The Dividend Cafe - The DC Today - Tuesday, November 15, 2022

Episode Date: November 15, 2022

MARKET ACTION Dow: Up +56 points (+0.17%) S&P: +0.87% Nasdaq: 1.45% 10-Year Treasury Yield: 3.76% (- 10 basis points) Top-performing sector: Communication Services (+1.78%) Bottom-performing sector: Materials (-0.11%) WTI Crude Oil: $86.86/barrel (+1.15%) Key Economic Point of the Day: The Producer Price Index only rose +0.2% in October, half of the +0.4% monthly increase that had been anticipated. And much of that lower figure came from a decline of -0.1% in services, the first decline in wholesale services costs in two years ASK DAVID** “Is purchasing gold and/or silver a good investment?” ~ Cindy W. My view has been for quite some time that it is a non-productive investment. What I mean by then is that it does not generate any cash flow and does not have any internal earnings stream, so the value becomes a matter of speculation or supply/demand around use. But gold is not really owned much for industrial use, and even its cosmetic use is somewhat limited, so those who own gold or silver for investment purposes must defend the notion of gold being a sort of inflation hedge or currency proxy. And maybe it will be that someday, but that day is not the last 42 years, where gold is down by -50% relative to inflation – a stunning and shocking fact to all who hear it. I will also point out that the most common thing I have been told over the years is that gold gives us a hedge or substitute against crazy unstable monetary policy. Well, trillions of printed QE dollars since 2012 later, gold is lower than it was a decade ago. This should have been the golden age for gold; instead, it has many wondering what exactly the thesis is. At the end of the day, gold can go up a lot, and it can go down a lot, but it rarely does what people seem to want it to do when they want it to do it. Links mentioned in this episode: 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 DC Today, Tuesday edition. It is November the 15th, and we had a pretty exciting day in the market, although you wouldn't necessarily know from the closing spot. Speaking of the Dow, after the PPI number came out this morning, which I'm going to talk about in a moment, the Dow futures got up 400 points. The Dow on the day traded in a range from top to bottom of 700 points, but it closed up 56. Now that's 273 points off of the low on the day. So it had a big rally off of wherever its bottom point was near the kind of middle of the day, a little bit into the second half, but it was also 394 points off of the high of the day. So a 700-point range in the Dow just to sort of settle with 0.17% upside on the day. But there were a few key Dow holdings that were holding it down because you saw in the S&P almost a 1% gain, 0.87%. And the NASDAQ was up almost 1.5%. The big thing rallying some

of the rate sensitive stocks, REITs were the second best performing sector today. These kind of longer duration type growth stocks have continued their bid since last Thursday. As the NASDAQ was up 1.45, the communication services sector was the best performing at 178. And the big thing is the bond market. The 10-year dropped another 10 basis points today as the bond rally continues. The 10-year is now all the way down to 3.76% yield. The worst performing sector of the day was materials, and it was only down 11 basis points. So really barely a negative territory. Crude oil closed at $87, just a few cents below $87, up over 1 percent on the day. So good day for a bunch of the market, a kind of average day with a lot of volatility for a good portion of the market.

And we'll anecdotally point out that one of the things, according to news reports, that was a big factor in the market early this morning was very positive results, this morning was very positive results, record-breaking results out of a huge Dow constituent, Walmart, which was up over 7% on the morning. And so you definitely have a lot of different factors affecting this. But I do think that the underlying story since the news sort of altered last Thursday around perhaps the Fed beginning to kind of slow down has been in those more rate sensitive spaces. So when you look at some of the impact of rate sensitive securities on the year. In 2008, they were literally up on the year. If you're talking about the debentures, meaning the Fannie and Freddie bonds backed by the credit of Fannie and Freddie, interest rates dropped so much that even though there was so much disarray in the

underlying assets of housing, so much disarray in the very solvency of Fannie Freddie, which was solved for by the federal government takeover. But you had a positive return there in 08. You got to go back to 94 to see something like this. And it's entirely this year in interest rate movements that have basically pushed the prices of the bonds down. I think that their fundamentals now are beginning to kind of matter more. And this might be less so with the debentures and more so with mortgage-backed securities that are not backed by the corporate guarantee of Fannie Freddie, which is really the Treasury Department, corporate guarantee of Fannie Freddie, which is really the Treasury Department,

but individual bonds that are secured by the underlying collateral of the real estate itself. If the underlying real estate is perceived to be worth less, then in theory, the credit itself is worth less, even if it's cash flowing. And I think that that housing slowdown, these are the types of things that that trickle down effect ends up catching up with. There are 1.6 million realtors in the country right now, according to the National Association of Realtors. I know a lot of them are part-time. A lot of those, you have to think it's more of a hobby than a profession. But in 2006, at the very peak of the biggest housing bubble in history, there were 1.35 million. And I don't know that there's any reason to think that proportionately the percentage of part-timers or hobbyists

was that different now versus then. So we've basically in total across all classifications of the realtor occupation added $250,000. And after the great financial crisis, there was a drop of 26% from that $1.35 million. that $1.35 million. So when one is talking about a contagion effect from housing, I'm of the opinion that housing prices moderating is a net positive for the economy because unless someone's looking to sell their house, I don't really care what it trades at. And yet I do care about household formation and I do care about affordability. Now, then the counter to that is, yeah, but David, you're forgetting trickle-down effect. Well, we've seen some of that, as I mentioned, in bonds this year. But then there's things like the amount of realtors or mortgage brokers or people that are employed in the industry. I would expect there to be a change in some of that too, but a lot of that

would depend on how deep and how long a correction housing ends up being. But I don't see how there could be any debate that there is some slowdown in housing prices in motion as we speak. Okay, so that economic news I talked about earlier was the producer price index. We know CPI came out last week and had grown on the month much less than was expected. The year-over-year consumer price inflation had come down largely as a result of goods inflation decreasing. The producer price index only rose 0.2% in October. It had been expected to rise 0.4%. It was up on the year, producer prices, 8% year over year.

But last month, it was up 8.4%. So there does seem to be confirmation of a disinflation narrative kicking in. And one of the things that stuck out to me is that even though PPI was up 0.2%, yeah, and that is less than expected, but the services component was actually down 0.1%. And so this is the first decline month over month in wholesale services cost in two years, a little over two years. in two years, a little over two years. So I do believe that there are anecdotal preliminary evidences that are hard to discount at the beginning of disinflation. On the news front, I talked yesterday about the big implosion of FTX and where the crypto space stands now. And there's some more things I want to write about it now in terms of key takeaways. But I did get a bulletin today that FINRA, one of the big financial regulators, is announcing a huge plan to crack down on crypto regulation.

I expect to see more announcements like that ultimately landing even in the SEC and Department of Treasury's doorstep. The other news on the political front is that Rick Scott has decided to challenge Mitch McConnell for a Senate GOP. My sources tell me Mitch has the votes, but it's more symbolic to try to show a little antagonism and intra-squad debate. It would appear, as mentioned yesterday, the Senate is set to go either 50-50 with Democrats still technically having a majority there because of the vice president, or 51-49. And then in the House, we're still waiting to kind of find out how much the marginal end up being. Some races got better in California for Republicans last night.

will end up being. Some races got better in California for Republicans last night. But, you know, picking the exact number is not totally known. But basically, everyone has now conceded that the Republicans will be taking a majority in the House. We're just not clear on what that margin might end up being. Kevin McCarthy today, the vote did go through where he will be the GOP nominee to be next Speaker of the House. There was some talk, given the Republicans' poor showing in these races, of discounting him. But with about 30 naysayers, give or take, he still ended up getting that vote. And so they'll wait till they officially call the House to move forward. On the energy front, I just wanted to point out that with the Republicans not taking control of the Senate, I think Joe Manchin may very well get a second shot

at that permitting reform bill, including a kind of easy-go approval for the pipeline project in West Virginia he wanted. That's what was promised to him in exchange for his vote for what they ended up labeling as the Inflation Reduction Act. And then he ended up getting it blocked as there were enough Democrats that were not willing to give in to what Chuck Schumer had promised them. So it died. Now, my sources tell me in the lame duck session, he's looking to bring it back up. He does have a little more leverage to get some form of energy permitting reform done. I don't think it'll be exactly what the bill was he wanted before, what was promised.

But again, that's worth watching. And certainly ourselves as big energy investors have a key interest in that. The question, by the way, in the Ask David section today, you're welcome to read at the dctoday.com. But it had to do with gold and a couple of different people with different wording asking me some form of, do you think gold is a good investment? And all I did in my answer is point out that I don't know how to price gold in order to say if I do or do not. I don't think very many others do either, including those that are most passionate about holding gold. And now there is the fundamentally obvious fact that that's because gold isn't priceable in the sense that you don't have a valuation metric to form value from when there's no cash flows or internal earnings growth

or what we call an internal rate of return. And I've made that comment many times over the years, particularly since we kind of abandoned gold as a small part of our asset allocation. But I certainly understand that some people could say, well, it's at this price and I think it's going to a higher price. I want to buy it and then I'll sell it at that higher price. But I think that's more speculative than investment driven. Others will say, yeah, yeah, but isn't it there to be kind of a hedge? What if things get real bad? We have a hedge.

And even there, I sort of don't know what I'm hedging. If it's the end of the world, Armageddon, nuclear war, just rank statism, I don't know how holding GLD or bars of gold, I don't know who my counterparty is going to be. I don't know where I'm going to spend it. I don't know who's not going to shoot me. I just have never really bought that, what I think is more of a sociological argument. But if we mean hedge out inflation so that the value of gold is going higher and I'm getting an inflation against the dollar declining or purchasing power declining, then I just can only point out, I don't know if it'll be that or not in the future. I only know it hasn't been that in the past, that over the last 40 years, gold sits right now. About 50% of its value would have to be added to the current value to get to

the inflation-adjusted value of gold since 1980. So I think that there's not been a great precedent for gold to be easy, low volatility, keep up with inflation investment. It simply hasn't done that. People say, yeah, but you got to own some gold to hedge out the insanity of the central bank. And I always say I can believe that central banks are acting recklessly without necessarily believing that gold is going to be a great hedge against it. And I don't know how you could have had a more reckless period of central banking in the last 10 years, certainly very adventurous and interventionist, and yet gold is down from where it was 10 years ago. A negative nominal return, let alone a significantly negative real rate of return

in a period that you would think was sort of the golden era for gold relative to what was happening in the world with the euro, with the yen, with the dollar and inflation and Fed QE and all those kind of things. So, yeah, it's true. We're not big gold buyers or owners. And yet I certainly understand something could happen that just makes it pop up in value at a given time. I just don't know what that thing would be

and how to time it, how to understand it, how to risk manage it. So it's not for us. We prefer cashflow generative investments that we can better value. That's my answer. I hope it was helpful. Another DC Today tomorrow. Thanks so much for listening.

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