The Dividend Cafe - The DC Today - Monday, November 13, 2023

Episode Date: November 13, 2023

Today's Post - https://bahnsen.co/47aKXKm There are some financial writers who I believe are professional doomsdayers. There are some who are more nuanced. And, yes, there are others who I think are hard to pin down. I suppose it is most fair to treat all people individually, with unique circumstances and particulars around their approach and worldview. For example, I think some are SINCERE but almost always WRONG (and have a business model that depends on scaring people, even if they really believe it). Some professional doomsdayers are, in my opinion, rank charlatans and grifters – though I’d rather not give names here. Hopefully you get the idea … As for how to prepare for various “bad things,” well, that’s pretty much what I write about every week in the Dividend Cafe. In the first such issue this month I wrote the following, and it would apply to the wide array of possible scenarios we face: “Our Operation Magnify is forever committed to active, proactive, intelligible allocation of capital across Dividend Growth companies, in the Boring Bond space needed to preserve capital, in Credit assets where there is opportunity and compensation for risk taken, in areas of both Growth and Income Enhancement, and of course in Alternatives where we can seek to lower the volatility profile of a portfolio and diversify sources of risk and reward. Doing that in an era of high rate volatility, of high ambiguity about monetary policy, and a period where far too many eyes are only on the Fed requires a contrarian bend, a deep commitment to real enterprise (bottom-up company realities that transcend monthly price volatility), and a faithful commitment to the principles that made Magnify what it is. 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. Back at it here on Monday and coming to you live from New York City. It was a pretty boring day in markets. The futures last night I think were down 50 when they first opened, when I first looked. I did see them down over 100 at one point. And then very early this morning they were flat. Market opened down a little bit. Ended up going higher a couple hours after the opening and just sort of stayed between, you know, the flat mark and up about 100 and closed, you know, right in between there up 50, 54 points, something like that. So the Dow was up

on the day, but not by a lot, about 16 whopping basis points as a percentage. The S&P was down a whopping eight basis points as a percentage. And then the NASDAQ was down a quarter of a point, although it had been worse, kind of came back a little bit. But like I said, pretty boring day in the markets. The energy sector was the top performer. It was up 71 basis points. Utilities were down over 1%. They were the worst performing. But you have a boring day in the bond market. It

usually means a boring day in the stock market. And the bond yields came in up 1%, excuse me, one basis point, one one hundredth of a percent. The 10-year moved higher. So where did it close at? 4.64% on the 10-year. It had been up six or seven basis points earlier this morning, so came down from there the yield, which of course, when the yields drop, the prices are higher. When yields are higher, prices are lower. That's the way it works. Real quick, on the big seven, these major seven companies, largely big tech, that have driven the market's return on the year. To be very precise, it's 92% of the upside of the market on the year. Those big seven, seven out of 500 is 1.4% of the companies in the index. They make up 28% of the index right now.

And you could say, okay, well, 28 seems way too high, which I think it is very unhealthy. 1.4, though, would certainly be way too low, even though that's what they are as a matter of all 500 companies being equally weighted. Why would you ever equally weight if you're looking at value of an index, which is itself the sum of parts of earnings. And those big seven represent 17% of the earnings of the S&P 500. So there's still quite a large disconnect between the market cap, 28%, and the earnings representation, 17%. Put it into context, the entire financial sector in the S&P is only 13% of the index. So less than half of those big seven is the entire financial sector,

but that makes up 21% of the market's earnings. So do with that what you will. Our intent is not to say, therefore, it means that tomorrow certain things are undervalued or tomorrow certain things are overvalued. It's to say that there's a top heaviness in index investing that has to be understood. In terms of around the world, President Biden's meeting with President Xi of China coming this Wednesday in San Francisco, I think is certainly the largest global news story. It appears all the details are wrapped up for that expected rendezvous between Xi and Biden. A couple of smaller things that I'll share in the news cycle. A couple of smaller things that I'll share in the news cycle.

Senator Tim Scott of the great state of South Carolina did back out of the presidential race. He had been bidding for the Republican primary spot for several months. He backed out last night. And then for our friends across the pond, David Cameron, who was the prime minister of UK for some time. He is back at the game, but not in the prime minister spot, but the new foreign secretary in the UK, a pretty surprise return to government. Speaking of public policy, here in the United States, my sources say, I trust my sources,

but that doesn't mean it's rock solid because they don't claim to be rock solid. But as far as where their finger in the wind is, that Speaker Johnson's short-term government funding plan will likely avert a government shutdown. But there are still a lot of unknowns around other spending priorities, primarily how to get the support for Israel, how to get potentially a Ukraine package passed, which is a big priority of the White House. Not a lot of clarity on how those things are going to shake out. Five months ago, we were told the government shutdown was going to happen. It didn't.

I expected it would then in this case, I think it's like around 50, 50. Um, one macro analyst I follow believes the odds have gone over 50, but not by much that it will. But then I'm talking to other sources on the Hill that don't think it will happen. So, uh, that's back out there. We'll have to hear more about it in the days ahead. The University of Michigan Consumer Confidence Index came in at 60.4 in November. It was 63.7 that had been expected. And so look, the consumer confidence reading was not as good as people thought. And if you want to read the signs from the University of Michigan report,

the consumer is struggling. But if you want to look at the spending and the actual data, it doesn't seem to be showing up there. Anyone who's been reading me or listening to me knows that this is a very long-term view I've had about the worthlessness of the consumer confidence reading. So take that as a sign. 24% of respondents say that they are going to take a vacation to a foreign country or have some travel planned to a foreign country in the next six months.

That's an all-time high. So that doesn't seem like a consumer getting ready to tighten the belt there, traveling all over the world. There's a chart at the dctoday.com that I think tells the entire story right now in the housing market as it pertains not to the cost of capital, but to the supply side, that there was a surge of excess inventory after the financial crisis

because of the amount of foreclosures of people that could not, would not, did not pay for their homes, not, would not, did not pay for their homes, resulted in an awful lot of liquidation to settle the market, to clear the market and bring supply and demand back into equilibrium. And now we face the exact polar opposite issue where you have nowhere near enough inventory to establish a price level at which the market can be cleared. And so the chart refers to the existing home inventory. I think it's fascinating. Speaking of cost of capital, the Fed, Chairman Powell, I thought, sounded pretty straightforward at the October FOMC meeting and then the press conference. But last week, it seemed like there were attempts to kind of re-jawbone a little hawkishness. I remain skeptical that they really will raise rates again.

Now, 16% of our imports, let's see, 16% of our imports 2020. So you're talking about a little over three years ago. Excuse me. Yeah, 2021. The number's down to 12% now. So post-COVID, our imports from China have dropped from 16% of our total imports to 12%. Why am I bringing this up when I was just

talking about the Fed? Because I think it speaks to a drop of dollars that are available for the Chinese to put into treasuries. It has a big impact on rates because the more we are importing from China, the more we are paying them in dollars, unless, of course, we were selling them as much as we're buying from them. But that has not been the case. And then those excess dollars get turned around and repatriated into treasuries. And I think that the decline in our imports from China is a big part of why long rates have gone higher. I've talked about this before. I'm just putting some more empirical data to support it on the table. Speaking of where rates may or may not be going, Morgan Stanley came out with a call this morning that the Fed will begin cutting rates in June of

next year. Goldman Sachs is saying it will not be until later. But Morgan is calling for a Fed funds rate of 2.37% by the end of 2025. So two years from now, basically that rate being cut about 60% from where it is at the moment. Take that however you wish. All right. Against doomsdayism in the DCToday.com and ask David about what I believe about doomsdayers and those who make their living with a sort of doomsday ideology. I really encourage you to check it out. I won't go through the whole long answer here, but it was one of my favorite Ask Davids to engage with in quite some time. So the CPI number comes out tomorrow, Tuesday. The PPI number comes out Wednesday. President Biden meets the President Xi of China in San Francisco on Wednesday. So we could have some interesting things happening in the markets, in the news over the next couple of days. In the meantime, I'll leave it there.

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