The Dividend Cafe - Miles and Miles To Go Before I Sleep

Episode Date: March 27, 2020

As of broadcast time, the market has moved significantly higher on the week, bouncing in a meaningful way Tuesday, Wednesday, and Thursday this week (after further sell-off Monday). As I record Friday morning, the market shows down (but it is early). We all know that we don’t know what the rest of the day (or weekend) will bring. This very special Dividend Cafe (long, but I think we all have extra reading time this weekend) attempts to combine a lot of investment application, macroeconomic commentary, and basic financial wisdom, into one trip to the Dividend Cafe. Jump on in. Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, financial food for thought. and we're recording in the middle of the market day on Friday. And I certainly in advance want to wish everyone a wonderful weekend. I'm hopeful that there will be good news over the weekend and hopefully the beginning of some improvement on the health data and things like that. But right now we continue to just be in prayer for the whole country, for those who are afflicted to heal and for those who are not afflicted to stay out of harm's way. And we look forward to that inevitable moment where we start seeing in the data really meaningful improvement around this virus scare.

From an investment standpoint, it's been a very interesting week in the markets, coming off of two of the worst weeks in history. And now this week, as I'm recording right now, with again, a little less than three hours left in the trading day, the market's down about 750 points today. It was down 600 or so on Monday, but then it was up 2,200 points Tuesday, 500 points Wednesday, and 1,300 points on Thursday. So we stand ready to close at a pretty meaningful up week in the markets. A couple different reasons for that. The smaller ones that probably are more obvious to people are that the stimulus bill is ready to be passed. As I am speaking, the House has not yet voted, but they are going to be passing it here in short order, even with a few little gymnastics and hiccups and kind of just clownishness antics along the way.

But the Senate has already voted unanimously to pass the bill. So we're headed towards the president's pen on that. And that has had something to do, obviously, with market recovery this week. But secondarily, I do think that there is a better economic picture right now of the idea of America getting out of its national lockdown. And there's still some ambiguity around what that would look like regionally. So the specific timing of improvement remains unknown. And the severity of where we are when we go into some of the loosening of restrictions remains unknown. But I think that there is a better feel in capital markets for the fact that the whole country will not stay locked down for months on end.

And we'll see in the week and weeks ahead just exactly what that looks like as far as how that so-called curve has been bent from a health pandemic standpoint, and then what the kind of turning on the lights of American economic life can exactly look like. So there's some unknowns around that still. But the primary reason the market's going higher this week is very, very much in line with the thing I was speaking of a couple weeks ago, the kind of peak of the sell-off and acceleration of the just real market swoon we were experiencing was the technical factors that are piled into the market of forced selling and the margin calls, the overly indebted investors, the asset allocators needing to move out of stocks into bonds or cash, needing to raise cash and not being able to get it across any asset class. That mismatch of buyers and sellers in a forced environment has a cascading effect that's highly distortive to markets and unfortunately leads to a pile on a selling pressure.

I can't say that that isn't going to come back or reaccelerate. And I can't say that the fundamentals won't even drive markets lower or retest the lows of where we were on Monday. So I don't have an opinion to offer you as to whether or not we've seen the low or not. We're pretty meaningfully off of it right now. But again, there's so much uncertainty right now that I just find it unproductive to speculate on that. I would be prepared for it to retest lows. And I also would be very much of a mindset that it's entirely possible that from here, we are able to create a formation of stability in equity markets. But the biggest thing that happened this week,

I think, was that you did get a lot of liquidity to come back in a municipal bond market. Some parts of the mortgage market, although there's an incredible amount of dislocations there too still, and certainly on a lot of the corporate bond market. And so by getting greater liquidity in those spaces, it relieves selling pressure into equities. Because again, I want to reiterate that one of the largest technical factors that was taking place across a multi-trillion dollar financial system in the last two weeks was the need to raise cash. And because people were not getting cash in other instruments, like I just mentioned, and there was downward pressure on safe assets, it was cascading into riskier assets as well. So if that phase of this whole saga

is preparing to wrap up, then that does allow for more stability in markets and a little more clarity and hopefully it's soon reduced volatility. I think I made this comment before, but I want to reiterate it. I'm not looking for a bunch of thousand point up days right now, although obviously we'll take them and everyone would love them. But realistically, one of the great signs of optimism into the stock market will be just a bunch of up 200 point days. And then you have some days that are down or whatnot. But just reducing the up and down volatility, which is so dramatically enhanced right now, it just speaks to abnormality. And you can't really get a footing in markets when you're in a backdrop of such abnormality.

in markets when you're in a backdrop of such abnormality. So that's where we are right now. The stimulus bill being passed, I have a whole kind of list of bullet points at DividendCafe.com today as to what all is entailed in there. There's not a whole lot of surprises. They did take out the notion of buying $3 billion of oil for the Strategic Petroleum Reserve. I think that hurt oil prices a little this week. And the facility that is in place for the Treasury Department to fund close to $500 billion into their stabilization fund and allow the Fed to lever off of that for lending to businesses is by far the

biggest thing, the most efficacious thing for stimulating the business economy. That won't get priced into the stock market right away. It won't get priced into GDP for months, but it's a big deal for good and for bad. But as far as its stimulative effect, it's by far, I think, the most efficacious part of this legislation and their intentions going forward. So we have right now the decision as investors to make is do we believe that the kitchen sink – let me just mix all these metaphors. The bazooka and kitchen sink of central bank, Federal Reserve activity. and kitchen sink of central bank, federal reserve activity. I also at dividendcafe.com list all of the facilities the Fed has created and various mechanisms that they have added into the mix just in the last couple of weeks in money markets, in corporate bonds, in municipal bonds,

in commercial paper, in treasury and mortgage bonds. And so their kind of interaction, even with the SBA loans, this TALF facility, how that gets translated into support to small business. You have this monetary bazooka and the stimulus kitchen sink. And by the way, I'm firmly convinced that there's more that will be coming from Congress as well, again, for good and for bad. And you have to sort of determine on the other side of the health

pandemic, when they have that contained and a bit more normalcy that is visible in the society, do we believe that the recovery is going to be more V-shaped or U-shaped? And do we believe that it's going to be setting a stage for risk assets to be priced on the cheaper, on the not cheap side? And I think that you could argue and history would argue that when the Fed is providing such a boost to risk assets and the valuations are such that the risk-free rate is compressed to zero and the real risk-free rate is negative, that you're going to be in an environment that is going to be very conducive to risk-taking

for an investor holding risk assets. Now, that's maybe too much jargon and maybe too much economics for me to just get to what I'm trying to say, which is I suspect we're coming to a time, whether it's three months, six months, or a year, where those holding legacy risk assets, like, for example, the stocks and real estate and credit that people hold now, they're going to be really dramatically compensated for holding those things.

I think that you can make that argument based on the stage that's being set by both Treasury and Fed. However, it does not mean it all gets priced in right away when you're in the middle of the crisis because of the selling pressures, because of the uncertainty, and because of the still bad news, the fact that there's still a lot more people testing positive for coronavirus. I have a lot of reason to believe those things are going to be getting better in short order, but we don't know. And so that uncertainty that still lingers has got to be humbling to the asset allocator, which is what we are. We want to look for green shoots. You don't expect everything to get better at once.

You do hope that everything quits getting worse at once. And everything was getting worse at once the week of March 9th and March 16th. But now this week, that really significant improvement in municipal bond spreads and in corporate bond spreads is kind of the start of healthier capital markets. Obviously, the stock market moving up a lot, you can consider the same. But like I said, the stock market's not moving up yet because people have been able to define how low earnings are going to go and when earnings are going to be repaired and what multiple they want to put on those earnings. Fundamental analysis right now, especially for the way we do it, by evaluating pro forma earnings and putting a discount rate on them is impossible to do. What we can continue to do for the benefit of our

clients is focus on those companies that have the balance sheet to weather these storms and continue paying out the dividends that we require as investors. So those dividends become vital either to people who need cash because they can continue funding their cash flow needs without having to sell distressed assets, or they become vital to accumulators because they're compounding their dividends in these periods of low prices. All of that is very difficult to stomach with the level of stock market drop we've experienced, but it is mathematically correct. It is philosophically correct. And our commitment and conviction around these things is completely unwavering right now. Why not load up the kitchen sink? I think that's a bad analogy too. Why not? All my metaphors are so mixed.

And I'm probably gonna have people emailing me again saying, oh, you look tired or something, which I got plenty of last week. And I guess the reason I may look tired is because I am tired and I have not slept a lot. However, I am feeling fine. I am really, really engaged here. Forgive me for fumbling over my metaphor. But why not just back up the truck on equities at this level? The answer is two different things. You have to be able to get money into equities from somewhere and getting it from other asset classes that are also dislocated, even if they're less dislocated than they were a week ago, is not so easy. So I made a commitment. We made a decision as an investment committee at Bonson Group that we were going to be prudent and slow and patient to allow that process to play itself

out. And I stand behind that. We do intend on the margin rebalance some client fixed income assets into equity assets over a period of time. And we are determined to do that at a point at which we do not believe we're leaving money on the table on the bond side of things. And doing it in a way, by the way, that still honors each individual client's risk appetite. So that's our posture at this time. I'm looking here at divincafe.com. It's one of the longest ones I've ever done. And I really hope you will read through all of it.

As I said, a big summary of the monetary policy provisions, a big summary of the stimulus bill, which right now just was passed by the House. So as I'm sitting here recording, the house did end up passing it. They did a little verbal roll call and I'll let you watch on YouTube some of the antics of people that took place. I'm not going to say anything beyond that because I won't be able to stop. But anyways, so at Divin Cafe, we unpack a lot of history, a lot of timeless principles, some real significant issues that are clogging up the mortgage market right now, and so forth and so on. So I do really hope you'll have the time to read DividendCafe.com because this podcast doesn't go into all of that granularity, but there's just some powerful charts and elaborations that I think you'll find really worthwhile. So by the time you're going to be

listening to this, I assume the president's pen will be on that stimulus bill. And we will have a weekend, hopefully a weekend filled of better containment of the virus. We continue to see a lot of data points that are going in the right direction, but still need more time. And there's different countries offering better data points as well. But that uncertainty lingers, and we have to get on the other side of it. My view for equity investors is that the equity allocation they have that was deemed to be an appropriate level before this ought to be maintained. And they ought to be maintained even if we retest lows, because that money should not be needed in short order. And the money that

is in equity allocations, by the time it is needed, we believe will be repaired and recovered. And along the way, significant growth will take place from dividend reinvestment, and significant cash flow will be available from dividend payment. The emotional aspect of seeing these prices fluctuate is still there, and yet trying to be as sensible and practical and economically opportunistic as we can, we think days are coming where not only is the economic narrative dramatically different, but the investment narrative dramatically different, and that we can get on with the business of doing business. So thank you, as always, for listening to Dividend Cafe. I will continue coming to you as frequently as I possibly can, continue writing heavily at our DividendCafe.com, various material around everything going on in emerging markets. There's a lot, by the way, on the emerging bond world in this week's issue as well. Various charts that will be useful for you to kind of see a picture of what's happening and timeless investment principles that matter to how we behave each and every day.

So have a wonderful weekend, the best that we can in these situations. Better days are coming. And if it's at all possible, some advice I'll share with you that I've been trying to put into practice every day through this very difficult period is to make my list each and every day of the things I'm grateful for. For even in times of adversity, there are far more things I'm grateful for than things I'm burdened by. And I hope that's true for you too. And I wish you a very, very good weekend. Thanks for listening to The Dividend Cafe. Thank you. 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 reference you're in. 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 team and do not represent those of Hightower Advisors LLC or any of its affiliates.