The Dividend Cafe - The DC Today - Monday, December 18, 2023

Episode Date: December 18, 2023

Today's Post - https://bahnsen.co/3NuO33W When one buys stock in the secondary market they are buying from Mr. Jones and Mrs. Smith, and the money is not getting to the company – that is correct. But there is a very important thing being missed when one concludes that therefore no money is being productively deployed. Namely, the existence of a secondary market is why a public market can raise money to begin with for primary productive purposes. When investors buy equity in a company that does go to the company for growth capital, productive use, etc., they do so with the knowledge, intent, and awareness that the money is going into a liquid, secondary market. That reality impacts the attraction of capital and it impacts the valuation of capital. Take away the ability for Mr. Smith to sell to Mrs. Jones, and you take away the marketplace for BIG INVESTOR to invest directly in BIG COMPANY. Supplementally, many times companies are doing secondary offerings in the public market where money is coming straight to the company. And finally, dividends are paid to investors who often do directly productive things with them. Where do these dividends come from? The productive profit-making activities of the underling company. Rinse and repeat. Links mentioned in this episode: TheDCToday.com DividendCafe.com TheBahnsenGroup.com

Welcome to the DC Today, your daily market synopsis of the Dividend Cafe, brought to you every Monday through Thursday to bring you up to date information and perspective on financial markets. Well, hello and welcome to the special edition of DC Today that is every Monday going through a handful of different categories. A number of things I think are important across those familiar categories of the Fed and housing and the economy and all that fun stuff. Let me start by saying that there are links at the dctoday.com to the Dividend Cafe from Friday, which dealt with the subject of housing, particularly housing supply. So the link there to the actual written Dividend Cafe, as well as the video and the podcast. I also was on Charles Payne's show on Fox Business Friday afternoon talking about dividend growth, and the link is there as well. Let me get today's market action out of the way. It was how boring of a day was it?

The Dow was up 0.00%, dead flat to the basis point on our percentage basis. Futures last night were up 50 or 60 points. And then the market opened up about 50 this morning. And then it kind of zigged and zagged a little up a tiny bit, down a tiny bit. And then by the end of the day, just ended totally flat on the Dow. Now, the S&P was up 45 basis points. The NASDAQ was up 61. So let's call it half a percent for both of the other two indexes, largely because communication services was up, let's see, 1.89%. So a big move up there.

Interestingly, consumer staples were also up over 1%. But then you had real estate and utilities down a tad. So a little bifurcation within some of the defensive sectors today. But again, on a dead flat day, none of this is exactly earth shattering. Speaking of not earth shattering, same in the bond market. The 10-year yield closed at 3.94%. That was up 1.7 basis points on the day. So basically flat on the long bond as well. But within the market and a little bit more interesting, 71% of the companies in the S&P hit a 20 day high late last week in that big rally. That is among the best internal readings. Most companies at a

particular moment in time hitting a 20-day high, it's one of the top five days for breadth, short-term breadth by that measure in the last 50 years. So I think that's somewhat significant to just point to how broad the rally that came. Not only was the rally a big deal, but how broad that's been, relatively speaking, in the last month and a half. Several of the large Wall Street firms have been updating their S&P forecast. It's one of my favorite things. Many of you know I spent many, many years of my career at two different large Wall Street firms. One of them in particular were at a much higher position, and it was a much larger firm. I got to see this quite a bit where the markets would move a lot and then you'd get a report out

about how we really project markets are going to move. And so you had a couple of big firms that have been quite bearish, you know, downward revisions to earnings estimates, downward revisions to price targets, other silly things like that. And then the market indices all go up over 10% over the last month. And then you had a couple of these companies come out with a bold call for new highs in the market in 2024. Worth pointing out. You can decide if it's worth pointing out or not that trading volume for investment grade corporate bonds was at the highest level it's been since the spring of 2020 in the month of November. And really, you know, even in the spring of 2020, that was at a very high level as rates had come down and the Fed was really intervening in the market. come down and the Fed was really intervening in the market. If you take that COVID blip out,

volume of investment in corporate bonds has been as high as it's been in over six years. So my read on that is that there's a lot of traders saying, buy what we can now. There's a reasonably limited supply. There's not a lot of new issuance coming to market and rates are going lower, not higher. Let's grab some of these yields while we can. That's my read. And then, okay, I was laughing at this. This was a real life statistic shared in a real life research report that I had to share with you this morning. January is up in the stock market 50% of the time in an election year, whereas in non-election years, it's up 63% of the time. So if that's supposed to indicate something about this January coming up, that basically around half the time it's up, and basically when it's not election year, around half the time it's up,

if that's meaningful to you, then there you go. I will leave it there. In the news, so a huge Japanese steelmaker, Nippon Steel, shocked markets this morning with the announcement that they were acquiring U.S. steel, paying a 40% premium. There's a link to that story here in D.C. today. U.S. steel, one of the original companies in the Dow over 100 years ago, the initial outreach with a lot of corporate, you know, maneuvering over the years was the, you know,

initial Andrew Carnegie company from well over a hundred years ago. So they will retain their name, brand and location in Pittsburgh. But I thought it was a pretty noteworthy story. We'll see how some of the politics and some of the merger arbitrage action plays out in the weeks and months ahead. Another new story today that came about when I was coming back from lunch meeting, that Apple is pulling a couple of its Apple Watches off the market right now, right here in the middle of holiday sales in light of a patent dispute. And it was a bit of a surprise. Okay. So as far as Capitol Hill, I want to move to public policy. There's no question that the biggest issue right now is getting a funding bill for Ukraine that is going to be wedded to some degree of a border funding plan. And then again, having all these things satisfy the various legislators that have to vote for it, Republicans and Democrats in the

House, Republicans and Democrats in the Senate, very divided. And there are certain things that just seem to me on both sides of this that are going to be unacceptable to one constituency or another. So I don't know how they're going to get it done. I'm very much in the mindset they're not going to get it done for the remainder of this year. And this will get punted into 2024. On the economic front, industrial production was up 0.2% in November, a little bit less than expectations. Utilities output declined, but mining output was up on the month. Auto production jumped over 7%. It's up 2.4% in the

past year. That's really the only bright spot we see in manufacturing. Outside of auto manufacturing, the rest of the sector is down 1.1% year over year. Interestingly, from NFIB, one in five small businesses see rising interest rates as their top challenge right now. Okay, the NHB Home Builder Sentiment Index came out today, came in at 37, which was a little bit better than the 34 of last month, but lower than the 40 of October, 44 of September, 50 in August. So you've had a steady and a significant fall in home builder sentiment ever since the summer. The present situation has not improved. Future expectations have improved a little, but the biggest area of decline is prospective

buyers traffic. That's just completely collapsed as it pertains to new home construction. 36% of home builders reported that they cut prices in December, but the average price cut has only been 6%. And then again, 60% have offered incentives to facilitate a sale, which is a price cut, just using a different variable than the actual sticker price of the home. So if you look at 36% sticker price cuts, 60% incentives, you basically have some concession coming from home builders for almost every single new home sale. The Fed was not mimicked by the European Central Bank after last week's waving of the white towel, conceding rate cuts coming, all the things the PAL did last Thursday, last Wednesday rather. Christina Lagarde of the ECB basically said she wasn't ready to talk about rate cuts.

I think they will end up following suit with the U.S. and not risking a huge euro rally relative to dollar. But so far, she's playing the hawkish role a little bit closer to the vest. Over the weekend, the Fed did send out Austin Goolsbee, who's not a voting member of FOMC, John Williams, Raphael Bostic, who are voting, to kind of say, no, no, no, we're not really fully there yet. They tried some of that late last week. We don't know that we're going to be cutting, but obviously markets are kind of chuckling it off. Oil today closed at $73 a barrel, up 1.7% on the day. A lot of new equity issuance in midstream energy. You have a lot of companies taking advantage of high stock prices, issuing some new secondary offerings.

That seems to have stalled a little bit of the rally in midstream. Okay, are you against doomsdayism? Because I am. Holland, the Netherlands, the great Dutch, the richest country in the world 200 years ago, and the life expectancy for the richest country in the world 200 years ago was 40. The poorest countries in the world today have a life expectancy around age 55. The richest country in the world, and the second richest, and third richest, and fourth richest, all have a life expectancy over 80. The poorest of the world are living much longer and are less poor, by the way. The rich are living much longer and are much richer, by the way. Do with that what you please. Somebody asked me if when you invest in the stock market, are you really investing in the economy?

Are you promoting growth? Are you promoting quality of life when all you're really doing is trading your stock for someone else's? And I point out that when one buys stock in the secondary market, it is true that we are not giving the money to ABC company. We're buying from Mr. Jones or Mrs. Smith who owns it most of the time. A lot of companies do issue secondary offerings. I just talked about it with Midstream Energy. But putting that exception aside, I just want to point out that that's not true, though, that they don't play in to productive use of capital that's actually promoting the underlying good and service of the company. Because the huge thing that gets missed when people point this out is that the existence of a secondary market is one of the main reasons a primary public market exists to begin with. In other words,

the only reason really big investors are able to go put big money directly into a company is the fact that there will be Mr. Smith and Mrs. Jones trading. The valuation of that money, the liquidity, of that money, the liquidity, the existence of that real price setting marketplace is a big part of the necessary ecosystem to attract capital. So you can't separate the two as if they're totally separate. One of them basically befits the other. There's other points I'd make too about dividends are paid from real activity and those go do directly productive things and those dividends come from a directly productive thing. So I still think within the world of dividend growth, there's actual, even for secondary market investors and public equity, still very productive things happening, both that create the dividend and with what the dividend has done.

But the primary point that the person who asked this question was making, it's a great question. I hope my answer is helpful. You have to understand that the existence of that secondary market is what drives the primary market. And so it isn't sufficient to just say, yeah, no, no money is really getting in anything productive. All of it is part of the financial ecosystem that drives these wonderful capital markets and wonderful free enterprise system that we live in. Okay, I'm going to leave it there. Have a wonderful Monday night. Please reach out with any questions you may have. I'll be back with you tomorrow as well. In the meantime, thank you for watching.

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