The Dividend Cafe - The DC Today - Monday, February 6, 2023

Episode Date: February 6, 2023

Futures opened last night down -80 points and stayed down near -100 points into the evening. This morning futures pointed to a down -200 point open pre-market. The market opened down -150 points, worsened a bit, and then steadily improved throughout the day. The Dow closed down -36 points (-0.11%) with the S&P 500 down -0.61% and the Nasdaq down -1%. We are exactly halfway through earnings season (that number will explode higher this week) and revenue growth appears to be tracking towards +4.6% year-over-year (a tad better than expected) with earnings decline tracking towards -2.7% year-over-year (a bit worse than expected). Full-year earnings now sit at $224 expected, a +2.2% increase over the $219 of last year. Profit margins declining from 17.7% at their peak early last year to 16.2% is the big reason for the delta between revenues and earnings. Expect all this to update a lot in the next two quarters. A clear by-product of the weakening dollar: Companies with high foreign sales are outperforming companies with low foreign sales. It would sure seem one of the biggest stories of January was narrowing credit spreads (note here the spread compression in Investment Grade corporate bonds over the last three months). This has facilitated one of the biggest bond market rallies I have ever seen. The ten-year bond yield closed today at 3.65%, up 12 basis points today Top-performing sector for the day: Utilities (+0.87%) Bottom-performing sector for the day: Communication Services (-1.31%) Nigeria presently ranks as the #1 nation in the world for use of cryptocurrency. Thailand and Turkey round out the top two. These three countries are known for the heavy presence of a criminal underground which may possibly (just maybe, possibly) explain some of this. Links mentioned in this episode: [TheDCToday.com] (https://bahnsen.co/3DKsV4G) 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 Monday edition of DC Today. There is a lot to chew on in the written DC today, I want to remind everybody that listens to the podcast and watches the video that on Monday, we generally do the old school long form written where I really do quite a bit into different categories around the market, around the economy, the big news stories. There's a lot of links, housing, Federal Reserve, oil. We do an Ask David section, which we do every day. But then also Monday, we have the Against Doomsdayism section. So Monday's written is always pretty robust. A lot goes into it over the weekend. And so that's what today's is. So feel

free to go to the dctoday.com to read up on that. But for those that are just pure podcast or video consumers, we'll give you a few things right now and go from there. The market closed down today, 36 points, pretty boring day. S&P was down a little bit more, 0.6%. The Nasdaq was down 1%. Last night, futures were down 80. By the time I went to bed, they were down 100. I woke up, Last night futures were down 80. By the time I went to bed they were down 100. I woke up they were down 200 and the market closed excuse me opened down about 150 points and it kind of improved throughout the day and then closed down only 36. So still in the middle of that earning season and there's not really anything that is stupefyingly negative or positive one way or the other going on. Halfway through earnings season, we are now tracking to the kind of recalibrated estimate

of 4.6% year-over-year revenue growth in 2023. And that's a little bit higher than had been expected. But then 2.7% year-over-year earnings negative growth, earnings contraction, a tiny bit worse than expected for whatever that's worth. But with only halfway through earnings season, those numbers will get updated more. Full year earnings right now, the analyst consensus level is at $224 a share of S&P 500 earnings. And we did 219 last year. So if that ends up being close to accurate, that would be a 2.2% earnings growth on the year. Very low, but also likely not recessionary if corporate profits were

to grow in the year. I expect all that stuff to change quite a bit in the next quarter and the quarter after that. What else? Credit spreads just narrowing as they did in January. It's incredible. It really is quite an anti-recessionary indicator. Narrowing credit spreads, anti-recession. Inverted yield curve, pro-recessionary indicator. Narrowing credit spreads, anti-recession. Inverted yield curve, pro-recession. And both of those things are glaring us in the face and staring us in the face and glaringly opposite of one another in what they normally are indicative of. The 10-year was

up again today. It was up quite a bit on Friday and then it closed today up 12 bps to 3.65%. Top performing sector is utilities was up 0.87%. I think consumer staples was the only other positive sector was up just a little bit. So definitely more of a defensive day. Communication services, which had rallied a lot last week, was down 1.3%. Number one nation in the world for use of cryptocurrency nigeria so uh nigeria you're number one uh thailand and turkey rounded out the top two so you know you guys can just sort of play around with that a little bit see what you think might make sense as to why crypto is most heavily used in nigeria and turkey and forth. And see what you come up with. Let me know, okay?

Lending standards are tightening. You have an inverted yield curve that takes away the profit motive of a bank model, which is to borrow short, lend long. You do have a return on invested capital that is barely above a cost of capital in aggregate. And that's when you want to be borrowing money is when you have a positive delta between your return on invested capital and your borrowing cost.

And that ends up putting downward pressure on demand for credit. And then, of course, it forces lenders to tighten up who they will lend to because the overall environment does not scream for a greater willingness to lend but rather less willingness and less attractiveness in lending so that downward pressure on loan demand becomes a self-fulfilling prophecy and is also radically deflationary as we wrote about in Dividend Cafe on Friday. Check that out. All right. Economically, 517,000 jobs created in January blew out the expectations.

Fifty-three year low in the unemployment rate at 3.4%. There are seasonal issues. There were upward revisions in November and December. That added another 71,000. But the household survey was very strong. So you didn't really have this contradictory data. You saw leisure hospitality lead the way. There was also positive job growth and education, health services, professional services. Those things had been lagging, picked up. But the biggest thing I want to say was that I pointed out that if you're looking for some negativity in the labor data, that the last couple of months, it was barely the case.

But in November and December, you had seen a decline in average hours worked. And that was up 1.2 percent, a pretty sizable jump in the month of January. And that was up 1.2%, pretty sizable jump in the month of January. So I just really couldn't find anything negative in the labor data other than people say it's all a lie or a conspiracy. Or the fact that the ADP number two days earlier had been quite weak. And so with all of the different data points we got from Friday, it does seem to indicate to me that the ADP number was the outlier, not the BOS. ISM services, by the way, rebounded in January. You recall that the January report that came out early in the month for the month of December saw ISM services go down. They were up in aggregate, although there were less sectors that were in expansion mode in the prior months. So you got worse breadth, but better depth. New orders and

business activity were up dramatically, and you had employment and supplier deliveries barely moving. There's a chart in the DC today showing the delta between joblessness and job openings, and I just think it's a fascinating story. Tells the whole thing. as well as the price by the way of eggs which just just unbelievable I'm gonna quote the great Alan Reynolds an economist I've read for many many years who said rising prices may seem a problem to be fixed but rising prices are the solution when something desirable suddenly gets scarce a higher price rations available supply more efficiently than political allocation or a Q. It encourages supply to be reallocated or increased. So again, you saw

egg prices had been around $3 in November. They went up to over $5 in January. They're back to $3 right now. And you can decide what you think could explain a price explosion in eggs that only happened in eggs and nothing else. Just see if you think that's indicative of macroinflation or not. On the Federal Reserve front, the one thing I wanted to cover is my continued belief that quantitative tightening will not be able to go all year long. They're really successfully right now reducing their balance sheet by about $80 billion a month, about 60 in treasuries and about 20 in mortgages. But again, from the New York Fed's own declaration that about 10% when bank reserves get down to 10% of nominal GDP, it becomes very hard to tighten much more. In 2019, it got down about 8% and the Fed literally had a kind of

liquidity crisis in the reverse repo market. I just think as we get headed down that range, as bank reserves get lesser, I think that they're going to be forced into potentially even quantitative easing, but certainly a pause on their own quantitative tightening. But I'm watching it and a lot of variables that go around with it quite religiously. It's sort of a part of my morning routine right now which does not make me the coolest guy in the world. A great chart in the DC Today about the dividend growth taking place in the midstream energy space that we love so much. You can get a chance to see how much more free cash flow is being generated, lower leverage rates still being distributed

to shareholders, why we continue to like that space. So read the DC Today written. I do have to let you go. We're a little tight on time today for the recording, but we're back at you this week with the normal DC Today podcast video, all the good stuff. And do check out last Friday's Dividend Cafe, as I mentioned about that whole theme of Japanification, deflation, and where we stand in those macroeconomic currents. Thanks for listening to, watching, and reading the DC Today. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, with Hightower Advisors LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities LLC. Advisory services are offered through Hightower Advisors LLC. This is not an

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