The Dividend Cafe - TBG Investment Committee Outlook - Week of February 3, 2020

Episode Date: February 4, 2020

Topics discussed: The market has gotten a bit exciting, and this week's special edition Dividend Cafe podcast explores why. We look into what it means, what is causing it, what investors have gotten right, and where we go next. Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, your Chief Investment Officer. I'm surrounded by my colleagues on the Investment Committee at the Bonson Group. To my right, Julian Fosroy, Director of Equity Research. Across the table, Robert Graham. And across from me, Dea Pernas. So we have the four of us here, and we're doing a special edition to talk about the market. Last week, we were heavily focused on coronavirus. I suppose some of the things we're going to talk about today are going to necessarily have to involve that as well. Some of the things we're going to talk about today are going to necessarily have to involve that as well.

But definitely the most volatile week in the market we'd had since going back to about last August. A couple of little periods in October getting there, but certainly not four, five, six days of downside volatility since that August downturn. And so it's enough to kind of startle some investors. And now here we are. We opened up about 200 points in the market here Monday morning. And at one point, it had gotten up closer to 300. As we're sitting here talking now, it's come down. We're only up 170. So it's kind of bouncing around a bit. It's pretty sector specific this morning. Some were expecting maybe US markets to open Monday even worse off just based on the fact that the Shanghai markets had opened up last night and were down at one point about 9%, closed down a little over 7%. And the reality was that the market there had been closed through a lot of this last week.

So it was kind of this built-up deal going in. Okay, so that's the lay of the land. Market last week was down 600 on Friday. It was down 400 Monday. It was up a few hundred a couple days in between. So I think from peak to trough, we're down 1,000-ish in the Dow. And now we come into this new week and, of course, the new month. The month of January ended up being down on the month after at one point being up about 3%.

So you could talk coronavirus. We're going to talk yield curve. We're going to talk geopolitics, American politics. There's a lot of things on the table. And we're going to talk earnings season. But I guess the broader question I'll throw out there, I'll start you, Dave, and we'll go around. Does this particular market hiccup do anything to you? Does it make you nervous? Does it make you want to be a big buyer? Are you in a wait-and-see mode? What questions do you have Just I'm throwing it out

there in a general sense. Well, it makes me kind of brace, you know, our mindset really for more volatility going forward. I think that we haven't seen this level of volatility for quite some time. And I think just preparing, you know, for that kind of short termterm volatility, I think it's important. As far as outlook goes, I think a lot of the fundamental – the ways that the fundamentals have been affected from all a lot of these diseases and the coverage and the impact, it has been short-term in nature. So I don't mind the enhanced volatility. I think we're prepared for it, and it's important to get comfortable with a little bit of volatility. Robert, it's a volatility story, or is there some other stuff beneath the surface bothering you? I mean,

obviously, you know, what people are calling a pandemic and all this kind of stuff would, would bother anyone to some extent, but you know, I'm, I'm a little bit comforted in some, some regard because a lot of the activity,

I think particularly last week in the markets was, was earnings driven. You know, we saw certainly a lot of strength in certain sectors and some weakness in others, and I think that is encouraging to me because, again, we always talk about how the fundamentals matter, and at the end of last month the fundamentals do and did matter. So the fundamentals were what was pushing markets lower

or fundamentals were holding markets in together. In what sense were fundamentals the material aspect last week? Different sectors were having earnings revisions. Some specific companies in tech did really well in terms of their earnings reports. And then we saw some weakness certainly in energy, most notably. The coronavirus, you can see from the market activity last week and today, particularly when the Asian markets opened, that hit those markets particularly hard. So there's no doubt that that's stirring some volatility there. But let's remember, anytime there was any news of something negative in China,

we see those indices get hit hard. And we've talked a lot about how those markets are not necessarily perfectly tied to the economic forces in China in particular. So there's no surprise that those markets are more volatile and open down today. Yeah, I agree. Julian, what do you think in the current environment? Is this right now? Are we living through kind of this volatility experience? Or do you think that there are legitimate questions about fundamentals,

whether positive or negative, as well as earnings quality? I would say if I think it's healthy and we should be grateful that there's still a little bit of volatility and a little bit of price discovery in this market with, you know, the Fed and central banks intervening so much, killing volatility. So that's a good sign that you're seeing, you know, when there's some bad news, markets go down and that creates opportunity as well to, you know, buy and chip in the stocks you like. So I think the fundamental picture is still good. Earnings season, we are halfway through earnings now.

We had busiest weeks for our names last week, and it was very mixed, I guess. So if you look at, you know, as well, we can't talk about specifically names, but if you look at the S&P 500, as of Friday, about 50% of the 500 companies had reported. And they always, you know, beat earnings. So it's more the question is not how many beat earnings. It's more like if you compare to a historical, you know, number on average,

about 70% beat on EPS and beat on revenue. And this quarter, it was slightly off that number. And when they beat, they didn't beat as much as they usually do. So it was pretty mixed. And as you say, Robert, you know, it was very, depending on sector. So like, you know, consumer discretionary and tech did very well. And then energy and just trials didn't do so well. So it's been interesting so far, earnings season,

and I guess because of the coronavirus happening at the same time, people are not so focused on earnings and probably too much on what's happening in China. But I would say fundamentally, if you're a Chinese investor, for sure you have to worry. And it's going to impact the economy for one quarter maybe or two. But as a global investor, it's still early days to know exactly what the impact is going to be. I guess if we look at, we have some data from the SARS back like 15 years ago.

I think it's hard to say exactly what the impact was globally. But China, the consensus view, I think now is that the impact was about 1% of GDP in China. So it looks like it's going to get worse. This one, it looks like it's worse just with the measure they're taking. You know, quarantine, 50 million people. A lot of businesses have closed. You know, you hear about American companies, you know, closing, you know, shutting down operations in some provinces or even all of China. So I guess that's going to be a real impact on the Chinese economy.

But, you know, for how long? That's the question. Yeah, there's a lot. That's what the market is struggling with, the uncertainty behind it. If we knew that it was going to last two weeks or three months, I think just the amount of volatility would be very different or how the market reacts is very different. But uncertainty is really what drives volatility

and the uncertainty around the impact. But is the uncertainty, Daya, around the health aspect or is it around the market response to the health impact? I believe the uncertainty is around the health aspect of it. I don't think that, just generally speaking, that people know exactly how dangerous this virus is, how dangerous it could be, exactly how it's spreading. I think there's a lot of questions around the health aspect. Or maybe there's people that – there's certain experts that understand it well, but I generally don't feel that the consensus feels that there's any sort of solid understanding around how this virus is spreading. Uncertainty around the medical aspect of how it's spreading as opposed to the uncertainty around what the impact of supply chain would be or what China's response has been.

Well, I think the market is just reacting to fear. I mean I just – I think all those things matter. How this virus is spreading, how it's going to impact supply chains, how is it going to impact China's import appetite, are companies going to continue to close stores? Those are all questions. Those all wrap in the same thing, in my opinion. All those are related. I don't think we can take... I totally agree with you on all points, but I don't

think we can really put down the supply chain constraints. And I think there's a lot of uncertainty around that, too, because let's remember the Lunar New Year, their big holiday, that already would be a period where there would be a dampening of activity, right? So we haven't,

and they've prolonged that holiday at a national level, I guess. We haven't really seen the supply chain disruptions come into effect. And I think there's probably a good deal of uncertainty around that. How much is this coronavirus going to start hurting supply chains?

And to what extent is that lost supply going to impact demand going forward? Yeah, I think that there is a number of different layers here. And I would start with what I do intend to be a kind of ridiculous example and then bring it in from there. Although I suppose there's some people who may not even take it to be that ridiculous. Although I suppose there's some people who may not even take it to be that ridiculous. But is there anyone who would say, are there market actors, when we talk about uncertainty, that have fear that one year from now, one year, that we will still have this kind of complete, open-ended, unresolved problem of coronavirus, medically or economically?

I'm going to go out on a limb and assume that most market actors believe that in a year this will not be a story so the question is are we talking about one week of uncertainty three months six months what's the most negative person think this thing could linger and have impact let's say that six months i don't think it is but let's say it is what's the quickest that this thing exits the newspaper one week i don't think that's the case either i think this the the story will change a little bit too we were talking actually before the podcast i mean what if this thing gets into africa right that's going to be a big deal there's going to be probably a more massive loss

of life but you know i'm not trying to downplay that but the effects on supply chains and how does it get into africa if nobody can leave the country well that's the the incubation period is longer than the chinese suspected so there's already people that got out of Wuhan, I guess, before they got quarantined. So, I mean, not to play doctor, but I think that's probably a big deal. But see, that's the thing I think markets are least concerned about is that there's a medical component that's a little more frightening than we thought. I think that that's probably if you make a list of market revocations that's the lowest on the list so so you think you think the market it what it cares about is really how it feeds into the short term i agree with you

completely all the markets responding to right now is just fear of unknown okay okay and and i believe uh that markets did not need an excuse to want to sell off i think this became that excuse but um there is a frustration from for those that just have a very very short term period here if you only want to look at 2017 2018 2019 that's not a very long period of time but three years years. I have lost count. I do this for a living. I do it passionately. I do it with an OCD memory.

And I can't even tell you how many times in three years there has been this significant step up, questions asked, concerns posed. And a week later, you can't even find someone still talking about it because the headline has changed. And those things are permanent in that there's always a need for the story to be changing to something else. People get bored. They quit clicking. They quit watching. I'm not blaming it all on the media. I think that there's a legitimate uncertainty about it.

But I guess what I'm saying is that there's two layers. The immediate volatility of our experience is not related to someone discounted the impact of cash flows by XYZ company not getting access to ABC supply chain, and therefore is fundamentally priced in this problem. It's uncertainty about it. No problem. That happens all the time. And so then the question is if you accept my premise that we're not going to be facing like a two-decade Spanish flu or something, then the question is are we really supposed to believe that investors as opposed to traders are wanting to reallocate around a three-month story?

And I think that's on the pessimistic side. I think it could be a four-week story. a three-month story and i think that's on the pessimistic side i think it could be it could be a four-week story and and and then you get into these other things going on that no one's talking about and i saw this happen so much last year you'd hear like oh china uh the the dollar one uh uh exchange has broken seven and everyone's talking about trump's tweet and i'm like it's currency this is a currency story and and the same week that this happened, this happened back in August of 2011, where the S&P downgraded U.S. debt from AAA to AA+. First of all, I don't know a person in the world who ever even knew the S&P rated U.S.

debt. Like, what is it? Like, this is the stupidest thing I've ever heard in my entire life. But, oh, also, Greece is about to fall into the Mediterranean Sea and the biggest default in sovereign nation history. But no, it was the S&P downgrade. That's what was causing the August 11 volatility. In hindsight, any credible economist knows the volatility we had in summer 2011 was Eurocentric. It was not an S&P downgrade story. I don't think it helped. It added to some noise. But we get this wrong all the time. Now, coronavirus may downgrade story. I don't think it helped. It added to some noise.

But we get this wrong all the time. Now, coronavirus may be the primary. I'm not trying to take that away. But you have a yield curve. You had a 10-year, it was at 190. It's come back to 150. Okay? That's a problem.

There's something going on there. Now, this morning, I see the manufacturing figure back up higher. Earnings seem at 45% through. we seem to be 50-50 on earnings, really good, really bad. We don't see this overwhelmingly outperformance driven cycle so far. So I'm wondering, back to the question I posed last week, is coronavirus involved because its uncertainty allows one to get over the hump, but the hump is the continued skittishness of this most disbelieved bull market in history. Right. So you're saying that it's less really the coronavirus

and more that the market just needs something, some sort of excuse. That certain investors need an excuse. Certain investors need something. And I think this speaks to how difficult it can be sometimes to draw like a direct causal link That certain investors need an excuse. it's rank oversimplification in many ways. And there's a lot of decisions that are totally contrary to each other that all average out to maybe the market declining, but it's hard to point to one thing.

I was going to say, it's been such a straight line and so much momentum since the phase one deal was the reversal, I guess, of the Chinese-U.S. fight in, let's say, September, October, that we know when you have so little volatility for so long and the straight line markets everything going in the same direction, the market is going to look for an excuse for a little sell-off. And I think it's healthy that you have these corrections.

I mean, it's never going to be a straight line. I guess what's interesting, if you look at SARS, and again, as a precedent, thinking about when could we see, how long is it going to be a straight line. I guess what's interesting, if you look at SARS, and again, as a precedent, thinking about when could we see how long it's going to be in the headlines, I think I would agree with you that it's probably a question of weeks. Because what happens again with SARS is

basically when the Chinese government realized the severity of the outbreak at the time, the peak infection was just four weeks later. So if you look at like they already quarantined all these people. So assuming that it's effective, you could be at peak infection with this new virus sometime in February. And I guess if, again, looking at SARS as a precedent, that's pretty much from the moment the peak was reached and numbers were starting to go down that people you know stuff of stopped talking about it and just discounted the you know the virus has gone and just went back into asian

you know emerging markets so maybe you know in march we probably talk about the elections again and not about this anymore or maybe tomorrow we're talking about the elections again i mean that's the thing is that in in uh and again we're recording here right now um before the iowa caucus results. And so it's possible some stuff could kind of change. But it certainly looks as if Bernie Sanders is going to end up winning tonight, if you believe some of the polls. And I find it hard to believe that there's no coronavirus. But we were sitting here with Bernie at a potentially significant lead in Iowa and New Hampshire.

And the yield curve flattening, if not inverting, that we wouldn't have another reason to be talking and doing a special podcast, especially with earnings season being highly volatile. About a sell-off? It wouldn't be a sell-off. It would just be volatility. Even this sell-off has been preceded by triple-digit upside volatility as well. So that's what we're back to, it seems in this last week and a half is the same

thing we had had significantly in August and throughout all of 2018, when you had sell-offs, they lasted two days, generally, three days on the bad ones. And then you got real big upside. And it reminds me, it reinforces, I should say, the idea of what does one believe they're going to do? What honestly is the trade around it? If you say, I want to just get out and I'll come back here when it's better, you're admitting I'm just going to give up 1,000 points. I'll come back here with 1,000 points higher. No one's going to say that. So they have to believe they're going to get out Monday, get back in Wednesday, get out again Thursday, back in the following Tuesday,

out Wednesday, in Thursday, out for three days, in for four days. Come on. But that's what you're dealing with right now. And literally, does anyone doubt that you could come in on Thursday this week and have the futures up 500 points and come in next Tuesday and have the futures down 500 points? 20 years I managed money, never saw any of this stuff. It's total insanity because people are so afraid of 2% to 3%.

2% to 3%. Wow. I would say it's equally stupid if I had to 7%. 10 plus, that's a big deal. That's a lot of money. That's a lot of capital allocation. 2% to 3%, 5% to 7% doesn't even trigger rebalancing. You know what I'm saying?

So I don't know what anyone is really supposed to do when they're afraid of two to 3% other than accept that they're probably not invested right. Because you cannot be in equities if you can't take two to 3%. And you can't be in equities if you can't take five to seven. And longer term, you can't take equities if you can't handle 10 to 20. That's a fact. I'm saying it to every client of ours right now. If you cannot handle that type of volatility, you can't have any part of your money in equities. It's going to happen. Yeah, it's almost like this compression we've seen in volatility

has totally changed traders' and investors' expectation around what volatility really is or actually is like. And 2% or 3% is, like you said, especially in the long-term scheme of things, totally insignificant by the way it's three percent of downside that followed two weeks of three percent upside so like on january one my financial goals were were totally uh what i'm supposed to believe is on january 20th everything was set right and now january 30th it's not but that january one was

it okay or not because you hadn't made that 3% that you just lost yet. So what exactly took place fundamentally in your life? Now, by the way, I should say this because there's a lot of non-clients and clients that listen. I'm not saying this in response to our clients at the Monson Group. I can't speak for every advisor, but I'm not sitting here getting overwhelmed with clients freaking out about 2% or 3%. I think we've done a really good job in our firm educating our clients on what we believe and don't believe. And most importantly, telling them the truth. Like, yes, you're right. We cannot trade in Tuesday and out Wednesday successfully. But the second truth that goes along with that truth is that no one else can either.

And I think that's the part we have to continue hitting home. But it's very clear that there is this kind of general wave and fear. You look at mutual fund and ETF inflows, outflows. There are people that are apparently believing they need to be in Monday and out Wednesday and all these things. And I'm telling you, it is not going to end well for people if they do not accept the truisms of asset allocation and time in the market. And you can say, well, that's nonsense. You can say all that, but I don't want to be there for coronavirus. Okay, well, so you wait until coronavirus goes down, and I'm telling you that when coronavirus is gone, there will be a new virus,

and it may not be a health epidemic. There will always be something to fear. Always. There will always be fears to me, in fact, whether they're real or not not to keep people from being invested or to keep people from trying to time the market it's interesting you say usc goes back to winning national championships every year there will still be problems and uncertainties and unsettled things in the world but that would save everything it just generally aligns with things functioning a little better i believe that i hear that of course when usc was at its peak, we had the Iraq War.

We had the financial crisis. So maybe I'm wrong about that. Well, anything to get people to start timing the market less, I would be completely in favor for. Because I agree it is a form of financial suicide in many ways. And despite the record being historically crystal clear, investors keep trying to do it. And I think there's a lack of self-honesty there where they don't take into account their own track record and how terrible

it is when they do try to time the market. You know, let's say they try to time the market around this corona thing and the market goes up, you know, I don't know, 5%, 6% in a couple months. They'll totally disregard the fact that they missed out on significant gains because of their timing experiments. So, Robert, let me ask you, what are the things, not in the next week, three weeks, or for the extent of whatever coronavirus is going to be out there, just bigger than that? What are the things you see as real assets in this economy and in this market? What are the risk-on arguments? And then I'll ask Julian for the risk-off arguments.

I mean, there's certainly some sectors that got absolutely hammered last week. So I see some good opportunities to dive in there, in particular energy. I think that's something maybe we would all agree on without talking to you guys. We should note we're saying that on February 3rd, 2020, not to be confused with what we said on January 3rd, 2020.

But I digress. And we own that. I mean, I think that that's part of being a value investor is you have absolutely no opinion on the timing when the market captures the value that you believe is there. Yeah. Something else on my mind a little bit is you talked a little bit about rates at the beginning, too. You know, the 10-year has been kind of a steady march downward during last month. And, you know, certainly there's discussions around how much of that is a flight to safety, but certainly not all of that could be what it's attributed to.

I mean, we had slightly better than consensus GDP from Q4 that came out. So I'm just wondering what's kind of softening the outlook at the 10-year yield space right now. That would be in the liability column of the overall risk posture right now. Yeah, it's a very good point. I agree with you completely. Julian, what do you say? What are the assets? What are the liabilities? Well, I always go back to rates and earnings. And then so when I see the yield curve inverting again, that makes me more worried than the coronavirus. What's the bond market trying to tell us basically?

And it's telling us they, you know, they want another one or two cuts this year. So not so confident about how to go to the economy. Earnings are kind of mixed. I'm wondering, you know, there was clearly a relief rally and I guess we feel better about the economy or like the manufacturing investing in particular because of the phase one deal. So I'm wondering how much now CEOs or boards, how much are they going to be worried or propose any further investing because of the election? I mean, we think it's not an issue. You shouldn't stop investing because of the election.

But everybody is, you know, we hear a lot of clients, or we even debate about us, how people are worried about having progressives at the White House. So if you have boards and if you have CEOs also worried about that, thinking, oh, maybe I should wait until the end of the year for my next plant or where I'm going to put it or the CapEx. Could that impact the economy? But you know what's interesting about that, Julian,

is let's say we were going to make the argument for the short-term reactionism. Surely someone wanting to trade out because of Bernie Sanders knows that in two weeks there might be a new poll, and in four weeks Biden wins the state, and in eight weeks Bloomberg's a presence, and in 12 weeks Trump's rallying, and in 20 weeks – so even the short-term people know that this thing is going to bounce all around. I could see an argument. I would vehemently disagree with it. But at least it's intellectually reasonable to say, I think Bernie is going to take the lead and hold it all the way to November and win. So now through that period I intend to be sold out and then go away. It's kind of absurd, but at least it's different than like you're playing this short-term volatility and you're doing it with something that isn't short-term.

It itself is going to bounce all around. I guess that the U.S. political thing is harder for me to reconcile than the interest rate deal from a true fundamental aspect. For one thing, and again, we're going to have a lot more to say on it after iowa after new hampshire but the reality is is that you would think the market which do we all agree the market is smarter than political pundits on fox and cnn yes you would think the market would view sanders winning as a positive because the market believes that Trump is more likely to beat Sanders than Biden. Am I right? So the market would view Sanders if the news catalyst is Sanders looking like more likely to get the nomination.

OK, OK. That's a positive for the market in the sense that the market believes Trump is more likely to beat Sanders than Biden. Sanders can't beat Trump. It is, but I guess the market, the thing is, if you have a Biden, then the market would think it's win-win. There's no loose scenario. Whoever wins, it'll be fine, I guess. They can see Sanders as the black swan. Yeah, but I don't think the market believes that Biden wouldn't unwind some of Trump's financial deregulation, some of his energy deregulation.

I agree Biden's no Sanders, but Biden's not going to be as market-friendly as Trump. And I'm not being political here. I'm being Mr. Market. And political. If someone has conviction to believe in every dependent step that, say, gets Sanders into the White House, it doesn't make it the case that there's nothing to invest in. There's plenty to invest in that would be benefiting from a Sanders presidency out there. So, I mean, I think the market certainly is smart enough to see that, and pundits can say what they will. By the way, what would you invest in in a Sanders presidency?

I don't want to live in that world. Costa Rican real estate? That's right. It's windmills, I guess. I don't know. No, I agree with you. There always is. Those things are easier to define in a kind of traditional Democrat scenario.

But I think that the volatility issue we're going to be with all year because the coronavirus thing is there now. Yield curve, I suspect, points to a more substantive issue. All the rest of this is noise and volatility. As we've said over and over again, you understand we had the rest of this is noise and volatility. As we've said over and over again, you understand we had the same conversation about Warren back in November, and now we're talking about she's going to get third or fourth place.

I believe that the forces that moved the tenure down to 150, they were absent the conditions of August when the tenure lasted at 150, with trade war pressures heightening. The tenure was well on its way down before coronavirus. I understand I gave it another leg down, but you can't blame the first 25 basis points on that.

Ultimately, there's no confidence and there hasn't been forever in long-term sustainable economic growth. And you're not going to get a 10-year that stays above 2%. The Fed didn't pull it down. The Fed had pulled the short end of the curve down. The Fed can't control the long end of the curve. And that's why we've now reflattened after having uninverted, is that this long end came down. They've brought the short end down. I think that you're still dealing with and this is not three weeks three months this is out there it's been out there it's going nowhere long-term sustainable economic growth there's no belief in it and that's forcing long-term yields down am i

right or wrong i think you're totally right and i think uh our central bank is to blame and they keep uh delaying the end of the repo purchases, the QE4. That's not happening. That chart you shared with the balance sheet is incredible. I cannot believe just the level of accommodation that is seemingly perpetual. I think there needs to be more creative destruction for that type of long-term growth, and I don't think that the Fed is going to let it happen for a really long time. So I completely agree with that long-end suppression, long end of the curve staying down.

Now, switching gears, we're kind of looking for a little add to this, Robert. When I say I think that we're in this suppressed long end of the yield curve, interest rates have a hard time reflecting meaningful economic long-term optimism. Is that a reason to go risk-off, or is that a reason to be selective in what you're investing in? Well, I mean, certainly the latter. You have to be selective, particularly in the fixed income space. You have to be picking your assets really wisely, I'd say.

You know, our philosophy, I think, a lot of times has been just because the market doesn't love something now doesn't mean they won't love it or we don't love it, right, in the near future. I couldn't agree more with you about that long-term growth. I mean, whether it's, you know, demographic issues or, you know, this slowing deployment of CapEx, whether that's going to happen now or three months down the road. It's a long-term trend, and I think one of the big hopes for the tax reform hasn't come to fruition. And that's the fundamental thing.

So what other knobs can the politicians turn? Certainly the Fed is kind of stuck, as Daya pointed out. So it's a tough picture, and I think the innovation, and to your point, the creative destruction, has to come into play. Yeah, and we're not seeing it. So I don't know what the solution is. All I know is that quality is going to matter at some point, and I think that focusing on quality names is something that we'll continue to do.

Well, and I think that one could argue, and I wouldn't be real defensive about it, but I would disagree. But one could argue, if you reject the idea that one should be investing right now for PE expansion from already high PE companies, and then you have a month where reasonably priced things go lower and reasonably high priced things have more PE expansion, I hope people understand. I'm going to be very honest here. That doesn't mean I was wrong. It means I'm more right now than I was a month ago, that there is even less of a conviction in praying for multiple expansion as your underlying investment thesis, and there's even more value. It was not like a month ago I was predicting it

would happen in 30 days or 90 days or whatnot. Fundamentally, I think this is, Ben Graham has a cute line about it, but it's really getting to what Robert Graham, Ben Graham's great grandson, was actually getting at, is that in the short term, we know that markets are voting machines, and in the long term, they are weighing machines. And I heard Jim Cramer on tv last week talking about a certain sector of the market that just has no chance of getting reflated because there's so many buyers that aren't coming in back into that space he was talking about some big names in the energy sector well he's totally wrong you know that's completely untrue that over time anything can ever dictate the movement of a price other than the value

you're telling me if and this is an if if free cash flows are still growing there's no that just people boycotting a certain sector can never re-rate the stock that is such an incredible denial of self-interest that you think there's no hedge funders out there. They're going to capture that value arbitrage and play it to the hilt. They may be wanting to really push it down before they pull it up or whatever. My point being, in the long run, we know they're weighing machines. And I understand, too. People say, you're right, David, but we don't want the long run to mean five years or seven years.

I'm just simply saying that there are things in the market that worked in January that worked off of multiple expansion. And there are things that got cheaper that are really fundamentally solid. There also are fundamentally solid names that went higher in January. They kind of finally got rewarded a bit and you saw some price movement there. But the idea of a very high dispersion market environment right now, I think that's reinforced

by what we saw in the first month of the year. What do you think, Julian, as we go to the second half of running season? Well, I feel like this is all, again, this is all correlated to the cheap money and what it creates. So it allows companies that don't make any cash flow to have crazy valuations and be able to raise debt or raise equity and destroy industries or sectors, you know, reshape the whole economy.

So it's kind of that's what's extraordinary about having rates here. But I guess it's at the end of the day, as an investor, you feel comfortable owning, you know, companies that are generating cash flow that have been around for a long time and that are growing. And they haven't done great the first months, but it's a marathon. It's not a sprint. So we'll see who's around in 10 years. I think we should do a podcast sometime dedicated to that subject about what – how do I say this? if the fed gets everyone dependent on

certain behavior and believe certain conditions exist and i don't think the fed should have done it but they did it is the fed then wrong to undo what they first did see this is the issue that's so interesting to me ethically is we talk about creative destruction okay the fed has told you you need to have a green light to go into certain spectrums of the credit market they're not free cash flow generating but we're giving you the reason to in to either lend money or to buy equity in these companies but then if they go hey you know this is really irresponsible we got to pull the punch bowl back here and they go wipe out a bunch of people and you get the self-fulfilling prophecy down. Is that any way to administer monetary policy?

To make yourself not credible as a central banker by setting up one thing and then pulling it down. As soon as I say that, there's critics that would go, no, no, no. The Fed never should have that moral hazard where they keep a bad habit going just because they did it. But see, I'm not sure I agree. I think that they shouldn't do what they do and then when they do it, you at least have to wean the market off of an addiction you helped create. Otherwise, you kill the addict. it. So you're saying that a huge reversal, even though it's, obviously,

if you're talking about free market, is not something that you think they should do? I think what I'm saying is we should do a podcast to discuss it. Because I have strong opinions on it. If I get into it now, we're going to be here another half hour. Yeah, right. But I think more of a transitionary thing would

probably be more appropriate. But yeah, I'm looking forward to that podcast, too. I have a lot to say about it as well. 10 seconds, take us out, then Robert, then Julian. Okay. Yeah. So just keep focusing on long-term, a little bit of volatility. It looks like the market is looking for reasons to sell off and then snap back. So a little bit of volatility is okay and get used to it. Stay focused on your individual or family time horizon. Know the volatility that comes with equities and be prepared for it and be prepared to be rewarded for it. For me, it's all down to earnings. And we've seen a lot last week.

I have quite a lot more this week. And so that's what I'm going to be focused on. And then, you know, keeping an eye on rates and the curve. Really, that's the two things that I think matters. The risk-free rate, so what the Fed said as the risk-free, and then the risk premium for different asset classes with different types of risk and

volatility. Absolutely. All good comments take us out. Thank you all for listening here to this week's Special Dividend Cafe. Market volatility is the norm. It is the rule, not the exception, and we're having it right now. There's some question marks out there. We're looking at some short-term things like coronavirus. We're looking at mid-term things like the U.S. election, and we're looking at

long-term things like the yield curve and the overall state of secular growth in the U.S. economy. Short, mid, long, plenty to talk about. We hope you've gotten something out of this week's podcast. Reach out to anyone, anytime at the Bonson Group with questions you have. Particular clients of ours, contact your private wealth advisor if you have any questions. In the meantime, as Julian has said, it's earnings, and then we want to look to where the Fed comes in to price these things. But the risk-on argument is there. You have a very positive credit environment. You have very low inflation.

The risk-off argument right now is not satisfying to us, a virus that could very well be out of the news in a few weeks. We're thinking bigger than that because that's our job as your fiduciary advisor. Thank you for listening to The Dividend Cafe. All right. Short, sweet, dramatic pause. Yeah, that's nice. Thank you for listening to the Dividend Cafe. Financial food for thought. Thank you. or for statements or errors contained in or omissions from the obtained data and information reference herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.

This document was created for informational purposes only. The opinions expressed are solely those of the team and do not represent those of Hightower Advisors LLC or any of its affiliates.