The Dividend Cafe - The DC Today - Monday October 3, 2022

Episode Date: October 3, 2022

A big rally day after a bloodbath week in markets. Lots to say on markets and more markets today. The thing most on everyone’s mind right now is surely the raging bear market (in both stocks and bonds). I addressed it thoroughly in Friday’s Dividend Cafe and really encourage you to read it here. The weekly video is here, and the same comments from the video are in podcast form here. The underlying theme is that our pathos very understandably sees times like these as negatives, while our logos must be reminded of how wonderful times like these prove to be. I was on Varney Friday, was on Kudlow’s radio show (WABC) Saturday, and on Charles Payne today talking markets. 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. Well, welcome to the very special DC Today. Why is it special? Because it's Monday. Monday means long form written and there is a lot of market stuff in the dctoday.com today. Brutal week in markets last week and brutal couple of weeks before that. And then now a big rally day today, but not big enough to make up for what's happened previously. But I think there's some points we want to make

about what has happened in markets today and last week and where we are. So most of what I'm going to talk about today is just market oriented. There will be a little Fed, a little policy and some economic data. But let's just jump right into it. As far as today's close, just kind of giving you today's stuff first and then going deeper. The most important thing I'd say, look, the futures were all over the place last night. So this wasn't a rally that started right when the market closed Friday. Markets were bound to close in utter violence.

We every day last week at the end of the day were selling off. They did it again going into the close, month end, quarter end. That was just sort of baked in the cards. There's a lot of different reasons why that has been happening and particularly happened Friday. But it wasn't like immediately the post-market action was pointing up. And even last night's futures opened flat. They went down, they came back up, but not a lot. There was a lot of volatility overnight. I was watching the futures heavily Sunday night and very early Monday morning. But then they caught a little bit of a bid, but I mean 150, 200 points. So, you know, the market

closed today up 150 or 200. It really, in the aftermath of last week and that Friday going into the weekend close, would have been a disaster. And yet shortly after the open, I'm going to say it was about a half hour. This is going to be extremely hard for me because I left the glasses I need at my desk. I'm going to make my screen a lot larger and I'm going to be using one eye to do this. I'm reading some of the data points off my screen here, but the fact of matter is that the markets took about a half hour to an hour to kind of warm up. I mean, they opened up, but to get up into this mega range, at one point, the Dow was up over 900 points today. It gave a little bit of that back in the final half hour, but still closed up 765 points, 2.66%. The S&P was up 2.6.

The NASDAQ was up two and a quarter. So a pretty broad rally. Energy, by the way, was the leading sector. And it's worth pointing out, it was up 5.77%. Now, energy got hit hard last week, but you had a violent rally to the upside today. And we're going to talk about oil prices in a moment in some news with OPEC Plus. But the consumer discretionary sector, which was also hammered last week and has been hammered all year, is down over 30% on the year. It was the worst performing sector today. And it was up, but it was up 0.24%.

And I couldn't find a consumer discretionary name that wasn't up 1%, 2%, 3%. So why the whole sector was only up a quarter point, I, as of the time I'm recording, still have not figured out the answer to that. There will be an answer, but bottom line, every sector participated in one form or another rally today. You've got to get used to this theme because I said it on the downside, and if there are upside days, it's going to be true. The major factor is going to be bond yields. And so the bond market rallies when bond yields drop,

is going to be bond yields. And so the bond market rallies when bond yields drop. And the bottom line is today, the 10-year rallied huge with the yield down 16 basis points. We hit 4%. I want to say it was Wednesday of last week on the 10-year. It came back down to 3.7 the next day. Then it did move higher, but didn't retest the four. And now with a 16 point drop today down to 365 on the 10 year yield, you're back to that place where you wonder, is 4% going to get retested or not? Or has the 10 year seen the high? I don't want to answer that question at this point, but I do think that that will end up proving to be the key factor. I said that months ago about the 3.5. When the 10-year hit 3.5, I said if it falls off of that, stocks are going to do quite well. And it fell off of it, came all the way down to 2.7, and stocks were up huge in July and the first half of August. Then as the 10-year reverted higher,

the last six weeks of the third quarter was a bloodbath, both for bonds and stocks. As the bond yields go, so goes equities right now. It's the best correlative factor we have in evaluating risk assets. I think that earnings season is going to be very interesting. We won't start getting companies reporting until next Wednesday, which I believe is October the 12th. So we have a little over a week to go till earnings season starts. But the thing I want to share is there are going to be companies that report their Q3 results.

And I expect a pretty Darwinian quarter, which is my way of saying high dispersion. Unexpected good news will be rewarded and unexpected bad news will probably get hit. And that was the case last quarter too. And it's been the trend for a while and I love it. It's the way I want the market to be, not all trading up or down together. The violence of the sell-off we had the last couple of weeks. And by the way, this is mostly just we had the last couple weeks and and by the way this is mostly

just true for the last like 10 days all of a sudden correlations went very high and everything traded off together um there's a couple charts in the dc today today.com uh the dc today.com today it's a mouthful that uh make the point about both utilities and consumer staples, more defensive sectors that they gave in fell to the downside just in the last week or two of the third quarter. showing Q3 results. It's not really going to be about what happened in Q3 as much as market-wide aggregate earnings guidance and essentially revisions. Okay, I don't think very many companies are going to be guiding higher than expected. There will be some, but it's not going to be needle moving. The good news will be companies that don't revise earnings expectations lower. The bad news will be companies that do revise lower, and there will be plenty that revise lower.

The question is how much of earnings expectations across the market come down. I've commented many times over the last several months, they simply have not come down that much. I've commented many times last several months, they simply have not come down that much. I still think, by the way, that they very likely come down to a point that still represents year over year earnings growth. That what we get from 21 to 22 is going to be positive earnings. And what we get from 22 to 23 could very well be positive earnings, but not the level at which they're being forecasted right now. And in fact, it could end up being very nominal, 1% to 2% earnings growth next year.

But if you get an earnings contraction expected year over year, combined with the repricing we've already had in the market multiple, that you could see the need for a lower bottom in markets. We will watch that as a matter of fundamental indicator. Speaking of fundamental indicators, the U.S. dollar, expect a ton of companies to talk about the impact that the dollar has had on their earnings in Q3. I put a chart in the DC today showing today the brutal move higher in the dollar.

Why brutal? I'm a strong dollar guy. I'm a king dollar guy. I want a good strong dollar. Why would I call it brutal? Because there's a bandwidth of healthy strength that when you get above it, the brutality is not about your currency strength. It's about other currencies' weakness that speaks to a lack of policy coordination. Perhaps a policy mistake of one central bank or another becomes problematic depending on what country you are and what sector you are, either for importers or exporters. there's a lot of issues. But just historically, it's undeniable that a level of violence of strength like this in the dollar has typically been accompanied by very difficult things, including a dollar

liquidity shortage, which has an impact in emerging markets, has an impact in sovereign debt, and is going to have an impact in corporate earnings as well. The speculation right now is that other central banks are going to get ready to coordinate some sort of intervention that will help weaken the dollar. We saw on a minor scale, it wasn't coordinated, but on an isolated basis, the Bank of Japan stepped in to try to briefly support the yen. It's not exactly in the forex, but the British Financial Authority last week stepping in to buy long dated bonds. Again, not specific to the currency, but in this case, moving bond yields lower. And that was done after they had been in heavy quantitative tightening, selling bonds, and they had to unwind. So you're seeing patches of spot response, but not coordinated. We really haven't had a coordinated response that included the US with other central banks towards the specific active dollar weakening. There's been a lot of central bank coordination around monetary policy,

rate setting, other different monetary targets, trying to create a certain reaction function from monetary policy. We've seen that coordination over the years. I think of when the Fed and the Chinese central bank coordinated in early 2016 in response to a lot of the forex action and foreign exchange reserves that were taking place with China. But when you're talking about historical central bank coordination to drive the dollar lower, it's pretty much 1985 with the famous Plaza Accord is the last time that's happened. And right now I have no information that says we're about to see something like that again. I only see anecdotal spot efforts from central banks. But do I think there are a whole lot of economic actors around the world, including in the US, that would like to see the dollar sell off. Yes, I most certainly do. So I mentioned energy up almost 6%, consumer discretionary barely up. Big talk over the weekend about Credit Suisse, a huge European bank suffering the credit default

swaps blowing out, stock price low low a lot of questions the thing i want to say as to why i'm not right now looking at that as a systemic story is that other banks weren't following suit generally when you get your lehman moments and these types of things you have all of the banks seeing their cds their credit default swaps the cost of insuring their debt blow up higher together. This seems to be a more isolated story right now. It could turn systemic, but right now it hasn't even really turned for that bank in particular. The other European financial institutions are not showing the same systemic vulnerability. So for now, I'm not particularly concerned, but I'm going to continue monitoring the story.

Month of September, the S&P was down nearly 10%, one calendar month alone. I mentioned that even consumer staples and utilities fell. Some of the big winners were of the year. Relatively speaking, they were still down, but some of the better performing big cap names really dropped a lot. Apple and Tesla are examples. Tesla today, by the way, was down quite a bit, even with the market up huge. So look, when they start going for the biggest names, that's a sign of this thing, having to kind of go full circle, run through an entire cycle of bearish pain. And that's where we are right now.

50% of companies in the S&P 500 were above their 200-day moving average in the middle of August. As of right now, it's only 16% that are. So a significant amount of the index was already in a place of technical weakness and almost all of the index moved to a place of technical weakness. It's a great indicator when breadth in the market drops that severely. All right. Any other things I want to hit up ism manufacturing came in it was in positive territory but barely so overall it's still expanded but lower than expected much lower not much lower but a bit lower than last month and um only half of the sectors i think it was nine out of 18 sectors showed expansion so not a lot of breadth, but in aggregate, barely manufacturing expansion from the ISM.

Consumer confidence on Friday was up a bit from August and yet lower than what their original expectation had been. Vice chair, let's move to Fed real quick and I'll wrap up. Vice chair, Lael Brainard at the Fed made some comments over the weekend that I think indicated they're leaning more towards a 50 basis point rate hike in November. The Fed futures are almost kind of evenly split, about 45 percent, 50, 75 percent at 75. John Williams is the New York Fed chair. He speaks tomorrow and Wednesday and tomorrow. He was speaking today, but then again tomorrow, you know, more public speech and we'll see where he is. But,

you know, there's still, there's still well over a month till the November meeting. I, we continue to not care very much if they go 50 or 75. It's going to be, I think one of those two. And I don't know why markets would care much that oh it's only 50 that's better you know if they're going to get to the same place by December regardless of how they do it in November December I'm not sure it's all that material but look the bigger issue I brought up all last week and I'm continuing to believe is going to end up being a big story is where the Fed is with quantitative tightening. There is $2.4 trillion parked at the Fed's repo facility right now. That's essentially dead money sitting on the sideline, not circulating the economy. Why is

there so much money in the repo facility? Because so much money leaves bank deposits where the excess reserves are and to get a higher rate than they're getting on deposit funds goes into a money market, which then has to go turn and deposit that excess cash in the Fed's repo facility. I think the repo is paying over 3% for money market funds. And so why does that matter? And what did I just say in English? Bank reserves have dropped by over $1 trillion this year. The Fed's repo facility has gone up by about a trillion. Those are more or less almost dollar for dollar swaps. The money leaving bank deposits are going to the repo. And that is a rate arbitrage.

One is a lower rate, one's a higher rate. And yet why it matters is you don't lend out the money at a repo facility. It gets kind of extinguished from circulation where bank deposit money can be lent out. So this speaks to tighter financial conditions. It speaks to the quantitative tightening sort of being done for them and adds to my argument that the Fed may feel they have a policy lever to sort of back off a little bit by slowing down on quantitative tightening, if not out and out reversing it altogether. Oil was up almost

5% on the day. A lot of talk that on Wednesday, OPEC Plus is not only going to reduce output, but might reduce output quotas by a million barrels a day. The Saudis wanted to target around $90 oil price. The Russians obviously being very supportive of the idea of controlling output so as to push prices higher, maximize margins. And I think that speaks to why it's hard to get bearish on the energy sector right now, unless you just get overwhelmed with global demand erosion, there is a continued argument for higher prices and higher margins. And of course, that means by definition, higher profits. Read the Ask David, the Against Doomsdayism, a couple of our feature components of the DC Today for some more fun information. We have the September jobs report

coming out on Friday, the monthly BLS number. Please be prepared for all sorts of economic stupidity that says things like good news is bad and bad news is good. But we will see what happens with the jobs report. And then tomorrow, Tuesday, the JOLTS data comes, which is the monthly job openings. Not a data metric that really got a lot of attention until the last year, year and a half, when we had this huge mismatch between available job openings and available laborers to fill those job openings. And now that data speaks to tightness in the labor market. And there's a lot of interest there. That's all I got for you today. Go back and look at Dividend Cafe if you have broader questions on the state of the bear market we're in and our view towards that. Thanks for listening

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