The Dividend Cafe - The DC Today - Monday, November 20, 2023

Episode Date: November 20, 2023

Today's Post - https://bahnsen.co/47JhGpJ Futures markets in the fed funds rate now show a 0% chance of any future rate hikes in 2023 or 2024, but then show mixed results around when rate cuts may begin (a 35% chance in March, a 65% chance by early May, an 88% chance by June). Those numbers will all change, but it is where the debate lies entering 2024. The Fed balance sheet sits at $7.8 trillion right now, down $1.2 trillion from its high, but still 88% above pre-COVID levels. Will the Fed’s inevitable cutting of rates be a good thing for markets? I wonder what you think? Let me put it this way … is it even possible to answer that question without any further information? Hint: It is not. Two things have to be known to better answer that question. (1) Was the cut a surprise or well-telegraphed, and (b) What. Was. The. Reason. For. The. Cut. Beware of anyone assuming rate cuts are good without a discussion of that second question. 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 Monday edition of DC Today. It's even more special than normal this Monday because it'll be the last DC Today of the week. We won't have one tomorrow, Tuesday, and then on Wednesday, we'll bring our weekly Dividend Cafe. For those who have been reading,

listening, following for years, we always make the Thanksgiving week Dividend Cafe a sort of Thanksgiving edition. And so we'll be doing that on Wednesday. And then of course, no communications for the Thanksgiving weekend. But as far as today goes, I'm recording from my house in the desert out here in Southern California, looking forward to a big family week for Thanksgiving. And I hope many of you are as well. It is my favorite holiday. And I really enjoy not only being here and being with my family, but I really love the Thanksgiving holiday and all it represents. I'll talk more about that Wednesday. For today, we had a Dow that was up a little over 200 points.

It opened kind of flat and just steadily went up throughout the day. It did sell off a little bit right at the close, but still closed up a little over 200 points. The NASDAQ was up a little over 1%. The S&P was up about three quarters of a percent. The best performing sector today was technology, which is generally what you'd see when the NASDAQ is up the most, utilities were down and the consumer staples were basically flat. So clearly the defensives were not in the strong suit today. More technology and those types of names did quite well. The 10-year bond yield was down to basis points.

So we're all the way down to 4.42% as this November rally to remember in bonds continues. I get asked a lot and I answer it a lot. And I know some of you listen all the time, so you're probably sick of hearing it, but it is one of those things in investing that I just have to say all the time. And so I apologize for the repetition. But this language is not inaccurate. It seems counterintuitive until you hear me say it. But when I refer to bond yields dropping, that is what I mean when I say bonds are rallying. Because yields and prices are inversely correlated with bonds. And so the way we just for shorthand talk about it is yields dropping. And that is a reference to bonds rallying. And so I way we just for shorthand talk about it is yields dropping. And that is a

reference to bonds rallying. And so I just don't ever want anyone to think they heard me wrong. And I always want to kind of make sure that I'm repeating what could be newer information for newer listeners, readers, etc. Okay. All right, what else I want to go through on the investment side, I did read a report that I think is fascinating. There's so much talk right now about declining foreign ownership of US treasuries and with China and Japan buying less, maybe even selling more, declining percentage of treasury issuance represented by foreign sovereign wealth, the Bank of Japan, the People's Bank of China. sovereign wealth, the Bank of Japan, the People's Bank of China. And yet, I do notice that foreign private ownership of treasuries, not the sovereign wealth, not the central bank holdings of the

country, their foreign exchange reserve assets, but meaning individuals, banks, insurance companies, hedge funds, other investors, they're domiciled around the globe. Foreign ownership in the private market of treasuries is actually increasing a great deal. It's important to have the whole context. The Japanese yen is right now at record levels of short positioning. And I guess I'll just let you guess what usually happens after that. It's interesting to see how one sided trading has gotten around there. And,

you know, it will see where that goes. 40% of the companies in the Russell 2000 remain as non profit producing companies, meaning 40% have negative operating earnings. That is not the all time high, but I mean, it's a very high number. It speaks to the reality of the small cap universe right now in public companies. reiteration of an important investment reality, the average drawdown in a positive year in the market. So forget all the negative years, take those out completely. Just years where the S&P 500 ended the year in a positive year, which is more than half the years, obviously. In those years, the average downturn in the middle of the year at whatever point from a peak level to a trough level is 11.6%.

That's the average in an up year in the market. So I am such an opponent of historical revisionism that starts to talk as if 5, 6, 7, 8% fluctuations are abnormal or concerning, that the best way to stay anchored to reality is to know history, and history is abundantly clear, and I would like to back that up with this empirical data. In the news, there's a link in DC Today, but just kind of a crazy soap opera with OpenAI, which runs ChatGPT, which Microsoft bought a big piece of, where the CEO and founder got fired by the board. And then there was a coup to bring them back. And then that coup failed. And then Microsoft has now hired them. And everything I just said happened literally in the last 72 hours.

So kind of a big drama playing out in the, in the news headlines in, in that sort of corporate America news. The, um, other thing I point out is this election, Argentina, a libertarian won the election, a bit of a surprise running on a platform about defeating inflation and defeating socialism and things like that. And that's reasonably new and curious for a LATAM country. We will see what plays out there. Public policy, I am now of the opinion that this FDIC chair, Martin Grunberg, is in a real hot seat and may very well end up resigning from his position.

There's a scandal the Wall Street Journal broke last week about, just kind of, I don't even know what to say, FDIC regulators are like our federal government bank regulators and they're wild parties and strip clubs and hotels and booze and this other stuff that you don't really associate that you don't really think of the Wolf of Wall Street of fine to the FDIC. And yet this is like a whole thing. And I don't know if he's going to keep his position. And if he doesn't, they won't have the votes for this greater capital regulations they want to impose upon regional and large banks. And so we may very well end up getting some policy loosening because of this story.

And so I wouldn't bring it up just for the because of the funniness of it. There's actually like a real policy and markets potentials ramification here. So I'm watching it closely. In terms of what else do I want to go through? This kind of interesting 20% of CMBS loans in the hotel industry were delinquent in September. Only 5% are delinquent now, excuse me, September of 2020. So back right is COVID, you know, in the aftermath of the worst parts of the COVID moment, and everything was still shut down and all those things. 20% of the commercial mortgage-backed security loans that are connected to the hotel hospitality industry, 20% were delinquent. Only 5% are delinquent now. In housing, private residential

investment was 6% up to 9% of GDP throughout the 1960s and 1970s. I mean, we were building a lot of houses, and it was a big percentage of total economy. It was sometimes somewhere between five and 7%. Most of the 80s and 90s. We were still building a lot of houses, but the denominator of GDP was growing. And it's been between three and 4% since the financial crisis, right now sitting at the lower level at 3% of GDP. So the reason I bring it up is not to say things are terrible, look how low, we already know there's not a lot of construction going on, there's not a lot of residential investment. But I bring it up to say those that are saying, oh, this is going to kill the economy, but it's already at its lowest percentage of economic output anyways. So I don't think there's a lot

of room for that to have a big impact to the math of economic growth. The things that happen within the sector are very real. But as far as this weakness in private construction and what it represents to GDP, I think probably that risk is to the upside in the future, not downside, something to understand. We're at 100% odds right now in the futures market of no rate cut going forward at all. And then we're at a 35% chance, excuse me, no rate hike at all. We're at a 35% chance of a cut in March, a 65% chance of a cut in early May, an 88% chance by June. So, you know, that I think I'll kind of leave it there. Final note in the oil and energy section, oil was down five and a half percent last week. It was up about 2% today. It's down 9% on the year and yet midstream energy as a sector,

year. And yet midstream energy as a sector, it was up two and a half percent last week when oil was down five and a half. It's up about 15% total return on the year. Pure MLPs are up more. Canadians and corps are up a little less. And so I'm blending it to that 15. That's a non-correlation between midstream energy and oil prices that ought to be the case. It's extremely healthy. And it would be healthy even if it wasn't working to our favor. I just think that there was a period of time where out of sentiment, oil prices and midstream energy became very correlated. And you're really seeing this year, I think, a vindication of what our thesis has been there for a long, long time. 60% decline in the number of deaths from malaria in the last 15 years globally. I often talk about things over 100 years, over 50 years, over 200 years to make this point of how much better certain things in the world have gotten.

But just in the last 15 years, one five, a 60 percent decline in malaria related deaths. There were times where malaria was wiping out half of the population. This is against doomsdayism for any rational, reasonable person. Somebody asked and asked David. Am I technically wrong? Am I technically wrong, you know, grammatically, where the way I write the DC today, I will say it dropped 4% and I'll put a negative sign before the 4. And he was saying, isn't that sort of a double negative? And the answer is yes, he is correct.

And I'm going to keep doing it the way I'm doing it. Because it's a visual aid and I'm erring on the side of being grammatically wrong and visually more clear. And how do I know that I'm not creating confusion? Because in four years of doing it this way, this was the first person to ever call me out on it. And so I just thought it was funny. Okay, I'm going to let you go there. Look forward to coming to you back in the Divinity Cafe on Wednesday. In the meantime, reach out with any questions. And thank you so much for listening, reading, watching the DC Today. Thank you. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.

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