The Dividend Cafe - The DC Today - Tuesday, December 19, 2023

Episode Date: December 19, 2023

Today's Post - https://bahnsen.co/47VBffb Today saw risk assets rally yet again with the Dow closing at another all-time high. It is interesting to see health care as the sector holding the defensives and lower beta names down. Consumer Staples and Real Estate have broken out a bit and Utilities have at least awakened, but Health Care has been the laggard. The Bank of Japan extended its policy of negative interest rates (it has been seven years now, for those counting), though most believe they will hike the policy rate up to 0% in 2024. The Yen remains quite weak against the dollar. Oil is down $20 from where it was in September (note, that was before the Hamas attack on Israel on October 7). The VIX is at $12.50, pretty close to the lowest it has been in five years, Credit spreads have tightened by 60 basis points just in the investment grade side, with high yield spreads tightening a full percentage point (and that is basically since Halloween). It would be hard to make up a series of data points that reflect a more favorable sentiment for risk assets than this. 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 Tuesday edition of the DC Today. I am very happy to be with you. It's going to be kind of a short one today, not a whole lot of major things to go through, but I want to hit the high points. It was another rally day in the market. For those of you, by the way, watching on the video, I am recording in my office in New York City instead of the studio,

just simply because we're dealing with a few technical things. And so I am sitting at my desk. I have all of the market action right in front of me. And these rally days are just quite interesting because at this point you do start to kind of wonder who some of the buyers are at this level. But the market opened pretty flat-ish, was up a little bit, and then just kind of worked its way higher throughout the morning and then kind of stayed flat for most of the second half of the trading day. And then it closed at a high on the day. The Dow up 252 points, which was 0.68%. And that also represented a new all time high for the Dow. So the Dow closing at 37,558 points, which is just rather remarkable. By the way, the S&P and NASDAQ are not to an all-time high, but are not that far away themselves.

So getting closer every day. The S&P was up 59 basis points. The NASDAQ up 66 basis points. We've had a couple of those days lately. They don't happen a lot. We had one last week where all three of the market indices were up in almost perfect tandem with one another. They are so compositionally different from one another that it's very rare, and it's rare for good reason. The methodology, how they're computed, and what it is that is being computed are all very different. So when they really land on what is almost the same place on a day, it just speaks

to the kind of broad market beta that was moving things. The bond market was up again today. The 10-year was down two and a half basis points. The 10-year yield closing at 3.93%, pushing bond prices a little bit higher. The top performing sector of the stock market today was energy. It's been a little while since we've seen that, maybe even a few weeks. But energy was up one and a quarter percent today. And the worst performing sector was also positive. That was consumer staples up nearly a quarter of a percentage point. Oil was up nearly 2% back above $74 a barrel. So it keeps kind of bouncing around within that

low to mid 70s and staying reasonably range bound as far as WTI crude oil goes. One of the interesting data points, I don't think it was moving the market or anything today, but I think it's interesting, is the November housing starts. I just did a Dividend Cafe Friday, how much I care about the significance of there being new housing supply that comes to market. And you did have a rare feat today, particularly yesterday in the back of the very negative reality of NHB home builder sentiment, being, you know, that is very poor sentiment these days for the last several months. November housing starts came in quite a bit above expectations on an annualized basis, a couple hundred thousand.

Building permits, on the other hand, came in exactly as projected. So there wasn't really a confirmation in the data. And I do believe that this is one of many examples where you need three months of rolling data to really be able to detect a trend to kind of be willing to say there's a new narrative changing. You know, I like the print, but I don't think we can call it validated at this point. The Ask David today, somebody had thoughtfully asked what I mean when I refer to cash flow conversion, free cash flow conversion, a metric we talk about when it comes to the health of some of our portfolio companies. And it really is a reference to a company's ability to essentially generate cash flow out of its earnings, out of its profits. And because we look at EBITDA as excluding the impact of amortization, interest expense,

and also you can even look at just the free cash flow you get out of your operating cash flow, because operating cash flow is a pure bottom line of what's happening in the business enterprise, where free cash flow is including the impact of capital expenditures. And so there is an accounting difference between how we think about money we spend to pay employees and money we spend to build new factories. And when you capitalize something, it isn't coming straight out of profits, but it does come from cash flow. So if you're going to be capitalizing something like a new factory, or if you're going to be capitalizing something like the interest and debt expense

for what you borrow money to do, you want to see a cash flow conversion over time. Are you growing cash flows out of these things that you're essentially investing into? Does the differential between your profits and cash flow turn into higher cash flow over time. That's a conversion. And that is what we mean by the ratio. There are some ways in which a company could have much lower profits than, excuse me, much higher EBITDA than they do cash flow. And yet they convert that over time and it results in a much higher cash flow into the future. That can be a very healthy thing. A lot of mature companies are already in that position where their ongoing investment into things they're doing with debt, things they're doing with capital expenditures are converting

into free cash flow generation, especially as dividend growth investors, we want to see that free cash flow generation. And that's what the cash flow conversion ratio is. Hope that makes sense. It's a little, let's be honest, extremely fun stuff. For those of us who love financial vocabulary, for all the rest of you, enjoy your evenings, enjoy your Christmas candy or snacks, your caroling, whatever you're doing tonight. And reach out with any questions anytime. Have a wonderful day. And thanks for watching.

Thanks for listening. Thanks for reading the DC Today. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, with Hightower Advisors LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities LLC. Advisory services are offered through Hightower Advisors LLC. Thank you. 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 does not constitute investment advice. The Bonser Group and Hightower shall not in any way be liable for claims and make no express or implied representations or warranties as to the accuracy or completeness of the data 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. 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.