The Dividend Cafe - The DC Today - Tuesday, September 5, 2023

Episode Date: September 5, 2023

Today's Post - https://bahnsen.co/3r2cE8d This is the kind of DC Today I love love love writing – where I really get to absorb a lot of material and bring pen to paper (or finger to keys) in all categories. I always loved this format the most, and being able to do this long-form version once a week is a true joy for me. Doing it every single day as I did for quite some time (though today’s is fuller than even the old format normally was) just became way too much, and I do hope the new program (long-form once a week, shorter form with daily podcast/video three times a week, Dividend Cafe on Friday) is working for everyone. I certainly solicit feedback about that. But in the meantime, enjoy this first post-Labor Day “fall and football are here” version of the DC Today. Note the deep dive into Public Policy and Housing (with all categories covered). 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 of DC Today, brought to you on Tuesday, doing our Monday format, but here on Tuesday the 5th because of the Labor Day holiday yesterday. I hope you all had a nice holiday weekend. And I'm going to just sort of go through for those of you listening on the podcast or watching the video, all the stuff I talk about in the dc2day.com today. I continue to love this version being able to go through especially over a holiday weekend working on weekends as I do there is just more time to digest new economic reports new news that comes out there was a fair amount of info that came out on Friday. And so to have this time to be able to process it and translate it into our daily missive, I think is a lot of fun.

And so I used to do it every single day throughout the COVID period and for a while afterwards. And we kind of pivoted to a new format a year ago. I still love getting feedback from people as to what they're liking or not liking on the way that we're doing it. But I think what we're doing right now is most realistic. This long form that we're doing today, it really is very difficult with the schedule

that I keep to do it every single day. And yet I'm hoping that what we are doing on the normal Tuesday through Thursday days is still scratching some itches. So share that feedback. But in the meantime, we'll dive into what we have today. The boring part is the market action today. The Dow was down 196 points. S&P was down 42 basis points and NASDAQ was down eight basis points. Dow futures had opened down 40 or so last night, stayed down throughout the evening and then opened it down close to 50 points. And then it just sort of got a bit worse.

It kind of, you know, pittered and pattered throughout most of the morning and then the afternoon dropped a bit further and closed at the low point of the day, but still down less than 200 points. I do continue to believe that the driver right now is bond yields, that as bonds have sold off behind rising yields, equities have come down with it. And we'll see how that continues to materialize. But bonds were hit today about nine basis points to the upside in yields across the two to 10 year curve. And I think Friday was pretty much anywhere from six to seven basis points. So yields higher between Friday and today, let's call it 15 basis points, therefore prices lower. And most of this in my mind is related to supply, that there is excess of issuance behind the cyclicality of current budget deficits, which are running quite large. And tax receipts will either help catch up to some of this in the weeks ahead or they won't. But they're lower than normal.

And now we're coming into a tax payment day of September 15th. But I also want to remind people that a lot of federal filers that are based in the state of California, where there's an awful lot of high earners, have not yet filed. And if you have money owed, you probably have not yet paid because of the fact that they were granted, most California filers were granted an extension up until October 15th due to weather conditions in the first quarter of this year. So I don't know how much that's impacting federal receipts, but I do know federal receipts are running lower than expected. Budget deficits are running higher than expected. Issuance of treasuries, new supply is high and bond yields have moved higher.

New supply is high and bond yields have moved higher. The 10-year close today at 4.26%. And as I mentioned, that was up nine base points on the day. Best performing sector for the day was energy, which has done quite well lately. Up half a percentage point. Materials and industrials both were down, not quite 2%, but down 1.7%, 1.8%. And then the U.S. dollar sitting at a six-month high. When you look at higher interest rates, better economic growth than had been expected relative to recession expectations, the US dollar is making the most of it. In terms of public policy,

In terms of public policy, infrastructure spending has really not shown up in a lot of the economic data. You recall the $1.3 trillion infrastructure bill that was passed a year ago. There has been an increase in public construction spending, but that's added maybe 0.1% to GDP. I think a lot of the companies, when you talk about from a stock market level, that were expected to benefit from these expenditures, it already had seen their stock prices rally. Semiconductors, certain renewable energy companies, infrastructure. The real economic impact is more likely to be seen in the next few years. Many have asked me if the fact that student loan payments are now resuming is going to take away from consumer spending and bring down some element of economic growth. And I just want to point out that the money had already been spent, that the money was borrowed for.

And then we're talking about the payback of money. And so the argument is that people would be going to the mall with the money, but now they're sending it to the government to pay back their debt. with the assumption because one way or the other, there's going to be an extraction from GDP, whether that money isn't paid back or whether it is. But the bigger point I'd make is that student loan payments are already back higher than they were pre-COVID levels. And that's before this resumption of the payments continued. So I think there were a lot of people that had already kind of seen that they had to start making their payments again and had already gone back. I think that whole issue has been overwrought, overestimated for quite some time now. The other thing in public policy, it's a really big story.

I have a link to the update that took place Friday regarding Amgen and their acquisition of Horizon Therapeutics, a big thyroid disease product that Horizon makes, as well as a gout treatment. Both of those products being bought and added to the Amgen portfolio. But previously, the deal had been blocked by the Federal Trade Commission, and now they have capitulated and agreed to the deal and gotten a few concessions out of it, most of which were things that Amgen was offering to begin with. I think that that's an important point about how the Biden administration's FTC had come out with a lot of bark and a lot of ambitions about blocking certain M&A and whatnot.

And yet that bite has not been anywhere near what the bark has. And a lot of failed cases, including some going to court. So it's a big deal on the public policy side, not in this case of something impacting markets, but something not impacting markets the way we would have expected because of their, well, frankly, their low hit rate in legal challenges. So on Friday, the unemployment rate came out to switch to some economic news, 3.8% that I was up from 3.5, but there were 187,000 new jobs created, a little more than the 170 that were expected. Now, the 180 expected, excuse me, 185 versus 170 expected is fine, but there were downward revisions again. I think it's a six month in a row of 110,000 jobs from prior months.

But the labor force picked up by 736,000, which is how you add new jobs and yet get a higher unemployment rate when the denominator of those who are looking for work goes up. But see, I see that as a very, very positive thing. That was the best news of the monthly report. Other economic news, though, the ISM manufacturing had picked up in August, barely, but it remains in contraction territory. Only five out of 18 sectors were in expansion mode last month. Factory activity has contracted for the 10th month in a row. Moving to housing, the national rent report from apartment list came out Friday. Rents are down nationally 1.2% year over year. That's on new leases. It does not include renewals of leases, which generally have an automatic price escalation baked in.

Vacancies are up for the 22nd month in a row. Now nationally are running at 6.4%. Moving to the Fed, $862 billion has left the banking sector since the Fed began tightening. That is money that was in deposits has left the banking. And then $896 billion has gone into money market funds. So I don't know how anyone could deny this as not coincidental, who could look at this as coincidental. It is clearly quite correlated. And the initial thesis in the aftermath of Silicon Valley was that fears about bank

solvencies, where insolvencies would cause people to pull money out, or looking for FDIC coverage, things like that. But it really looks like it's just been a yield play. By the way, the Chinese Fed, the People's Bank of China, has lowered their FX reserve requirement from 6% to 4% to allow banks to hold more Chinese yuan. The dollar had dropped relative to yuan last week each day. And so China is still trying to navigate through that mess. We're now sitting at 93% implied odds in the futures market that there will be no change in rates at the Fed meeting this September. We're up to 63% odds of no change in November. For what it's worth,

the Federal Reserve of Australia, called the Reserve Bank of Australia, left their interest rates unchanged. So yeah, oil closing all the way up near $87. Midstream Energy had rallied 2% last week with commodity prices firming up, earnings season having gone very well, and a lot more M&A surfacing in a lot of midstream. I love this line from Heinz Howard, who's an analyst I read every week that covers the midstream energy sector. He said, the midstream sector is leaner across the board, leaner. At the individual company level, there's less debt and less capex.

At the sector level, there's fewer stocks. And at the investor level, there's fewer investors who care. I pretty much sums the whole thing up there. 96% of stocks in the energy sector, by the way, are above their 50 day and 200 day moving average. So I'm going to go ahead and leave it there. We have two questions in the Ask David, and we have a brief against doomsdayism, both of which are worth checking out in the written the dctoday.com. Tomorrow morning, clients will receive their weekly portfolio report. And we got a lot of fun things in store for you throughout the week. We're going to keep pressing on doing what we do. But in the meantime, reach out to us questions at

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