The Dividend Cafe - The DC Today - Thursday, August 3, 2023

Episode Date: August 3, 2023

Today's Post - https://bahnsen.co/3QoFycQ Saudi put a further stake in the ground on extending production cuts, and oil jumped over +2.5% as a result (nearing $82 WTI). Again, they cite the silliness of SPR not making any moves to refill (something I spoke about on CNBC last night). Other than 2008 when the world was ending, 2022 and 2023 have seen the highest bond volatility since the 1980’s. This year has actually seen more days of > 10bp moves in two-year treasury yields than even last year did! The higher yield levels in the long end of the curve are the story of the week in financial markets, for sure, though. The 10-year is not back to the 4.35% high it saw last year but it is comfortably over 4% again. 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 Thursday edition of DC Today. We continue to slog on through this week. It actually ended up being kind of a boring day in markets in terms of net closing levels and all the major market indices after yesterday's sell off. What I want to do today is kind of go through today's market action quickly. There's a number of things I do want to cover. So I'll get through all that and then I'll come back to kind of a bigger little issue I kind of wanted to talk about just for a moment. I'll leave you in suspense. Obviously it's worth continuing to listen for, or I wouldn't set it up this way. So that carrot is being dangled on purpose. The Dow was down 66 points today. The NASDAQ was down just 10 basis points, S&P 25 basis points. So all three indices were kind of just down 10 to 20 base points, somewhere around there. Not anything substantial. The Dow had been down quite a bit more. I think it was down 150 at the low, but it may have been worse

than that. So nothing severe, but it ended up kind of being reasonably benign on the day. so nothing severe but it ended up kind of being reasonably benign on the day i can't say the same for the bond market though the the long end of the bond curve has uh been pummeled and the short end really is not it actually the yields were down even a little more today on the short end so you've got a tiny bit of rally the shorter end and you've had uh yields moving higher on the long end and so you're supposed to call this a steepening of the curve, right? When the short end is not moving and the long end is going higher. But it's very hard for me, even though it's the financially technically correct term to use, it's very hard for me to use the word steepening when we're in negative steepness, you know, because we're still in an averted yield curve.

But 30 basis points, 35 basis points of that negative inversion has gone away in the last few days. That's pretty substantial. And so I do think that's the biggest story in finance. Now, interestingly, the 10-year is not back to its high from last year. The yield in the 10-year hit 435 late last year, and it's still below 420 now. But it had been in the mid-3s and then gotten up to about 375 or hung out for a while. Now it's kind of dancing in a higher range, so we'll see where that goes. Now it's kind of dancing in a higher range. So we'll see where that goes. The Saudis helped rally oil again.

And they made an announcement about extending these production cuts they've been doing. And oil jumped to about 3% on the day. And you're back right around $82 on WTI crude. dollars on WTI crude. And the Saudis are specifically citing the fact that the promised buys to replenish the Strategic Petroleum Reserve are not coming. And so their argument is, if you're not going to provide that for in oil, then we will. And they have a very different motive than I would. An anchor on CNBC asked me about this last night. There's a link at the DC Today about my fuller answer. But I think that there's a kind of universal response about this issue of why the SPR did not refill oil in 66 or 69 or 73 or 71.

There's either people that are just completely disgusted or people that are really, really surprised. And I think I'm in a combination of both, but regardless, that's moving oil prices higher. The bond, well, okay, let me give you the summary of the day. I'm going to come back to my bigger point. So the top performing sector was energy. It was up almost 1%. Utilities just got hammered down 2.3. And like I said, kind of a lot of flattishness in between with the market being down quite a bit earlier in the day, getting up in the middle of the day and then closing just down 66 points.

Economically, there was a lot of news. You had initial jobless claims this morning came in at 227,000. So the four-week average now is back to the level that we had in March after it had been moving higher. But that rolling four-week average is now basically almost at a six-month low. The non-farm productivity increased in the second quarter at 3.7% annualized. It was only expected to be about 2.2%. So you got a big boost in non-farm productivity. You had reduction of unit labor costs. You had greater output from not a greater number of workers, really very encouraging numbers, almost all of that outsized gain coming in manufacturing, which ties into the theme I've

been writing about lately regarding resurgence of factory production. The challenge is that year over year, non-farm productivity is only 1.3%. And so when I was writing all this up early this morning, as some of these reports were coming, it really did help reinforce the theme of there are certain annualized numbers in a quarter that can look really good and the year over year not, and then even vice versa. And it's just really imperative that we not be guilty. I certainly don't ever want to be guilty of it myself from a macroeconomic analysis standpoint of taking the simplest explanation without looking into the full picture. There is reason to cautiously be optimistic about this increase in non-farm productivity. But when you look at a fuller picture, there's

also plenty of reason to not really buy it yet. We're watching it. ISM services came in at 52.7 in July. Not a great number. Still an expansion, but it was a little lower in expectations. You did have in the ISM services, non-manufacturing, you had business activity and new orders declining. Services, non-manufacturing, you had business activity and new orders declining. Basic theme, you know, not recessionary, just kind of slower growth. Okay, so this is the thing I wanted to get to about today. The bond market volatility, not bond market returns up or bond market returns down, but the up and down vol, the daily volatility of bonds, is at a level it hadn't seen since 2008 when the world

was ending and before that since the 1980s, like 1986, 1988. The number of days where you've had a 10 basis point move higher or lower in the two-year yield is really, really high this year. And in fact, we've already seen a higher volatility this year than we saw last year. And last year was an incredibly volatile year. So the reason I bring that up is to say that you had a very famous, all over the news, all over Bloomberg, CNBC reports, pop-ups. I was getting it at 3.30 in the morning Pacific time. And it took about an hour of my morning this morning, maybe 45 minutes, unpacking just tweets

from very, very well-known kind of celebrity hedge funder, Bill Ackman. Bill is a guy who loves to be in the news, loves to be on social media. He's a brilliant guy. He's been just embarrassingly wrong on some multi-billion dollar calls that he's made. And he's been just famously right on a couple multi-billion dollar calls. And so I don't say it to take away anything from the guy,

but I woke up to him talking about how he and his hedge fund are taking a big short position in the long dated, uh, treasury bond. And it just sort of re sparked something I've talked about 20 times over the years. There's a kind of recurring theme. I'll get emails every now and then, Hey, Warren Buffett said this, you know, what do you think? Or, or, or, you know, Paul Tudor Jones said that, what do you think? And there are certain famous people, whether they're wealthy or whether they're celebrities or whether they're hedge funders, whether they're Federal Reserve governors, they have

a point of view. And generally people are asking the presupposition and it is, you know, hey, if this guy says it and he's smart and rich. Should we do something? And the problem with that, first of all, is that for some rich, smart hedge funder to say up, there's another rich, smart hedge funder saying down. Someone likes ABC and someone doesn't like ABC. And so you don't actually really have a valid appeal authority because there's generally a counter appeal to authority that works against it if you're using that logic. But secondly is the problem that the logic itself is flawed. All appeals to authority short of argumentation

and an actual cogent thesis are wrong. But you've got to remember that these guys are wrong about things all the time. So the appeal to authority in this case, you actually have empirical support for the fact that, you know, yeah, they're rich and smart, but they are wrong sometimes. And other times they're not. But you don't know anything just by nature of someone saying it that way authoritatively. But the third is the most important point that you don't even know if they believe it, even if they were smart and rich and authoritative and, and even if they weren't wrong, sometimes they just, you just don't even know if they, if they really believe it, if they're really doing it. Uh, what you do know is this, and I'm going to end the point here. They are not sharing it for your benefit.

If you believe they are, if you believe a multi-billionaire hedge funder goes to CNBC or goes on Twitter, social media to say something provocative for you, then I can't, I don't know what to say, but they don't. So it doesn't mean they're lying. It doesn't mean they're telling the truth. It means it's just worthless in terms of actionable information for us. That's all I have to say about it. Thank you for listening.

Thank you for watching. Thank you for reading the DC today. And I will look forward to coming to you tomorrow with the follow-up to our two-part series on credit, a little extra credit coming to you tomorrow in the Dividend Cafe. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC,

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