The Dividend Cafe - TBG Investment Committee - The Week of March 2, 2020

Episode Date: March 3, 2020

Our Investment Committee's weekly podcast today basically delves into all things market correction, market snap-back rally, coronavirus, and the political landscape shift of the weekend. An important listen in these volatile times. Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, financial food for thought. day on Monday, March the 2nd, coming off of the worst week in the market from a point drop standpoint in history, from a percentage drop standpoint, nowhere close to the worst in history, but certainly the worst we've experienced in quite a long time. And so we've tried our best to be very regular and very frequent with updates, material and perspective. Last week, having our investment committee podcast and a special dividend cafe that came out Wednesday, and then the normal Friday dividend cafe along with the podcast and video that I recorded around the kind of climax of the week selling on Friday.

So we appreciate all the feedback we've gotten from many of you. But again, we plan to kind of just inundate you with updates and material for the foreseeable future based on the situation in which the market finds itself. And so right now, we've assembled our whole investment committee. We've all, of course, been inundated in research and news and the futures market and interest rates and updates all weekend. And now here we are, midday Monday, to provide you a little update. As I sit here and record, and I ask you to bear with me on the fact that this is a moving target,

I suspect it'll move by the time we're done recording here today, gentlemen, and I think I very likely could move one way or the other by the time people are listening to this. But as we sit here and record, the market measured by the Dow is up 630 points. So that represents about a 2.5% move higher in the Dow. S&P and the NASDAQ each up over 2% themselves. And I would add to it to get an idea of kind of where we have been since about mid to late day Friday, because, of course, the whole violence of sell-off taking place Monday through Thursday, then adding on to it market day Friday.

I think some of us internally made the comment Friday afternoon that we had a down 400-point rally day because the market was, I believe, as late as about 30 minutes before the close, still down roughly 1,000 points on Friday, and it closed down 357. So you had a 650-point move coming into the close Friday. The reason why it's significant is because we're very used to, you remember, Brian, in the financial crisis, all those Fridays, the last 15 minutes going into the weekend. I remember at one point Bernanke even joking that he would name his memoirs one day before Asia opens because they were doing so much policy Sunday afternoon based on weekend activity

and traders being so fearful of an exposure over the weekend. So I really did expect a kind of add-on level of selling on friday i went the other direction which told you that there was you can't move the market if it's not big volume there was some big money maybe smart money maybe not maybe short covering short covering but people that didn't want to be naked over the weekend short which is the exact same thinking just the other way of not being naked long over the weekend, meaning exposed. But also someone expecting that you could get a gap up at the open.

So then on 3.30 p.m. Pacific time Sunday, the futures market opened. And within a few minutes, we were down about 400 points, I think about 300. And I watched it well into the evening, along with what currency movements are taking place and interest rates. And the reality was that there was no rhyme or reason. You would get a little pop up about there being another, you know, someone who had been diagnosed with coronavirus in New York and someone else in Washington. And so there's a little spot things here. This is something we're going to talk about in a moment, the market's response right now to individual health cases in the US, and why they're really not a market factor but

here's the thing futures were down 400 then they were up i think 250 or so by bedtime i was up of course very early and by that point um it moved down about 300 and then we went up, and now here we are. And again, as I'm talking, what did I just say? 634, and now we're up 700 points. So you have had something in the range of about a 1,500-point move higher since the low point on Friday. But nevertheless, the Dow is just barely over 26,000. Of course, the Dow had been at 29,000 plus change just a few weeks ago. So it has been violent.

It has been significant. It has not been safe in Japan. As market investors, it has not been safe in Europe. In fact, it's been worse. It has not been safe in China where it's been particularly worse. So you just have this broad risk asset sell-off, and we are very focused on what we want our clients doing and not doing in this time period and how we're going about deploying and so forth. So, Dave, I'll start with you because you're sitting to my left,

but you, of course, running our trading desk here at the Bonson Group, know that where we had cash that we had put aside, we have attempted to go ahead and deploy if cash that is for the purpose of investing in equities is not to be invested after a 4,000-point drop. I don't know exactly when it is to be invested. But in addition to that cash deployment that you and your people were putting to work early this morning, we also last week were adding to positions, and we can't actually

say names, but a couple of the particularly distressed names that took place in the sell-off last week. Talk a little bit about our thinking around adding those positions. We're recalling a bottom? And what are your expectations on some of the particularly distressed energy names? So I don't think you'll ever hear anybody in this group say that this is the bottom. We don't attempt to be prognosticators. We don't have a crystal ball. All we can really do is do our analysis and arrive at the conclusion that there's value in these names and that they're trading more at a bargaining at today than they were yesterday. And all else being equal, we like them even more if they're at a bargain, obviously, which was the case last week. over about seven consecutive days of the market, selling off violently in some circumstances,

selling off to the downside. As far as, just to give you an idea how we think about this opportunistically, we don't exactly just add to equities as far as a blanketed add to all our equities in a time like this. We look for particular names that may be more oversold.

And like David mentioned, we had added to some names, particularly on the energy side of things. I mean, if you look at the energy valuations, they're trading around what they were around, you know, 2009, 2008 timeframe. So there's, we think that a lot of these businesses are incredibly stable. They're incredibly well run, and they're trading at very extreme bargains. So in that sense, we continue to like our energy names even more. As far as the sell-off goes in general, again, we don't know how long it will last.

We do think that it's likely things will reverse soon, but we're not going to make any grandiose claims as to when that will happen. So, Brian, to Dave's point about not being able to time a reversal but believing that historically there's precedent for it, one of the huge indicators I relied on since I really studied it a lot back at the time of the financial crisis is a spike in the VIX as being indicative of some degree of move higher. As we sit here and record right now, the Dow up 750 now, and the VIX is down 13%, sitting at 35. It got up to, let's call it, 41. Tell me where you think the VIX indicates, first of all, the backwardation of it, how the VIX was so much higher at one month and three months and six months.

Tell our listeners where the VIX as a measure of panic gives us some sort of general indication about market optimism. Yeah, no, happy to. I mean, to Daya's point, I mean, it's not so much that we're calling an exact bottom or something like that, but the volatility index is very telling. You know, it's sort of the old adage, I think it was a Warren Buffett quote, you know, be greedy when others are fearful and fearful when others are greedy type of thing. When you get a volatility index above 40, historically, that's a pretty good time to add to position so long as

you think that your fundamental analysis on what you're buying is still intact. And so you're kind of you're able to pick up shares when markets are dislocated, and there's just mass selling going on. And actually, on Friday, I had you run the chart, it was 49.48 was the intraday high, which it's not, again, it's not telling you that's the bottom, it is telling you that it's, it's, there's capitulation going on, and there's just mass selling going on. And so those are the those are the kind of times we would add to some of the positions that Daya mentioned that we find a lot of value in when there's that. And the fact that it's down to 35 today is obviously good news.

It's why the market is up or one of the reasons that kind of go hand in hand. You know, last time the VIX was above 40, it was August 2015. You know what the S&P was then? Oh, gosh. 2,300. You're starting with the wrong then? Oh, gosh. 2,300. You're starting with the wrong number. Oh, gosh. 1,800.

Wow. Phenomenal. 1,800. So the last time the VIX got this level, the S&P since then has moved 70% higher. Yeah. Yeah, it's interesting. I mean, that's a big deal. That's a big deal.

Yeah. Reiterating the point you're making. Yeah. Yeah, it's interesting. I mean, that's a big deal. That's a big deal. Yeah. Reiterating the point you're making. Yeah. Yeah, it is. Yeah, I mean, yeah. And to speak to the S&P in those levels, for just 2020, after this coronavirus and this stuff was coming out, earnings were estimated at 179 on S&Ps. Now they're at 165. You divide that by what it currently is, what today, I don't have your phone there, but 3020 or something like that.

3026. So try to be more precise. We went from 19x to 16x in a couple of weeks. We did. Now we're back up to, what, 17? Yeah, probably not, actually. It depends. That's a great point.

And so I guess, Julian, the question I'd ask you, we talk a lot about the Fed monetary policy. Obviously, we internally discussed this this morning. First of all, I'll start with a yes or no question, then I'm going to invite you to elaborate. Do you believe that the market's so far today rebound is related to expectations of Federal Reserve intervention? I guess that's one of the reasons. It's probably overshoot last week, clearly. It was a very fast move, leg down,

vol went to some very high levels. So I guess there's a bit of normalization maybe this week. So we'll have to see in the next few days. But there was, you know, the value hasn't changed that much, the value of the assets, but the price has changed a lot. So if you look at the expectations now of Fed cuts, they're much higher and much earlier than we were months ago.

We're expecting maybe some rate cuts at the second half of the year. Now the market is pricing. half of the year now the market is pricing or if you look at the implied probabilities um we have 100 of 50 beeps cut coming in march by march 18 it could actually even happen faster than that so like what you don't see very often but like have an unscheduled red cut and so this is a psychological operation it's not going to do anything about the virus, but it's really going to help sentiment and it's going to look, make, you know, equities,

uh, on a relative basis, even look even cheaper. Yeah. So, so then let's add to this discussion, Julian, what will they do?

Um, we, you're, you believe it helps. It's hard to say how much of this is normal snapback and how much of it is an anticipation. hard to say how much of this is normal snapback and how much of it is in anticipation i don't believe that we can say that this whole uh move higher today is related to the idea of the fed coming in to intervene simply because the futures market that's pricing in the fed intervening

were at the same level overnight the the same level of the open, and yet we were still down 300 points. It took us a few hours to kind of get the machines going with buying. And I guess I don't mean this sarcastically. I'm really serious, though. Was there not a man, woman, or child in America who didn't know that the Fed was now going to be cutting? So wouldn't markets have been pricing that in, or do you think it's because now they're

going to be cutting more and maybe sooner? No, I think that was pretty much pricing as of Thursday, Friday already. Maybe, if any difference, maybe sooner, but I guess it's more, and the reason for the rally today is just like we're in volatile environment, so we used to be at 15% vol, now we're at 40, so we're going to have some plus 3%, minus 3% moves. So we're up 800 right now for the same reason we were down 800 Friday, just because. Yes. And the day's not over, too.

That's true. So we'll see where it closes. God, you've got to re-know. You dropped 50 points right when you said that. I'm not kidding. Okay. So the Fed is a sentimental factor, a psychological factor, obviously not a health factor. No one's going to get healthy from this. But all things being equal, is it, to your mind, Julian, this is important,

is it the Fed's intervention or the global coordination across central banks that the markets are more looking to? They're looking to global coordinations. I guess that's the what's being expected but if we have a few more days of rally and less

volatility maybe we don't even have a global coordination I'm not sure what's priced in at the moment I guess what's clearly priced in is some cuts I don't know if that means by the 18th or earlier than that I guess it's just it's been a lot of uh fear last week and maybe the the leveraging that needed to happen you know it's

been done and now it's a bit being a bit more uh rational you're talking about margin call and things yeah yeah and you know they explain like if people are done with their margin calls and the hedging and whatever they had to do by midday Friday. Maybe that's why we closed a bit better. They wanted to get before the weekend on whatever target they had, and they achieved that by 12, and then that was it. And then that changed the flows. So, Robert, from your perspective, we talk about the VIX as a contrarian indicator.

They obviously speaking to our philosophy on cash deployment and our execution there and then julian's comments on the fed and where that fits in as you see the lay of the land now are you optimistic specific to coronavirus that there's a better environment ahead are you uncertain? What's your take on where the actual, forget panic, hysteria, just the fundamentals of where coronavirus is. The American society will leave China and Italy and Iran out of it.

I'm not planning on taking a long position in Iran in case any of you are wondering. So just to quickly follow up on something Julian said, last week, whether it's the end of the margin calls or people kind of just feeling like it was a clearing level, you have that feel a little bit to it. And I always think back to some of the talks I give to 401k groups or to, you know, my younger cohort. The end of last week was a large part of time when people might have been deferring into their plans. It was perhaps a payroll date, right? So from a cash flow perspective, that's wonderful, especially for those folks that are younger

or more risk tolerant. In addition, you know, you look at the balance sheets and the dividend payers, those dividends are continuing to come. And when you have those cash flows into what we probably consider a lot of times are depressed valuations, that's a really good thing for long-term IRs for investors, whether they're institutional, personal, et cetera. From the perspective of the virus, you know, I absolutely feel for anyone infected, particularly those that are living in authoritarian regimes, you know, China and Iran, because that's where we're seeing the brunt of the really ill effects. And we don't even really know how many people are affected over there. And it's really, really terrible.

You know, in the United States, we're seeing, and I'm not playing doctor here. We've seen plenty of those folks on CNBC. But we're seeing, you know, pockets of, you know, emerging, you know, infections, things like that. They're being reported on very, very heavily. But, you know, I think people have to remember at this point, I'm just, you know, making some statistics up here. But there's probably more people infected with the Black Plague in the United States than have, you know, this, this coronavirus as of this year, you have, you have a couple of cases of that every year. It's not reported on, there's not mass hysteria. You know, we saw photos over the weekend of people, you know, rating Costco, Walmart, all these different

big stores. Right. And that's, that's one thing, but at the end of the day, people have to kind of keep it, keep it in perspective. You know, this is, this is not the flu. Maybe it's, maybe it's worse. Maybe it's, Maybe it's not as bad. But from a field perspective, I think it will pass on a forward basis. So we believe it will pass because of history and our awareness of the reality of human innovation, human capability. I do not – I'm sorry, guys. I'm switching here kind of serious. I am deeply troubled by people who believe the realistic approach is the pessimistic one.

I think there's something psychologically wrong. Now, I also get fear. I also get concern about the unknown and particularly when we're only talking the category of the investor, not the health reality of society. I put out a tweet and a Facebook post over the weekend that one of the things that really scares me a little is for people that – look, the Dow didn't theoretically drop 4,000 points. It really dropped 4,000 points.

But it is theoretical about the health fears and so forth. And you see people raiding Costco and walking around, just different things people are doing on the health side. It's not that, oh, wow, how could you be so worried about coronavirus? It's how could you not be worried every day when there isn't coronavirus? That's right. About flu, about the freeway, about a light bulb falling down and hitting your head. Yeah, something else we've touched on in our industry in particular, there's so much fear mongering. freeway about a white bulb falling down and hitting your head.

Something else we've touched on in our industry in particular, there's so much fear mongering. We have the doom and gloom folks out there. We all know who they are that are making a living trying to project the next calamity, right? And I think aside from a certain large philanthropist this weekend that we saw come out and say, hey, this is a hundred year pandemic, that was a disservice. But I think level heads are starting to prevail. I mean, a little bit of leadership in these situations really goes a long way towards reassuring the public, whether they're medical professionals,

whether they're politicians out there. And I think more and more people are starting to digest and the leaders are starting to say, okay, this is the time to calm folks down. Whether it's the Fed having to step into that role as we've started to see a little bit. I think that's really, really a good thing. On the Fed side too,, one of the things I noticed is, you know, people kind of backstop with the Fed counting on them to solve a lot of problems. But maybe, and this is just my thought, maybe the Fed might start relying upon data to influence their decision. Because if unemployment starts to tick up, maybe as a result of the Q1 issues, that's a reason for them to act as well. I was going to say, I think we should be

worried about the cure than the virus itself. I mean, if you look at this, 10 to 60 million... Economically. Economically, yeah. There's 10 to 60 million Americans who get the flu every year, right? About 0.1% die. That's 10,000 to 60,000 people. We don't talk about it.

And this virus has a mortality rate of 2%. That's the official rate. But it's actually probably much lower because there's a lot of cases that are not reported. So, like, it's not going to have a massive impact, like, from a health care point of view. But when you look at the measures that have been taken in Asia and now in Europe, you know, stopping, you know, museums being closed or games being played with, you know, people not traveling anymore, that's really hurting the economy. So, I'm worried that if that's where we're going here, that's going to hurt the economy as well. But hopefully, we're smarter than that, and we're not going to change our lives.

Yeah. More of a self-fulfilling prophecy. It can be, but this is kind of what I think, guys, it was the situation last week, was people were responding to what they worried about other people responding. about other people responding. And I do not believe that airline travel was dead and gone nine months after 9-11. It was dead and gone for about 90 days. And it was still on the low side for another few months.

It picked back up. And we can go on and on and on and on and on and on and on with examples. But Julian's exactly right. There is that knock-on effect of responding to the response of the thing. But those fears, if you want to call them that, are generally the things that create really big buying opportunities. In this situation, I think we all would grant that we don't know exactly how it's going to end. It can get worse. It can get better. Right now, I'm just a little bit confused as to – it strikes me as so disproportionate now that I've studied it more medically, the mortality rate being as low, the similarities between how people respond immunologically with the flu.

It's effectively saying for older people, weaker immune systems, it's where the higher mortality vulnerability is. But economically, I know they canceled classes in Japan and their turnout was low. A client of mine who is near and dear to me had texted about the turnout at the Lakers Golden State Warriors game was really low up in San Francisco. But I wrote back and I said, well, you know, Golden State's in last place. I mean, I guess I'm wondering, Dan, do you think that there is a knock-on effect

and that it will be something that is persistent or will it prove to be very transitory? So that's really the question. We believe that this group will be temporary in nature, and we arrive at that conclusion by looking at the historical data, looking at the incidences in the past, looking at what were some of the epidemics. There was SARS.

There was bird flu. Bird flu. Ebola. And looking at the market movement you know uh the swing dancing the swing dancing craze of the 90s was a big embarrassment but that was the main one that was the main one and and all if you look at the if you study the market movement after that and you study the economic impact after that it is temporary in nature and we have a hard time seeing how this is going to be otherwise how how this is going to have a permanent effect i it's we don't see it so yeah we're very firmly in the camp this is temporary nature and because of that that's why that's why we're buying because

the long-term fundamentals of the businesses that we own are fine in the long term so if you know like i said you know we we like buying them at a bargain. So Brian, would you add to that? I mean, I would, I would say, yeah, I definitely think it's transitory. And so far as fundamentals aren't dramatically changed, you end up getting a temporary kind of consumption decline. And then you get a ramp back up when things kind of normalize. And that's, that's historically what's happened. And I think that's what will likely happen in this case. But that's not to say it's not a big deal. This is a, you know, you know, PMI in China went from 52 to 35 in one month. So that's a big contraction. And,

you know, I mean, you know, and so those things are meaningful, you're going to get a print on GDP in second quarter, I'm sorry, first quarter of 2020, that might be zero, or, you know, upwards of one 2%, something like that from China, which is averaged around 6%. So these things do matter that all said, you know, the fact that it is historically transitory, and there's pent up demand that kind of resumes and those things kind of come back. In other words, it's not like the demand is gone, it's just temporarily muted. And in those environments, when you have volatility over 40, you know, when you have VIX over 40, when you have, you know, yields, 10-year treasury treading, you know, 1.08, I mean, those are indicative of times when you would want to add to quality

position so long as that thesis is intact. Just real quick, I know Brian deals with a lot of, you know, obviously has a lot of client relationships. And I talked briefly with a client yesterday that said, look, you know, I hear what you guys are saying. I know you guys look at the data, but the song is always the same with you guys. It's always stay invested. You always like equities. And to him, it sounded like because of the same drum beat, it fell on faint ears a little bit.

So what do you say to a conversation like that? Yeah, I mean, what I would say to that client, I've had many conversations, I think I've reached out to over 100 at this point, who knows how many meetings and things and conversations. But look, it's not that we're always saying the same thing, and we're just going to stay invested in a static portfolio or anything like that. It's basically, you know, cooler heads will prevail, you look at what you're invested in in your allocation, times that we don't find value in markets, whether it's equities, fixed income alternatives, any of those asset classes, we're going to reduce

exposure there if there's not value there. Is it something where we're, you know, knee jerk and all the cash and waiting for it to go down or some silly notion like that and putting it all back? And of course not. But I would, you know, to to that client i think it's a fair question but i would just sort of remind that the allocation is not static it's fluid and so we're managing that allocation uh to be either more aggressive more conservative and and that's a much better way to make money consistently than it is to try to i think yeah i think there's a couple things around that that are are important um one is the kind of fact of it like i agree that um it's really really really hard to get a long-term return from equities if you don't stay invested in equities

so that part is probably a true part of the accusation but um the weighting level that we recommend for equities um if anything i think people would say we're too cautious sometimes not not too overly aggressive. The other thing would be the alignment side. If we thought that the best thing for a client in terms of their return, in terms of enhancing their portfolio return, was to be uninvested at given times, uninvested altogether. We are paid on how well we do. If their return is enhanced, our fees are enhanced We have a real alignment

I also have money in the market As everyone at this table does If I believed I could improve my own result by doing that I would do it with my money just as much for everyone else's So whether we're right or wrong That these things are difficult to time – first of all, it isn't intellectually up for debate that they're impossible to time. You are talking about as a percentage basis, the Dow right now is up 2.5 percent today, right? What percentage of the recovery – let's say the Dow is going to get back to 29,000.

How much of that recovery did people miss today a third of it or a quarter of it or something like that right so you're gonna miss 20 or 25 percent of upside from your timing over one day or one hour and there's a certain humility humility that we have in this is which is that gosh i i like to think we're all smart uh folks here and we read a lot, and been managing money for 20 years, all those things. But at the end of the day, there isn't a crystal ball. And so you're managing that allocation based on the most optimal way for that particular client, and then most likely how you will make money. But the idea of timing it and getting it right, like to David's point, I mean, today we're up 2.5%.

If you would have gotten that wrong, that's a third of the return, just back to the top. The key is be invested. Not only stay invested, but be invested. And be invested in what? Anti-fragile companies. I mean, the stuff that we love and we own, they have great balance sheets. They're paying out cash flow.

They can be dynamic and respond to opportunities in the marketplace. I mean, and harkening back to how economic events hit different countries or the virus hits different countries. You look at a nation like China where they have so far the highest mortality rates, I believe. Well, you have kind of a homogenous population there, maybe reduced immunities. You have a concentrated command and control center. Contrast that with the United States. We have a wonderful, diverse population. We have a dynamic workplace.

We have entrepreneurs all over the place. We're going to get through this. And I have more confidence in that than anyone else around the world being able to do so. And we're talking about 3,000 people. That's right. Exactly. That's right. Not to say it isn't tragic, but you're right.

40,000 die every year in this country from influenza alone. And so to your point earlier, it's not about the actual virus. It's about the reaction to it. Gosh, they were talking about potentially suspending the olympics um or something like that in japan which is just it's you know those things actually curtail economic uh expansion it's not the actual virus itself i also would point out that um again some people may not choose to buy into the philosophy and that's all right the humility you speak of is also applicable when I talk about the rather fervent ideological commitment we have to dividend growth. But to the extent one becomes less invested or uninvested for periods of market turmoil – and again, the question always comes up after the markets drop thousands of points, not before.

So if you know the market's dropping 4,000 points the next day, you can make a lot of money by selling that day and then buying back three days later. But since we don't know that, I would just point out that there's only two things that we believe people are investing for. That is income now or income later. That's it. Some form of cash return right immediately or sort of cash return in the future in some form or another you cannot get dividends to reinvest in distress prices if you're not invested in periods of distress it's just pretty much where most of the money gets made it's a reinvestment of dividends i do not want to say to people in a week where the dow's down 4 000 what i know to be intellectually

true which is that a lot of people are going to make a lot of money off of what happened last week. It's actually a very opportunistic period, especially when there are prolonged down markets. The reinvestment of those dividends accumulates a lot of shares that produce a compounding effect for one's future income, which is very, very attractive. But I also point out, too, for those needing income, if you need cash flow right now and the dollar drops 4,000 points, your cash flow for dividend investors was not impeded, not even remotely. And yet if you exit, you then have no choice but to withdraw from your principal base. You have to deteriorate your balance sheet for cash flow in that one-month, two-month, three-month, six-month period you choose to exit.

For cash flow in that one month, two month, three month, six month period, you choose to exit. So I'm not at all insensitive to the idea of being in the market when it's up and out of the market when it's down. But I am providing the rationale that we hold dear as to why it's a very bad idea. Okay. So I promised in the Divin Cafe on Friday, and I want to switch gears a little bit, some interesting things that have to be talked about in the political circle. First, there's sort of the absurd, which is anyone who would say last week was not primarily about coronavirus, and sort of a global hysteria around global fear of a global health epidemic. We all know that was driving the sell off. At the same time it happened, you were fresh off of a massive Bernie Sanders win in Nevada,

which represented more or less the second or third state that he had prevailed in, and Bloomberg's just decimation in the debates and this sort of feeling of, okay, wait, wait, wait, I don't really know how Bernie's not going to win now, like those options kind of floating away. So there became some sort of speculation that there was a belief that Bernie was also driving some of the market sell off. And obviously, it behooved the president to share some of that as well. My own view has become very convinced that what markets could get an add-on event is if the sell-off of coronavirus, driven by coronavirus, stemming from coronavirus, that sell-off becomes a source of a self-fulfilling prophecy in the political sphere. And then realizing, wait a second. If something happens that damages Trump's calling card, which is the economy, the stock market is whether people like it or not.

The stock market is very much viewed as a bellwether on the economy and the sentiment around the economy. As I've pointed out in this podcast many times, 96% of the time, the stock market has been a very good predictor of one's election or re-election or not. Okay, so here's the thing. There's Joe Biden's massive win in South Carolina. And now as we were sitting here recording, Amy Klobuchar announced she's dropping out, not even waiting for her Minnesota vote tomorrow. And just so you know, and I like Senator Klobuchar to the degree I've gotten familiar with her, but dropping out the day before your own state's voting, I think she saw some polling that said, I do not want to go through that. You don't want to lose your own state, as Marco Rubio and others have gone through. possibility that Buttigieg and Klobuchar being gone sets the table for a Sanders versus non-Sanders

race that we've been talking about, and now that not Sanders, being Joe Biden? Or is Bloomberg's $60 gazillion and still presence in the race going to mess up the non-Sanders play for Biden?

And therefore, are we no really different than we were a week ago? Is it still Bernie's race to lose? Does anyone want to comment? Because if you don't have a take on it, I don't want to put you on the spot. But does anyone have anything to say? I bet you do, Robert. Yeah, I mean, the consolidation of what we'll call the moderate Democratic lane is certainly good for Biden.

You know, I've been reading some mixed reports on whether or not it's good for one candidate or the other for Bloomberg to stay in. And I guess my takeaway is that with Bloomberg staying in on Super Tuesday, which is, I think, what he bet his millions on doing, I think he's going to see that through. He looks to draw not only from moderate Biden voters, but also from the Sanders potential voters as well. So I think net-net, everything's kind of falling in line to help Biden. Now, Sanders' comments and admiration of Fidel and the Sandinistas and all that over the past week or so definitely don't help. I think a lot of people hadn't really seen that side or heard anything but his kind of campaign lines. So I think things are shaping up well for biden if he

can really stay awake on the stage i think so okay um i will i will say if i can that i agree but i don't know how there's any possibility that you put the genie back in the bottle that the biggest beneficiary of a non-sandrist person coming is trump and now for if and and what i don't mean by that is that Biden couldn't beat Trump. Now, most of the people listening right now are going to get mad at me because I actually think Biden would beat Trump. I certainly think he could or gives them the best possibility in the Rust Belt states. But now, because of the sequence of events, how does Biden win this nomination without getting all the Sanders people to

sit out or stay home or revolt or go third party or even vote for Trump, which many of them did in 2016? So now you're kind of like, okay, Biden does have a path in theory. And yet Biden's path is still, it's still likely going to require a convention fight. It's definitely going to require a convention fight it's still it's definitely going to create a more divided party i'm just not sure how even if it's biden's the better risk proposition for the democrats and i think the markets would prefer a biden versus trump contest because they could say yeah well worst case this one is pretty good and this one's okay

right where where the sanders thing has obviously a different dynamic to it. But I guess I wonder what kind of damage they've done that they can't reverse at this point. Anyone have a comment on it? I essentially agree with what you both said. I would say that as far as markets selling off last week because of Bernie Sanders doing well in Nevada and those types of things, I think that's a little silly. But I would say that maybe it was a 10% type of factor. And I think that now with Biden's rise and Buttigieg dropping out and Klobuchar, that he's definitely more market friendly.

That's my view. And so if you had a Biden-Trump type of race, to your point, markets are going to like that a little bit better just because the downside is a little bit more limited than it would be with the Sanders. And to your other point, so does the market go, so does the incumbent on the next election. It's usually 90 days out. Markets are good. Incumbent wins all the way around the other result. And so I think the fear was if it's a Sanders-Trump deal and then markets are still bad because of this thing, then you could end up with a turnover in administration and that would

be scary for markets. Yeah, that's a good point. I guess it would seem at this point pretty likely that there's ongoing uncertainty on the political front. You could handicap it. There are betting odds that do just that. You still have something over a 50% chance that Sanders wins the nomination. It's lower from where it was a week ago.

The Sanders one's a nomination. It's lower from where it was a week ago. But all things being equal, having a candidate as a default for markets that is a little bit less threatening to markets than Bernie is probably a good thing. It's up to these guys. I'm a conservative lifetime Republican guy. It's not for me to give them advice on what to do at this point but from i'm giving that objective market count uh take i think that the markets would prefer something a little a little more benign and i'll tell you i'm really mystified why this has not happened sooner but but the other antidote i'll share just with listeners and you guys may be interested or may not, but

why has Barack Obama not come in to make an endorsement in this race? I read something over the weekend from his people. They think the same thing I think, that it's going to be a bruising convention and that one way or the other at the end of it after some sort of effectively a political and civil

war knife fight, that there's going to either be a Bernie or a Biden or whatever, and that the party is going to be in need of cohesion and in need of some sort of healing, and he's holding his dry powder to come in and be that centralizing and unifying force. I get it for him. I think his motives are probably more ego-driven. It's just not – it doesn't make him look good to bet on the pony who loses the race.

But that could work too. Whatever happens for the Democrats, having Obama kind of come in after the fact to get everyone unified. I think their Minnesota convention is in August. It's still going to give them three months. So the election volatility is likely to persist through the year. Julian, you are an American citizen. Yeah, that's right. I won't be able to vote for

the Democrat primaries, I guess, but for the big deal in November, yes. But if anything, I think this is a bad week for Trump. I guess he has to you know, the coronavirus is threatening the economy and his chance of being related with a weaker economy. And on top of that, I'm sure he'd love to have Sanders.

It would be easier for him to win. It sounds like that's how he sees it. And he's more worried about Bloomberg or Biden. Talk to someone in the White House over the weekend, and I'm not saying who. But I think Trump actually, deep actually deep down of course they all especially the consultants would love the oppo research and i did a hammer sanders where his vulnerabilities are you know castro and all the things trump knows the enthusiasm level that

sanders has versus some of their democrats and he is the one in their little private rooms that's always cautioning people that be careful what you wish for. I agree. I've said it many times. I agree. Six months ago, certainly a year ago, I would have said Bernie had zero chance. I now would just say he's the riskiest candidate. But I would not say and I don't think POTUS would say, that he can't win. Because I think he knows sometimes, you know, if the stars align a

certain way, where there's enthusiasm. Joe Biden is the safest nominee. There's not going to be a lot of enthusiasm for that guy. I guess he knows from his own example, you know, being the outsider, nobody can bet on him. And, you know, being at 45 in the polls, he'll still win. Sure. Yeah. But those things can line up. I mean, you have market volatility, being the outsider, nobody would bet on him. And, you know, being at 45 in the polls, you still win. Sure. Yeah. But those things can line up. I mean, you have market volatility going into the election. You have economic numbers that aren't palatable.

You have a handling of what is really a tough needle to thread, this coronavirus, to handle that properly. It's kind of darned if you do, darned if you don't. But it's February. See, coronavirus in February means that if you have any kind of improvement, which I think all of us would predict you will, that he also has opportunity to benefit politically. Absolutely. Yeah, absolutely. But to your point on could Bernie win, and I think that there are stars that could align for that. And I agree.

I think that would be a risk. I think it would be unfriendly to markets. We'll have to see how that goes. I would be surprised if we're still here before election talking about the impact of coronavirus personally. I think it will be more transitory than that. I agree with you completely. Okay. Well, I'll get back to work here.

As we sit here and wrap this up, we do still have two hours of trading to go on Monday. The market is up over 800 points. So I would say I'm going to give everyone a chance to just offer any closing thoughts that they may want to send us out with. But I do think for those of you who are clients, we do believe that undervalued areas in emerging markets and energy went to what we would call extreme undervaluation. It bears mentioning that a couple of those energy areas, as the market was continuing to sell off Friday, they actually, and it had been a long time since we've seen this, they went up.

So there was already some degree of other value buying and maybe hedge funds starting to see in that space. The biotech and healthcare sector, very interesting there because some of the companies are inevitably going to have to benefit around the solution, the ongoing healthcare needs. There's consumer goods that can come out of this that are at play. So we are being tactical and opportunistic around our name selection and our weighting of dividend growing companies there. But then on a more macro basis, the significant part of anyone's portfolio right now is all going to be the betas or I should say correlations are going to be very high. From one sector to the next, from one market index to the next, you're either going to

be in a risk on or a risk off for quite some time. I will say finally, anyone who disagrees with this or wants to add to it, please feel free. The VIX down 14%. The Dow up 750 points. Those things are not fully, as Julian commented, the volatility of the market. You're going to get some snapback, things like that. It is a repudiation against market timing and trading. But it isn't necessarily a fundamental thing. What would be more fundamental is if bond yields backed up.

Right. And they're not. So you have now the 10-year – started the day at 110, is now at 107, 108. It isn't like this market rally is being accompanied by money out of bonds and other safety trades. So there's a long way to go here, a long way until anyone can kind of say, okay, things have settled. Haven't settled yet. And so anyone want to comment on that bond yield aspect of it? No, I would completely agree. It's hard to have a 10-year yield at 108 going lower,

even though markets are up. And I appreciate that they're up, obviously. But it's telling you that we're not through it yet. Although the one thing I would say is through this whole time, you didn't have credit spreads really blow out into a level where i thought that was a real sign of deterioration of fundamentals so it's kind of two sides one we're not out of it yet because bond yields are too low and lower credit spread certainly widened they did not as much as you would expect but not as much as i would expect with a vix at 49.48 and so i think they're silver lining then the other thing i would say thanks for taking that up if you don't mind i'll elaborate because it's something we talked about this morning.

Credit spreads widened about 100 basis points in high yield last week. That's significant. Yeah. In January 2016, credit spreads widened out 500 basis points. That's five times more, yeah. When the market did about the same thing. S&P was down about 10 percent. Last week, down 13 percent.

And yet, minimal impact in credit. That's interesting. Yeah, yeah. I think both of those things are telling, and I think that's where we're at. The last thing I'd say, and we're kind of closing out, is just that we really do want to hear from clients.

You know, I've reached out, and David has, and Robert, you know, to virtually everybody at this point, but, you know, we're standing by, we do care. It's not a little thing. I mean, 14% in a week is unnerving, and I am very empathetic to that. So please reach out. We're here for you, and we want to talk to you, and I would encourage you to do that. Thanks, Brian. Daily Liquid Alternatives, I'm going to comment in our client-only bulletin this week. Pretty

impressive how some of the alternative strategies have held up through this turmoil. Yeah, without saying any names, we have a lot of alternative strategies that are up on the year. They're up in the month of February. And it's funny, I had a talk with one of our liquid alternative managers last week,

and he has many different wealth managers as clients, many different RAs as clients. And they were upset that they were only up about 6% or 7% in 2019. And he was trying to explain to me why they weren't up. And I was like, no, no, we understand how the strategy works. We would actually be very worried if you were up what the market was up in 2019. What we look for for our alternative managers is not outsized returns. It's that de-correlation or even inverse correlation to the equity and bond market. And our liquid alternatives have done exactly that this year. So we're very happy with how they fit into the asset allocation, how they zag when the equity,

when some of the risk stuff starts zigging. So I think it's a secular component to client portfolios, and they're doing exactly what they're supposed to do. Yeah, absolutely. All right, Julian, Robert, anything else you guys want to chime in on? I guess for me, it's going to be down to looking at how corporate earnings are going to be impacting in Q1 a little bit because in the US, it's probably going to really affect businesses in

March, not so much in February. So the last months of Q1 and then Q2 is going to be probably a bigger impact. I would say companies with more China exposure probably were even impacted in February. Some have already won or they're already guiding down.

So there's going to be some cuts there. But that's what a multiple dropping from 19 to 16 is supposed to do. Exactly. I mean, in terms of EPS revision so far, for Q1, the consensus has moved down 3%, right? And then you have a 15% or 13% move in the market. So you could argue it's quite aggressive priced

in any cut in future earnings. Yeah, I would say weeks like last week can certainly be unnerving for individual clients across the board, but let us be your Churchill. Keep calm and carry on. Yeah, amen. Amen.

There we go. Thanks, everyone, for listening to this episode of The Dividend Cafe. I echo what my partners here have said. Like I said, we intend to continue coming to you with more updates, bulletins, perspective. It's not all good news. There's plenty of things still that have to be sorted through that are uncertain. And yet at the same time, I think the very good news is that there is a plan to deal with it. There is a time-tested discipline and best practices that will be executed and implemented

on behalf of our clients at the Bonson Group, and we'll do that faithfully just as we will communicate with you as long as it takes to continue our mission of keeping you on track for your financial outcomes. Thank you for listening to The Dividend Cafe. Thank you for listening to The Dividend Cafe, financial food for thought. The Bonsai Group is registered with Hightower Securities LLC, a member of FINRA and SIPC, and with Hightower Advisors LLC, a registered investment advisor of 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 Thank you. Information referenced herein are from sources believed to be reliable. Any opinion, news, research, analyses, prices, or other information contained in this research is provided as general market commentary. It does not constitute investment advice.

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