The Dividend Cafe - The DC Today - Tuesday, February 27, 2024

Episode Date: February 27, 2024

Today's Post - https://bahnsen.co/3TeiRcu A bit of a mixed day in markets with the Dow closing off its lows for the day down 96 points. The treasury raised $46B in seven year paper with a bid to cover ratio in the mid fifteens versus the thirteens where it has been (meaning there more buyers). I suppose if the big news in Asia today was a ‘hotter’ inflation read at 2% in Japan with 10 year government bonds rising to their highest yield since 2011 at an eye popping .165%, its no wonder this auction near 4.32% cleared with more demand. Capital will always flow around the world where it is most rewarded and with attractive economic fundamentals and positive real yields, its why the US Dollar is nearing its 2020 pandemic apex and trading 17% above its historical average versus trading peers. Short term, this can make US exports more expensive which can slow growth, and also further trade imbalance as we already import more things then we export, but its a net positive long term. Tomorrows trade balance figures may reveal more there 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. Hello, welcome to DC Today. Brian Seitel with you on Tuesday. It's February the 27th, and here with you on a fairly quiet day, really, in markets, we closed off of the lows, at least on the Dow. We still ended up slightly negative. We were down about 96 points. S&P and NASDAQ eked out some small gains on the day. 10-year yields were down a couple basis

points, two basis points. So a bit of a quiet day, which is fine. There was a seven-year treasury auction. Actually, after the auctions yesterday, I think it was two and fives that were a little slower as far as bidders coming in to buy the supply that we have of new treasuries. Today's seven-year actually went pretty good. It was bid to cover of 15 and a half versus about a 13 to one on average. So a good amount of buyers there. And what I wrote was if the big news out of Asia today was that Japan's inflation was much hotter than expected at a big 2% year over year inflation rate versus ours. And their two-year government bond yields are now yielding 0.165%. So 0.165%. It's just no wonder that US debt trading at 4.3% with arguably in most ways, by most metrics, the stronger underlying economy wouldn't attract bidders from around the world. And that's,

of course, what happens. Capital flows around the world where it's most rewarded, risk adjusted, meaning that you can get higher yields in parts of the world that are devaluing currencies, like South America or some of these places. But risk adjusted, when you look at a strong credit like the US and in these higher yields, and frankly, higher yields because of these places, but risk adjusted. When you look at a strong credit like the U S and, um, in these higher yields and frankly, higher yields because of good fundamentals. So they're not higher yields because we're trying to restrict capital from leaving the country or, or, you know, capital outflows, people trying to sell dollars. It's the opposite. We're, uh, we have higher yields because we have higher growth right now. Um, knocking on wood.

Um, and frankly, some higher inflation that we've dealt with that is now coming down. And so as capital flows around the world, what you end up getting is currency appreciation. The US dollar is now trading 17% above where its historical average is versus trading peers. And it's back to where it was in the pandemic, basically. So those highs, which was more of a flight to safety into the US dollar, you're back there based on fundamentals, relative strong fundamentals versus a pretty weak Europe, a stronger Japan, which is nice to see than what we've seen in recent decades, frankly, but still on a relative basis, fairly slow overall.

So that's where money goes and you get rising currencies. And in the short term, it causes a slowdown in exports potentially because our widgets that we sell across the world end up costing more because they're sold in dollars. And then since we already have a negative trade imbalance, meaning that we import more than we export, it's not necessarily a great thing if we're going to export a little less potentially. And so those are the short-term kind of naysayers on why strong currency is tough. Long-term, it's hard to argue that it isn't a net positive. It's why we're the reserve currency of the world. It's that we have a strong and stable economy and a strong and stable currency. And that's something to be coveted and protected.

And so I don't necessarily have a problem with, you know, a strong currency, given all the fundamental reasons. The pendulums do tend to swing back and forth. All these things are interrelated and tied together. But that's where we are right now, at least for 2024. Some news. David had a piece in there about just where markets are. So we're about 90% through reporting season on earnings. We're Q4. And we're expecting a finish with 10% to go of right around a 10% growth on total earnings for the S&P 500 versus a year ago.

growth on total earnings for the S&P 500 versus a year ago. So that's pretty good. We were expecting 11% in October, so it's a little lower, but not much, and we'll take it. And that's fine and good. His point was, if we're looking at an S&P at 5,078 as of today, and you're looking at an estimate for 2024 earnings of 243, which is about 10% higher on an estimate versus where we closed last year, then that means that you're already trading at 21 times forward earnings on the S&P. So it just isn't cheap by any metric. And so when you're thinking of buying an index or making that case, just remember that there's a lot of things right now that rhyme with 1999, 2000 era. There just is. The top 10 holdings are trading at a wider margin to the overall market than they did in the year 2000. And so there's a part of the market that's just over

value. There's a part of the market that isn't.valued. There's a part of the market that isn't. We tend to play in those. We tend to swim in those pools a lot more often. The other news for today, there was a durable goods report out that was, frankly, much weaker than expected. It's a month over month number. So, you know, I don't know that there's a lot for me to read into on a 30 day change, but durable goods matter. These are big orders in the economy,

things like airplanes and transportation and things like this, core goods. They were down 6%, 6.1%. And we were expecting them to be down. There's some seasonal factors and such, but they were down more than expected and fairly broad-based. There was a slowdown because of some Boeing safety issues on some trade, I'm sorry, on some plane deliveries. And so that was part of it, but it was broad based otherwise. So we'll keep an eye on that. Consumer sentiment on the day was weaker than expected. Again, it's a lagging indicator. We've talked about it many times before. It's a survey of how people felt about what they've just been through, not necessarily them knowing what is to come. And then the Case

Shiller Home Index on the day, this is all just in the economic calendar, was up 5.5% for year over year. So for the month of December, we're now 5.5% higher than we were December before. And again, it's still a very resilient housing market from a price perspective, mainly around just a dearth of activity. There's not a lot of transactions happening to set prices and the ones that are, are holding up on the prices just the prices just fine. Um, I put a question, a live question that I got, um, that I thought was fairly relevant and important, um, around our ability to design asset allocations to meet a certain income yield. And so what I've described in there is if someone has, you know, an income yield of say 4%, meaning that the assets that they've saved and, you know,

to support their lifestyle with a 4% income yield that supports, you know, their spending needs and such. If that's the need, we can easily tailor the portfolio around asset allocation versus things like risk and things like, you know, other goals, tax considerations, all these things matter. With that, we've got tomorrow, there's a first revision of Q4 GDP. We're expecting it unchanged at 3.3. And so we'll see if that alters a little bit one way or the other. And then there's some trade imbalance figures, which I alluded to in my opening paragraph that I'll be looking at. So with that, I'm going to let you go for the night. It's been lovely being with you. Reach out with questions or thoughts, frankly, or anything you think you disagree with. I'd love to hear from you. Otherwise,

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