The Dividend Cafe - The DC Today - Monday, January 9, 2023

Episode Date: January 9, 2023

Futures opened last night up +40 points and were up over +80 points by bedtime. This morning futures pointed to a +100-point open pre-market. The market opened up +150 points and got up over +300 points before falling just over -100 points. A 450-point delta between the high and low levels today … The Dow closed down -113 points (-0.34%) with the S&P 500 down -0.08%, and the Nasdaq up +0.63% as Tesla and the chip sector rallied substantially. The massive rally Friday saw 7-to-1 advancers to decliners, fairly solid breadth. The top 20% of companies paying out cash dividends as their primary cash outlet were down -2.7% last year compared to the top 20% of companies doing the highest stock buybacks (which were down -13.3%). This is comparing apples-to-apples – top performers compared to top performers by their primary cash outlet vehicle. The ten-year bond yield closed today at 3.53%, down 4 basis points on the day. Top-performing sector for the day: Technology (+1.09%) Bottom-performing sector for the day: Health Care (-1.66%) Revenue growth is expected this year in each sector of the S&P besides Utilities and Materials (and a very slight top-line revenue decline is expected in Technology). The more significant factor will be margins and where overall profit levels come in, though if earnings are revised downwards as time goes on, I suspect it will have more to do with lesser-than-expected revenues than it will have lesser-than-expected margins. 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 DC Today. I feel like things are kind of normal now. It's an actual Monday. We have the longer form DC Today. of normal now. It's an actual Monday. We have the longer form DC today. It's a full market week, you know, in terms of the calendar. And so through all the sort of abnormalities of the holiday season, it does feel like things are normalizing a bit. I'll start with a little reminder to ask you to subscribe to the podcast if that's what you want, if you want to receive the podcast regularly, as opposed to getting the email all the time and clicking to it. It does help us if you subscribe with your podcast player of choice. And certainly if you're watching the video, it helps if you'll subscribe on YouTube. And by the way, also throw a little thumbs up

ranking deal there that is beneficial for those numbers. But beyond that brief commercial, it was a weird day in markets. And, you know, we've only been open for five market days so far this year, and we've had quite a few weird ones. The futures last night, when they opened, as we're in the midst of all football and everything like that, they were up a bit, which was somewhat surprising after the massive rally day over 700 points from Friday. And then futures actually continued to go up into the evening. And I believe by the time I went to bed last night, they were up, what was it? 82 points, 82 points when I went to bed. And this morning up very early, they were up another 100. So then the market opened up 150 or so and got up as much as 300 points. It closed down 112.

But most of that was happening throughout the last, let's call it two thirds of the day. You kind of had a rally early. It peaked, um, before the day was a third done and then spent the rest of the day sliding down that hill with a few little, you know, blips and valleys on the way. Um, but again, you had a 450 point Delta between the high point and the low point of the day. And on both up days and down days last week, we saw something similar. So, so far this year, we're off to more volatility, more intraday volatility and whatnot. And yet, overall in the year, markets are still modestly up. Today was a little unique. I don't want to get these numbers exactly right for you. I mentioned the Dow was down a little over 100 points.

The S&P was barely down, but the NASDAQ was up 0.6%. You had a big rally with a company you may have heard of called Tesla that's been down a lot this year, but it's a big NASDAQ constituent. And it's, of course, an S&P constituent as well. But when you get one name like that, that is of a $400 billion market cap, having a 5% or 6% up day, it drives a lot of indices. But in addition, on the NASDAQ side, you had a huge day up in the chip sector. And so that was pulling a lot of the tech stuff up, even when a lot of other tech things weren't necessarily up. Even FANG for an up day in the NASDAQ, I I think Fang had a kind of mixed bag,

three names up, two names down type of a thing. So what else do I want to highlight? On Friday's rally, there were seven advancers for every one decliner. That's pretty impressive breadth. And the 10-year bond yield today closed at 3.53%. That is down four basis points on the day. So I think now it's four out of five days on the year that bonds have rallied. Today, again, being the same. Please don't be confused. We've had now, I think, two questions in the last three months that I answered in the Ask David section about this. But you need to just remember when I refer to yields being down or the rate being down, that is a reflection of the bond prices being up.

That bonds and yields, bond prices and bond yields trade inversely to one another. Today, the technology sector was up a little over 1%. The healthcare sector was down 1.6%. That was definitely the leading laggard. Okay, bigger picture, just two things I want to highlight today. Both came up in morning research. I think this is fascinating. It's a weird way to measure it, but I want you to get this lesson out of it. I don't need the glasses because I know the data by heart. The top quintile of companies returning cash with dividends versus the top quintile of companies returning cash with stock buybacks. The study also measured the top quintile with M&A, with debt pay down, with other things that one could do with cash. It's about cash use and the top quintile. So you want to compare

apples to apples. You could always compare the whole universe, but when you're looking at top quintile dividend return or dividend payers, excuse me, versus stock buybacks last year, the dividend payers were down 2%. The stock buyback companies were down 13%, 13.3%. I think M&A was even down 14%. And so again, that's just within top quintile. Once you expand the universe, the numbers kind of change a bit. Obviously, if someone owned a dividend growth portfolio, hypothetically, that was up on the year, it would have been a byproduct to that stock picking and perhaps energy weighting. There's a number of other factors that could play in, but I'm just isolating a few here. So the way in which cash has been returned to shareholders in a bad market, and we're not talking about dividend growth.

We're just talking about dividend payers. bad market. And we're not talking about dividend growth. We're just talking about dividend payers. We're talking about stock buybacks, M&A, debt pay down, far and away by a major factor. The dividend payers were the best performers when you do apples to apples comparison. The other piece then that I want to highlight talks about revenue growth in the S&P. And there's a little update to some numbers. We are expecting, but from analyst estimates and consensus forecast, revenue growth to the upside in every S&P sector this year, besides utilities, which is expecting a pretty meaningful drop down for a number of reasons, and then materials,

which is expecting a bit of a revenue drop as well. Technology is technically forecasted in aggregate to have a drop, but it's like 0.8%. So kind of flat revenues expected in tech. Pretty good size revenue drop in utilities, materials, and then the rest of the market is expecting revenue growth. Okay, but here's the thing. It's that margins are expected to grow, to expand this year. And that's really where you get overall profit expectations where they currently are relative to where revenue expectations are.

So in my opinion, if earnings, if profit expectations starts being revised downward, I think it's far more likely going to be because revenues disappoint than the margin side of things. And so as revenues go, it's very likely that that's where profits will go, but we'll keep an eye on it. And of course, you could have a very divergent response from one sector to the next. On the new side, we know now that as of very late Friday night, Kevin McCarthy was in fact elected Speaker of the House. It was the 15th ballot attempt. A lot of history being made last week. I'm not going to go into my political commentary on it now because I don't think that's what this is for. I don't think a lot of people care. I've kind of gone back and

forth on a few things. There's some parts of the way it played out that I'm really pleased with. And some parts that I think a lot of people, myself included, are embarrassed by. But the one thing I'll say is that I think it's August where the debt debate, the debt ceiling debate will reach its crescendo. And I'm not expecting good things out of that. I'll write more on it in the near term, plus, of course, throughout the months ahead. On the policy front, the rules package is being voted on tonight that will govern kind of house operations. I don't think many care about how they go about electing people to certain committees and what the numerical breakdowns are. Some of the kind of bureaucratic and procedural elements of this rules package,

I doubt, are very important to markets. But what is in there, or has been committed to be in there, is some form of committing to hold 2022 budget levels in line for, I think, 10 years, which implies this time, without some other knobs being turned, a pretty meaningful likelihood of cuts in defense spending. So you're not only going to get some political action around how they pass it through, but then anything that is ongoing, again, for an indebtedness hawk like me, I don't mind anything that can kind of limit it, but this could very well be a little less stabilizing of a way of doing it than the kind of legislative intent. On the economic front, the jobs data is what drove markets up on Friday.

And you got a real good chance to see the kind of just moronic reality of what people are trying to do in trading some of this. The BLS jobs data came in at 223,000 for December. That was a little more than expected, 205,000. And then futures came down thinking, oh no, this is good news. And then that's bad because it's going to cause the Fed, you know, the whole thing. And I'm now going to just shorthand. I kind of abbreviate when I explain it cause I'm so sick of it, but I do think people listening right now know what I'm talking about. But then the bad news, um, in the jobs number became good news because underneath the hood, first of all, the bad news of really good job growth last month turned out to be a little less

than people expected because there was some downward revision from the prior month. But more importantly, under the hood, wage growth was much less than had been expected. Now in the month, it was only a little less than expected. But when you go to a further timeline, I believe wage growth in March was at 5.6%. And as of this December's number, it come all the way down to 4.6% year over year wage growth. So that's quite a meaningful move lower. Overall, what I think markets did is say, OK, this jobs report wasn't on fire. And in fact, there is a little hair on some of the things inside of it.

And so it kind of reinforced Fed pause phase. Right now, Fed futures are looking at 77 percent chance at the next Fed meeting of just a quarter point rate hike and a 23 percent chance of a half a point rate hike. So, you know, it looks like the market's expecting another rate hike and a very modest one. And once you go from 75, 75, 75 to 50, and you go to 25, you've really set yourself up to be able to go into a pause. I would encourage you to look at the dctoday.com today for a chart we've put in the Fed section. There's something called the proxy rate. An analyst I follow a lot named Sam Rines at Corbu talks about this a bunch. And I'm becoming a bit more intrigued with the way it's actually generated by the San Francisco Fed that their policy effective rate, what they call a kind of proxy

rate, that they're taking the Fed funds rate, which is right now four and a quarter, and adding in a measured effect. There's a model around it of things like the balance sheet tightening and other financial conditions with mortgage rates, with spreads, treasuries, what have you. And really, at the end of the day, they're saying that they think the effective rate, when you factor in forward guidance in the balance sheet, is 6%. And this isn't people like me or Sam saying it. It's the Fed saying it about their own policy.

saying it and it's the Fed saying it about their own policy. Okay. And I think that really does speak to the argument for why I believe they're getting much closer to pause than some had thought. Oil and energy, you're still not at 700, you're still 700,000 rather below pre-pandemic levels. It's a big story. U.S. production is still not back to pre-COVID levels. Demand is back to pre-COVID. And yet then prices sitting in the 70s, a byproduct of massive strategic petroleum reserve drawdown. And then the Department of Energy was set to buy back a little bit, not very much. How much was it? I think it was 3 million barrels. Is that right? Yeah, it sure is. 3 million barrels is that right yeah it sure is three million barrels that they were going to buy back over the weekend and then they canceled it they dropped the order

and uh i believe that they may be because they want to get a lower price and we're sitting here today at 75 i don't know maybe i mean who you know. But it's very possible that they're going to wish that they were filling up Strategic Petroleum Reserve in the 70s very soon. China reopening is a big part of that. But we'll see. It's not something I want to bet my life on. Check out the Ask David section against doomsdayism. Get a little bit more information at the Written DC Today. I do want to leave it there. We're going to do our podcast and video Tuesday, Wednesday, Thursday this week.

The abridged market summary in the Written DC Today, Tuesday, Wednesday, Thursday. And then on Friday, I'm going to be doing a special Dividend Cafe on Bernie Madoff, a name that was one of the major financial stories at late 2008 going into 2009 that represented one of the great Ponzi schemes in history, the largest Ponzi scheme in history, and now is back in the news because Netflix has a four-part series on it. I watched it over the weekend and then got inspired, and that's what Dividend Cafe is going to be dealing with. But it's not really going to be that much about Bernie.

It's going to be about, let's just say, a derivative investment lesson that all of us can learn out of the Bernie moment. And I'll bring that to you on Friday in the Dividend Cafe. CPI comes Thursday. I'll keep you posted on other things Tuesday, Wednesday. 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

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