The Dividend Cafe - The DC Today - Monday, November 28, 2022

Episode Date: November 28, 2022

Market Action Futures opened last night down -50 points or so and were down -160 points into the evening. This morning they were pointing to a down -200 point open pre-market. It is safe to say embedded in market action today is come “catch up” after last week where Wednesday is always a “low participation” day, Thursday saw markets closed for the holiday, and Friday is a token open day where markets close three hours early. The market opened down -50 points and just steadily worsened throughout the day. The Dow closed down -497 points (-1.45%) with the S&P 500 down -1.54% and the Nasdaq down -1.58%. The market’s challenges today were clearly related to concerns about the supply chain and some contagion effect around the disruptions in China (see Top News Stories below) The ten-year bond yield closed today at 3.67%, down two basis points on the day Top-performing sector for the day: Consumer Staples (-0.31%) Bottom-performing sector for the day: Real Estate (-2.80%) There is a lot to be said on the crypto/FTX implosion of the last couple weeks, and I believe even more will be said in the weeks ahead. BlockFi, another large crypto exchange, has now filed for bankruptcy as well 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 back to the DC Today. It feels like forever since I last recorded one, even though it's actually not been all that long. But with the shortened Thanksgiving week behind us, we're back in action in the Newport office. It was a very heavy day of trading here at the Bonson Group. A couple hundred million dollars of trading activity around some of our tax loss selling. And perhaps others are doing some tax harvesting as well. You did have a downward move in markets today, although I think that the number one

news story of the day is really more behind some of the downward momentum in stocks, which is these protests breaking out all over China in opposition to their just preposterous out all over China in opposition to their just preposterous ongoing zero COVID policy and the various attempts to continue locking down society. And now they're starting to get some civil resistance. And why do American markets care about that? Well, you know, there's a lot of reasons why people may care politically, socially, culturally, ethically, humanly, but no, markets are responding to the potential of contagion, primarily around the

supply chain, the notion that things that are going to possibly dampen supply chain activity in China could create problems outside of the borders of China. Now, of course, the opposite possibility exists as well, which is that some of the events going on in China are headed towards a conclusion that will be less lockdown oriented and more open and therefore enhance more activity on the supply chain and global contagion economic circumstances. But that remains to be seen right now. It's certainly enhanced volatility over the weekend and today in market hours. So futures last night were only down 50 or so when the market futures first opened. By the time I went to bed, they were down 150 or so. And then I was up very early this morning and they were down about 200.

Markets a few hours later opened only down 50 points. But really, if you look at the chart of the day, it was pretty much just a very steady, unending move downward, eventually closing down nearly 500 points without a lot of zigs and zags along the way. Just kind of a nice, steady downward movement with the Dow closing down 1.45%, the S&P 1.54%, the NASDAQ just a tiny bit more than that. So all three indices basically down 1.5%. Number two, it's possible that there's some built up trading activity. Markets were bit more than that. So all three indices basically down one and a half percent. Remember, too, it's possible that there's some built up trading activity. Markets were open for a half day on Friday. I think there might have been about six people in the country that were at their desk on

the day after Thanksgiving. And then you had the market closed Thursday and even Wednesday, although last week was a really good week for markets overall, but, you know, there's just some distortions. And certainly trading at size and scale in a week like last week is very rare. And so I wouldn't be surprised if there's some built up kind of activity as well. The 10-year bond yield closed at 3.67%. So it was actually down two basis points on the day. point six, seven percent. So it was actually down two basis points on the day. And again, that's we've seen markets really rally as as bonds have been going higher and the and the yields have been going lower and vice versa. And so I don't have any reason to believe that that stock bond

correlation is broken up. And yet today, where bonds were slightly up on the day and stocks were down, that lends itself to the China disruption thesis that I shared a moment ago. I do have a lot that I've been saying and writing about and thinking about on this crypto implosion. BlockFi was the one that declared bankruptcy today. We all know of the big FTX implosion. So you do have a lot of institutional distress and the ongoing kind of contagion effect within the crypto world.

And I have more that I've said about that if you are interested in my writing there. So the China lockdowns are the big story geopolitically, economically. On the public policy front, the Biden administration is looking to again delay required payments on student loan debt, but they've all but admitted this time it is not. I mean, they have to do it legally behind the pretense of ongoing COVID emergency. They've kind of been admitting for about a year now that even that was just nonsense. But at this point, it's because they're in kind of limbo with what

the courts are going to do with the student loan cancellation. So they're buying themselves time with kind of stretching out that whole emergency provision. I don't have a prediction on what's going to happen with the appropriations deal, whether or not they're going to get a full year deal done in the lame duck that would have to be obviously bipartisan or just do a continuing resolution that allows them funding, but it punts a bigger funding deal into next year. One of those two things will end up happening, and I think it could go either way at this point. The National Defense Authorization Act is another thing that we've known is kind of lingering out there in the lame duck.

And now based on the way that the elections went, what do we expect? Well, I don't know. I mean, the GOP has a majority of the House now. There's certain provisions they want to alter and state that they probably have the votes to do before they'll agree to renew it. So it'll depend on what level of intensity there is in pushback. But that's the other public policy piece I'm keeping an eye on. There's a lot in DC today, today on the economic front. We know Black Friday online sales were over nine billion dollars this year, a new record. On the other hand, we also know that 30 day delinquencies in both auto loans and credit card loans have picked up. The 90 day delinquency number has not moved up. So, you know, there's always the possibility of just a noise there.

You know, there's always the possibility of just a noise there. But again, you see ongoing higher retail number and yet higher delinquency, a mixed bag, which, as is the case with a lot of economic data, is kind of the norm right now. Last week, new orders for durable goods were up. They came out, the read from the month prior came out up 1% in the month of October. So it beat the expectations quite handily, primarily around a surge of new orders for commercial machinery, commercial aircraft. But then you have the combined manufacturing and services PMI number,

which fell the most. It's fallen below 50. So 50 is the breakeven point. Anything above that shows expansion on the month. Anything below that shows contraction. And it was at the lowest negative print since June of 2020, right in the midst of the kind of COVID finality there. It's the yield curve, I think, is the biggest indicator about why people would predict a recession that's been inverted so severely for so long now.

The part that the yield curve and nobody else is able to predict is how deep the recession could be, how long it could go, and then what level has already been priced in. Manufacturing data is kind of an in-between spot in that argument. The employment data is an argument for a shallow recession, but the yield curve is certainly the argument on the other end for one. We'll keep an eye on all that. The other thing, by the way, I mentioned the delinquencies on credit cards. The balance level, outstanding credit card balances has creeped up very near newer highs. But we hear, you know, we hear it in my business, this theme comes up quite a bit. It's come up most of the time since the financial

crisis that the governments are over levered and overextended and that the corporate sector had taken on a lot more leverage. But the household sector post-crisis has been the healthiest it's been with the least amount of debt and debt relative to income and debt relative to assets. When you start seeing credit card balances creep up the way that they have, you have to wonder if there are some murmurings underneath the surface that can call into question that thesis. We'll keep watching that. All right. A chart at the DC today on housing fastest slowdown on record. So you can look through some of the past periods of rate hikes and see the way that volume of sales and housing slows down. The volume drop that we've seen here since the Fed began hiking rates is absolutely unprecedented. And I'd encourage you to look at that chart.

The FOMC is still two weeks away. I think the FOMC meeting will start two weeks from tomorrow, which is December 13th. And then they will announce their decision on the rates, And then they will announce their decision on the rates, on the rate level of the Fed funds rate on Wednesday the 14th. Two things. The futures market is now pricing in 68% chance of a half a point rate hike. And that number had been higher. The likelihood of a 50 basis point rate hike had been higher. So it's come down a bit.

The other 32% being aligned in the futures market with a three quarter point. I'm still in the 50 basis point camp, but I'm surprised that number has moved a little lower. So we shall see what whispers there are over the days and perhaps week or so to come. But seeing a progressive-left Senator Elizabeth Warren come out really critical of the Fed and really hitting up criticism along the lines of Fed tightening now, just hurting lower income wage earners, going to spike unemployment and so forth. It's the first that we've started to see some political pressure

start to blow the other way from those saying, oh, you got to do something on inflation. Please raise rates to someone like Liz Warren saying, you guys can't even control inflation. If you want to do this, you know what, right now you're just going to hurt wage earners and job holders. And so I don't know if the Fed is going to respond to it or not, but that political climate I'm keeping an eye on. So oil closed a little below $77 a barrel. It was actually up on the day-to-day, but its movement down had come over the weekend. So the daily movement masks what happened in days that markets weren't open. daily movement, masks, what happened in days that markets weren't open.

And again, I think the primary reason for oil prices dropping was this report of intensity in China around the lockdowns. I think it's worth noting that even with oil prices down over 15% in the last few weeks, that midstream is up about 2% to 3%. And that's really just reinforcing an ongoing breakdown of correlation between midstream and commodity prices. And I think a vote of confidence from investors that the midstream sector has improved its business model. And with pipeline companies, there is an approach now being taken

that focuses on capital discipline. All right, what else do we got? You got to read DC Today for the Against Doomsday section. That's one of my favorites. I encourage you to read it and come back to me with some negative spin on that.

I'll leave you in suspense. Finally, I would not argue, this was a question posed to me in the Ask David section, I would not argue that the FTX implosion is proof that all of crypto is corrupt and that everything with Bitcoin is going down and whatnot. I don't have an opinion on that. My opinion is that it's impossible to value these things. They're heavily reliant on speculation. And I acknowledge that speculation can cut both ways. You can speculate something without intrinsic value much higher and the lack of intrinsic value can cause it to be speculated all the way down. My point is that the FTX implosion speaks to an ecosystem of fraud, corruption, poor transparency,

and a lot of the heavy users of the medium are caught up in this. Do I like the argument or the idea of the argument that Bitcoin could be a beneficiary from this as it separates from the pack? If someone is not using leverage, if they're not hooked up with a corrupt exchange. And the problem is that I believe the underlying thing itself is highly reliant on speculation. And that even if there were to be a point where someone decided they wanted to use Bitcoin as a heavier medium of transaction, it continues to strike me as very unlikely that the stability will be there for it to catch mainstream transactional approval. And that even if it did, I don't know what that would have to do with the price of a Bitcoin. Stable means stable. And that doesn't mean going way up or way down.

It means stable, right? And I haven't seen that at all. So my ongoing view is that what you've seen in FTX is indicative of a larger problem in this whole world. All right. Friday, the jobs report will come out. I'm doing a dividend cafe on the Fed Friday as well. But we've got a whole week in between now and then. We did an awful lot of tax selling today.

We're going to summarize all that for you in the Wednesday portfolio report that goes to clients only Wednesday morning. I'll be back on Tuesday, Wednesday and Thursday with the normal DC Today written market synopsis and summary and the video and the podcast. But today you have the old school enhanced version of the written DC Today. Check that out and reach out with any other questions you may have. Thanks so much for listening and watching and reading the DC Today. 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 offer to buy or sell securities. No investment process is free of risk. There is no guarantee that the investment process or investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance

and is not a guarantee. The investment opportunities referenced herein may not be Thank you. Tax laws vary based on the client's individual circumstances and can change at any time without notice. Clients are urged to consult their tax or legal advisor for any related questions.