The Dividend Cafe - The DC Today - Monday October 10, 2022

Episode Date: October 10, 2022

I am not sure I have complained enough about the absurdity of having a day when the stock market is open and the bond market is not. Columbus Day is this odd anomaly where they honored the great explorer in financial markets in the most convoluted way possible – by taking away banking transactions and bond activity but by having stock exchanges open (for those who have not read my prior writings on such a thing, it is highly distortive to markets, as many financial actors function in both spaces at once, so lose use of the left hand while they continue to use their right hand). That said, today was such an absurd day. I did write a Dividend Cafe Friday with more information about the bear market in which we find ourselves, and the historical lessons that may be useful as we proceed through this. The video is here with the same comments on podcast here. I was on CNBC this morning giving my feedback to comments the media was running with from Jamie Dimon (the CEO of JP Morgan). My first comment was spot on. My second comment was spot on. And my third comment was about to hit the ball out of the park, when all of a sudden …. (you’ll have to see). Off we go … Links mentioned in this episode: TheDCToday.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Hello and welcome to the Monday edition of the DC Today. There's a little more to go through today than normal coming out of a weekend and with just sort of a variety of topics I chose to address in the Monday Written DC Today, which as is the case every Monday, stays with the legacy format that had a lot more topics and items to address. I want to make the point for podcast listeners that I made in the Wr DC today, that today is Columbus Day. And it is one of these extraordinarily rare moments in which for whatever reason, they choose to have the bond market closed and the stock market open. It's combined with banks

being closed. So it just makes for a very odd day. you have a lot of financial actors not at their desks you have a lot of uh capital markets actors that are kind of able to use one hand and not the other which causes them to use neither um and you get a lot of arbitrage trading that uh tries to take place around these inefficiencies so i I wouldn't read much into anything. You don't really need to when you already have so much excitement in markets anyways. But just to give you kind of a quick update of these last 24 hours, futures opened, as they always do, Sunday night at 6 o'clock p.m. Eastern. And they were down about 200 points.

Eastern. And they were down about 200 points and finding an equilibrium with futures and fair value took a couple hours. And I don't really know why. But futures went up from there, but stayed down net net. By the time I went to bed, they were pointing down 100. And then they were close to even very early in the morning. And then the market itself opened up over 100 points. Okay, so you had some weird pre-market action, Sunday night, Monday morning, nothing strange there. And then you had a market that was up 100, zigged and zagged a bit throughout the morning. And it was somewhere around 9.45 or so Pacific time, a few hours into trading being open, that Jamie Dimon is the CEO of JP Morgan, largest financial institution in the United States. They gave an interview on CNBC where

he talked about markets could go down more and the recession risk. And we don't know if there'll be a soft landing or not. Very candidly, he didn't say much, but the one, you know, because he's saying both like, oh, it could be worse, could be better. We don't know, blah, blah, blah. But, you know, they tagged onto the markets could go much lower. And CNBC ran it right into an argument for why Jamie Dimon's comments had pushed the market down a couple hundred points. Right after that, CNBC had me on and I chose to come and explain to them and their listeners how these things work and why I thought maybe they were taking Mr. Dimon a little out of context and that the fact of the

matter is the potential of market events is a day by day, second by second reality, not new, not unique and not unknown. And, um, I really liked the anchor who I was talking with Brian Sullivan a lot, but, uh, you'll see if you watch the clip of the interview right in the midst of me making my second or third point to these effects, the feed from the studio cut off. And I think they had some technical issues there at CNBC studio in New Jersey. And that was that. So anyways, we put a chart in DC Today showing where the market was and then how it kind of rebounded from there. And as I want to do every now and then, I chose to take credit for the market reversal, which, of course, in real life had nothing to do with me or my comments. But then the market ended up in the last few minutes giving back a few points.

So it closed down 90 on the day. It had been down about 280, came back up in a few points. So it closed down 90 on the day. It had been down about 280, came back up into positive territory. And so it was just kind of a little roller coaster, not much, especially compared to what we're used to. But a silly day for anyone trying to get an accurate understanding of where we are. Well, where are we in real life? I'm going to actually skip a few other bullet points and come back to them to first make the point. I'll tell you one thing where we are in real life is the cover of Barron's Magazine over the weekend has a headline saying the powerful greenback. The dollar is near a 20 year high and it has a picture of George Washington coming out of a dollar bill flexing.

coming out of a dollar bill flexing, this may be about as bearish of a sign for the U.S. dollar as I could possibly think of. I comment frequently about the historical reality of magazine covers and newspaper headlines and their contrary indicators to reality. And so what may be bearish for the dollar in terms of this sort of sports illustrated curse of financial media may be bullish for risk assets at some point here as I continue to believe that both the dollar and bond yields coming down is the needed catalyst to some forward discounting and equities of an eventual Fed softening. All right, let's talk earnings for a bit. Fundamentals, all the things that actually matter in the world. We're expecting about 4% earnings growth in the S&P for the third quarter that will get reported in the fourth quarter starting this week. The one thing I want to say is that 4% earnings growth in the quarter would be a negative

number apart from the energy sector. So over 100% of earnings growth is relegated to the energy sector. It's not new. It isn't a surprise. It isn't like once that earnings reality plays out that markets have to respond. It's been known all year. It's been forecasted all year. But it's worth kind of reflecting in the way we think about earnings and sectors. I do also believe that it's going to be a difficult earning season. I don't expect a lot of great headline results. But see, the thing is, is I'm looking at the MLIV poll survey over the weekend. It doesn't look like anybody is. And so you really don't know how markets are going to respond because if the expectation is already baked, then it's entirely possible prices surprise

us. Don't have any update for you on bond yields today because, as I mentioned, the bond market was closed. A little shout out to a couple of my traders today who tried to place some bond trades and were really disappointed in the lack of liquidity with the bond market closed. That's for you, Kenny. Hey, the industrial sector was up 33 basis points today. Consumer staples right behind it at 29. But energy was down 2%. Technology was down nearly the same. So kind of a high dispersion of results there. want to point out just because I did a dividend cafe on Friday about the history of bear markets, and I've done a two-week theme now on lessons we can extract from history for those who choose to live in the reality that there's nothing new under the sun. The S&P 500 in the year I was born,

in aggregate, which by the the way, was 1974. As long as I'm 48 years old, I don't mind talking about it. There is an age coming at which I may talk about it less. But 1974, the S&P kicked off $9 of earnings. And this year, it's going to kick off again. It could be a buck or two worse or better depending on this next quarter, but more or less $225 of earnings is baked in. I just want you to think about that. $9 up to $225 of earnings in my hopefully middle stage of life. Dividends in the S&P 500 are up 1,700% since I was born. Now, I guess most are saying, wow, that's huge. What a great number. What a wonderful

data point to reflect the long-term reality of markets. But I would say 1,700% is pitiful when one factors in that actually, if you just isolate the dividend growers in the market and you eliminate those wounded souls that pay no dividend or don't grow, they're actually up 3,200% from the dividend growers of the S&P in my lifetime. So you do with the data what you will. I know what I do with it, but I hope it has some import in the way you think about markets and what it is we're doing in markets. So the top news stories, Senator Ben Sasse on Thursday, after D.C. Today Gunner Press announced he was likely going to be leaving the Senate and accepting a position of president of the University of Florida. That won't switch the power of the Senate at all, as Pete Ricketts, the Republican governor, will appoint a replacement.

There's actually quite a bit of speculation he may appoint himself. And then there will be a special election in 2024. Nebraska is a pretty bright red state regardless. The issue there is not so much the math change of what it could mean, plus one or minus one for Dems or Republicans, but in my mind, it's a qualitative change. Because if you are asking me, Ben Sasse is about as good as they come. And the United States Senate's loss is the University of Florida's gain. Okay, big attack at the Crimean Peninsula, the bridge that comes from Russia to the Crimean Peninsula. Russia retaliated with escalated attacks back into Kiev, which they were really targeting civilians.

And there's just a continued reigniting of fears about escalation in the Ukraine-Russia matter. Public policy real quick, and I got to move it along a little here. Everyone's going to be focused for the next month on what happens in the midterms. And then there's going to be a question as to whatever the new composition of the House and Senate will be, what that could mean into 2023. Of course, that new composition won't take effect until late January. And so what we have, once we know the outcomes of elections, until the actual installation of new senators and representatives in the Congress, is called the lame duck session. And I'm expecting that there's a good possibility the R&D tax credit will get revisited with bipartisan support to continue

instant and full expensing of R&D as opposed to making that roll off and go into an amortization. That's something they don't want to touch before the election, but as best I can tell, has bipartisan support to get past in lame duck. The Safe Banking Act, I think will get revisited, but it is more likely depending on what happens in the Senate. Relief from tariffs could get voted on, and that is definitely election sensitive. National Defense Authorization Act, whereby they want to amend the bill to allow for national security reviews before any outbound investment by U.S. firms. I think that's highly likely to happen.

And I suppose is a little bit sensitive on the Senate side in the lame duck, but again, is a pretty bold statement of sort of deglobalization that it's even been considered. And then the child tax credit is very election sensitive. There's definitely a goal from some Democrat legislators. They weren't able to get it done. And there's a goal to try to get a skinny down version of it extended in the lame duck. So by now, you know, 263,000 jobs were added in September, 250 were expected. The unemployment rate dropped to 3.5%, 57,000 jobs left the labor participation force. So you had a few more jobs created and less people in the denominator made for a lower unemployment rate. And used car sales prices are plunging. And I put a chart of that

in the DC Today today. A couple of comments I got to make on housing and mortgage. The inventory of available homes is still about 10% below the January of 2020 levels. That's pre-COVID. So you look at the demand supply equilibrium that we have not obtained, and you really only have two choices. Either prices come down to stoke demand or supply comes up. And I don't know how anyone thinks supply is going to be adequate in the short term. and so I think the level of the 30-year mortgage moving up is the best catalyst to declining demand. You have high prices and a higher cost of borrowing that pushes demand lower and what that is called is pushing prices lower and so the speed in which the 30-year mortgage more than doubled is the fastest in over 40 years. And I think that what we're talking about now is the inevitable reality of a price impact. It started to happen at the middle of the year. At the beginning of the year, I was forecasting it would kind of be into the end of the year,

going into 23. It happened a bit sooner, uh, before I expected, um, well before I forecasted, uh, but nevertheless is, is happening. And I think now accelerates, um, uh, real housing price correction in, uh, 2023 to bring supply demand into equilibrium. Rents are dropping too, by the way. There's a chart in DC Today you have to look at indicating really about a 12%, 13% decline in what new places are renting for relative to what those same places had been renting for just a few months earlier. So worth commenting on there. Futures are pricing in. It's close to 80% chance of a 75-bip rate hike here in September,

a 20% chance of a 50-bip hike. I actually see it's a good thing I'm looking at my DC today as I'm recording because I see a typo in the written DC today. So i'll have it fixed before you even have a chance to read it but yeah it will either a 50 or 75 bp rate hike and 80 versus 20 are the respective odds evidenced in the futures market right now a lot of hawkish talk from some of the voting governors and even non-voting governors that are not named J-PAL. Oil's hanging in there, $91 a barrel. A chart of the strategic petroleum reserves as we look at the almost 250 million barrels of oil that have left SPR in the last several months, bringing us down to 1983 levels. I love the against doomsdayism

section of every Monday. And today I talk about water levels in Holland, which is something I'm sure you've been thinking about a lot lately. And it does speak very much to the foolhardiness of a doomsday mentality. And then in Ask David, we address the issue of what kind of indexes and what kind of methodology in the construction of stock indexes we like and why. You got PPI and CPI numbers coming Wednesday and Thursday, respectively. Earnings season starting. It should be an action packed week. That's the story here at the DC today. Thank you for listening to the podcast. Thank you for watching the video and thank you for reading the DC today and sending your questions and comments to us at questions at thebonsongroup.com.

And of course, please do subscribe to the podcast, subscribe to the video, just hit that little button. And if you're so inclined, you can even give us a little rating or thumbs up or any of those kinds of things, especially if you're watching the video, just hit that thumbs up and move on with your day and evening. That's all we have. Thanks for watching 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 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 suitable for all investors. All data and information referenced herein

are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary and does not constitute investment advice. Thank you. its affiliates. Hightower Advisors do not provide tax or legal advice. This material was not intended or written to be used or presented to any entity as tax advice or tax information. 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.