The Dividend Cafe - The DC Today - Tuesday, June 27, 2023

Episode Date: June 27, 2023

Today's Post - https://bahnsen.co/3pr9HgK So another day gone by and I don’t think the world knows much more than it has 24 hours ago about Putin and the weekend coup threat. Natural gas prices have jumped from $2 to $2.80 BTU in just 15 days or so (+40%) and not surprisingly energy stocks with a natural gas focus have done much better than those exclusively focused on crude oil. One of the energy bear arguments seems to have really dissipated, and that was the idea that exposure to higher rates would be catastrophic for the highly levered energy sector (in 2020 it was often said that the debt cliffs these companies have would usher in a wave of bankruptcies). A new survey from the Dallas Fed of 150 oil and gas companies indicated that less than 20% see tighter credit conditions having a significant impact on their business. New home sales were up +12.2% in May (volume) with supply down to 6.7 months (had been 7.6 months). My study is starting to indicate a worthlessness to national supply data when some markets are so substantially under-supplied and some suffering from big over-supply (making the aggregate number like the guy whose “average temperature” is found with one arm in the freezer and one in the oven). But what I would point out is that median sales prices have dropped -16.2% (for new homes) since their peak, right in the middle spot of that 10-20% drop I predicted (though this is just new homes, not existing, yet). Seattle and San Francisco, by the way, have seen double-digit median price drops of existing homes. Hmmmmm 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. Really interesting rally day in markets. Again, consumer discretionary and technology kind of leading the way. And every sector was positive except for health care, more of a defensive sector. And even that was only down by about 20 basis points. Let me get the market stuff out of the way so I can talk about some more fun things here. Dow was up over 200 points.

The S&P was up over 1 percent. NASDAQ up over one and. The S&P was up over 1%. NASDAQ up over 1.5%. The 10-year treasury was at 3.77, up five basis points. Oil fell off 67.70, down 2.4%. And yet most of the energy sector was positive today. I suspect you may have had some rolling of futures there. But regardless, you know, really big day overall in risk assets. There are some economic data points that I wanted to go through. Durable goods were up 1.7% in May, and that was double what was expected. And even if you take out transportation, it was up quite a bit more. Commercial aircraft, electronics, machinery, metals, computers, all up, not a ton, but up for the month. And none of that was necessarily expected. So that's some news there. I think

natural gas prices being up 40% in the last little over two weeks now is big news. You can see a little bit of separation in the energy sector where stocks that are levered to natural gas have done much better than ones that have a pure crude oil exposure. I think one of the energy bear arguments, those that have been negative on the space, has really dissipated around this concern about debt and leverage and that the movement higher of interest rates posed a big threat. There was a survey I read this morning from the Dallas Fed of 150 oil and gas company CEOs indicating only 20% of them see an impact from tighter credit conditions impacting their business. So I really do think that the kind of wall of worry that existed with debt levels during the 2020

moment of energy seems to be in a very different environment now as you have interest rates that have gone all the way from zero at the Fed funds level to the mid fives. and the cash flows and overall health of the oil and gas business has more than dealt with that. And so it's a positive in the space. The thing I wanted to spend a little time on was new home sales. They were up 12.2% in the month of May in terms of volume of transactions. Supply is down to 6.7 months worth of inventory. It's the number they estimate if you were to sell out all inventory of available existing homes, it would take 6.7 months to do so. That number had been 7.6. But I do think that it's utterly worthless right now, the national supply data, because as is the case with pricing, you have such a disparity from one market to another. And that's always been true

that real estate is local, not national. But I mean, it's on steroids right now about how undersupplied some markets are and oversupplied some are. And I always use this analogy about trying to calculate a body temperature with one arm in the freezer and one armlied some are. And I always use this analogy about trying to calculate a body temperature with one arm in the freezer and one arm in the oven. It's kind of unhelpful. Even on the pricing side, you do see median home prices. Well, let's take not existing homes, but new homes. Prices are down 16.2% year over year. And I've always said I thought there would be somewhere between 10% and 20%. But see, that's new homes, not existing. And I think that when you look at markets like Seattle and San Francisco,

their data for existing homes, prices are down well into double digits and still declining further. And I think that's the way it's going to end up playing out. and still declining further. And I think that's the way it's going to end up playing out. You will not have a national home data point that everyone is somewhere around that mean. I think that you're going to end up with much different results, one market to the next. And it doesn't mean only bad markets, because Seattle and San Francisco have a lot of challenges right now, will see big drops and good markets will not. Some good markets will see bigger drops too, we'll see big drops and good markets will not. Some good markets will see bigger drops too,

because of overvaluation and perhaps eventually inventory that gets higher and that supply allows for a pricing, a repricing. So lots of two on there around the housing side. There were two questions in the Ask David today, and I put both in because I'm not going to be doing DC Today tomorrow because I have meetings here in New York all put both in because I'm not going to be doing DC Today tomorrow because I have meetings here in New York all afternoon and Thursday because I'll be on a plane flying back to California. And so I wanted to get two in before I check out for the week on DC Today because I really liked both these questions. And one of them was in response to my Japanification thesis and the Dividend Cafe I wrote on Friday about low, slow, no growth being my expectation in US markets, is that a little inconsistent with me always writing against

doomsdayism? In other words, is there this sort of doomsday outlook that I have been critical of, and I put data point after data point showing how silly it is for one to be this pathological pessimist, and yet Japanification to be this pathological pessimist. And yet Japanification can be somewhat doomsdayist. I think it's a really fair question, but I think it's important to understand the categories we're talking about. I do not view Japanification as apocalyptic. I think low, slow, no growth is totally unacceptable. But one of its problems is that it doesn't have a bang. It has a whimper. And that enables it to sort of drag on much longer.

I think that us performing as an economy and as a society less than we are capable of, less than our capacity, is totally unacceptable. And yet that doesn't mean that you end up with this declining standard of living that all of a sudden feels apocalyptic or doomsday-ish. I think a lot of those metrics I look at in the against doomsdayism about mortality, about health and whatnot will continue to improve. But improving at a 1% growth rate when your society is capable of improving at a 3% or 4% growth rate is a big deal. And so I would suggest that those are the category distinctions. And yet there's nothing inconsistent with saying that we ought to be performing as an economy much better and that we are inviting upon ourselves a Japanification process, which I also should point out, U.S. Japanification may not even be as severe as Japan Japanification. And so even Japan Japanification has not been doomsday. They just simply have kind of floated along and survived and not thrived.

I want us to thrive. That's my critique. Okay. Then the other question was a really fair one. I've dealt with it before. People wondering, why do I say the ultra low interest rates in that period from 2009 to 2017 or in the period 2020 through 2022, artificially low rates below a natural expectation of cost of capital, that it puts downward pressure on productivity. It would seem low interest rates would draw more capital into productivity.

And my point is that they're kind of missing half of the equation. It is not that low interest rates mean people will not be funding productivity enhancing opportunities. But see, a productivity enhancing opportunity is going to attract capital, whether the interest rate is below natural or natural, right? There is no need to use the cost of capital to manipulate attraction to productivity enhancing investments. But low interest rates that are artificially low do attract capital into non-productivity enhancing investments and otherwise bad ones. They distort investment and economic calculation so badly that they divert resources into

investments that otherwise would not be getting them. Then they produce an incentive because risk takers can look at it and say, I can take risk, productivity enhancing investments. We love those terms, productivity enhancing, opportunity investment. They still have risk. And if you're a risk taker, if you're an entrepreneur who brings value and capital and vision to something, and if you say, Okay, well, I can with artificially low rates, leverage up an investment that already exists by you to by borrowing money, artificially low rates, and investing higher in the things that are already doing what

they're doing. Or I can take risk and put capital into something new, you're incentivized to lever up pre-existing investments versus risk taking of new investments. That's another distortion that puts downward pressure on productivity. I hope that makes sense. Read the dctoday.com for a more written and articulate summary of what I just said. So I'm going to leave it there. I'll be on Varney tomorrow morning at Fox Business. If you happen to be watching from 9am to 10am Eastern time on set, and you clients will receive their weekly portfolio holdings report in the morning. And then my partner, Brian Seitel will be with you both

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