The Dividend Cafe - Monday - May 19, 2025

Episode Date: May 19, 2025

Today's Post - https://bahnsen.co/4doM7FT Monday Market Updates: From Moody's Downgrade to Japan's Economy In this Monday edition of Dividend Cafe, the discussion covers a wide range of market updates and economic indicators. Key points include Moody's recent downgrade of U.S. debt, which the market largely ignored, and the mixed market performance with the Dow Jones closing up 137 points. The episode also highlights the ongoing U.S.-Japan trade negotiations and recent conversations between President Trump and Vladimir Putin about Ukraine. Furthermore, the script discusses new house budget bill developments and recent economic data such as the Producer Price Index, retail sales, and housing starts. The episode concludes by inviting listeners to get more insights on Warren Buffet's investment success from Friday's edition at dividendcafe.com. 00:00 Introduction and Overview 00:38 Warren Buffett's Investment Success 01:07 Market Performance and Moody's Downgrade 04:07 Sector Performance and Trade Issues 05:44 US Political Developments 09:20 Economic Data and Fed Expectations 13:00 Energy Market Update 13:27 Conclusion and Final Thoughts 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, and welcome to the Monday edition of Dividend Cafe, brought to you from absolutely beautiful Midtown Manhattan. Gorgeous spring day and a reasonably traditional Dividing Cafe Monday in that there's the five or six categories I always like to cover. We're going to cover a little bit from all of them. Nothing super exciting to report and we'll give you the update on the things that are

happening around the world. I first want to say if you didn't see or hear the Dividend Cafe from Friday, I would love for you to check that out at DividendCafe.com wherein I look at what I consider to be the five unique factors behind the investment success of Warren Buffett. And there is, of course, as always, the video, the podcast, and the written commentary

available for you at DividendCafe.com. And I think it's a topic that there's a lot of takeaways that really have nothing to do with Warren Buffett, that we use Warren Buffett's situation to extract some lessons that may be applicable to all of us. As far as markets themselves go, the market opened at the low of the day and was down almost 350 points, and then just very

steadily increased throughout the day. It didn't hold at those lows in any of the market indices. And then by midday hit a high, and then it just bounced around a bit and closed a little bit below the high of the day off of the lows. To be honest, I think you're nearly 500 points off the lows, but the Dow closed up 137 points, which is 0.32%. The S&P was up 0.09%, nine basis points, and the NASDAQ basically flat on the day up two basis points. Now, the story of the day was supposed to be this Moody's downgraded US debt. They had downgraded the credit rating of United States sovereign debt from AAA to AA1,

which is essentially the same rating the Standard and Poor's, Moody's biggest competitor as a credit agency, credit rating agency gave the US back in the summer of 2011. Fitch two years ago downgraded it one notch. So what Standard & Poor's did 14 years ago and Fitch did two years ago, Moody's did over the weekend. And I don't really want to belabor this point when I say this is about as non-newsy of a story as news stories get. If you look to the substance of the matter, that the US is running high deficits and has been forever, that the ratios have gotten worse, that the level of national debt is

higher. Certainly, standard and poor's was onto these things a long, long time ago. And of course, bond yields remain very reasonably low and appetite for purchase of US Treasuries remains very reasonably sustained. Now, I'm sure there's some symbolic significance in the credit downgrade, but as far as it being something substantive to the actual credit downgrade, but as far as it being something substantive to the actionable activity of bond investors or financial actors, I don't buy it for a second. Markets were down a few hundred points and then came right back and closed up.

So apparently markets agreed. Even the bond market, the 10 year today closed at 4.45% up one basis point on the day. It had been at 4.56% earlier in the day. So at one point yields were up 11 basis points, but they closed up just one. So I guess my joke is that Moody's can take comfort in the fact that markets responded to their warning for almost a half hour.

And there we are. Okay, the top performing sector today, most market equity sectors were up on the day. Healthcare was up almost 1%, but energy was down 1.5%. There's a link to this at Dividend Cafe, but Walmart announced last week that they saw a little choice but to pass along the impacted tariffs to consumers.

And then President Trump tweeted over the weekend that they shouldn't do that, and he's gonna be watching them. And I just wanna point out Walmart has an average margin of 2.9% on goods sold. Japan ships $40 billion of automobiles to the United States per year. That's one and a half million cars. That's 30% of Japan's total exports. And Americans like their automobiles. The tariff Japan charges on US auto imports is 0%,

but I don't think the Japanese care for our autos that much. I don't know how a deal is gonna get worked out with US and Japan on this, but I am told a deal is forthcoming, and that it will very likely not focus around tariffs since we don't pay tariffs to them on our exports of automobiles. But there's other factors at play, non-trade barriers, things like that. We'll see where this goes.

Definitely this was believed to be one of the easier deals when President Trump changed his mind on his Liberation Day announcement back in early April, and it is not proving to be one of the easier ones. On the news front, we know that President Trump spoke with Vladimir Putin today. We believe the call lasted almost two hours. He did speak with President Zelensky of Ukraine afterwards, and the follow-up doesn't appear to be very specific or substantive, but just that both sides are agreeing to talk further about talking about some form of ceasefire and ultimately some potential off-ramp. I don't want to make light of it. It is true there's nothing really to report, but there could be something to report of it going really badly. And President

Trump announcing afterwards, I'm tired of the games, we're out, US is done. That didn't happen. And so I think that is newsworthy. But yeah, we are a ways away from being able to announce that there's actually some sort of substantive conclusion. Speaking of substantive conclusions, late Sunday night, the conservative hardliners allowed the House budget bill out of the budget committee. They had blocked it as of Friday. Now, there's a long way to go to say that the House is going to vote for this, but let alone getting the Senate vote, let alone getting House approval of Senate changes. But the thing that could have killed it, not getting out of Budget Committee, didn't happen until once again, Speaker Johnson's had moved the ball and they have not scored a

touchdown yet, but they have continued to move the chains, if you will. I miss football analogies, and that one actually worked. There's not a lot to report on what was modified. Speaker Johnson referred to it as minor modifications that got the rules committee guys holding out to move forward. What we hear is that they are going to accelerate the timeline for enforcement of work requirements for Medicaid and that there will be some more aggressive removal of some of these clean energy tax credits. So those are a couple of things that might be fiscally moving it in the way that some fiscal hawks might like.

We're also told that the draft is moving to a $40,000 salt deduction cap, not 30,000, but if it's true that they're holding a 200,000 income limit, that really is pretty moot. I don't think you're going to talk about very many people qualifying for it, let alone itemizing at all at that level. So I remain a little mystified what's going on there. Speaker Johnson is supposed to be meeting with the Salt Caucus tonight at 9 p.m. Eastern. There is a rules panel hearing set for one o'clock in the morning, Tuesday night,

Wednesday morning, with a four vote in the morning, Tuesday night, Wednesday morning, with a four vote on the House, desired for Thursday. And so we'll see, there's still plenty to happen between now and then, as things stand right now, it would not end the votes, but it obviously is moving towards the votes. But the final comment I wanna make on this is just, the irrelevance to markets of merely getting a bill. We are much more in a stage

now of the bill itself. I know that there's a lot of drama on what Speaker Johnson is going to get done and not done, and are they going to get a vote, and who's holding it up, who's not holding it up. I remain in the position that they're one way or the other going to be getting a vote, one way or the other going to get a bill passed, and one way or the other not like they have a bill passed that is going to meet the moment, and that there'll be some disappointment in the final substance. I do hope I'm wrong, but that's my base case at this point, that A, they do get a bill, and B, it isn't a great bill.

That's my presumption. We point that A, they do get a bill and B, it isn't a great bill. That's my presumption. We'll see if I'm wrong. Economic data I wanted to share that came in late last week. The producer price index had declined half a percentage point in April. The year over year PPI is only 2.4%. Energy and food wholesale prices were down, but the core PPI was also down about the same. I think core PPI was down 0.4 percent and the headline was down 0.5. So food and energy prices being down was only additional 0.1 percent. Goods prices are up a whopping half a percent year

over year. Services prices up 3.3. So the combined total wholesale prices are very much around where the Fed's target is. Now we go forward in terms of what to expect with the overall economic scenario. You had freight shipings up 275% last week versus the week prior. Not a big surprise given the removal of the US tariffs on China and vice versa that took place. So you had a lot of pent up demand that then accelerated in the wake of that announcement. Retail sales were up 0.1% in April. They're up 5.2% versus a year ago.

And then Japan's economy contracted 0.2% last quarter, more than expected. And I just wanna add that I don't think that's gonna help Japan's leverage in whatever discussions and negotiations are going on. Moving on with more economic data, the NHB, the National Association of Home Builders, sentiment index was abysmal,

it dropped another six percentage points to 34. It's the weakest it's been in over two and a half years. And it reflects a very poor present situation read and very weak prospective buyers traffic. The tariff issues around lumber, steel, aluminum have created issues for builders 78% of survey respondents saying it's creating difficulties for the enterprise homes. Then the housing starts in April were only up 1.6% that was below expectations and 1.7% lower than had been the case a year ago. But the far more important element of this is that single family starts are actually down 12% from a year ago.

The total net number is only not down more because of multifamily starts, which are overwhelmingly in the positive. The Fed is sitting at a 92% probability of no change in the Fed funds rate at their June meeting next month, 8% possibility of something happening that's more or less the same as zero. But what I think is the bigger news is that there's a 35% implied probability of a rate cut in July, meaning a 65% chance of no cut at all even in July. And largely that reversed as the presidential reversal on terror threats happened,

the odds of economic distress in the market that the Fed will be responding to became less of a catalyst. So where we stand now by the end of the year is a 23% chance in the futures market of only one cut, a 38% chance of two cuts, a 26% chance of three cuts, and only a 7% chance of four cuts with five cuts basically almost entirely off the table. There's definitely been more in the two to three range versus the four to five range that had existed a month or two ago.

WTI crude closed today a little over $62 dollars. Not much of a change on the day. Midstream energy stocks were up two and a half percent last week. MLPs were up even more. They were about four and a half percent. The refiner stock, the downstream segment was up huge last week. Upstream was somewhere in the middle. But crude itself was up two and a half percent last week and it's sort of just floating there around $62 a barrel. There is a question in the Ask TBG portion of Dividend Cafe, a three part question that

someone brought us with additional color about Warren Buffett. Rather than get into it all on the podcast, I'd say if you're interested in that, I encourage you to go to DividendCafe.com for that answer. Other than that, we're really going to see what happens out of the tax bill this week. We're largely, we're past the FOMC meeting, we're past earnings season. So yeah, we'll focus a bit here on what's going to happen with Congress. And in the meantime, pray for an otherwise boring week, but there's not a lot of boredom these days.

Covered a lot of ground today. I'm going to leave it there. Reach out with your questions anytime. Questions at thebonsongroup.com. And that is me signing out with a lot of gratitude for you watching, listening, and reading this Monday's Dividend Cafe. 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. No investment process

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