The Dividend Cafe - The DC Today - Monday September 26, 2022

Episode Date: September 26, 2022

This is a long DC Today with a lot more market talk than you are used to, largely because the “legacy” version is only one day a week and I am purposely trying to pack a lot in. The last week has been brutal for markets and I have a lot to say today to quantify it, and a lot coming Friday in Dividend Cafe to qualify it. I was the market guest on Maria’s Wall Street over the weekend, discussing all sorts of aspects of the market and investing environment. Dividend Cafe on Friday dug deeper into foreign policy and geopolitical threats and their potential ramifications to markets. The video is here and same comments on podcast here. Off we go … Links mentioned in this episode: DividendCafe.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 Monday edition of the DC Today. We have our legacy written format available in your inbox at the dctoday.com. Pretty long DC Today because a lot happening in the markets. And I want to take advantage of the longer form written version today to really unpack a lot of market info. And I'm going to walk through it all here for those of you listening to the podcast or watching the video, just kind of bullet point by bullet point, sharing some of the information with you. And I'll probably have a little bit of commentary as we go. It was another day and I've kind of lost count in the last six weeks, particularly in the last

three of those six weeks, how many times this has happened where markets were down, but then there was a cascading of selling into the close. And I mean, in some cases, today being one of them, the last five minutes. Sometimes it can be the last half hour, and that's oftentimes ETF trading, as the trading books have to get aligned with what market redemptions and share creations were done by the exchange traded funds that day. But in the last five minutes, it's almost always technical traders, a levered position unwinding, and it just puts a huge amount of downward selling pressure when there's an imbalance of sellers to buyers in the final minutes. But nevertheless, even apart from those technicals and whatnot, the

momentum is clearly to the downside, and we'll walk through some of that. So let's see here. The exact numbers, the Dow was down 330, wasn't it? 329. 330 points, a little over 1% on the Dow. The S&P was also down over 1%. The NASDAQ was actually a little better off, although it's been getting hammered more lately. But today it was down 0.6%. So this is interesting. All three broad market indices, Dow, NASDAQ, S&P, have given back all of their 2021 returns and are back to November of 2020 levels for the Dow and the S&P. NASDAQ's back to August of 2020 levels. So, I mean, at that point, we were only in like the first of the seven, or we were only in like the second of the seven lockdown phases or whatever. It's a while back.

So this is the way things go. It's sort of been our view on things like NASDAQ investing for some time. When things are good, they're very good. When they're bad, they're very bad. And you take on both elements of some extremes, right tail and left tail, upside, downside. So in terms of how close we're getting to a sort of capitulation in markets, the put-call ratio, meaning people making option bets that are very negative versus those making option bets that are very positive, it has finally hit the highest point of the year. That's a good thing in my mind because I'm a deep contrarian, and those of us who have studied market history know that there are certain indicators at which the maximum level of panic and fear ends up being a good thing, not a bad thing. However, it's still not as high as some past capitulation levels on that put-call ratio. Similarly with the VIX, look above into the 31, 32, 33 range, it's pretty high, but $40 VIX is generally where we start to think like, okay, things are getting quite overdone on the fear side, what people are paying for protection, which is really what the VIX is, by the way, we call it the fear index.

The S&P was 13% coming into today below its 200-day moving average, which means it's roughly 14% below its 200-day moving average now. It's down 23% plus change on the year, which is over 20% down. That's a bear market, and that's why I'm going to devote this Friday's Dividend Cafe to some more qualitative and historical and philosophical takeaways around bear markets. But I got to say, down 13%, 14% from its 200-day moving average is not as down as certain real significant market bottoms have been in history. But you never know. IPO activity, this is insane.

You're talking about less IPO activity in 2022. There's been barely soaking wet $15 billion of IPO activity this year. That is significantly less than we had in 2008, 2009, and the world was ending. And of course, a lot of it has to do with during a really good year, like 2021, the number of companies who went public, 87% of them are negative from where they went public at, at an average aggregate of down 49%. If you had bought all IPOs in 2021, 87% of the holdings in your portfolio would be down and your total portfolio would be down half. That is not the type of environment that makes people the next year want to be buying IPOs and it is not the type of environment that makes

companies want to respond to their investment bankers by doing a public market transaction. want to respond to their investment bankers by doing a public market transaction. Stock buybacks, by the way, have passed $1 trillion over the last four calendar quarters, the most in history. When companies use their profits to buy back stock, they are generally indiscriminate about where the stock price is. When they give the money to you, you get to put it to work for your own gains, excuse me, for your own ends. And it is gains by definition. It's a positive payment to you in your pocket. The over $1 trillion of stock buybacks, it's very difficult to net out what it really means in terms of shareholder capital return, because we have to know how much of that was used to offset

issuance of new shares from stock options and restricted share grants and things like that. The 10-year bond yield closed today at 3.92%, up 22 basis points on the day. All of last week, it was violent moves to the upside of bond yields, pushing bond prices lower. This is not just US treasuries. This is other sovereign debt as well. There's a significant unwinding in sovereign debt, which very likely means it's setting itself up for a huge reversal rally. But this is quite indiscriminate selling. And it's highly correlated as well with what's happening in equities as well. At some point, bond yields quit going higher.

They probably drop, bringing bond prices up, and that probably will be the correlative event to an equity market rally. And that could be in one minute, and it could be in one month or whatever. I'm not timing it. Don't care to. Only sector up today was consumer staples, which of course, those of you know, is my favorite equity sector on the planet. It was up a whopping 0.01%. So with the magnifying glass, you can see some of that green on the screen. The bottom performing sector was real estate down 2.63%. And coupled with what I'm about to say on the housing market,

kudos to those who don't ever have to mark to market real estate. You can lie to yourself forever. What I will say about the pricing issue, I talked a moment ago about sovereign debt. The key to high prices has always been high prices and the key to low prices has always been low prices. And if you apply that mantra to the price of borrowing, that when borrowing gets so cheap that you get a lot more of it, that it then will push the prices lower. Eventually, that pushes the borrowing prices higher, right? The price of the bonds go down.

The borrowing costs go up. There's an inverse relationship between the two. And anything that one gets too expensive, what cures for the high price is it gets so high that then the price has to come lower to adjust for the demand side of the equation. This is a classic supply demand fulcrum. record level in 2020, 2021, as the Fed came out with the zero interest rates post-COVID, that you had a ton of companies refinance their corporate debt. Right now, there's very little need for refinancing. People locked in really attractive rates at those COVID lows. And corporate borrowers, they just are no appetite to issue new debt right now at these higher bond

yields and the market is not as interested. That means there's a lower supply, which then means it pushes demand at some price fulcrum and prices are likely to go up and bond yields are go down. The same principle can be said in high yield as well. But keep in mind, And the same principle can be said in high yield as well. But keep in mind, we are down in our issuance of corporate bonds this year 50 heavy level of refinancing that was done at much more attractive prices a couple of years ago. So, look, the sovereign bond market and the Forex markets are largely trading in a similar issue right now. I think there's a heavy unwinding of certain trades. Sterling Pound has gotten destroyed against the dollar. We know the Bank of Japan intervened with the yen to strengthen the yen last week.

And I do think that we're on the verge of a massive snapback rally in Forex that would be short dollar in treasury bonds that would push yields lower. But while this thing's playing out, traders are getting their faces ripped off. So you have to be very careful. I will add this on bonds. We are pretty heavy investors in the floating rate bank loan sector, which has far outperformed all other bond aspects this year, largely because the thing that's hurt bonds is that they have a fixed coupon and then rates go higher and you're stuck at that lower coupon, which pushes the price of the bond down. Floating rate bonds are basically syndicated and securitized bank loan debt. And it goes higher. The yield that

the borrower pays goes higher as interest rates move higher. So they've done far better than other aspects of interest rate sensitive fixed income this year. But they also are generally bonds or debt issued to lower credit quality borrowers. And so right now, credit conditions become a bigger concern than the interest rate level. And recession fears are trumping interest rate dynamics. So you've seen floating rate come down a couple percent in the last week or two. So the aggregate earnings estimates for the S&P 500, they started the year at $253 across the S&P. And I've pointed out, I've been writing about how I thought analysts are underestimating the downside to earnings revisions. They got it all the way down to $242 by the end of Q3 from 250, 252, 253. Not a lot. My friends at Strategas Research have come out with a $200 earnings call for 2023

aggregate earnings. So if you do the math, 17 times $200 of earnings, and 17 times is a fat multiple. It's not frothy like in the 20s, but it's not as low as things could very well go in theory. That's a 3,400 S&P. We're in the 3,600s now. So if they were right, their earnings come down that much, there could certainly be more market downside for index investors next year, even if multiples hang in there. But I'm not going to comment on where 2023 earnings will be right now for the same reason that any other analyst doing it is putting their neck out there around things that are somewhat unknowable. I think what Strategas is doing is modeling where the economic conditions are and how much historically that could mean for an adjustment.

And I think that they're right, that the level of revisions we have right now don't seem to match the economic news, which could suggest further downside. But getting 242 could go to 220, it could go to 200, as Dave said. I don't have an interest in guessing where that number is at this time. We'll get more specificity in the months ahead. All right. So real quickly, outside the market, news stories. I think you know Italy. It looks like, as far as I understand, this new prime minister will be the first conservative since or after World War II. And the first time the conservative coalition will have a majority in their parliament. And my Italian friends, forgive me for the pronunciation. I believe it is Giorgia Maloney. Italian friends, forgive me for the pronunciation. I believe it is Giorgia Maloney. So a little interesting news there as clearly a very hostile to European Union politics individual has been overwhelmingly elected in Italy, speaking to the populist moment,

especially in the European Union. By way of public policy, I think it's noteworthy. The ABC Washington Post poll had President Biden down to a 39% disapproval, excuse me, 39% approval, 53% disapproval, a pretty significant gap had widened from where it had been in recent weeks, and then a generic ballot for congressional at Republicans now plus five, and that had been going the other way. So we'll keep our eye on the whole political aspect of things. Obviously, I talk about it quite a bit. But I don't want to bring up every single poll that comes out. I only bring that one out because it is obviously ABC and Washington Post. I don't think I'm stepping on toes to suggest

they're not exactly a MAGA-friendly conservative polling group. And they came out with what was rather contrarian news relative to some of the recent narrative about democratic momentum. What else? Yeah, I don't know. Tomorrow's a big day on the Senate vote of the continuing resolution to fund government. And then it is attached to it is the mansion energy bill that many progress Manchin that it will not be going alone. And so then do they reintroduce a standalone funding government bill rather than get blamed for certain progressives shutting down government? Do they vote for it with that energy piece in it they don't like? I just, I don't know what's going to happen, and I get different predictions from a number of my political sources on Capitol Hill. Home price appreciation was officially negative in the month of August nationally by 1.6%. That's not annualized.

That was on the month, basically kind of breaking up a momentum that has been there since the middle of 2012. kind of breaking up a momentum that has been there since the middle of 2012. And it was over 2% down for higher price areas. 45 out of 60 metropolitan areas had negative price appreciation. 15 out of 60 were positive. So the higher tier doing worse than the lower tier. And I expect more of this narrative to go ahead because one of the things, largely the people that I'm surrounded by, not just clients and professionals and colleagues, but in my kind of social dimension, I am mostly surrounded by people who live in higher price points of homes. And one of the things I hear all the time is, oh, the high level, high price points never go down. High price points are not interest rate sensitive. Everything's fine. I think that narrative is going to get the what beat out of it, that I think the most significant price depreciation of housing will come from higher

priced homes in the year ahead because of the need to correct a higher level of excess that had taken place in higher price relative to lower price homes. Not just dollar levels where that's just mathematical, but as a percentage. All right, I'm going to leave it there. You have to go to thedctoday.com to read the Against Doomsdayism. And I asked David today, the question we got was how futures work. And there's quite an explanation of what I refer to by post-market and overnight and pre-market futures versus pre-market trading that can take place on an exchange. Just a little market education for those that are interested. We got consumer confidence coming tomorrow. Durable goods, new home sales for August, few economic data points tomorrow. Tuesday, we'll come back to you with another written market synopsis. Tuesday, Wednesday, Thursday, the full length podcast video tomorrow as well.

Reach out with any questions and understand we are working around the clock. These are crazy times in markets and we have an awful lot of conviction about what we're doing and not doing during this time. Thank you for watching the DC Today. Questions at thebonsongroup.com if you would like to reach out, take care. 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 Thank you. and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein.

The data and information are provided as of the date referenced. Such data and information are subject to change without notice. This document was created for informational purposes only. The opinions expressed are solely those of the Bonson Group and do not represent those of Hightower Advisors LLC or any of 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.