The Dividend Cafe - Jumping Around But Staying Out of Trouble

Episode Date: September 25, 2020

There are a lot of places to go on the map right now. Markets were not just "up" throughout most of June/July/August, but they were "boring" in the way they did it. Limited volatility. Total transcendence to some of the silliness in how the media covered COVID. And a pretty consistent slow-burn to the upside. September has now invited normalcy back, and by normalcy, yes, I do mean frothy, over-valued tech positions getting re-priced (and that process could be in very early innings from where I sit), but also just plan going up and down - the standard bi-directional definition of volatility. We have a number of things going on in markets right now that will be discussed in this week's Dividend Cafe, and I suspect the conclusions I draw will be really satisfying for some, and really unsatisfying for others. I am hearing more and more people talk about certain things that seem obvious to them. This is the most bullish thing you could hope for if you are a contrarian (or a half-way decent hedge fund manager). In this week's Dividend Cafe we will look at ... • What all may be wrong or not wrong with markets • Five facts to focus on through the weeks and months ahead • Cash levels are still very, very high - but what does that mean? • Whether or not 2009 has anything to teach us right now • All the things happening in the economy (must read) • Politics and Money, and now the Supreme Court? • And of course, the Chart of the Week And with that, let's dive into the Dividend Cafe ... 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. Hello, welcome to this week's Dividend Cafe. This is David Bonson. I am the Chief Investment Officer and Managing Partner here at the Bonson Group. And in case you can't tell, I'm back in our Newport Beach studio, and we are pretty excited to have some changes going on. I'm going to do a little housekeeping first and then get into all the market stuff. Let me get the housekeeping out of the way. Hopefully, if you're listening to this podcast, you also receive into your feed the COVID Markets

podcast, which we've been doing for a while daily for actually months and months daily. And then most days, you know, going back to quarantine and so forth. Our plan right now is to retire the COVID and markets.com daily entries as of next Tuesday, which I believe is the 29th of September. That'll be the last one. And then on Thursday, October the 1st, to officially launch our new property called the DC Today. And of course, the DC, you could think of it as a dividend cafe, and you could also think of it as Washington, DC, but the point being it's a daily market recap. And I do intend for it to be a lot more succinct than COVID and markets was. There will be bullet points each day covering the Fed, covering housing, still covering COVID news as warranted.

I don't want to obsess over the COVID news anymore. That's kind of what's driving a lot of this. And yet I also believe that a lot of clients have benefited from us having that daily communication. So I intend to keep it going. But in the meantime, this here, Dividend Cafe, will continue to be our weekly offering, the major kind of weekly commentary, which has been near and dear to my heart for 12 years now. And I'm going to kind of even reorganize that a little bit. Basically think of this week's Dividend Cafe as like the exact opposite of everything I want the Dividend Cafe to be going forward. Where if you do read Dividend Cafe, you'll see this week that I kind of bounce around a number of different topics. It's, you know, those headlines and then kind of a treatment on what's going on with this, what's going on with that and so forth.

And I've been doing it that way for a long time and there's still going to be some of that, but I really want to get a lot of that captured into the DC today, Monday through Thursday. If there's something that comes up about global trade that I want to share or an update in our view of the oil sector or things like that, I want to encompass that into Monday through Thursday. a really comprehensive, really productive, really relatable, but significant single topic type of weekly commentary. And there will be a lot of weeks where there might be more than one thing to cover or a lot of weeks where multiple topics need to be treated together that are kind of integrated. So we'll see how it shapes. I'm going to be very open to anyone's feedback, both positive and negative, but I'm excited to kind of reorganize some of our offerings.

And the team here at Bonson Group has been working really hard to make all this happen from the production side and web and just everything that goes into it. There's a lot that has had to happen, and here we are. We'll give it a shot. that has had to happen, and here we are. We'll give it a shot. So in the meantime, as far as Divin Cafe here goes this week, the kind of weekly recap is most certainly that September has been a very odd month.

We're not done yet. We'll see where things go for the last four days of the market month next week, but we are looking at multiple weeks here of continued pressure in markets, and it has still been largely concentrated in the technology sector. And the NASDAQ, from its high level, which came in the middle of the day on September 2nd, to where we were as of early morning Friday, I'm recording on this in the middle of the market day Friday, and everything's actually up a little bit right now, but it's been going up and down and up and down all day, So I'm not even going to venture to guess where we end up today. But more or less, NASDAQ was down about 12% or 13% from its high level to low level. S&P a little less than that. Dow about 5% or 6%. And so everything's down, but it's been mostly concentrated in big tech.

And then it has just invited this incredible amount of debate and conversation as to what exactly was causing that and there the market was down a bit on monday of this last week like 500 points or something a significant amount um and there were all these people speculating had to do a ruth bader ginsburg dying and i wasn't exactly sure what that meant and i think in, what they're getting at is that that therefore made more political gridlock likely or more it elevated the noise and the toxicity. Certainly fair enough that it maybe was going to hurt this candidate or hurt that candidate and whoever that candidate may be. It would theoretically be bad for markets. bad for markets. So yeah, I would say that probably isn't the case that the mere passing of Justice Ginsburg and the really kind of complicated melodramas that will take place around that in DC are pertinent to markets. I would say that if one wanted to do an all of the

above kind of thesis here, that there is a question with the Fed's next move may be, we are going to go into an earnings season that'll start in the middle of October. And there's some question now, because we're going in kind of blind without a whole lot of guidance from companies. Is it possible that we might actually, for the first time since COVID started, have companies underperformed their really bad expectations. With thus far, companies have mostly outperformed bad expectations. I think that the election noise, the volatility around that, that certainly is a very legitimate thesis. The election tightening in the polls a little bit. It's tightened in some battleground states more than a little bit.

tightening in the polls a little bit. It's tightened in some battleground states more than a little bit. It's tightened in some of the Senate races substantially. Those things do not help markets. Because in this case, the thesis often is, well, President Trump wants to cut taxes and Joe Biden wants to raise taxes and Biden was winning in the polls. And so that's bad for markets. And if Trump narrows it in the polls, that'd be better for markets. It's far too simplistic. I really believe that what's going on, first of all, the polls have not tightened anything meaningfully. Those that believe President Trump is going to win, and I'm of the camp that just has absolutely no idea. And so there's people who are adamant Trump will win, people who are adamant Biden will win. And they profess that prediction to be separated from their own preference or aspiration.

I'm skeptical that most people are able to do that, but in fairness, some may. But regardless of what one objectively believes is going to happen, there is absolutely no way that the markets are able to price that in. So markets dropping 500 points in a day or rallying 500 points in a day, which they did each of those things this week. It's not like one day a poll comes out and it's down and the next day it pulls up and it's up. Like I said, it is the uncertainty of it that moves the volatility. Just the sort of concept, which I think is an extremely likely concept of not knowing who the winner will be going into election day and even on election day and potentially even for a few weeks after

election day. Hopefully it would only be a few days. It could be a few weeks, but who knows? And as I've gone to great lengths to talk about, that uncertainty is not merely applicable in a linear way to the presidential race. It's very applicable to the senatorial races. And I don't think that we're going to have two or three close ones. I think we may have four or five close ones. And that's all together going to have a lot to do with what ends up happening in the market. But in the meantime, I don't think up and down movements around an uncertain election outcome are going to go away. We're only near the end of September.

The election is still, let's call it at this point, five, six weeks away. OK, so you're going to have this dynamic out there along with the other dynamics. Are states tightening unexpectedly around COVID lockdowns yet again in certain areas? Are states reverse tightening? This morning as I was finishing up Dividend Cafe, the announcement came of Florida going to stage three, reopening restaurants and a lot of these types of things. So a month ago, we were expecting things to be tighter in Florida. Now they're getting more open. So the markets have to kind of adjust.

The economic activity is going to adjust around that. The question is, is it going to adjust favorably or unfavorably? That's another uncertain dynamic. I've used this analogy before, but if someone had told me New York was going to be less than 1% COVID positives and the restaurants are still going to be closed a couple months ago, I never would have believed it. And then if someone had said back when Florida was at its peak level in new cases that in a month, Florida's restaurants are going to be reopening, I wouldn't have believed that. So you can have surprise tightenings and surprise openings all at once, and that's part of our landscape right now. Earnings, Fed, election, and COVID economic activity, not COVID medical news.

That's the most important thing, the heightened severity. Why are we going up or down 300 points, 500 points here and there as opposed to those 2,000 and 3,000-point days? When we were going down 2,000 and 3,000 points, it was because we did not know the severity of the medical side. Right now, it's worth 200 or 300 points, so a tenth of that on intraday volatility because we don't know the policy response. We know that COVID is not going to go kill millions of Americans if we can protect our most vulnerable. We know of a 99 point fill in the blank survival rate. We know of the vast majority of positive tests being applied to people between

the ages of 18 and 49 that are better for the most part, sometimes in a matter of days. That's not Pollyannish. That's all stuff that we didn't know six months ago that we know now. Okay, that's good but that the market doesn't have to respond to the idea of uh what was the famous headline you know with the hedge funder on cnbc hell is coming back in march well hell's not hell's not coming but the election is and uh you know uh ongoing uncertainty about what some mayors and governors will do you know that's all that's all legitimate um and i don't expect that to change. So I want to be real clear. Big tech valuations being excessive are the only thing I feel a lot of clarity around. Where the policy response to COVID goes,

I just don't know. Where the election goes, I don't know. I should add the Fed – I feel a lot of clarity there. The Fed is going to backstop risk assets as they are now in a profound and totally abnormal way. But when I say abnormal, I mean abnormal for the first 70, 80 years of Fed. For the last 10 years and the next 10, this is actually the new normal, not abnormal. So I have pretty good clarity on the monetary policy backdrop to capital markets and the idea of COVID not necessarily being what we feared it would be medically. But I think those other uncertainties are going to continue, and therefore, I expect market volatility to continue at least for another four or five, six weeks. The problem with volatility is I did not say I expected it to go straight down and I did not say I expected it to go straight up.

I just have to always remind people volatility means two things, up and down. There's a couple of really interesting charts at COVID markets today. interesting charts at Dividend Cafe, Freudian Slip. Now, I want to call to your attention the level of money market funds. I did something I have not done yet, and I've tried to put these cash balance charts out there. I've done it at least three or four times since March to kind of reflect the roughly $4 trillion of sidelined investor capital that's out there. But what I did today is I broke it up of institutional and retail. It's really important for people to be able to see the big increase in sidelined money that remains on the sideline.

It's come down a little bit. So some has now been deployed as markets have recovered. But it is not all this retail money on the sideline with institutional money invested or vice versa. It's both and. And I think that speaks to the inevitability of an additional tailwind coming into risk assets. There are pension funds and hedge funds and other institutional investors that require a return on capital obviously aren't going to and can't get it from cash. And so at some point, they have to go play ball. And whenever that happens, it represents some boost into the opportunity and risk assets. I believe stocks will

end up being the primary beneficiary there. Another thing that I did, and of course, I devoted so much time and effort to that white paper I wrote that came out two weeks ago on the election, that I don't want to overkill with data and information I already provided in the white paper. And yet I also had kind of a new area that came to me this morning in my research and writing that I want to share with you, that the principle of it, the point of it, of your policy expectations, and how then sometimes the way that that translates into market performance can really be surprising. And I used the example of some of where we would have expected President Trump's preferred sectors to have done well and then the ones that you would think he would have been in opposition to not doing well and how it proved to be the opposite in this so far first term of his presidency. But everyone who absolutely hates Trump and everyone absolutely loves Trump would more than likely say that in a matter of the major policies, he would have been in a different position than President Obama. point is I don't know anyone that thinks that they were coming at this with a very similar policy

portfolio that most people would have said for good or for bad on one or not the other that they were at opposite ends of how they would approach some of these issues and yet the top three performing sectors under President Obama were consumer discretionary technology and health care and the top three performing sectors under President Trump were consumer discretionary technology and healthcare. And the top three performing sectors under President Trump were consumer discretionary technology and healthcare. And the sectors that did worse under President Obama, the two worst performing sectors were financials and energy. And the two worst performing sectors under President Trump were financials and energy. So you really only have logically one of two conclusions you can draw.

And I've already eliminated the first one. And the first one is that maybe President Obama and Trump had the same policies on those matters that would have affected those sectors. And I think that's an absurd conclusion. So the second conclusion would be, well, maybe the president is pretty overrated in how they affect the sector performance. And I think that that is the testimony of history and certainly the testimony of the last 12 years of presidential history. A couple other things that we cover at Dividend Cafe this week, more on the oil industry. My argument in a nutshell, we're holding firm here with crude oil at $40, but just a continued battered and bruised sector as far as the stock performance goes around a lot

of the upstream energy companies and midstream energy. And I lay it out as simply as I can. Do you believe that the trillions, and I say that without a typo and without hyperbole – that the trillions of dollars of investment and opportunity and expenditures and transactions and fossil fuel that are necessary to right now run civilization, to feed energy needs around transportation and around heating and around cooling and around food. Do you believe that that's going away in the next 10 years? Now, some would say 20, 30, 40, there's different opinions. There's different beliefs about when it should go away and different beliefs about when it will go away. That's all fine. I'm not going there right now. I'm making a simple comment that I'm not aware of anyone who believes that's going away in the here and now. And therefore, to the extent that we know and I'm aware of, believes that we're going to stop heating and cooling and feeding civilization,

can deny the market need for particularly natural gas and crude oil. And therefore, all the other arguments that one may make or not make around cleaner ways to use natural gas and all that different things. It's kind of irrelevant. All I'm getting at is that right now, if one believes that the multi-trillion dollar need for fossil fuels for the next 10 to 20 years is still going to be there for that period of time, someone's going to make a lot of money from it. And in my mind, it would probably be the strongest and best companies in the sector that are right now at very distressed levels. So that would be the underlying thesis. Do I happen to believe that it's still a multi-generational opportunity set? I do. But that's kind of irrelevant to the point now. irrelevant to the point now because no one I'm aware of would deny anything I've said so far in a shorter horizon. And I think that should be a very succinct and digestible understanding of what that investment thesis would be around the transportation, the safe,

environmentally safe, and economically efficient transportation of natural gas and crude oil in our country. A lot of going on in the economy, and I think the economic update of the week is somewhat meaty this week, just around durable goods orders that really outperformed expectations in August. The chart of the week looks at overall global trade and how significantly quicker its rebound has come out of the COVID moment than it did out of the financial crisis in 2009. And yet that's true, even though many of the economies of the world, including here in our own country, are not even fully reopened yet. And yet we already see a really robust reanimation of exports out of China, of American household import demand, durable goods orders. You see a lot of pretty healthy economic activity.

The question will be if it's sustained. If this is just a mere little blip of a rebound out of the second quarter problems that we had, then that will not be optimistic. I will not be, stay optimistic around that. But thus far, it really appears that a lot of that data is outperforming expectations. Let me go ahead and leave it there. We do have a debate you may have heard on Tuesday night of next week, September 29th will be the first of the three presidential debates. That should be good for a little fodder here in the Dividend Cafe. I'm sure I'll be covering it to some degree next week. We'll see if it moves the needle, if there's any kind of market impact around it. But I think at this

point, you should be pretty familiar with my overall thesis around markets. I think we have not one, but three or four categories that are legitimately ambiguous in the short-term direction. I expect that to be true of markets, but that is true with markets having achieved this kind of 27,000 range instead of a 22,000 range. And so markets did recover a great deal of pricing. And to have gotten up back above $28,000 and experienced some kind of up and down movements, I don't think it should be a surprise to anybody. And ultimately, I made this point in COVID of markets this week, you have to understand that with equity markets now moving the way they have and the bond yield not moving at all, that's the new normal. That's where you lose the opportunity

for bonds to provide risk mitigation around equity volatility. And of course, by the math of it, you already have lost the income from those bonds with yields at sub 1%. So our dividend cafe next Friday will be dedicated to what we are internally here at the Bonson Group calling, I guess it's not internal because I'm telling you, Operation Magnify, where we are looking to kind of restructure, reorganize the way we're presenting our portfolio construction. the way we're presenting our portfolio construction, but it is not replacing anything we've ever believed. It is magnifying long-held principles, magnifying long-held beliefs,

and seeking just a better contemporary application of the normal environment, the new normal environment in which we live, which has everything to do with interest rates and what that is going to mean to the economy for the next 10 years. Thank you, as always, for listening to the Dividend Cafe. Reach out anytime with any questions. We will get you your very final COVID and markets missive and podcast next Tuesday, and look forward to introducing you to the DC Today on Thursday, October 1, followed by another

weekly Dividend Cafe on Friday. And with that, I will say, have a wonderful weekend. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, with Hightower Advisors LLC, a registered investment advisor with 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. Thank you. way be liable for claims and make no expressed 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. Such data and information are subject to change without notice. This document was created for informational purposes only. The opinions expressed

are solely those of the Bonson Group and do not represent those of Hightower Advisors LLC or any Thank you.