The Dividend Cafe - The DC Today - Monday, July 17, 2023

Episode Date: July 17, 2023

Today's Post - https://bahnsen.co/3Q15Bql Economic Front One of the economists I read every day who has been screaming non-stop for 18 months now that we are entering a recession sent a “reminder�� email this morning that we are “still likely” to enter a recession. And maybe we are. First of all, broken clocks and all that stuff. But secondly, I think the question about if and when we enter a recession now misses the point. Short term, these people obviously don’t know. Additionally, no one knows what it would mean to markets if we did. No one. But longer term, we don’t need to know if there is a Q4 2023 or a Q1 2024 recession to know that we do face significant excessive indebtedness that matters for the next 10, 20, 30 years. I remain mystified by why these chicken littles can’t focus on a long term reality we do know versus a short term reality we do not. Consumer confidence jumped to 72.6 from 64.4 last month in the latest University of Michigan Consumer Confidence survey. This is the highest since September of 2021. Current conditions and expectations were both higher. Two quick caveats: (a) I have always found consumer confidence to be worthless; (2) Pre-COVID it was at 101, so putting the index in perspective, it is ahead of expectations, ahead of recent prints, and yet well below prior level. China’s Q2 GDP growth missed expectations, coming in at +6.3% year-over-year but slowing to just 0.8% from Q1’s growth rate (which had been +2.2%(, which was a surprise. Retail sales are not huge, capex is muted (as their property sector stumbles), and youth unemployment is over 21%. 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 Monday edition of the DC Today. recording from our house out in East Hampton. I just got in a couple of hours ago. Very busy weekend in the city after a week of travel and a lot of research today I'm kind of excited about. The DC Today Monday is always intended to be a little longer. The written version, I sort of follow a template that I had created in the aftermath of COVID and markets.com for those of you that remember that. And we go through market action and public policy and the Fed and economic data. You know, just these different categories that we used to kind of write off of. And so all of that is stuff we're going to go through right now. And then the Ask David,

where we have real life questions. They're never made up at all. It's real questions from readers that we try to answer one every day. And today we have two. I want to go through that a little as well. The Monday edition also has a special column we do called Against Doomsdayism. And the attempt there is to just highlight some different factoids, some reinforcement of the fact that in fact, the world is not ending, and that we have various empirical support indicating that doomsday is sort of a different interpretation of the way the things are going versus reality that indicates an awful lot of improvement for those who have eyes to see and ears to hear. So we will do all that today. And I just wanted to kind of reinforce what the Monday edition is

about. Tuesday, Wednesday, Thursday, we're going to continue using DC Today to give market updates and ask David and any other kind of market factoid or news of the day that is relevant. Very often, I'm the one bringing that to you. I'll bring in Brian Seitel, sometimes Trevor Cummings. We like the idea of different partners and advisors and members of the investment team at TBG filling in from time to time with that. And then, of course, Friday is the Dividend Cafe. This last Friday is Dividend Cafe. I encourage you to listen to it or watch it or my favorite, read it. If you haven't yet, we're just a little refresher on our philosophy about dividend growth. And it seems to have created a lot of feedback. And so I welcome

your feedback as well in terms of Dividend Cafe's affirmation of our dividend growth investment philosophy. So the market today ended up being up. Futures had pointed down last night, and even pre-market this morning, the market technically did open down 30, health care, real estate. Things are generally considered to be more defensive in nature versus higher beta areas. Speaking of higher beta, the technology sector was the best performing today and financials not far behind. And so it was kind of a mixed bag in terms of results, but the Dow closed at its high level of 2023 today, which is just shocking, up 76 points. The S&P was up 39 basis points and the NASDAQ was up 93 basis points behind that technology movement. The bond market was up a little bit. The 10-year was

down 1.5 basis points. So you have a 10-year yield sitting at 3.8%. We're going to talk about that in a moment with the Ask David. And then you did have oil down a little bit, but of course it had a huge rally last week. And so by way of public policy, one thing I think needs to be pointed out, I don't know what will end up happening with this for a reason I'll explain in a moment, but Senator Joe Manchin of West Virginia, he finds his way into the DC today for a number of reasons on a number of occasions. But Senator Joe Manchin announced over the weekend, I believe it was actually Friday, his intention to oppose the Biden administration's nomination for Secretary of Labor, Julie Hsu. And Julie Hsu is a very far left progressive. She had supported AB5 when she was the California Secretary of Labor, which was the assembly bill that really kind of almost got rid of independent contractors. It was very problematic in the state of California for a kind of freedom

in how one provides services to a company either through a W-2 employee or those who want more independence as an independent contractor. So things like that have kind of weighed on her. But because there was a departure, she's serving as Secretary of Labor now in interim capacity without Senate approval to the cabinet position. And so whether or not they may just try to continue extending her interim role or give up and go find a different Secretary of Labor or see if they will end up getting the votes. With Senator Manchin saying no, they still technically could be 50-50, and that would enable her to pass with a tie-breaking vote from Vice President Harris.

But the assumption is that either Mark Kelly in Arizona or Kyrsten Sinema in Arizona or maybe even Jon Tester in Montana would also oppose at least one of those three likely. And so I don't think she has the vote. So we'll have to wait and see what happens. But there's a lot on the line there about the Secretary of Labor personnel as policy, and particularly with a lot of the antitrust things going on and various other regulatory apparatus, the Labor Secretary matters. And so we'll continue to follow that.

On the economic front, I'm going to start with China, because the big news last night was that China's GDP growth the second quarter came in at 6.3% year over year, which, of course, Americans would kill for. But it was below expectation and sequentially going quarter over quarter to ignore the base effect of how low things were in their economic growth a year ago. Quarter over quarter was underwhelming. effect of how low things were in their economic growth a year ago, quarter over quarter, it was underwhelming. It was only 0.8% and it had been 2.2 in Q1 from the prior quarter. So slowing down growth, a lot of that having to do with the consumer very weak in China and then the business expenditures, CapEx, very low behind their troubled property sector. I don't much care about consumer confidence, as you know, but it did come out in America or anywhere. It did come out on Friday and the University of Michigan consumer confidence level jumped quite a bit from 64.4 last month to 72.6

this month. That's well below the pre-COVID 105 level. It's still way down, but it's moved up quite a bit more than people would have expected at this point. I do want to remind people, I read a bulletin this morning, there's a certain economist, I'm not going to say his name now because I don't want to be critical, and actually it's somebody I like quite a bit most of the time. But he'd written a bulletin this morning just wanting to remind people that it you know, it's still very likely we had a recession and credit conditions have tightened a lot. And, you know, there's someone who's been screaming that there'll be a recession nonstop for 18 months. And I just think it's worthwhile for me to remind people that a short-term recession call, you know, people could end up being right

about it because the broken window, people that scream for a recession for nonstop for two years and or three years or whatever it ends up being and eventually get one, you can decide if that was a right call or wrong call. But I think it's entirely possible you'd get one without the market responding. It's not really that pertinent if you have a recession short term, if the market doesn't respond from an investment standpoint. And so there's a lot more to ask than just will you end up getting a recession. Right now, there seems to be more and more moving in the soft landing camp. But I just want to point out that the long term thing we do know seems a lot more significant than the short term thing we don't know.

The short term thing we don't know is whether or not we have a recession, and if we do, when, and if we do, how deep, and if we do, how the market will respond. There's about four I don't know and no one else knows either things there. Four things. And then the long-term thing is something I think we do know, which is that there's an excessive amount of indebtedness that weighs on global growth. And that's a 10-year, a 20-year, maybe a 30-year story. And then we're talking about whether or not we have a recession next month or next quarter.

I just, I don't know what to say. Keep your eye on the ball of things that matter. All right, what else do I want to discuss here? I'm looking at today's bullets. The housing market. I shared it last week, but this is just phenomenally interesting. 92% of Americans, we shared last week, have a mortgage below 6%. And that explains the lack of incentive to sell a home now at a lower mortgage to buy something that you'd have to get a mortgage around 7% for. Fair enough. But to put more color on this, of that 92%,

23% have a mortgage below 3%. And 61% have a mortgage below 4%. So we're not just talking about people having a lower rate that would go higher, but in well over half the cases, a significantly lower rate. And that is the reason so many are frozen in place here, and you just can't get any activity to allow prices to reset higher or lower. By the way, that against doomsdayism, I'll read real quickly. I often skip it in the podcast and video, but I think it's worthwhile noting that the global literacy rate in the early 19th century was 12, the literacy rate was 12%. Okay. 12% of the world's population could read and write.

Today it is 83%. So people that are of reading and writing age, 83% can read and write around the world. And it was 12% less than 200 years ago. I think that is just remarkable, remarkable. And only a hyper literate society like ours, where we take it for granted as a given, could possibly not find it remarkable. All right, so someone asked me how we go about weighting, making adjustments to the weightings of what we do in stocks in our portfolio, managing our dividend growth portfolio that we manage in-house here at the Bonson Group. And I think there's two quick distinctions I want to make for you. One is when we are affecting trades in our portfolio up to a target weighting, like we didn't change the target weighting,

but a stock has fallen in the portfolio below its target weighting and we're buying more to bring it up or we're trimming some of the stock to bring it down. So a stock could have dropped and it just mathematically sits below its weighting. It was 3%. It fell to two and a half percent where a stock was 2.5% and it went up to 3%. And at that point, we're either trimming just as a means of bringing down risk, or adding up to be opportunistic on price weakness. And that's a decision we make,

Brian and I, in terms of our portfolio management, working with our investment committee, our analyst, we meet every single Monday. We are dialoguing throughout the day electronically and telephonically and in person, hundreds of communications a day, and then their formal meeting where decisions get made Monday. And, you know, we generally, if we think a stock has dropped and we don't want to own it anymore, we'd be selling it. And so when it drops and we want to buy more, it's opportunistic and we want to trim, but we're not changing the weighting, it's risk mitigation. And I've talked about that before. But then when we're actually changing the weighting, oftentimes it's just simply opportunity

cost and conviction and valuation and all those things kind of coming together. So we could have a company that's just been a phenomenal dividend grower. And yet now current yield has gotten very low because the stock price has grown so much. And we want to continue owning that dividend growth in the future. But at current level, we want to weight it lower to add for some higher yielders into the portfolio. So we may bring a name that was two and a half or three% weighting, bring it down to one and a half percent and, and yet, um, uh, go find another name that we have a more conviction in, or is it a lower valuation or we see opportunity for more dividend growth. And so it generally changing the weighting is valuation oriented and then trading around a current weighting that we're not changing is either risk management if it's trimming or buying up is opportunistic. I hope

that answers that question. Someone else had then asked, and it was just based on kind of a false premise, it looks like the 10-year bond yield, that 4% is near the higher end of historical yields for a 10-year treasury. So if so, is it possible that cutting the rate wouldn't even un-invert the yield curve? Cutting the short-term rate wouldn't un-invert the yield curve because the long end would just drop more. But I put a chart in DC Today today to show that no, no, no, the 10-year has been always over 4% until the financial crisis. It's only been at or lower than 4% since the Fed went to this hyper low rate environment. And so the reason for that, as I talk about all the time with the Japanification

thesis is expectations for downward pressure on growth. Downward pressure on growth puts bond yields at the longer end of the curve lower. And right now, if that number is priced in something between three and a half and 4% for the time being, could very well go lower. But if they cut the Fed funds rate 100 basis points, you would un-invert the yield curve. More than 100 basis points at some point most certainly would un-invert the yield curve. But the long-term interest rates for the 10-year have changed in more recent years. And it's a byproduct of lower expectations on growth. All right.

I'm going to leave it there. I think we've covered a few different things. I always love you reading the actual written version of the dctoday.com. Reach out with any questions you have. We are getting deeper in earning season. A number of big banks reported Friday, mostly with pretty darn good news.

The stock prices had gone up and then they kind of gave some of that back on Friday. But today moved higher across most financials. But we're really brand new into earnings season. So we have all this week with a ton of names coming and the next week even more. We'll watch earnings season and continue to do what we do each and every day

at the Bonson Group. Should be a busy week ahead. I'm kind of excited for it. So thanks for listening. Thanks for watching. Thanks for reading the DC today. Please reach out questions at thebonsongroup.com and have a wonderful evening. Take care. 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. Thank you. The Bonson Group and Hightower shall not in any way be liable for claims and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein.

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