The Dividend Cafe - The DC Today - Wednesday, December 7, 2022

Episode Date: December 7, 2022

A DEAD FLAT day in the Dow – up/down +0.00% (you do not see that often), and a whole lot I discuss in the DC Today. MARKET ACTION Dow: Up 1 point (LOL) (+0.001%) S&P: -0.19% Nasdaq: -0.51% 10-Year Treasury Yield: 3.42% (-9.3 basis points) Top-performing sector: Health Care (+0.85%) Bottom-performing sector: Communication Services (-0.93%) WTI Crude Oil: $72.43/barrel (-2.48%) Key Economic Point of the Day: Used vehicle prices hit their lowest level in over a year as outright deflation continues to permeate that marketplace (-15.6% decline since January) 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 Wednesday DC Today. So yes, we are now through that halfway point of the week and then some. through that halfway point of the week and then some. And we had a very rare occasion in the Dow today. I have seen it before, actually. And there's a part of me that thinks we saw it earlier this year, although I think that was the S&P, not the Dow. But I haven't seen it but maybe three times in 25 years of doing this, the Dow was up 0.00%. Now, because it was up one point from a roughly 33,000 to 34,000 point denominator,

it was technically up 0.0001%, but flat as can be in the Dow. The S&P was down 19 basis points and the NASDAQ was down, let's see, the exact amount was 51. Yeah, 51 basis points. So you had a little bit downside with the tech side. Communication services was the worst performing sector. It was down 93 basis points. So not a very exciting day in the market overall. But nevertheless, that flat thing on the Dow, I thought would be interesting to you. Okay, in terms of the stuff that was kind of up today, we've had a real theme here, you may have noticed this week, and I wanted to reiterate what that's about, is that the best performing sector was in the healthcare side. It was 85 basis points. Consumer staples were up 38 basis points. Real estate was up a quarter of a percent. Those are the only three

positive performing sectors. So whether it's been the only positive space or the least negative space, you're now working on four or five days of the defensive type sectors doing much better. And so there's a real theme going on right now. We'll see how long it lasts. I think it has most everything to do with advance to where the Fed is going to be next week. There's a lot of things I actually want to talk about. And so I hope I can make it more interesting. First of all, it just has to be repeated because if the facts change, I'll change having to say the same thing. But the facts keep repeating themselves that the 10-year bond yield was down nine and a half base points today. The 10-year is down to 3.42%. Okay. So that is from the high level of the yield,

which was now a little over five weeks ago, that is just a monstrous rally in bonds. And it continues. Now the one year, now let's use the six month just because it's maximum drama. The six month T-bill is 4.7%. The 10 year is 3.4%. So that is a heavy degree of inversion, obviously. Heavy degree of inversion, heavy signal or belief being priced in the markets of a policy mistake from the Fed. an incredibly loud claim from markets, a belief being expressed in price discovery in bond yields that we are looking at the Fed doing a lot of tightening on the front end and then significant disinflation and compression of growth pushing things down on the longer end. The 30-year is technically not inverted to the 10-year. There's a lot of optimism for growth from 10 to 30 years

because the yield goes from 3.42% to 3.43%. So you can pick up one extra basis point by extending the amount of time before the government pays you back your money an additional 20 years. So there you go. Those are real life market price signals, and I assure you they mean something. As expected, the Senate is now 51-49 for the next two years, majority to the Democrats, as the incumbent senator in Georgia won the election in their runoff last night. And it comes on the heels of a Republican governor winning by a landslide and then now a Democrat senator winning. And so, you know, the message in all that politically I've written about, spoken about, I think it's painfully obvious. And then in terms of where we go into 2024, it'll be very interesting.

I would love for there to not have to be a lot of talk about electioneering for a little while. But, you know, you might get into like the second quarter of 23. And then by then, you may not have as much heavy focus on the midterms in markets. Excuse me, the 2024 election, House and Senate in markets. But by then you have a presidential primary going on and whatever drama is surrounding that. So I think that we'll be lucky to get four to six months of election free living before this stuff comes back in full effect. Economically, a few things I want to highlight about today. China's abandonment of their COVID zero policy is absolutely accelerating. The problem, I guess I would say, is some of the

things it's accelerating from are going from the just fantastically ridiculous to something a little bit less fantastically ridiculous. That's not exactly the stuff that screams global reopening, but they're moving in the right direction and at a better pace than maybe some thought a couple weeks ago. Tax loss selling, I do think, has exacerbated some of the volatility to the downside in markets in the last few days. You've seen some of the worst performers of the year do worse, the worst. And that generally is those are the areas that then are getting sold off to capture tax loss. And it's never perfectly

scientific. It's never perfectly accurate. But in a year like this year, anecdotally, I feel comfortable saying that it's at least a factor. Now, do I think that people are really throwing in the towel on a lot of the lower quality stuff? You know, you look at how well energy is done on the year and then you look at some of these tech things, particularly non-profitable tech. So Fang, for all of its overvaluation problems, is our profitable companies, or at least capable of being profitable.

When you look at things like ARK and the kind of innovation tech index space, index space, over a billion dollars more has flowed into that than energy sector ETFs on the year. It's real hard to call a bottom in the frothy stuff of markets, and it's real hard to call a top in energy when things like that are taking place. Speaking of bottoms and tops and things, bank stocks are at a two-year relative price low to the S&P. That's quite interesting in terms of where we are right now with the yield curve and just overall economic outlook. The banks and their defense have done a really good job talking down expectations. You don't get much more pessimism than hearing some of these bank folks talk. And they're either right or they're wrong about what they're saying. Speaking of being right and what people are saying,

John Burns Real Estate Consulting, by far one of the most valuable sources of information in the residential real estate space. sources of information in the residential real estate space. Their indexes for home price levels in November showed double digit decline since the peak level of March and April. In a number of major U.S. cities, San Francisco was the worst off, down 13 percent, just in basically what amounts to about a seven or eight month period. Austin and San Jose are both down 11%. Las Vegas was down 10%. So you are seeing certain markets that are either distressed for a number of reasons or were themselves rather frothy, like Austin and Vegas dropping double digits.

Many more markets are expected to be down from peak to trough, double digits here this month. Now, the mortgage rate is sitting at 6.41% on the long mortgage. It had been 7.14% a month ago. So that's moved down as much as you've seen the 10-year and 30-year move down. And then on the policy front, the National Defense Authorization Act has gone to the House. It was filed in the House. I think they're going to end up getting this through in the lame duck. It's an $858 billion bill. So the Republicans were successful in getting more defense written into the Defense

Authorization Act. I mean, that call me crazy, you know, but that seems like what you do with a defense bill is you do defense spending. So really wild stuff there. There were a few little adjustments coming from the initial legislation. First of all, they did end up in this version that is now gone, filed in the House, eliminating a vaccine mandate for those in the military. The Senator Manchin energy permitting bill that was shut down last year by Congress did not end up getting snuck in as an attachment to the NDAA. So there's a few other little, frankly, kind of reprehensible add-ins that were being considered to attach to the bill. It's one of these political things where they're daring someone to vote no on something by attaching it to a pretty popular and important piece of legislation. And a lot of those kind of add-ins did end up getting struck. They didn't make the

final cut. And then finally, on economic data, used vehicles hit their lowest level in over a year. It's outright deflation, not merely disinflation. Disinflation is a decrease in the rate of price growth. Deflation is a negative price growth. And you're now down almost 16% since the beginning of the year in the used auto vehicle space, which was a huge part of the inflation we'd had previously. I don't year in the used auto vehicle space, which was a huge part of the inflation we'd had previously. I don't normally in the podcast, in the video, go into the Q&A that I'm doing in the written DC today. I like to make that kind of a unique part of the daily written that people are getting some live Q&A. Those are all real questions from real people. And I answer them all myself every day. And yet I thought that

this question and the answer I want to give did warrant a little conversation here on, for those listening to the podcast and so forth. I'm going to read this individual's question word for word, but then I'll go, I won't read my answer the way it's written in DC Today verbatim. I'll just talk to you straight up. He says, we seem to now be living in opposite land. Anytime there's good news, stocks drop. And when there's data suggesting that recession's coming, the market has a massive up day. Every time the job report comes out, strong stocks go down. I totally understand the underlying reason, inflation and the Fed raising rates, but there's bad news that seems to suggest inflation will go away and the Fed can slow, pause, or even reverse rate hikes, stocks go up. However, isn't it just inherently wrong that we're

celebrating harm to the economy and booing when it's resilient? Is this a further breakdown between Wall Street and Main Street? Would appreciate if you have some thoughts on what's happening here, if it's the right way of thinking, if there's some investment insights on how to deal with this current opposite day environment. And so what I basically said back to him is that, of course, I agree entirely that there is something very, I think, perverted about the idea that many people believe that more people having jobs is a bad thing for the economy. Now, the one thing I got to say is in fairness, some people could view it as bearish for markets, not because they believe that jobs really are a source of inflation, but merely because they believe that

the Fed believes that. And so they're acting on what they think the Fed might do, that it's going to impact Fed policy. They're going to end up raising rates more. They're going to not cut as soon as we thought, you know, with good economic news. And so someone could be wrong in that thought, but at least that thought is a little more explainable as to why they're doing it. It doesn't defy rationality to believe that the Fed may be responding that way. Now, the Fed has most certainly talked that way. And now we are stuck in a position, in my opinion, where oftentimes in the short term for markets, as this individual says, opposite day, what seems to be good can be bad and what seems to be bad can be good. But this is the thing I want to point out. More people having jobs and wages is not inflationary if you understand what inflation is, which is too much money chasing too few goods and

services. And more people having jobs is producing more goods and services. Now, it's true. They get paid. And so you could say, oh, yeah, we're also really provoking demand there. And if you think the way to not let demand be overheated is to make people lose their jobs, I don't think you're thinking about it right economically, and nor does that sound like a particularly humane aspiration. The fact of the matter is that people having jobs does not overheat demand unless you have an entire job sector that shouldn't exist because monetary policy has provoked zombieism or silly speculation. So you can have unproductive jobs. But the notion that we need to have people lose productive jobs and that wages can be actually paying for themselves through greater productivity

from the workforce, I don't know what to say about that. But why markets go up or down in the short term makes sense because I think people are trying to front run the Fed. Midterm and long term, I would just tell you, I think that people having jobs is a pro cyclical, virtuous, appropriate expectation economy. And whatever good news you find, it should never result in a negative long-term view in risk assets. Short-term could be different because of the disproportionate role that the Fed has. But I've got to say, this financialization process where people are more focused on trying to front run what they think traders are going to think about other things versus that kind of fundamental assessment markets. I don't think it's good.

And I think it's a byproduct of an excessively interventionist Fed. And in a world that has a more right-sized Fed, which is what I wrote Dividend Cafe about last week, I don't think you end up with people celebrating bad news or mourning good news. So that's all I want to close with. I do appreciate listening to DC Today. Look forward to another DC Today with you tomorrow and Thursday. And then, of course, our Dividend Cafe on Friday. Thanks so much for listening to and 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 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. Hightower Advisors do not provide tax or legal advice. This material was not intended or written to be used

or presented to any entity as tax advice or tax information. Tax laws vary based on the client's individual circumstances and can change at any time without notice. Clients are urged to consult their tax or legal advisor for any related questions.