The Dividend Cafe - Only One Side to Choose

Episode Date: August 17, 2017

Only One Side to Choose by The Bahnsen Group

Welcome to the Dividend Cafe, financial food for thought. from last week. When I say lost, I hate using that word because it is so grotesquely inaccurate. When the market goes down, nobody lost any money unless they did something dumb. But what I mean is that the values of the market levels may have gone down. And then this week we saw in four straight days, those market levels come back up. Although as of recording time here on Thursday, markets were moving south just in terms of its first down day in four days as well, giving back some of those movements. You see how silly it is, by the way, to get all caught up in that conversation. But the point is that a little bit of elevated market volatility, both this week and last week, both on the downside and upside, have resumed.

And that intra-week volatility or day-by-day volatility is something, as we've talked about, ad nauseum that has been totally lacking all year. But let me just kind of get into a few things this week, and hopefully you'll get some good takeaways and we certainly would love any questions or comments you have. But as far as our side of the stock market debate, our thought earlier in this calendar year was that a combination of Trumpian policy particulars, overall market valuations, meant that investors would be better served by selectivity than passivity in their stock allocation. In other words, we were not ticking down our allocations to equities per se, lowering our stock market weighting, but we were recommending a change in how one composed their

stock allocation, namely by focusing on individual company opportunities instead of the broad market. We stand by that advice right now, though now make the recommendation with even more intensity. To be clear, we know not when overall market valuations may top. We buy into the argument that they're reasonably close to full value across the whole market, but reiterate that valuation is not a timing tool. We do not know when market sentiment may reach maximum saturation, let alone when things like margins may actually peak, profit margins that is. As I will never tire of writing, attempts to broadly time market exposure are futile, dangerous, and often fatal. So what am I saying? Within one's proper

exposure to equities determined through their specific financial planning, risk profiling, cash flow needs, specific needs assessment, we want to see that equity allocations are composed of high quality companies that pay above market levels of dividends to shareholders and grow those dividends reliably and consistently. It's a core investment philosophy that served us very well for a long time and that we believe will produce successful client outcomes, which of course is the entire goal of all of this. We can study with the gift of hindsight what periods of time this philosophy proved to be more opportunistic, what periods its relative defensiveness were less necessary, but on a go-forward basis, our reiteration of selectivity

is based on the secular need for greater income, the relative valuation benefit this sector offers compared to the overall market, meaning these high-quality dividend companies are cheaper in valuation than the lower-quality think is often, not always, embedded with shareholder friendly policies like dividend growth. And finally and least significantly, our tactical reading of the landscape. Selectivity allows us to own what we want to own and more importantly, not own what we don't want to own. It's all in the price or what to do if you want some juice. If one was reviewing their asset allocation, felt a higher exposure to growth was desirable, and of course were willing to take on the accompanying volatility that higher equity allocation meant, but felt uncomfortable with U.S. equity allocations, again, probably because of valuation concerns. If one wanted a market exposure right now that might represent a more attractive entry point

than various alternatives, what would one do? The answer, we believe, is emerging markets. You take on currency risk, geopolitical risk, systemic market risk. I know what you're thinking, but other than that, well, but you right now would also receive a starting valuation that suggests a very attractive long-term result and significant growth that stems from demographics, monetary advantages, and the historical juxtaposition we find ourselves in, namely the ascension of a middle class in third world countries. Conclusion, with no real forecast on the next 10 weeks, we would suggest that over the next 10 years, a greater allocation of emerging markets will serve investors well within their equity bucket. Are we getting worried? China version. Our periodic reminders about China risk system from the revelations that August of 2015

and January of 2016 provided to market actors that the world economy is significant and systemic China connectivity. To the extent China has succeeded the last 18 plus months in controlling the slowdown of its economy, we obviously have had categorically different global investment markets. We largely avoid direct investment in China because of rule of law concerns and corporate and banking debt excesses,

but predicting when things there will turn in such a way as to negatively impact global conditions has been a fool's errand and it doesn't get any easier forecasting an improvement effect either. The concerns center around their reliance on an overheated property sector. I think I've heard this story before. But the commodity price indicators tell us expansion is healthy. Their central bank is in brand new territory, and the world of economic pundits is in brand new territory as well.

Our posture has served us well. Avoid predicting the inherently unpredictable, but refuse to turn off the antenna as it pertains to China. Are we worried MLP version? Oil and gas pipelines in the MLP sector, master limited partnerships, gave investors fits in 2015, including ourselves. The sector is running into trouble again this year, though those results are much less bad for the high quality names than others. It's a fair question as to whether or not we feel anxiety over the state of the pipeline space, when frankly much of the environment for the space should be a tailwind. when frankly much of the environment for the space should be a tailwind.

The reality is that the very attractive yields are not believed to be sustainable by too many in the space. And until that belief is recalibrated, this sector will not be bid up. We're patient and diligent, and that leads to a total counteract towards anxiety. We're determined to be focused on financial stability and not play speculation games about particular assets and resources. There's a singular goal here for oil and gas pipeline MLP investors, growing the cash flow to unit holders. That mission continues with rewards for investors who maintain that understanding. At DividendCafe.com this week, in the midst of our weekly written, we do have an embedded video of an interview I did this week regarding Federal Reserve monetary policy,

what to expect for the rest of the year. We'd encourage you to check that out. I want to make a quick comment on high housing prices. Long-time readers, listeners, and clients know I'm an ideological critic of the rather bizarre idea that promotion of high housing prices is in and of itself a good thing. Natural and organic market forces, inflation, job growth, wage growth, supply and demand, etc., doing what they do is one thing. And certainly if one's about to sell a home, a high price is more to be desired than the alternative.

But the notion that promotion of permanently advancing housing prices should be a mandate, a public policy, is not only foolhardy and guaranteed to end in catastrophe, but it ignores an entire segment of the population. 18 to 34-year-olds that now own 11% of all owner-occupied houses and people 55 and over own 53% of them. Let me rephrase that. 18 to 34-year-olds own 11% of homes. People over 55 own over half of them. These numbers are dramatically different from where they were just 10 years ago. Baby boomers, 18 to 34, the kids of today's baby boomers, were double the market share then. 10 years ago, people over 55 owned 40% of American homes. So you can see how much it's moved. Well, these numbers are hard to interpret any other way than reflection of hyper-stretched

affordability levels. Markets have a way of organically correcting what policymakers inorganically distort. I'll leave it there on the podcast for the week. I really would love for you to go to dividendcafe.com, check out some of the charts about small business optimism and the high quality companies versus low quality companies and how they perform during periods of market distress. Reach out to us with any questions. We're working hard. We are here for anything you need. Look forward to next week's Dividend Cafe. Thanks for listening.

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