The Dividend Cafe - The DC Today - Tuesday, January 16, 2024

Episode Date: January 16, 2024

Today's Post - https://bahnsen.co/3vEgA0Y Ask David “What is your view about investing in the Indian economy since it appears to have the potential for considerable growth and is not hampered by the regulations of the CCP?” ~ Al On one hand, India is the highest country allocation in our emerging markets strategy. On the other hand, that is not really “investing in the Indian economy” as much as it is investing in “companies that happen to be based in India.” The domestic market strength is a huge factor, but it is really more of a bottom-up than top-down decision. We are not looking for good countries but rather good companies. 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 and welcome to the Monday edition on Tuesday of the DC Today. You know, I guess this sort of feels like this every year, but this year has felt more pronounced than normal, that it just seems like a long time to get into that normal rhythm and routine. First of all, Christmas Day and New Year's Day being on a weekend or on a Monday, rather. And then the way that we shifted the schedule this year with our white paper, the year ahead, year behind coming out on a Monday.

And then the Martin Luther King Day holiday being yesterday, just two weeks into the new year. There's just a chain of events. It feels like it's a weird rhythm. But I really like doing at least one DC Today per week that is that longer form version. And if people don't care for it anymore, don't need it anymore, then, you know, we could change that. But as best I can tell, some people like the longer form. So that's what we've done today is on the Tuesday, do the Monday format. And then of course, we will kind of go normal for the rest of the week. But the idea of getting a sort of normal Monday and then moving forward through a normal week, it just feels like it's been elusive because of these odd events so far to start the year.

I'm going to start off before I get too into details by just saying on the top news story side that I think most people are aware that the Iowa caucus for the GOP played out last night. President Trump, as expected, did prevail. Ron DeSantis did come in in second place. And Vivek Ramaswamy has dropped out of the race. And now we go on to New Hampshire and we shall see if anything gets shaken up there, but it pretty much won't. Um, and so at this point, I think there's a lot more clarity as to where the, the GOP side of the nomination seems to be headed and what, what that might entail. We'll, we'll save for a different day. Um, other news stories I just

want to point out because I'm not a big TV watcher, but I try to watch shows that I think are really good quality. And it just so happens that two of like the only shows I watched in 2023 just crushed it at the Emmys last night. And so I have to do a shout out for Succession, which over four seasons, as far as I'm concerned, was the greatest television show ever, maybe besides Mad Men. And then The Bear, for those of you who haven't seen it, also did extremely well. And I mean, both shows, The Bear and Succession cleaned up not only in their category for best show, but all kinds of best actor, best supporting actress, best director, all the other peripheral awards. So those two shows cleaned up. And I think that was newsworthy, so I'm sharing it because I did love, love, love both shows.

We're going to get into the markets here now. The futures were down about 150 last night. And then this morning we're pointing to pre-market about a 100-point drop at the market, which it did open up down about 75. Quickly fell further, kind of zigged and zagged throughout the day. And then at one point, the Dow was down almost 400 points, just a tad shy. It rebounded from there, closed down on the day 230 points. So it made back close to half of its worst point.

But nevertheless, still closed down on the day 0.6%. Nothing too bad. And then the S&P was down 0.37%. The NASDAQ down 0.2%. The Dow going into today was down a quarter of a percentage point on the month, the NASDAQ the same. And I just want to point out that's pretty much perfectly correlated to what's happened in the bond market. The 10-year yield started off the month at 3.85. It started off today at 4%. It did move about five basis points on the day, but either way to higher.

So the downside in the bond world, the 10-year, is more or less perfectly correlated to what's happened in the Dow and the NASDAQ this month. the 10-year is more or less perfectly correlated to what's happened in the Dow and the NASDAQ this month. And that correlation was very, very tight and positive last year as well throughout the year. And I think that that continues to be a primary story that a need to see that positive correlation between stocks and bonds break up is an important thing to get us to a point of more normalcy, particularly for asset allocators. I think it's a big deal that stocks and bonds, which are normally used to kind of hedge against one another and produce some non-correlation and sometimes reverse correlation against each other, that they are so tightly correlated, it makes an asset allocator's job very difficult. correlated. It makes an asset allocator's job very difficult. I mentioned the 10-year bond closed at 4.05% today, up 10 basis points. The 2.10 spread is now at just 20 basis points. So the

inversion between the two-year treasury and the 10-year treasury at 20 basis points, it's the least inverted. It's now been in several months and close to the least it's been inverted since the inversion began. The top-performing sector of the day, which in fact was the only sector positive of the day, was technology at 0.39% to the upside. Energy was the worst performer again. It's been lagging a bit here on the month and energy was down 2.4%. And every other sector in between was also down, but not a lot of them were down all that much. I want to make a comment. There's a chart in the DC Today

about money market fund balances. Our cash balances sitting at about $6 trillion in money markets that have been at $4.5 trillion. And so there's a lot of folks using that fact to make an argument that there's a trillion and a half extra dollars, $6 trillion total. A lot of this money could come roaring back into stocks and risk assets and bid them up higher. And I'm not here to say it won't happen. I'm not here to say that's a happen. I'm not here to say that's

a bad argument. I just want to make the point that last year when a lot of money was going into money markets, the stock market was going higher. So the idea that now money coming out of money markets means stock market would also be going higher just strikes me as a difficult, logical argument. I also would say that I don't think a lot of the money that went into money market mutual funds was coming from risk assets i don't think it was a case of risk investors saying hey i'm pulling money out of stocks i want to go into money market there's always some of that and maybe some of that reverses comes back in uh but maybe not. But I think that the empirical data is rather clear that the bulk of the money going into money market funds last year is coming out of the banking system. It's

coming out of bank deposits that were lower yielding to go into money markets that were higher yielding. And so it was opportunistic cash hold substitution, which is very different than money going out of risk into the sidelines and therefore coming back from the sidelines to risk. Something to think about. All right. In public policy, it appears that the Senate Finance Chair, who's a Democrat, and the House Ways and Means Committee Chair, who's a Republican, have come to an agreement now on some of these tax amendments that, again, I don't know how they're going to get leadership on board, get the votes, but I'm told they will. And you have bipartisan agreement out of committee to extend the child tax credit, bringing back on the table a refundability where even if the tax

credit is larger than the amount of tax owed. So someone with a $0 tax balance, and in fact, with the child tax credit, a negative balance will actually receive that money. It's another way of saying the government for some taxpayers would be paying them to have kids. And as opposed to just using the child tax credit to wipe, to decrease the amount of tax liability, getting perhaps even to a $0 net tax position, getting into a tax position where they owe you money, that may be back on the table. Some people found it objectionable, but that's where we are. And I want to point out that what they're doing to get a more favorable child tax credit scenario is putting

relief around those conditions for R&D expense deductibility, interest expense deductibility for businesses, and instant expensing for capital expenditures. So on the margin, there's three rather friendly business tax movements and one friendly to household tax movements that very well could be getting ready to become re-implemented. I'm not going to say much about a Trump-Biden rematch in 2024. I do believe that the Trump nomination looks more likely right now. that the Trump nomination looks more likely right now. I have other opinions that I can't really back up as to why it's not a foregone conclusion that this exact matchup between Trump and Biden will take place. But to the extent that it looks more likely right now, and people would like more analysis of what that could mean to markets, I just want to point out that it really can't be done

without understanding that a Trump Biden rematch doesn't speak to the house or the Senate. And those things become very important. There are policy modifications on the table. I don't think a lot of analysis can be done yet, but there's still some initial thoughts that I'm in the process of formulating. And even if I said, I'm not going to talk about any of this for six months, everyone would know I was lying. I will be. But I don't want to do it prematurely, okay? Producer prices on Friday fell for the third month in a row. This represented a 1.1% drop on the month,

a 0.1% increase had been expected. You heard from Brian Saitel last week. He did the DC Today on the day the consumer price number came out. And that shelter inflation reading is still, which is 34% of CPI, is still saying that rent of primary residence was up 6.5% year over year, and that owner's equivalent rent was up 6.3% year over year. I obviously find that data in a real-time market context to be preposterous. Again, I don't have a lot on the housing market per se and the residential mortgage market, but because I incorporate into this commercial real estate, I did want to say that 192

office leases were signed in Manhattan last year at over $100 a foot, the highest amount ever by a wide margin. The high end part of the market is not just surviving, but thriving in Manhattan. And of course, that is a bifurcated story from the lower end of the market, where there is a big struggle to keep tenants. So that bifurcated reality in New York City is really the profound story about office commercial real estate because their city hasn't fully normalized. But using a reopened city, a re-established that's kind of normalized post-COVID is more useful. Quickly on the Fed, their bank term funding program. Remember this deal? This was what they created last March in the aftermath of Silicon Valley Bank's failure. Signature Bank in New York was included in this too.

They created a facility that all banks could get liquidity if they had assets that were held to maturity but were upside down, mark to market. They'd give a dollar for dollar credit for that asset being posted as collateral. And it was meant to be an emergency liquidity function, and it worked. I mean, that's what they used it for. And now they are saying it's going to be retired on March 11th, that there's no more need to provide liquidity against money good assets that were previously undervalued likely because of interest rates. Now, here's my question. Who believes that the Fed would let this program expire if they did not believe interest rates were going to be going lower and therefore there would be less of a need to get liquidity against mark-to-market assets.

In other words, if these assets become fully valued mark-to-market, there's not that same need for liquidity. And yet who knows better than anyone else what the mark-to-market on some of these assets is going to be that is fully dependent as duration instruments on what the interest market on some of these assets is going to be that is fully dependent as duration instruments on what the interest rate is. I would say the answer to that is the Fed. Speaking of which, the Fed funds futures do show a 71% chance right now in March of a quarter point rate hike. By the May meeting, there's a 28% chance of a quarter point hike, 72% a half point, 0% chance of not having a cut.

I think I might've said hike. I did mean to say cut. So forgive me. So there's either a 71% chance of a first cut by March and 100% chance of a first cut by May per the futures market right now. And then by December, we're still sitting there somewhere between three and a quarter and four and a quarter in the Fed funds rate. That's somewhere between 100 and 200 basis points lower than we are now by the end of the year. Oil close to $72, just down a bit. That whole story continues. And then someone in the Ask David section asked me what I thought about investing in the indian economy since they appear to have potential for growth they're not hampered by the same

regulations of the ccp and i did say that uh india as a country represents our highest concentration our highest country allocation in our emerging market strategy um but we're not we don't we still don't view that though as, as investing in the Indian economy. We view it as investing in countries that are domiciled in India. Domestic market strength is a big factor, but we really approach this from a bottom-up standpoint, not top-down. And I just want to reiterate that important point about how we view emerging markets investing. All right, there's a link to some fun things in the DC Today, and I'm going to leave it there.

Stay warm if you're in one of these prevalent cold storm spots. And I will be with you tomorrow for DC Today. Again, I hope you have a wonderful night. We'll see you tomorrow, Wednesday. Thanks for watching. Thanks for listening. Thanks for reading the DC Today.

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