The Dividend Cafe - The DC Today - Thursday, January 12, 2023

Episode Date: January 12, 2023

Dow: +269 points (+0.81%) S&P: +1.28% Nasdaq: +1.76% 10-Year Treasury Yield: 3.54% (-7.6 basis points) Top-performing sector: Real Estate (+3.60%) Bottom-performing sector: Consumer Staples (+0.06%) WTI Crude Oil: $77.71/barrel (+3.45%) ASK DAVID “The US government has stated that it will purchase crude oil to replenish the strategic reserve once the price hits $70. In effect, this seems to indicate that the government will purchase millions of barrels at $70. Does this function as a price floor? And, if so, what impact does a government-created price floor have on markets?” ~ Keith So just by way of clarification, they have indicated they want that to be the rough price level at which they will transact, but their rough and very ambiguous guidance on the subject would indicate the intent of more a floor than a ceiling and yet, if the price does not go (or stay) there, it may not be a price at which much transacts. The government cannot make the market cooperate. But to the extent the market expects that level to be a rough “floor,” I suppose one could assume in their economic calculation that some of the left tail risks of various price collapses are less likely. The problem is that they can change their mind, and any number of events could happen (upside or downside) that alter the economics here. What market actors ultimately know is that there is a forced buyer in the marketplace, and supply calculations, profit expectations, and a number of numerical considerations around production can be performed with that intervening fact lingering. It does suggest a certain backstop in matters which provide a bit of an asymmetrical risk/reward (in the producers’ favor). 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 DC Today. We got here. It's been quite a long week, a bit busy, and I think the CPI number was what a lot of people in markets were waiting for. So we got here to this point. And let me just kind of give you first the market summary, and then I want to unpack the CPI, the consumer price index, the inflation data a little bit more for you. So the market was up, and yet I wasn't really wrong about how the market was going to respond immediately to the news that there would be short-term positioning issues. And in reality, market went up and then it did come down, went negative. And then again, an hour, almost two hours after the data came, then the market went back higher. And so you just

get this kind of clearing out of different hedges and speculative trades. And then you get a little chance to breathe. But indeed, this CPI number did not underwhelm or disappoint. And it wasn't overwhelmingly lower, meaning inflation was not overwhelmingly lower than had been expected, but it was lower as expected. And that we'll talk about the details of in a moment. But the Dow was up 217 points. You'll see in the chart of the day of the way the market moved today that it took that V down and then V back up and then kind of stayed to the upside for the rest of the day. There was some ups and downs, but really pretty steadily higher at that level. So I think it was by

10, 15 a.m. Eastern that the market came back up. And then from there all the way to the close, just kind of stayed right there around up 200 points. The S&P was up 34 basis points on the day. The NASDAQ was up 64 basis points, the same as the Dow. And then just really massive bond market rally. God, the 10-year was down 12 basis points and all the front end of the curve dropped the yield as well. So you had prices move up and down, up across the whole term structure. Really quite an impressive first couple of weeks of 2023 in the bond market.

The top performing sector today was energy. It was up almost 2%. The worst performing was consumer staples. It was down about 0.8%. Crude oil was up a little over 1% at 78.28. So it's still in the 70s, but it's kind of off the mid or low 70s up to the high 70s, getting close to 80 again. Weekly jobless claims came in at 205,000, and they were expecting 219. So that's a thinner data point each week, but it was all things considered positive. There is in the Q&A today, the Ask David section at the dctoday.com, I think worthwhile answer with someone asking some questions about quantitative tightening. And so we talk about QE and QE1 and QE3 and all these, uh, QE which stands for

quantitative easing so much that perhaps a little discussion on quantitative tightening, uh, will, will make sense, uh, kind of unfold some of that. So bottom line on the CPI numbers here, let me try to make this a little bigger for me. The CPI was down 0.1% in the month of December. So let me explain what this means. There's a month over month, which is a sequential move. And so if something costs 10, and then it goes down one, it's then nine, right? But then there's what it was compared to a year ago. That's the year over year move. And that number shows inflation, meaning prices are higher from a year ago. And it came in at the headline level, which includes food and energy at six and a half5%. Now, where is the disinflation?

That's because that number had been over 9% in June of this year. So two things are true at once. The year-over-year inflation is positive. You have inflation from the end of 2021 to the end of 2022. You have inflation from the end of 2021 to the end of 2022, but you have disinflation, meaning a dropping rate of inflation from June to the end of the year. And a pretty significant level as well from nine to the sixes. That's a big move down. But then deflation is when you actually have negative prices,

and that's what you experienced at the headline level year over year, excuse me, month over month from November to December. Now, when you strip out food and energy, the core CPI number was actually a tiny bit higher. It was up 0.3, which was expected, and headline was down 0.1. So you can see that the impact of food and energy was taking away 0.4% from inflation. And I think that there's all kinds of arguments to not look at headline, to look at core based on certain extrinsic sources of volatility in both the food and energy number. Yet I have decided for purposes of the way I communicate about this with the public to just always look at both because I don't cherry pick data. I want a full

objective and transparent presentation of the facts, and then I'll just do the work to unpack it and so forth. But for some to kind of look at core when it serves the thesis and look at headline when it serves the thesis is very dishonest. In my case, I don't need to go straight to headline because I do think that there are reasons to strip out food and energy sometimes when you're looking at a different economic objective. For example, I think monetary component of inflation is far more meaningful in core and less meaningful in headline because I don't believe the Fed is driving wheat prices higher or gas prices lower per se. I think those things are a byproduct of other issues. things are a byproduct of other issues. And most people believe that from the beginning of time, certainly from the beginning of the discovery of oil, that crude oil has a geopolitical component that is different than monetary. And therefore, to have that separate data set isn't confusing. It's not contradictory. It's just additive and

useful. Okay. Let's get into a few other details around it though. Gasoline prices dropped 9.4% in the month. And I think a lot of people knew that. Those of you that fill up gas tanks probably knew. But the bigger fact is that gas prices ended the year lower than where they started. And based on where they were in the middle of the year, that just speaks to the violent volatility that was both up and then down in gasoline prices. I also think the fact that we have real strong disinflation coming in these numbers is quite evident because that much anticipated lag effect from shelter that eventually catches up, the fact that it's still not come at all is evidenced by the fact that shelter was reflecting a 0.8% gain last month. And again, I don't need

to make the argument unless somebody wants me to. I can quantify it with a whole lot of data, a whole lot of charts, but nobody believes that housing prices and or rent prices were going higher in December. So how do they reflect a 0.8% contribution to services inflation via the shelter component of such? It's because of this lag effect created by how it's measured, the overall level of rents and rent leases just generally being one year long. And so each month there's leases that roll off and roll on, but it takes a while to get the leases from a year ago off. And that's the issue. And so that's coming. And the fact that we're not going to have a 0.8% contribution, and in fact, are probably going to have a significant negative attribution, speaks to me of where the real headline number is going. And then finally, just because it's

something I've been focused on all year, core goods prices were up just 2.1% year over year. That's how much they've deflated since about the middle of 2022. I believe it was May or April where I call it a peak in goods inflation. And that exact month proved to be the high level. It's disinflated ever since. And you ended up the year in goods inflation right at what the Fed's target is of 2%. Now there's overall higher inflation because there's more to the price level than core goods, but that's my point. And so yeah, bond yields fell

today in response to this disinflationary CPI report. So that's the summary of today in the DC Today. We're going to have a Dividend Cafe tomorrow, Friday, dealing with the subject of Bernie Madoff. I'm going to leave you in suspense as to what that has to do with you and what the broader investment message is. So check out Dividend Cafe tomorrow. And in the meantime,

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