The Dividend Cafe - Monday - August 18, 2025

Episode Date: August 18, 2025

Today's Post - https://bahnsen.co/45lNva0 Analyzing a Flat Market and the Impacts of International Events In this Monday edition of Dividend Cafe, the host discusses the relatively stagnant state of the DOW, S&P 500, and Nasdaq, attributing this to ongoing events such as the meeting between President Trump, European leaders, and Ukrainian President Zelensky, and the upcoming Jackson Hole meeting with Chairman Powell. The episode delves into metrics like the earning yields and price-to-book ratios of the S&P 500, highlighting historically low real earnings yield due to high stock prices despite high earnings and moderate inflation expectations. David also explores foreign investments in U.S. stocks, particularly a record $163 billion purchase in June, insights into tariff impacts and court rulings related to the Consumer Financial Protection Bureau, and the uncertainty surrounding upcoming Fed rate cuts. On the energy front, updates include WTI closing at $62.63 and midstream energy sector trends discussed at a recent Las Vegas conference. The episode concludes with an overview of the supply-side effects of monetary and fiscal policy, touching upon tariff implications and monetary supply growth. 00:00 Introduction and Market Overview 01:38 Inflation Insights and Market Metrics 03:35 Valuation Indicators and Market Analysis 05:33 Foreign Investments and Geopolitical Updates 07:30 Tariffs and Legal Challenges 11:07 Economic Indicators and Sector Performance 13:21 Energy Sector Deep Dive 15:52 Monetary Policy and Supply Side Economics 17:51 Conclusion and Final Thoughts Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividing Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Hello and welcome to the Monday edition at Dividend Cafe where boring markets are good and going around the horn of all of our weekly information is a lot of fun. When I say boring in the market, the Dow opened to more or less where it closed on the day And though it Zygdenzagged a little before closing down a whopping 30 points, it basically went up and down throughout the day within a bandwidth of 100 points. Not a lot of movement in the Dow and then the S&P and NASDAQ both closed totally flat. That'll happen in a week like this week where there is this meeting taking place as I'm talking right now in the White House with European leaders, with President Trump, with Ukrainian President Zelensky, and there's not a lot of awareness yet as to what.

the outcome of that may be around Russia issues. And then the Jackson Hole meeting, an annual affair, Chairman Powell speaking near the end of the week. It gives markets a pretty good excuse to pause and do a little wait and see action. So we'll see if that happens each day this week, but I'm not surprised it was a reasonably boring day in markets. I do want to direct any of you missed the Friday Dividend Cafe to check that out. If you're interested in the subject of inflation. We're getting an awful lot of feedback about it, and I thought it was a reasonably useful treatise on how to understand inflation, what the big questions are, what the big challenges really are that goes a little deeper than what some

of the media narratives are. So when it comes to markets, we're just going to go around the horn in the order that I presented in the written Dividing Cafe. The earnings yield of the S&P 500, That is the current earnings of all the companies in the index put together divided by the price of the index. So when we talk about the real earnings yield, it is that number, but you have subtracted the inflation rate from it. Generally, we're doing that by looking at what the break-evens are in the tips market. And so the implied inflation rate from inflation-protected treasuries gives you a very good market measurement of inflation. expectations, if you take the earnings of the S&P divided by the price of the S&P minus the inflation rate measured in tips, tips spreads, you get a real earnings yield.

And right now, that number is, wait for it, the lowest on record, certainly the lowest you've had in about 30 years. And that is not because earnings are low, earnings are high, it is not because inflation expectations are high. Inflation expectations are actually quite tame right at about two and a half percent. It's because prices are high. The number that gives you a low number in this division process is the denominator in the ratio, the earnings divided by the price. That is what is leading to such a low real earnings yield. The other metric from a valuation standpoint that I found interesting over the weekend is the price to book ratio of the S&P. It's the highest it's ever been

5.3 times. But, by the way, it's up against 5.1 times in March of 2000. However, is the price to book a great valuation indicator? It's not. Price to earnings is much better for a lot of reasons. The book value of companies is going to be very different. It's largely an accounting metric. The level of tangible versus intangible assets matters a lot, and those weightings of tangible versus intangible assets and the balance sheets of S&P 500 companies is very different now than it was 25 years ago. Profit margins are higher. The index composition is very different. There are plenty of reasons for that, yet I still believe it would be a bad idea for me to ignore the data point. I want to point to the fact that there are a number of issues that speak to high valuations in the market.

I don't think this price-to-book ratio is dispositive, and I certainly don't think it's a timing indicator of anything. But I don't think it is intellectually honest to ignore it either. 30% of the S&P 500 is now trading over 10 times revenue. I want to be clear what I mean. That is 10 times top-line sales. Not profits, revenues. So, there's always companies that have a high multiple of revenue, but right now a full 30% of the market cap of the S&P is trading above 10 times revenue.

The 10-year bond yield closed today at 4.33% flat on the day. So flat stock market, flat bond market. Top performing sector for the day was industrials, was up 40 basis points. Real estate was the worst, down 95 basis points. And the other piece I wanted to share, courtesy of my friend Peter Bookvar, was that we got data for the month of June regarding foreign purchases, all U.S. assets, and there actually was a little bit net negative number in Treasury bonds, but there was an overwhelmingly high number of purchases from foreign investors in U.S. stocks.

And it was basically a record month, foreign investors buying $163 billion a U.S. stocks, speaks well to international liquidity in advance of tariffs. Keep in mind, this is from the month of June, not from the month of July. I also want to point out that the past record months we've seen included February of 2000 and May of 2007. So the big story playing out right now is that President Trump is meeting, has met in Alaska with Vladimir Putin on Friday. Very little was released of what was discussed. European leaders did. say that President Trump is talking about providing a U.S. security guarantee to Ukraine with the right deal being worked out. President Trump tweeted a couple of things over the weekend,

but nothing real substantive. And I'm very purposely ignoring all those that are coming out saying this is about to be the best deal ever and all those coming out saying we clearly swung and missed just to give this thing a little time to breathe and not establish myself as a partisan and hack announcing things before anyone knows anything. And all that to say, that doesn't mean I'm overly optimistic because I am not, but I am waiting until I have something to say to say it. People should look into that idea. I've heard it works well.

That said, right now, as I'm talking, Zelensky's in the White House, is a number of European leaders, and we're waiting for more information, which will probably start coming the second I am done recording. On the policy front, a couple of things to update. Strategist research estimates, and I think they're right, that the tariffs, as they stood after the April 2nd announcement, would have amounted about $700 billion in annual cost to the economy, and that where things appear to be headed is going to settle somewhere around half of that, $350 to $375 billion of cost in the form of taxes that corporate importers

pay. Their projection is that the effective tariff rate will end up being somewhere around 14 as high as 15%, while others have been suggesting 17, 18, and even 19%. And I'm with them. I'm having a very hard time getting to that number, but some of the people reporting it are respect enough that I'm trying, but I do think that the total net number when all of a sudden will end up being 14 or 15. We have to remember, though, that there's been a real significant watering down to some of the

sectoral tariffs, big delays. on what they're going to do with pharmaceutical and just a fraction of what they've threatened to do with semiconductors. And that's only been playing out here in the last couple of weeks. So some of these numbers and estimates may just not reflect slightly different than previously threatened outcome in sectoral tariffs. The federal appellate court upheld dismantling of the Consumer Financial Protection Bureau by a two-to-one vote. There's still more appeals that will be pending and so forth. but that apparatus of financial sector regulation does appear to be coming down and the administration continues to win in court on that subject anyways.

Speaking of winning or losing in court, I think that a lot of these appeals around the constitutionality and propriety of some of the tariffs working their way through various aspects of the court system are far more complicated. I continue to believe the administration will lose more than they will win with some of these courts, but that ultimately all that will matter is whether or not that the Supreme Court agrees to hear it and what will happen when the court does hear it. But I want to read to you, which I don't do a lot in Dividend Cafe, but I just think it captures the full sentiment word from strategist research, their summary, about what to make of the potential

court challenges on different elements of the way these tariffs are being implemented. We believe the Trump administration will institute legally settled tariffs to replace IEPA tariffs, the kind of economic emergency pretext they were using, which includes balance of payment tariffs, which they can do for up to 150 days. This gives the administration time to then institute Section 301 investigations, and when those investigations are concluded, more permanent tariffs can be theoretically legally imposed. This is a lengthier process than IEPA, but on better legal grounds. We also expect Trump to use the reconciliation process to push for Republicans to codify the tariffs to get around the courts, which, of course, is not getting around the courts.

It's just doing what the Constitution says. If Congress passes tariffs, then they're in law. And if they don't, they're not in law. They're being appealed to using other executive issues that are the subject of what's going to court. So all that to say, I don't really think it's going a matter a lot in the end. I'm with Stratigis on this. I believe it should matter, but I don't think it will. I think that there's a number of different ways in the views. Wackham Bowl to figure out what the rationale will be. But I bring all this up because some are saying, don't you think some of this could come way back if there's some prevailing wins in the courts? And I think there could be prevailing wins in courts, but then I think it just

moves to a different mechanism. And that's why I'm trying not to get overly animated about that. On the economic front, industrial production declined 0.1% in July. That is the first time in four months that activity fell. Every category, not just business activity was modestly lower. Retail sales were up half a percentage point in July, expectations were for a little more than that. They're up 3.9% versus a year ago. Building materials, restaurants and bars were all down.

And then an interesting tidbit, and it's only one region of the country, so I'm going to wait for more. But the six-month business activity outlook fell by eight points in the New York Manufacturing Survey. And the fact that capital expenditure plans fell in the survey. And the first survey after the Big Beautiful bill passed, which again, has big incentives for new capital spending was a surprise. But again, it's one region.

We're going to keep it going. On the housing and mortgage front, the NHB Home Builder Sentiment Index fell one point and is now at the lowest print since December of 2022. Prospective buyers traffic remains anemic. 38% of builders cut prices last month. Not a lot of positivity coming out of the home builder sentiment, not a big surprise there. Odds now sit at 85% for a quarter-point rate cut at the FMC meeting in September. It had been 100% after CPI came last week, but then it came down to 85% after PPI the next day.

We're at a 38% odds for 75 basis points worth of cuts between now and the end of the year. That number had been 50% a few days ago, but it had been basically 0% a couple weeks ago. So the odds of getting three rate cuts, which could be 150 basis point and 125, but basically three quarters of a percent lower by end of the year, those odds are way higher than they were, a little lower than they were a week ago, but in enough middle ground that you can understand why with that uncertainty, markets are wondering what Chairman Powell is going to say in Jackson Hole this weekend, as well as whether or not the Senate is going to get Stephen Moran approved before the September FOMC meeting. On the oil and energy front, WTI closed at $62.63, up 1% on the day.

Last week, midstream stocks were pretty flattish as you had an up week in stock market, but the Canadians were mostly up, Canadian oil gas midstream with U.S. mostly down. There was a very significant midstream energy conference in Las Vegas that takes place every year. And a couple quick things I want to highlight from that in terms of takeaways that I deciphered out of analyst's commentary over the weekend, that there is an overbuild of natural gas liquids pipelines, which is a concern for some, but it is not at all a concern for some of the larger players who have so many upstream volumes that they can always repurpose and redirect some of the usage of those pipeline assets. U.S. LNG exports are liquefine natural gas is obviously a huge point of conversation. The administration's regulatory stance is very favorable. And then you had a lot of LNG talk and trade deals being talked about. The U.S. does not have a lot of goods to export outside of soybeans and LNG.

And that LNG would be right up there in one of these major conversations is understandable. And someone encouraging to the LNG. and G-export business that midstream centers around, both pipeline takeaway to terminals and then the terminals themselves. Capital expenditures are increasing in midstream, but not an unreasonable pace. Financial flexibility is strong. And I would add that the capital expenditures at some point, obviously have to turn into profit growth. And some companies have a more compelling case that they're on their way to that than others. I love this sector. I love this. industry, and it's a vital part of what we do, and that's why I spend a little more time on that

each Monday than some of the other sections. Energy, by the way, not just midstream, but the total energy sector is the only sector currently in the S&P 500, below its own 200-day moving average. So energy has been a laggard on a relative basis for sure. Okay. Against doomsdayism, there's a video that I would like you to go click on embedded inside our dividend cafe.com. It's been a while since we've had it against doomsdayism, and I just love this little brief video, so check it out when you get a chance. Finally, someone had asked if from my dividend cafe Friday, I believe that tighter money supply

and increased production is good. So with the Fed reducing their quantitative tightening and holding off on rate cuts, are we headed in that right direction? And I wanted to be clear that the supply side of current tax policy is a mixed bag. On one hand, there are incentives for supply in the One Big Beautiful Bill Act, including capital expensing. But remember, though it is up against what I consider to be a little bit disincentive with tariffs and the unknown impact of what tariffs will do to the supply side of the economy. What we do know is that there is a very large tug of war between the cost of tariffs and the benefits of the Big Beautiful Bill Act. that affects the supply side of the economy.

But on the monetary side, I want to be clear that we're not referring to the cost of capital, which is the federal funds rate and various price indicators that come out of that, or even quantitative tightening versus quantitative easing. When I talk about money supply, I'm talking about literal M2 money supply growth, which certainly cost to capital is intended to impact. That's the goal is to use cost to capital as a tool, a means to the end. But nevertheless, I do not believe the cost of capital is directly related to M2 money supply. Of course, we know that post-financial crisis.

You can lower cost of capital, but if there's not loan demand, if they're not investable opportunities, if there's not the appetite, confidence for capital expenditures, then you're pushing on a string. And so what you have to see in terms of the right monetary approach is a money supply growth that is moderated along with supply side. I talked about a dividend cafe on Friday, but these categories or these specific terms and tools used therein are often equivocated where they're not speaking to the exact same thing. I hope that's helpful. So I've gone through a lot and I've gone through it quickly, but I hope you've gotten a lot out of today's dividend cafe. I love going

around the horn with this. I will be back with you in the dividend cafe on Friday. And in the meantime, and in the meantime. Thank you for listening. Thank you for watching. And thank you for reading the Dividing Cafe. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, and 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.

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