The Dividend Cafe - Problems in AI, Tax Cuts, and DOGE

Episode Date: February 24, 2025

Today's Post - https://bahnsen.co/4hQ3QHD Market Insights and Economic Updates: Monday Edition of Dividend Cafe In this Monday edition of Dividend Cafe, recorded from the Bahnsen Group's downtown Nashville office, the host discusses essential market movements and economic updates. Key topics include the impacts of AI and NVIDIA on the market, recent fluctuations in the Dow, NASDAQ, and S&P indices, and an in-depth look at concentration in U.S and non-U.S. investments. The script delves into healthcare gains, bond market movements, and the outlook for S&P 500 earnings. It also touches on Germany’s recent election results, U.S. policy changes regarding Medicaid, and the ongoing complexities in the housing market. Additionally, the host provides insights on the Fed’s likely shift in monetary policy and the current state of the midstream oil sector. Tune in every day this week for more updates, culminating in a special edition on Friday. 00:00 Introduction and Market Overview 00:58 NVIDIA and Tech Sector Insights 02:17 Market Performance and Trends 04:11 Concentration in U.S. Markets 05:47 German Election Results 06:34 U.S. Public Policy and Spending Cuts 07:54 Housing Market Update 09:01 Federal Reserve and Monetary Policy 10:07 Midstream Oil Sector and Conclusion 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 of Dividing Cafe. I am very happy to be recording from our beautiful downtown Nashville office here at the Bonson Group. I will be in Nashville all week. There is a lot going on in the world. There's a lot going on in markets. I should add, there's a lot of stuff not going on in the world too. A lot of noise, commotion that adds to new

cycle, political hysteria, things like that. But no, there's some real things going on that I think are relevant to where we are in the economy and public policy and certainly markets too. And so I'm going to try to cover some of these things here for you today. And I anticipate being with you each day this week in terms of the what's on David's mind and Ask TBG. I have a lot on my mind and I want to try to share it with you each day and come and do a special dividendividend Cafe on Friday.

But in terms of just where we are in markets, there's some links at DividendCafe.com today. NVIDIA is a huge company and there's a link about some things going on there in Dividend Cafe today that obviously has a profound impact on overall markets. Being a $3.3 trillion company, I happen to have a little discussion, shall we say, that it was a rare heated discussion. I don't have a lot of those with media and that we put the link in Divinity Cafe. But the reason why it's relevant to non-invite investors and just broad market actors is AI CapEx valuation ties into other stories that impact everybody.

And there was today a news story about Microsoft canceling leases for some data center expansions have been working on. And I just want to reiterate that the hyperscalers are in this sort of pro-cyclical loop with the customers that the hyperscalers are growing because they're hyperscaling and the people that feed the chips and infrastructure to the scalers are growing because they're the customers getting the big checks from them. And if something breaks down in that, there's impact in utilities and in power demand, data center and certainly in the underlying companies.

So we want to follow all of that and as much as possible not be really overly levered to it. The market today, the Dow ended up being up 33 points. It opened up, fell in the negative territory quickly, rallied way higher than at the final minutes. The trading gave most of that back, but again, oh, it did close up 33 points, largely with healthcare and energy and things like that leading the way. But the NASDAQ was down a full 1.2%, even coming off the big sell-off from last week, Friday, and the S&P was down half a percentage point as well. And that again was technology down almost 1.5% today. So those are some of the stories that went into it.

When I say healthcare was the lead, it was up three quarters of a point. So pretty good day there. Bonds were up today as the 10 year yield fell two basis points to 4.4, putting a little bit of upward pricing movement on the long bond and video is the last of the mag seven names that will be releasing their earnings, and almost 90% of the S&P has now released last quarter's results. But NVIDIA will be the last of the MAG7. The total guidance for MAG7 names for 2025 earnings, which is such a huge part of total S&P 500 earnings, the guidance range is now seeing a lower low than it started

with, but a higher high. So you just have a kind of wider range of guidance outcomes for 2025. Not super healthy at this time. Only 60% of names in the S&P 500 right now are trading above their 200 day moving average. That's not catastrophic, but it's not robust. It's vulnerable in terms of breadth. And then the Russell 2000 small cap, it's about 45%. It's less than half. We're just treading water here in some of those market names, but a lot of defensives, a lot of given and growth value stuff is doing quite well. Who knows? There's definitely a kind of pause feel of vulnerability around markets. One of the final comments I'll make

on markets before we go into some news and policy and other things today is the concentration issue I bring up a lot. It's easy to think of it as a story, and I think of it largely as a story about US investors being overly concentrated in US markets, which is a great thing relative to what international markets have done for a long time. But then with that concentration, which is a great thing relative to what international markets have done for a long time. But then with that concentration, bidding up a very select few names, making top heavy markets. One thing I don't think I've written about a lot is the way in which non-US investors have overly concentrated in US markets and then concentrated themselves in a lot of the tech, large cap

growth, Mag-7 type names. So you have sort of two concentrations and they're both centering around US play with non-US investors. So there is a good story in there that the US is still just such an incredibly attractive place for capital flows. That speaks to US, I think, dynamism and innovation. But you got to remember that non-US investors are also human beings and like domestic investors, are susceptible to buy into euphoria and discipline, logic.

These things are the very important components that we want out of domestic investors that we serve. You got to realize that they're not always there with non-US investors either. And so human nature crosses borders. Let's put it that way. Germany had its election yesterday, the center-, Friedrich Mers in his party. Friedrich is the new chancellor. It was a pretty overwhelming victory. The far right party came in second place. So it was a trouncing of the social democrats coming into a really stunning third

place. It's going to be very difficult to build a coalition. You look at the warring factions in American politics, this is a mess in Germany. And so we shall see how a coalition gets formed, but some of the far left and far right elements did not take place, but even the center-right is going to have a difficult time without some sort of compromise. We'll keep you posted in terms of where it's relevant to markets. In the public policy front here, there is a meeting going on probably as I'm recording right now with the House Rules Committee, but it's a very sensitive thing to thread this needle with where they're going to come up with spending cuts.

And it's largely going to have to come from Medicaid to some degree, but they can do that without cutting any Medicaid. They can do it by reducing the future growth of Medicaid benefits that the federal government pays to states in the future. But they don't have a lot of margin there for all the reasons I've talked about before. Reduction in expectations of growth in those entitlement programs is sensible, but it's also needed. They're not going to get to the budget that they need.

The politics are tricky, the math is not tricky, and we'll see what happens. I do find it funny, but also just relevant. The Doge website has a tab of savings with an itemization, and they're saying they've now saved $55 billion so far, but it turned out that one of the canceled contracts they're touting as $8 billion savings was $8 million savings. Government inefficiencies are tough, even websites about government inefficiencies. Some may not find it funny, but I promise you it is, and also speaks to a broader complexity and challenge of the day.

There's a few bullet points I have today on housing. I just want to point out that housing starts came in January at 1.36 million. That was below estimates by a little bit, but it was below last year's number by a lot. Single family starts was below 1 million. That's the far more important number in terms of clearing the housing market than multifamily. Existing home sales were down 4.9% in January. The median sales price was down a little bit on the month, but it was still up 4.8% from a year ago. The annual pace of total sales activity is around 4 million, way below the 5 and a quarter

million before COVID, and way below the 6 and a half million pace that we saw during 2020, 21, into early 22, the COVID moment. So that's where we are. Nothing's really changed. I have a chart in Dividend Cafe about the maturity wallet debt with commercial real estate. And you get a chance to see why particularly multifamily, there's so much debt resetting that's very relevant to the state of affairs we're in. The Fed is very likely going to be terminating quantitative tidings earlier, even than I expected. I definitely had a theme of the year that it would be done by the end of the year. At this point, I cannot imagine it makes it to June. And my friends at Strategist Research

are forecasting a March termination just based on debt ceiling issues going into April and the complexities it creates about liquidity for treasury as bank reserves get much lower when they raise the debt ceiling. And so in the meantime, I think it's relevant from a market standpoint because if they are right now tightening with the balance sheet, but loosening with Fed funds rate, and then they end up stopping the reduction of the Fed funds rate, pause for a little bit, maybe don't cut till May or cut till June. There's a 62% chance the next cut will be in June, only a 28% chance the next cut will be in

May. But if they, in the meantime, stop the 25 billion a month of tightening, it enables them to be doing a sort of backdoor easing of monetary policy without touching the Fed funds rate, which is, it provides a little cover, shall we say. Very encouraged by what we saw in the midstream sector in bottom-up company results throughout this earnings season. The macro factors are what they are, but micro, we like bottom-up activity. Again, there's individual companies doing acquisitions, making capital expenditure commitments, managing their own balance sheets, being productive or unproductive, whatever they're doing.

That's really ultimately it drives things, but we get focused on the macro side a lot around natural gas, around liquids extraction, around permitting, regulatory environment. All the macro stuff matters, but micro, bottom up, really healthy beginning to the year and midstream. Oil, by the way, was up, I think, 0.7% today, still just right at around $71 a barrel. Check out every day, DiveninCafe.com. We have an Ask TBG where we're posting answers to your questions. They're real life questions coming all the time. And like I said, there'll be a few additional things on my mind throughout the week I'll be in touch with you on and then we'll look for a bigger dividend cafe Friday. I'm gonna

leave it there for now. Thanks for listening. Thank you for watching. Thank you for reading the 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 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 is free of risk. There is no guarantee that the investment process or investment opportunities referenced herein will be profitable. Past performance is not indicative of current

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