The Dividend Cafe - The DC Today - Tuesday, September 19, 2023

Episode Date: September 19, 2023

Today's Post - https://bahnsen.co/3LvZG9P Oil hit a ten-month high this morning. Bonds continue selling off as yields continue rallying. Japanese ownership of Treasuries increased by $7 billion on the month, while Chinese holdings decreased by $13 billion. 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 Tuesday edition of DC Today. here in New York City, even though the traffic and overall commotion of a presidential visit combined with a U.N. General Assembly is still quite massive. Yesterday, taking all that and combining it with the rainstorm, it was a surreal experience here on the east side of Manhattan. But things have settled a little bit. And markets today as well, not anything super exciting. The S&P was down 20 basis points. NASDAQ was down about a quarter of a percent. The Dow at one point was down 300 points, but even it closed down only 100 points. And we go into the Fed day tomorrow. Oil hit a 10 month high this morning. Let's see, where did it close?

It closed just barely up, but still right around $91 a barrel. Bonds continue selling off. Yields moved higher. Again, today, the 10 years, as a matter of fact, was up almost five basis points up to 4.37%. So you continue to see upward movement in yields, pushing bond prices a bit lower. Interestingly, I noticed that last month the Japanese ownership of U.S. Treasury bonds went up by $7 billion. Chinese ownership went down by $13 billion. So you don't have any big movement in category of ownership that explains some of the supply issues. If anything, it's just kind of shifting around within the categories,

more from one country, less from another, a little less from the Fed and more from the private sector, A little less from the Fed and more from the private sector, things like that. Off the subject of the extremely interesting U.S. bond market is this UAW strike. The United Auto Workers, right now, it appears that they're going to increase the stations at which they are picketing and striking by this weekend. by this weekend. And again, their list of demands they've published include a 40% pay increase over a four-year contract, a 32-hour work week. So what is that, two days, right? No, I'm sorry, four days.

Overtime pay for anything over 32 hours, expanded retirement benefits, and then the same pay for new workers that are doing the same job as more experienced workers. I don't have the foggiest idea which points within their list of demands are pliable or flexible which ones the auto makers will give in on, which ones the union spokespeople will give in on. I have no idea. I don't know how long this thing will go and it's just a very strange set of alliances and whatnot and it'll be interesting to see how this kind of plays out. The Fed did meet all day today and by Fed I refer to the Federal Open Market Committee,

the FOMC, and then they will conclude their meetings tomorrow and come out and announce in a written release that they're not raising rates and that they'll stay on pause for a bit, and then Jerome Powell will have his press conference. And generally speaking, we're about a year and a half into this cycle now where you can get some pretty wild volatility around that, depending on what they kind of indicate. We will see what happens tomorrow. And volatility should not be looked at

in the moment around equities, but bond yields alone, which is a far more relevant factor. Speaker McCarthy may have gained an upper hand with some of the more obstructionist members of his own caucus in this negotiation. I don't know that that's the case. There's been conflicting reports of what's going on, but there are some members of the Freedom Caucus that are supportive of it. There's still some saying that they're holding out. So we don't know where that stands.

And like I said, it doesn't really matter in the end. It's not going to end up happening. But it's just a question of whether or not they push the Republicans by lack of a unified deal from their House majority push into a shutdown or if they have an agreement, but then it gets rejected by the Senate and the White House and then that ends up being the catalyst. And so there's some political relevance to all that. Housing starts, by the way, okay, so what else within the market? Healthcare was the leading performing sector. It was up just 10 basis points. Energy was the lowest. It was down just 80 basis points. And I mentioned oil at 91 a barrel. Housing starts declined over 11% in August. When I first saw the headline,

I thought that was a catastrophic, apocalyptic number. And it isn't good, but it turns out that a pretty high proportion of the housing start declines were in multifamily, about 25%. And that skewed the number. Single family was still down nevertheless, and they're down 15% versus a year ago. So we're 150,000 new homes on an annualized basis, less than what had been expected. And what had been expected is way inadequate. So there's significant issue there in the housing supply story, nothing new. A thoughtful reader asked the question, what we think about convertible bonds? Are they a wonderful way to get equity-like returns with just bond-like safety, principal protection,

all that kind of stuff? And I had to explain that, first of all, let's just start with the conclusion, anytime, anything, ever, no matter what it is, is presented as a certain level of reward with not an accompanying correlated risk. You don't have to listen to it beyond that. Somebody's lying to you. It's either because they're a grifter, a charlatan, a thief, or they're an idiot, or they mean well, but they don't understand the way the world works. There's all kinds of possibilities.

But just that notion that such a la-la land exists should be rejected out of hand. But you know, to the extent people want to like say, OK, well, I sure like the idea of it. Can you at least tell me why? Besides the philosophical reality that such a Pollyannish notions don't exist. And if they did, they'd get priced away in about five seconds. Convertible bonds actually do not do that. They have a conversion ratio that allows a bond that has already a lower coupon.

That's why companies issue them, because they can save money in servicing the debt because the investor is receiving a conversion privilege. So they're willing to take a little less coupon from the bond in exchange for this conversion to equity idea. But if the underlying stock before conversion gets hammered, the value of that bond gets way hammered because obviously the conversions worth less if it rallies a lot the company has the ability to call the bond if the bond itself gets tanked it probably means there's something wrong with the stock too and then your

value of your bond is deteriorated and your actual and that principle value of investment so yeah there's good things that can happen there's bad things can happen like any bond and like any stock. But mixing the two together doesn't create a magical solution. It's important to not be misled. I hope that's helpful. Clients will receive weekly portfolio

holding support tomorrow. Please check that out early. There's some big things we want you to read in that. And the Fed comes out tomorrow, middle of the day. You know the story there. Thanks for listening. Thanks for watching. Thank you for reading the DC Today. We'll see you tomorrow on Fed Day. 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 advisor

with the SEC. Securities are offered through Hightower Securities LLC. Advisory services are offered through Hightower Advisors LLC. This is not an offer to buy or sell securities. No investment process is free of risk. There is no guarantee that the investment process or investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors. All data and information referenced herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary and does not constitute investment advice.

The Bonser Group and Hightower shall not in any way be liable for claims and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice. This document was created for informational purposes only. The opinions expressed are solely those of the Bonson Group and do not represent those of Hightower Advisors LLC or any of its affiliates. Thank you.