The Dividend Cafe - The DC Today - Tuesday, November 7, 2023

Episode Date: November 7, 2023

Today's Post - https://bahnsen.co/46Z4Xj5 This is the longest winning streak (number of up days) for the S&P 500 in two years. One of the least encouraging things? The delta between cap-weighted and equal-weighted results … Top-heavy doesn’t end well. But nevertheless, markets are enjoying a very strong rally over the last week and a half. Oil was hit hard today (down over -4%). Some traders think things will settle in the Middle East. It appears S&P earnings growth year-over-year for this earnings season is going to top +5.7%, with revenue growth of +1.2%. Margin expansion has been something to behold and has a lot to do with market resilience in this challenging rate period. Office behemoth WeWork, officially declared bankruptcy. Shiny objects are painful to watch implode. The ramifications to commercial office space will be notable, but it does appear creditor restructuring has been reasonably pre-negotiated and is not likely to result in huge vacancies hitting the market. For all the weakness in manufacturing and insistence that construction is hurting and (especially) China’s weakness, why is iron ore doing so well and copper basically hanging in 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. Well, hello and welcome to the Tuesday edition of the DC Today. The S&P and NASDAQ have been up seven days in a row, which is the longest winning streak in about two years. And so from that big sell-off we had had as bond yields were going higher near the end of October, and then what has taken place in the last couple of days of October here into the first week of

November, you had quite a significant rally. Now, you know, let's caveat this a little. The delta between the cap weighted S&P 500 and the equal weighted or even weighted S&P 500 is pretty big. You know, what does that mean? It is a way of saying that the returns are very top heavy, right? That you could take all 500 companies with an equal weighting in the S&P and get a certain return. And when it's a meaningfully higher number in the way that the S&P is constructed with the proportionality of the index

being the market capitalization of the company, it means those large multi-trillion dollar companies, trillion dollar companies, 700 billion, 800 billion, 500 billion. Those very large companies carry a much bigger weight. The smaller companies may carry a much smaller weight. And what that means when the delta between that latter methodology versus the even weighted, when the delta is large, it means you have a very top heavy market. And that is generally much less sustainable. Nevertheless, good returns for the market.

The Dow itself up 1,200, 1,300 points in the last seven market days. Oil was down over 4% today. That was the fly in the ointment for oil traders, maybe traders not thinking that the Middle East stuff will get worse. Oil back to the, where are we close? Seventy seven and a half. So for the first time in a little while, probably the first time. Yeah, it's the first time since the initial Hamas invasion of Israel, October the 7th. This will be the first time oil has dipped below $80.

So we'll see where that goes. S&P earnings, there is still about 18% of companies to report. We had a couple report after hours today. We have a couple reporting next week. And then we're kind of done out of the 30 to 35 companies that we own. We're down to just after today, only two to go. There were two that did report today, but you know, the final 10, 11%, whatever. But yeah, I mean, it looks like you're on track for earnings to have grown year over year by 5.7% with revenue that only grew 1.2%. So that is a pretty meaningful margin expansion,

a better than expected profit result. And probably pretty good reason to believe that margins can hold when earnings have been able to expand despite higher cost of capital like that. despite higher cost of capital like that. Nevertheless, some bad news out there. WeWork, there's a link to this in the DC Today, today has declared bankruptcy. It does appear to have been a largely pre-negotiated situation with creditors and there may not end up being a big explosion of vacancies. There's going to be some, but it looks like they may have been able to work out certain arrangements with some of the creditors that may change terms substantially, wipe away a lot of debt, give the ownership of the company, obviously, to creditors versus equity holders who will, I'm sure, be wiped out in the bankruptcy and yet not necessarily

move out a lot of the leases. We'll see what the ramifications of that just disaster of a shiny object company could end up being across other commercial real estate assets. Just an anecdotal thought as I was looking at some commodity charts before the world awoke this morning. Manufacturing's been weak 12 months in a row. We know about the alleged issues in construction, whether it's commercial or residential. And certainly we know about China weakness. Yet iron ore is doing really quite well. Copper, I wouldn't say it's doing well,

but it's hung in there. Certainly not the kind of drop you'd expect in copper prices based on the holy trifecta of China construction and manufacturing. Just saying. All right, what else do we want to go through here? So Dow was up 57 points today. The S&P was up 28 basis points. The S&P was up 28 basis points and NASDAQ was up 90 basis points. Consumer discretionary was the leading sector up over 1%. Energy was the worst, down over 2%, but that's with oil down over 4. Bond yields were down 8 basis points, back to 4.58%. points back to 4.58%. So a little bit of a rally again in the long bond. And I want to throw out there that the trade deficit came in about $2 billion higher than expected. 61.5 billion. It

was, I think, 59.7 was the projection that we were seeing. Keep in mind, trade deficit means that we import more than we export. We have to pay for the difference with dollars, which means more dollars going to the country that is exporting to us. That they then have to take those dollars and usually buy treasury bonds with them. There's other dollar denominated assets they could buy. There's other dollar-denominated assets they could buy. People remember back in the day we were buying Pebble Beach and Rockefeller Center, and more recently the Water for Storia with those dollars in the hands of foreign investors.

Usually it's treasury bonds. Do I think bond yields fell on the news of a wider-than-expected trade deficit and the fact that total trade was up 14.2 billion from last month's level. I do. You can't really ever prove this stuff. So I don't like to lean into it when various causation allegations are both non-falsifiable and non-verifiable, but I think it's worth pointing out. Someone asked me what I thought about this whole idea of tax loss selling and that there's a big push that people should be harvesting tax losses all the time. And I just want to reiterate our philosophy. It's in the Ask David and DC Today, but I'm not done talking here on DC Today podcast and video, so I'll keep going. I do believe two things can be true at once and in fact are true at once, that the tax tail wagging the investment dog is a very bad idea.

And yet, at the same time, some form of tax gain management and tax loss management in the month of December, the end of the year, when you kind of get up against that final month, I think that could be a very sensible strategy when it's executed prudently. So yes, taking unrealized losses against realized gains and buying back the positions 30 days later because of what is called the wash sale rule and having a reasonable and efficient taxpayer. They can never be perfect, but trying to make them as reasonably correlated as possible. So one is not naked in that 30-day period, I think it's a prudent thing to do. But that is a far cry from those obsessed about tax harvesting throughout the whole year and at every opportunity. You're essentially turning the portfolio into an active harvesting as opposed to buying the companies you want to own. If there's a company that makes it into a portfolio we manage, we want to own it. And to be out of it for any reason

is a, at best case, necessary evil. And other than that, shouldn't happen, meaning for some purpose around tax management. So yes, the long answer is we believe in it, but we do it within very tight confines and very prudently. That's our philosophy of tax management at the Bonson Group. All right, I'm going to leave it there. Brian Saitel will be with you tomorrow as I'll be at meetings at Blackstone in the afternoon. And he'll be bringing it to you on Thursday as well, because I'll be at meetings at Golden Tree in the late afternoon.

A couple of specific meeting things I have going on this week that happen to run in the time we normally be recording. I'll be with you in the Dividend Cafe Friday. And of course, please send your questions at thebonsongroup.com anytime. Thanks for listening. Thanks for reading. Thanks for watching 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

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