The Dividend Cafe - The DC Today - Monday, October 23, 2023

Episode Date: October 23, 2023

Today's Post - https://bahnsen.co/3QqYcRa So the market came into today just 300 points above its intra-day low of Friday the 6th at the beginning of this month, having rallied about a thousand points off of that in the six days that followed, but then selling off three days in a row to end last week. Bill Ackman announced this morning that he had covered his short on U.S. Treasuries (another way of saying this is that he ended his bet on rates going higher). Bonds also rallied on the news as the 10-year yield dropped 17 basis points (from +8 to -9). 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. I am here in Newport Beach where it has been a very exciting day in markets. where it has been a very exciting day in markets. We basically, last night, futures came into the week, and keep in mind it was coming off of a week in which markets were up about 850 points from Friday intraday until the end of the day Tuesday, then sold off substantially Wednesday and Thursday and Friday. So net on the week ended up being down about 500 points. And futures opened up about 50 last night. And then this morning, we're down 200. Markets opened down about 130 and really quite quickly after that, reversed as a very highly

known hedge funder by the name of Bill Ackman, who had very, in a very high profile way, about a month or so ago, announced that he was shorting treasuries, which is a way of betting that yields are going higher. shorting treasuries, which is a way of betting that yields are going higher. He announced this morning that he had closed out that bet, that he was done shorting treasuries and immediately bond yields reversed down, meaning bond prices went up. And then the stock market went from down 130 to up 130 or so. And that kind of lasted for most of the day. Markets up about 100 after being down over 100. And then in the very final half hour or so of the day, the market dropped. It was actually about the last hour. It wasn't like all in the final minutes. It was about last 45 to 60 minutes.

It dropped and ended up down 190 on the day. So I just want to quickly go through today's market metrics, but then I do have a few more things I'll walk through today. The S&P was down just 17 basis points. The NASDAQ was actually up 27, and the best performing sector was communication services, which was up about 70 basis points. Technology was also up, but not quite so much. Energy was the worst performing. And a lot of that was just Chevron, which was down in light of this $53 billion purchase of Hess. That deal was announced in the press overnight. And so anyways, you had a very odd

day, a little intraday volatility down, then up, then down. And there we are. The multiple right now for the S&P 493, and what that is, is the 493 companies that are not the big seven companies is trading at 19 times earnings. That is the S&P 493. The seven companies that have created all the return for the year are trading at 45 times earnings. And so I think even the S&P 493 is quite elevated from a historical standpoint. Now, on a forward multiple basis, if you get good earnings growth, perhaps it doesn't become so stretched, but it's priced for that and then some. And then, of course, the 45 times earnings on the big seven. I just think people need to understand what they're buying.

If they buy the index, what they're really buying is a high multiple, high valuation play on seven companies right now. Yields did pass 5% on the 10-year today, but then it closed at 485. So the yield was up about seven or eight basis points and then closed down about seven or eight basis points. So you had a 15-bip reversal intraday. The bond yields in Japan, Germany, Australia, Italy, the UK. I didn't check France, but I have to think France is likely in that list as well, have all been higher in recent weeks. This is very much a global bond story, which is something I've been trying to communicate for some time. A chart you may want to look at in the DC today and a comment I want to make here. I don't like it when people take a statistical data point and compare it to what things were before the financial crisis, implying like, oh, this might itself be predictive of the financial crisis.

I think that those correlations are barely ever causative and oftentimes really clearly and explicably so, that there is not a sense in which certain data points need to lead one to believe we're doing a financial crisis part two. But there is sometimes different things that can be taught that have nothing to do with that conclusion. And this is one of them, whereby interest rates were growing up from 2003 to 2007, and bond spreads really weren't going up until the economy got bad. And then bond spreads, the spreads in corporate credit over treasuries really exploded. And right now, a lot of people said, my gosh, interest rates have really gone higher in treasuries and in corporate debt. But the spreads haven't widened much. And all of that is true.

debt, but the spreads haven't widened much. And all of that is true. And I don't think that economies get bad because spreads widen. I think spreads widen because economies get bad. And that's what happened in 2003 to 2007. That to me is the issue here is we're looking The issue here is we're looking at economic conditions and we will see if spreads end up widening or if yields drop before spreads have a chance to widen. And that is another very big possibility that would have ramifications to the investment grade corporate bond sector and the highield bond sector, not to mention other forms of credit. The VIX closed at a six-month high on Friday, by the way, but that high was $22. So, I mean, it's not exactly anywhere close to panic capitulation. The VIX has moved higher, but still in a range that is historically considered actually pretty benign. range that is historically considered actually pretty benign. I mentioned that S&P 493, the valuation versus the seven companies, of the total S&P 500, 33%, that's it, only one-third are above their 200-day moving average. Two-thirds of the index is below its moving average. By the way, 39% of regional banks are above their 200-day moving average, and that's the level that we saw back in March.

So you really have a lot of technical weakness inside the regional bank sector. As far as certain things around the world, we do know, obviously, the Israel situation, their need to defend themselves, what we expect will be more escalation in that process as they seek to destroy Hamas. A full-blown ground war in Gaza seems to be on hold right now, or at least on a short-term delay as other contingencies and options and discussions play out. I did think it was interesting that the New York Times wrote a correction to their erroneous report about Israel having bombed a Gaza hospital and did so by saying that Hamas had failed to make the case

that Israel did it. So there you go. The House GOP is a dumpster fire. I don't have much else to add to that. Tom Emmer is the new person projected to possibly be a lead to be Speaker of the House, but still seems like he's a long way away from being able to get the votes necessary on the Republican side. Anecdotally, the budget deficit as a percentage of GDP, the annual budget deficit in our recently closed fiscal year, came in at 6.2% of GDP. It was at the low point 2019, only 4.5%. So you have seen it move down from the huge peaks post-COVID, but still quite a bit higher than it was pre-COVID. As far as other statistical data points, the chance of a Fed rate hike next week in the FOMC meeting is basically 0%. There's right around 100% chance of no rate hike

in the futures market. And then in December, it's currently at 75% odds of no rate hike. So not quite at 100, but again, the market's not pricing in much of a possibility of another rate hike at all. Oil was down today 2.2%, back to $86. So really didn't move or sustain a move above 90 after the Hamas attack on Israel. And there is a Ask David against doomsdayism in the written DC Today that I'll have you go there to read today, and I'll let you go. That's all I want to go through here on today's DC Today. I'll be back with you tomorrow and Wednesday. We will be taking Thursday off this week, and not with Brian or Trevor filling in, but off

altogether because our entire team will be in our annual off-site meetings, retreat, discussion stuff on Thursday. But I'll see you again tomorrow and I'll look forward to it. Thanks for listening. Thanks for watching. Thanks for reading the DC Today. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, and with Hightower Advisors LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities LLC.

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