The Dividend Cafe - One T Giveth, and the Other T Taketh Away

Episode Date: June 29, 2018

This week, David covers the ongoing market reactions surrounding trade..... Topics discussed: trade policy contributing to uncertainty dividend growth investing and separating market price fluctuations from market fundamentals 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. Both those of you listening on the podcast and watching the video right now, we are officially here to the end of the first half of 2018. And so by the time you're likely listening to this, we've called it a wrap on the month of June in the market. And there with that, obviously, the end of the second quarter and the end of the first half. And this has been quite an incredible week.

We're not yet at the end of the close in the market on Thursday, but we're getting pretty close to it. So I have a kind of decent feel for where we are for the week, although obviously Friday, you know, we'll do what it does. But mostly downward pressure this week. We're getting a bit of a rally on Thursday. We had a big rally on Wednesday after being down quite a bit on some news that had come out that I'm going to talk about in a minute. And then I kind of petered off by the end of the day. But a big drop on Monday was really obviously centered around trade and the ramped up conversation about additional retaliatory tariffs. In this case, it's our tariffs retaliating against China's tariffs, which were retaliating against our initial tariffs.

And what happened, the complicated thing is an article came out in the Wall Street Journal over the weekend, in the Monday morning, that said that we were now looking at a lot of very, what's the word, cumbersome restrictions on investment into China. And so really elevating the gravity of what would take place in this dynamic with China, some frustrations with the administration on how the trade talk's going, turns out not getting everything they want right away. And the blunt instrument of tariffs generally leads to more tariffs.

As far as trying to get this whole thing solved, you know, it's a holistic kind of recipe as needed. But then on Wednesday, what changed? And I'm going to be talking about all of this on the Advice and Insights podcast to kind of deeper dive because a lot of it's very boring, very granular in the weeds on the trade particulars. But the decision to say no, excuse me, we're not going about restricting investment in China through these very bureaucratic measurements that would be under the State Department and whatnot, bureaucratic measurements that would be under the state department and whatnot calling it a national security risk but instead using what's called cfius which is the committee on foreign investment to the united states well that um is much less cumbersome much less burdensome and much less threatening it's under the moniker of the Treasury Department.

And the market rallied on that. That rally didn't hold, although it's up, as I said here today, Thursday. So this is the point I want to make for Dividend Cafe viewers and listeners right now. The market is responding around the trade issues. We had achieved a certain point at the end of the earnings season and with more economic data coming in and market rallied back above the 25,000 level on the Dow and with no new earnings news, no economic news, no real substantive changes in geopolitics, with the only news impacting being the ramped-up tariff and trade war endeavors of the administration with China and with threats against the European Union and with Canada and Mexico, Canada more so at this point. That's what has created the last several weeks of volatility in the market.

And now we sit here kind of in the middle spot of where we've been for the last four months. We're about 1,000 points higher than our low spot and about 1,000 points lower than our high spot in the Dow over the last four months. So the catalyst to that uncertainty is certainly trade, and I've been rather vocal about what I think about it and so forth. But what we unpack a little this week is the very real dynamic taking place, which is that I call it one T giveth and the other

T taketh away. The T being tax reform gave a certain amount of economic growth and business confidence and jubilation into the economy. And now the other T, these tariffs, taking a lot of that back. Interestingly, even in sort of public perception, I mean, I'm talking about economic fundamentals and reality, but even public perception, tax reform had like a 51% approval rating a few months ago, and now has a 34 percent approval rating and the only thing uh from a particular poll that i'm citing the only thing that poll came from monmouth by the way if you care the only thing that's changed in between those two polls is that the economy's gotten better the data's looked even better. Unemployment has gone even lower.

The predictions around use of cash from corporate tax reform have all been better than expected, but the stock market is lower. And I believe that the tariff pressures into the market are depleting the goodwill around the tax reform side, not just economically, but even in the court of public opinion. So it'll be very interesting to see how this has to kind of be navigated politically, economically. My own forecast continues to be that there will have to be some face-saving end to this that enables all parties

to claim some form of victory, including our own president. There will probably end up being a trade arrangement or deal that is somewhat better than it was then we started. I would argue probably not anywhere near what they've kind of said and hinted at and threatened to do and all that. But again, something on the margin, a little better. And then the markets could see that we're not headed towards that ongoing trade war. But the transition I'm going to make right now with Dividend Cafe is that I believe that the trade issue now, tariff issue now, is a real thing that's affected markets the last few months, but that if it wasn't that, we still have the reality

of markets being priced second by second, driven by sentiment, driven by momentum, driven by noise, driven by rumor, driven by fear, driven by greed, driven by fear, driven by greed, driven by economic actors that have entirely different objectives, but none of it having anything to do with real intrinsic value. Companies' prices moving second by second when their earnings and their revenues and their dividends and their competitive strategy haven't changed

at all. It doesn't make any sense other than the fact that this is what public markets do. They provide day by day liquidity. The upside to day by day liquidity is you get a premium in your valuation when you have second by second liquidity. Investors will pay more for the ability to exit immediately a position. But the downside is that one has to do an incredible amount of work, emotionally, psychologically, mentally, to separate mark-to-market movements from fundamentals. And I want to use this opportunity to reinforce the merit of a dividend growth-based strategy,

like the one we implore at the Bonson Group, in adjusting to that reality, in responding to that reality, we want to beat inflation, which we can do with the compounding growth of the dividends our companies are paying out relative to the growth of inflation rate. We want to mechanically not force people to deteriorate their principle by withdrawing from a declining asset principle, which we think most index investors end up having to do at some part of their investing life because they're in withdrawal mode and the index doesn't go up in a straight line. And we think being able to withdraw from this perpetually growing flow of cash that dividends from these companies represent is a good thing.

We also want the companies to be telling the truth about their own confidence, their own prospects, their own internal financials. And we think that that statement of a growing dividend gives us a lot of clarity and a lot of transparency about those things. We talk about that a lot. We want some form of tax efficiency. The dividend rate is taxed at a lower rate than ordinary income. Things like short-term capital gain and bond income and other investment alternatives often, not always, will have a less advantageous tax profile. So there's a lot of advantages on the dividend growth side.

But fundamentally, from all the different perks and bells and whistles, we really do want to be investors in businesses, not stocks. We don't want to buy stocks. We want to buy companies. and we buy them by buying their stock. And so the focus, the instrument is the stock. I get that. But the focus is on an underlying business that is growing earnings that we become an investor in because we believe in what they're doing. believe in the strategy we believe in competitive advantage we believe in their way to monetize whatever their value proposition as an organization is different from a soft drink company to a chip maker to to a uh a phone maker to to

phone service provider to oil pipeline, all these different types of companies that make the world turn. We want to claim on those future earnings and we want to receive in the way that we kind of monetize into our own investing life that cash flow. And then, of course, at that point, everyone is either one is going to spend that cash flow based on what their own financial objective is or one is going to reinvest that cash flow into future investments. So I'm giving a kind of rehash of our dividend growth philosophy in specific response to the noise of markets the last four months. I could give you names of real-life companies that are leaders in the beverage space

or whatever type of company you want to think of, that their stocks will move up 1% one day and down 1% another, and each one of them have had no material impact to any aspect of their business, okay? And yet that is the price we have to pay of those fluctuations. I wish that we could end the trade and tariff controversy. I have economic opinions. I have geopolitical opinions around it. I understand some of the things that they're trying to do, and I get the overall objective with it. And I have my own feelings, as I shared before, about how it's going to end up playing out. But along the way, it does add noise into the valuation level of the overall

market. And this is what we have to deal with as investors. And we can deal with it a lot more confidently, knowing that we're investing for a growth of cash flow that is unaffected. We're kind of out of harm's way in that sense. So I'm going to leave it there. I do welcome any questions, comments you may have. Let's unpack more about trade and tariffs and advice and insights. In the meantime, have a wonderful, wonderful weekend. Read DividendCafe.com this week for some thoughts on all of this and on the 4th of July. And have a great weekend. Thank you for listening and watching

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