalidating assumptions around capital allocation as the companies announce what they are doing with the excess profits from corporate tax reform, discovering potential CapEx intentions. There is a lot embedded in the market that will be challenged and maybe gotten better or gotten worse as a result of the earnings season we're about to go into. So we look forward to applying our understanding of corporate America's capital allocation plans in the weeks ahead. And that's what I'm going to talk about in this week's Dividend Cafe podcast.

And just kind of generally give a few exhortations to the bulls, those that are generally bullish on the market right now. And maybe give them a bit of an apologetic as to why their viewpoint might make sense. And we'll go through it, you know, point by point. I mean, why would one be optimistic right now? I alluded to this concept of corporate America's capital reallocation. We've been banging the drum for some time. The dividend increases are coming. That's a positive. Share repurchases are coming. That's a positive. And new capital expenditures, CapEx, are coming.

Also a positive. Overall balance sheet improvement. Let's say companies use money to pay down debt. That's a positive. $2.4 trillion of cash is sitting on the balance sheets of America's non-financial companies. You don't use the banks because they're kind of an obvious exception to the rule, but just non-financial companies sitting on $2.4 trillion of cash. It's an all-time record. There's a chart at DividendCafe.com reinforcing that. And we think it's only going to go higher from here as the impact of tax reform becomes actually realized. And this speaks to the opportunity set for those aforementioned uses or allocation plans for that capital that could, in our mind, become very bullish

and reinforcing of an already bullish thesis for markets. Now, the overvaluation argument is one of the most common arguments in the public square against stocks. And yet, time and time again, this argument ignores the most obvious nuance in the facts that matters. The overvaluation, quote-unquote, is highly concentrated in a very, very small number of companies bringing the overall valuation of the market up, but in fact, speaking to their own overvaluation much more than they speak to the broad market.

Or, you know, its many sector constituents. Overvaluation may apply to a diagnosis of certain parts of the market, but that is best remedied with selectivity and discernment. Well, fear is so much higher, right? Well, you know, people have pointed to the elevated VIX as signs that fear was playing higher in the market now. Economic headwinds must be out there that bode poorly for stocks. In fact, the VIX has collapsed from its February levels. While it sits above the January lows, it's actually in a healthy, normal spot historically. But let's ignore the VIX for now. I'm not sure I'm ever going to pay attention to it again just

now that I see the technical impact had on the VIX by those dealing with exchange product but you know putting VIX aside high yield bond spreads are in my mind one of the totally pivotal vital tools at measuring risk and complacency. The higher the spread, the more risk investors are pricing in, and therefore more compensation they're demanding for that risk. Inversely, when spreads collapse, it indicates the perception of less risk, for right or for wrong. This is a marketplace indicating the votes of hundreds of billions of dollars of sophisticated economic actors with real skin in the game. I would anecdotally add that high-yield bonds have a high correlation to oil prices at times, like now,

and oil's resurgence is surely behind some of this. However, a skyrocketing complex of fear and panic is completely incompatible with tightening spreads in the high-yield bond market, and yet here we are. Readers will recall, listeners will recall, viewers will recall how consistent the theme was last year of globally synchronized economic growth. The U.S. conditions economically were improving, and that received the kicker late last year of tax reform. Europe, Japan, China, and emerging markets were also experiencing robust economic growth, some more robust than others. And the landscape of harmonious GDP growth was a very appetizing landscape for risk assets.

But is that momentum slowing, accelerating, or something else? The data is mixed. Europe's economic growth is slowing, and we would argue is most vulnerable as the ECB begins pruning the patient off of its monetary medication. Uncertainty abounds because of trade and tariff matters, FANG regulation, China, and so forth. But we see positive conditions in emerging markets and the beginning impact of corporate tax reform boosting U.S. business investment. Excessive conviction one way or the other is a poor idea right now. The positive impact of tax reform will take time and should not be missed.

By the way, at my Advice and Insights podcast this week, for those who follow that or those who want to check out what the other property is, our topic this week, which we do a kind of, you know, elaborated deep dive, good information, not particularly long, is about trade deficits, which you probably have heard a word or two about just in the news cycle. So check out Advice and Insights podcast. A couple charts to point out. If you can go to dividendcafe.com, when 10% never equals 10%,

we have a chart showing the average return of the S&P 500 going back 50, 60 years, and then showing year by year by year what that return has been and how unbelievably rare it is for the market to be on a given year even around 4%, give or take 2% north or south of its average return. It really tells you something about the difference between what an investor can expect from the market over a long period

of time and what people may deal with year by year. I'm going to go ahead and leave it there. There's just so much more that is chart driven. I do have some great content at DividendCafe.com, in my opinion. It's always nice when I say it's great content and I'm the one who wrote it because then it makes me sound like I'm some arrogant you-know-what. But, no, I do think it's valuable content for you to check out on what we believe one of the key ingredients is to the whole private equity story,

what the investable thesis is in private equity. And then most certainly at the chart of the week, you have got to see the truth behind long-term bull markets. We go through the last hundred years of history and look at the length that a typical bull market has gone. And you will notice that even in this now nine-year-old bull market that we've been going through that so many people tell us is long in the tooth. We literally have had four bull markets of significantly longer and a couple bull markets of about the same size, same length, but there have been markets that were up 900%, were up 900%, 820, 800. So you have to look at the historical data, and you'll read our point on how bull market cycles can be expected to operate. Other than that, I do hope you have gotten a lot out of this Extivity Cafe podcast.

I'd love for you to subscribe or review some nice comments for us on your iTunes review or whatever the case may be. But let's leave it there. Welcome, welcome, welcome questions. I want to engage with you on anything you want to know. And I encourage you to check out Advice and Insights podcast. Read DividendCafe.com. And thank you for your interest in the things that we are saying and doing at the Bonson Group. Those things that we say are the things that we do, and the things that we do are the things that we say. We don't break apart the distinction. Look forward to your ongoing

feedback. Thanks. Thank you for listening to The Dividend Cafe, financial food for thought. with Hightower Securities LLC, member FINRA, and SIPC, 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

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